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Debt and equity as optimal contracts

  • João Cabral dos Santos

Using a principal-agent model in which an entrepreneur has an investment project whose returns depend on his effort, which is not observable by the financier, the author shows that the optimal contract used to finance such a project can be replicated by a unique combination of debt and equity, proving the optimality of these financial instruments. ; A look at the evolution of the collection, clearinghouse, and regulatory provisions of the Federal Reserve Act. The Reserve Banks’ check collection service was designed in 1913 to serve as "glue," attaching the new central bank to the commercial and financial markets through member banks.

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Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 9505.

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Date of creation: 1995
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Handle: RePEc:fip:fedcwp:9505
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  1. Grossman, Sanford J. & Hart, Oliver D., 1988. "One share-one vote and the market for corporate control," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 175-202, January.
  2. Allen, Franklin & Gale, Douglas, 1992. "Measurement Distortion and Missing Contingencies in Optimal Contracts," Economic Theory, Springer, vol. 2(1), pages 1-26, January.
  3. Flath, David, 1993. "Shareholding in the Keiretsu, Japan's Financial Groups," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 249-57, May.
  4. Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Wiley Blackwell, vol. 52(4), pages 647-63, October.
  5. Oliver Hart & John Moore, 1997. "Default and Renegotiation: A Dynamic Model of Debt," Harvard Institute of Economic Research Working Papers 1792, Harvard - Institute of Economic Research.
  6. Rogerson, William P, 1985. "The First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 53(6), pages 1357-67, November.
  7. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
  8. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  9. Diamond, Douglas W, 1991. "Debt Maturity Structure and Liquidity Risk," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 709-37, August.
  10. Harris, Milton & Raviv, Artur, 1988. "Corporate governance : Voting rights and majority rules," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 203-235, January.
  11. Jewitt, Ian, 1988. "Justifying the First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 56(5), pages 1177-90, September.
  12. Cable, John R, 1985. "Capital Market Information and Industrial Performance: The Role of West German Banks," Economic Journal, Royal Economic Society, vol. 95(377), pages 118-32, March.
  13. Oliver Hart & John Moore, 1997. "Default and Renegotiation: A Dynamic Model of Debt," STICERD - Theoretical Economics Paper Series /1997/321, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  14. Bester,Helmut Hellwig,Martin, 1987. "Moral hazard and equilibrium credit rationing: An overview of the issues," Discussion Paper Serie A 125, University of Bonn, Germany.
  15. Prowse, Stephen D., 1990. "Institutional investment patterns and corporate financial behavior in the United States and Japan," Journal of Financial Economics, Elsevier, vol. 27(1), pages 43-66, September.
  16. Mirrlees, J A, 1999. "The Theory of Moral Hazard and Unobservable Behaviour: Part I," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 3-21, January.
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