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Moral-Hazard Premium

Author

Listed:
  • Misumi, Takashi
  • 三隅, 隆司
  • Nakamura, Hisashi
  • 中村, 恒
  • Takaoka, Koichiro
  • 高岡, 浩一郎

Abstract

This paper provides an explicit asset-pricing formula in a continuous-time generalequilibrium exchange economy in the presence of moral hazard. Specifically, it solves an optimal consumption/wealth allocation problem of a representative lender in financial markets under regular market risk and rare-event risk when an endowment process is subject to a firm manager’s moral hazard. Consequently, it shows that, under the moral-hazard problem, a positive premium is stipulated on a riskless rate in market equilibrium – call it a moral-hazard premium – due to the necessity to give the manager an incentive to avoid his opportunistic misbehavior.

Suggested Citation

  • Misumi, Takashi & 三隅, 隆司 & Nakamura, Hisashi & 中村, 恒 & Takaoka, Koichiro & 高岡, 浩一郎, 2014. "Moral-Hazard Premium," Working Paper Series G-1-7, Hitotsubashi University Center for Financial Research.
    • Handle: RePEc:hit:hcfrwp:g-1-7
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    File URL: https://hit-u.repo.nii.ac.jp/record/2054298/files/070hcfrWP_1_007.pdf
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    References listed on IDEAS

    as
    1. Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, vol. 7(3), pages 265-296, September.
    2. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
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    Keywords

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    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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