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Equilibrium equity premium, interest rate and the cost of capital in a single-firm economy under moral hazard (2009).
| Content Provider | CiteSeerX |
|---|---|
| Author | Sung, Jaeyoung Wan, Xuhu |
| Abstract | We present an equilibrium model of a moral-hazard economy with one firm and financial markets, where a stock and bonds are traded. We show that it is optimal for the principal to forbid the agent to trade the stock; that the second-best interest rate is lower than the first-best interest rate; and that the second-best equity premium can be higher or lower than the first best equity premium. We also obtain a number of striking results. In full equilibrium, even in the absence of the well-known empire-building motivation, moral hazard can sometimes result in overinvestment. Unlike conventional wisdom, moral hazard can decrease the cost of capital of the economy. Moreover, the second-best market price of risk depends not only on well-known factors such as risk aversion and production-asset volatility, but also on the agent’s marginal effort productivity and marginal cost of effort. |
| File Format | |
| Publisher Date | 2009-01-01 |
| Access Restriction | Open |
| Subject Keyword | Moral Hazard Equilibrium Equity Premium Interest Rate Single-firm Economy Well-known Empire-building Motivation Equity Premium Moral-hazard Economy Second-best Equity Premium Equilibrium Model Full Equilibrium Production-asset Volatility Risk Aversion Marginal Effort Productivity Conventional Wisdom Striking Result Marginal Cost Second-best Interest Rate Financial Market First-best Interest Rate Second-best Market Price Well-known Factor |
| Content Type | Text |
