By Anjan V. Thakor, Arnoud Boot
The expansion of monetary intermediation learn has yielded a number of questions that experience driven ''design'' matters to the fore while the boundary among monetary intermediation and company finance has blurred. This quantity offers assessment articles on six significant issues which are hooked up through information-theoretic instruments and characterised by way of priceless views and demanding questions for destiny study. Touching upon a variety of matters relating the designs of securities, associations, buying and selling mechanisms and markets, constitution, and legislation, this quantity will motivate daring new efforts to form monetary intermediaries sooner or later.
* unique assessment articles provide beneficial views on study concerns showing in most sensible journals
* Twenty articles are grouped by means of six significant subject matters, jointly defining the top examine fringe of monetary intermediation
* company finance researchers will locate affinities within the instruments, tools, and conclusions featured in those articles
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Furthermore, the optimal contract gives the entrepreneur the option to make a larger payment at the ﬁrst date (if the ﬁrst-period output is high) in order to reduce the residual payment at the second date. In addition, it is optimal to restrict the entrepreneur’s ability at the ﬁrst date either to make payments to himself or to borrow additional funds. These properties imply that the optimal contract is again a debt contract requiring interim payments (which can be interpreted as coupons or a sinking fund provision), with features like call (prepayment) provisions and covenants restricting the borrower’s ability to pay interim dividends and to incur additional debt.
Thus, strictly speaking, the model is again cast in a CSV setting, with “prohibitively large” investors’ veriﬁcation costs, k1 . The absence of a (viable) veriﬁcation technology implies that investors receive a payment only if the entrepreneur has the incentive to do so. The entrepreneur’s incentive to reward investors for their investment depends on a nonpecuniary penalty k0 that may be imposed on him. In contrast to Gale and Hellwig’s model, here the penalty k0 is chosen endogenously as an integral part of the optimal contract.
The key result of this paper is that this universal game can achieve a more eﬃcient outcome than the one proposed by Hart and Moore (1989). The reason is that making payments and liquidation decisions contingent on these reports indirectly allows for contracts to become state contingent and therefore to further reduce ineﬃcient liquidations. Paolo Fulghieri and Eitan Goldman 17 4. DEBT CONTRACTS AND THE PROVISION OF INCENTIVES In the models discussed so far no consideration is given to the importance of giving the entrepreneur suﬃcient incentives to take the appropriate action a εA.