SHERP

Credit Rationing with a Moral Hazard Problem

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Authors
Jung, Jeeman
Issue Date
2000
Publisher
Seoul Journal of Economics
Citation
Seoul Journal of Economics 13 (No. 2 2000): 165-184
Keywords
Moral hazard; credit rationing; Continuous trading
Abstract
This paper examines an alternative model of credit rationing when moral hazard is present in the credit market. Two regimes are considered: one with a continuous trading assumption and the other with a restriction on trading. Continuous trading enables one to construct a riskless hedging portfolio and therefore leads to market failure. Under restrictions on trading, however, the entrepreneur of a firm does not undertake an extremely risky activity and the optimal strategy depends on the amount of debt: the larger the amount of debt, relative to the value of a firm's assets, the greater the entrepreneur's incentive to follow a risky strategy. In this situation, credit rationing is beneficial to lenders.
ISSN
1225-0279
Language
English
URI
http://hdl.handle.net/10371/1205
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College of Social Sciences (사회과학대학)Institute of Economics Research (경제연구소)Seoul Journal of EconomicsSeoul Journal of Economics vol.13(2) (Summer 2000)
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