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http://hdl.handle.net/10419/26921
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| Title: | | A reconsideration of the Jensen-Meckling model of outside finance  |
| Authors: | | Hellwig, Martin |
| Issue Date: | | 2007 |
| Series/Report no.: | | Preprints of the Max Planck Institute for Research on Collective Goods 2007,8 |
| Abstract: | | The paper studies outside finance in a model of two-dimensional moral hazard, involving risk choices as well as effort choices. If the entrepreneur has insu¢ cient funds, a first-best outcome cannot be implemented. Second-best outcomes involve greater failure risk than first-best outcomes. For a Cobb-Douglas technology, second-best effort and investment levels are smaller than first-best; for other technologies, they depend on the elasticity of substitution. If firm returns not too noisy signals of be-haviour, suitable incentives can be provided by some mix of debt and equity issues. If firm returns involve too much noise, this is not possible. |
| Subjects: | | Financial Contracting Debt Finance Equity Finance Moral Hazard Risk Choices |
| JEL: | | D86 G30 G32 |
| Document Type: | | Working Paper |
| Appears in Collections: | | Preprints of the Max Planck Institute for Research on Collective Goods
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