Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/26921
Authors: 
Hellwig, Martin
Year of Publication: 
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

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