Bank monitoring incentives under moral hazard and adverse selection

Nicolás Hernández Santibáñez (1, 2) , Dylan Possamaï (2) , Chao Zhou (3)

1 DIM - Departamento de Ingeniera Matematica [Santiago]
2 CEREMADE - CEntre de REcherches en MAthématiques de la DEcision
3 NUS - National University of Singapore

In this paper, we extend the optimal securitization model of Pagès [41] and Possamaï and Pagès [42] between an investor and a bank to a setting allowing both moral hazard and adverse selection. Following the recent approach to these problems of Cvitanić, Wan and Yang [12], we characterize explicitly and rigorously the so-called credible set of the continuation and temptation values of the bank, and obtain the value function of the investor as well as the optimal contracts through a recursive system of first-order variational inequalities with gradient constraints. We provide a detailed discussion of the properties of the optimal menu of contracts.

Mots clés: bank monitoring; securitization; moral hazard; adverse selection; principal-agent problem

Domaines: Probabilités [math.PR]; Economies et finances; Gestion des risques [q-fin.RM]

Nicolás Hernández Santibáñez, Dylan Possamaï, Chao Zhou. Bank monitoring incentives under moral hazard and adverse selection. Journal of Optimization Theory and Applications, 2020, 184, pp.988-1035. ⟨10.1007/s10957-019-01621-9⟩. ⟨hal-01435460⟩