Skin in the Game and Moral Hazard

Gilles Chemla (1) , Christopher A. Hennessy (2)

1 DRM - Dauphine Recherches en Management
2 London Business School

What determines equilibrium securitization levels, and should they be regulated? To address these questions we develop a model where originators can exert unobservable effort to increase asset quality, subsequently having private information regarding quality when selling ABS to rational investors. In equilibrium, all originators have low/zero retentions if they are financially constrained and/or prices are su¢ ciently informative. Asymmetric information lowers effort incentives in all equilibria. Effort is promoted by junior retentions, investor sophistication, andinformative prices. Optimal regulation promotes effort while accounting for investor-level externalities. It entails either a menu of junior retentions or a single junior retention with sizedecreasing in price informativeness. Mandated market opacity is only optimal amongst regulations failing to induce originator effort.

Mots clés: moral hazard; skin in the game; Securitization; risk-sharing

Domaines: Gestion et management

Gilles Chemla, Christopher A. Hennessy. Skin in the Game and Moral Hazard. The Journal of Finance, 2014, 69 (4), ⟨10.1111/jofi.12161⟩. ⟨hal-01457063⟩