A Reconsideration of the Jensen-Meckling Model of Outside Finance
نویسندگان
چکیده
The paper studies outside nance in a model of two-dimensional moral hazard, involving risk choices as well as e¤ort choices. If the entrepreneur has insu¢ cient funds, a rst-best outcome cannot be implemented. Second-best outcomes involve greater failure risk than rstbest outcomes. For a Cobb-Douglas technology, second-best e¤ort and investment levels are smaller than rst-best; for other technologies, they depend on the elasticity of substitution. If rm returns not too noisy signals of behaviour, suitable incentives can be provided by some mix of debt and equity issues. If rm returns involve too much noise, this is not possible. Key Words: Financial Contracting, Debt Finance, Equity Finance, Moral Hazard, RiskChoices. JEL Classi cation: D86, G30, G32.
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