We extend the theoretical model of external corporate financing to the case when the buyers of the borrowing firm may default during the financing period. In our setup there is an asymmetric information and hence moral hazard between the lender and the borrower concerning the effrts of the borrower. We define the optimal debt contract in two cases. In the symmetric case the lender and the borro...

This paper reflects one of the important trends in macro thinking about corporate finance: There is an internal economic life of the firm where the most important decisions-employment, investment, production-are made. The players within the firm are the salaried managers of the firm and the workers. Quite separately, there are wealthy individuals and institutions who provide finance for these a...

We study how institutional design influences moral transgression. People are heterogeneous in their feelings of guilt and can share guilt with others. Institutions determine the number of supporters necessary for immoral outcomes to occur. With more supporters required, every supporter can share guilt more easily. This facilitates becoming a supporter. Conversely, an institution requiring more ...

Several empirical regularities in the prices of financial assets are at odds with the predictions of standard economic theory. I address these regularities and explore the extent to which they are resolved in the context of two markets organized in very different ways. The first setting is a neoclassical economy with incomplete markets and heterogeneous agents. Market incompleteness naturally a...

Did the unification of commercial and investment banking heighten risk in financial markets due to moral hazard of borrowers? In a simple intertemporal model with moral hazard and uninsured risk, we argue that if financial contracts are properly written, the integration in financial markets could give rise to greater risk sharing arrangement and could eliminate the equity risk premium attribute...

In this paper we review and extend the analysis of moral hazard response in two relatively unexamined empirical directions: (1) how insurance changes in one program affects employee participation in other programs at a point in time (inter-program moral hazard), and (2) how the consumption of program benefits now tends to affect employees behavior over time (benefits consumption capital). We de...

This paper investigates the properties of intergenerationally equitable discounting by using an axiomatically well-founded welfare function which was originally developed by Epstein (1983), and more recently extended by Bommier and Zuber (2008). In stead of seeking for the appropriate value of social rate of time preference, intergenerational equity is incorporated at axiomatic level. I show th...

The IMF potentially creates moral hazard when it provides bailouts to countries in a financial crisis. We ask whether a creditor moral hazard is observable in the data. We test the hypothesis that recent unprecedented bailouts – starting with the 1994 Mexican crisis – changed international investors’ perception of default risk on international borrowing. Our events-study approach identifies imp...

The majority of research on emotion and moral decisionmaking has focused on the intrapersonal effects of emotion. However, witnessing and displaying emotional expressions is also known to play a significant role in the facilitation and coordination of our social interactions. In this work, we hypothesize that interpersonal emotions effect moral appraisals by prioritizing different moral concern...

In this paper I put forth three criticisms against McDowell account of the idea that moral requirements are categorical imperatives. I argue that McDowell’s account fails as a defense of Kant’s doctrine for at least three reasons. First, McDowell claims that agents can appeal to experience in order to formulate and recognize categorical imperatives. However, Kant strongly disagrees with this cl...