This paper examines how unhedged currency exposure of firms varies with changes in currency flexibility. A sequence of four time periods with alternating high and low currency volatility in India provides a natural experiment in which changes in currency exposure of a panel of firms is measured, and the moral hazard versus incomplete markets hypotheses tested. We find that firms carried higher ...

We consider a dynamic setting where both adverse selection and moral hazard concerns are present. We analyze how the power of the optimal incentive scheme varies over time according to the agent's performance history. In many circumstances, the power of later incentive schemes optimally declines as earlier performance improves. The imposition of poor performance incentives following good perfor...

This paper explores the role played by press regulation in selecting the information mass media deliver to voters. The focus is on whether press regulation can reduce political corruption and increase voters’ welfare. By endogenizing the response of the voters to information from the media, we clarify under which circumstances regulation reduces or increases corruption. We show that punitive la...

We consider a canonical two-period model of elections with adverse selection (hidden preferences) and moral hazard (hidden actions), in which neither voters nor politicians can commit to future choices. We prove existence of electoral equilibria, and we show that in response to electoral incentives, office holders mix between “taking it easy” and “going for broke” in the first period. Even in t...

a r t i c l e i n f o a b s t r a c t We examine implications of a society's cultural emphasis on moral sentiments. Entrepreneurs and investors interact in a game that entails both adverse selection and moral hazard; entrepreneurs may attempt to breach their contracts and expropriate investors. An agent is born into a particular culture but chooses whether to develop a moral conscience and ther...

This paper considers a simple model of credit cycles driven by moral hazard in financial intermediation. Financial agents or bankers must earn moral-hazard rents, but the cost of these rents can be efficiently spread over an agent's entire career, by promising large late-career rewards if the agent has a consistently successful record. Dynamic interactions among different generations of financi...

The paper reports the results of two experiments in which people who first made an immoral choice were then more likely to donate to charity than those who did not. In addition, those who knew that a donation opportunity would follow the potential moral transgression were more likely to behave immorally than those who were not told of the donation option. We interpret this increase in charitabl...

Uncertainty has qualitatively different implications than risk in studying executive incentives. We study the interplay between profitability uncertainty and moral hazard, where profitability is multiplicative with managerial effort. Investors who face greater uncertainty desire faster learning, and consequently offer higher managerial incentives to induce higher effort from the manager. In con...

This paper uses unique data and augments existing theory focussing on bank’s lending to new ventures. We are primarily concerned with banks’ use of collateral and interest margins in terms of reducing adverse selection and moral hazard problems. We find a trade-off between interest margins and collateral per unit borrowed. Margins are insensitive to the magnitude of collateral per unit of borro...