Abstract
In the present paper uncertainty over the
market price of a risk-neutral competitive firm's output and limited
liability imply the possibility of bankruptcy, give rise to moral hazard and
entail that the firm's output decision depends on its equity holding.
Subjecting the firm to a Value-at-Risk constraint induces it to behave in an
as-if risk-averse manner, but in a static context moral hazard persists for
a certain interval of values of equity. In a dynamic setting the size of
equity holding becomes a choice variable and the VaR constraint guides the
firm to select equity values outside the moral-hazard interval. Thus it
achieves to reconcile two apparently conflicting goals: encourage
entrepreneurial activity by means of limited liability and avoid
irresponsible gambling due to the incentives provided by it.
Lingua originale | English |
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pagine (da-a) | 93-118 |
Numero di pagine | 26 |
Rivista | Decisions in Economics and Finance |
Volume | 38 |
DOI | |
Stato di pubblicazione | Pubblicato - 2015 |
Keywords
- Value-at-Risk
- limited liability
- moral hazard