Not logged in.
Quick Search - Contribution
Contribution Details
| Type | Working Paper |
| Scope | Discipline-based scholarship |
| Title | Scale Effects in Dynamic Contracting |
| Organization Unit | |
| Authors |
|
| Language |
|
| Institution | University of Zurich |
| Series Name | Swiss Finance Institute Research Paper |
| Number | 15-49 |
| Number of Pages | 56 |
| Date | 2016 |
| Abstract Text | We study a continuous-time contracting problem in which size plays a role. The agent may take on excessive risk to enhance short-term gains; doing so exposes the principal to large, infrequent losses. The optimal contract includes size as an instrument: downsizing along the equilibrium path may be necessary so as to preserve incentive compatibility. We characterize the principal's value function and the downsizing process, both of which depend on the nature of the liquidation value. When the latter has fixed and size-dependent components, there is an optimal (endogenous) liquidation size. In the special case where the liquidation value is linear in size, one may describe the solution in size-adjusted terms, which allows for the study of re-investment. The optimal contract is implemented using the full array of financial securities plus debt covenants; holding equity is essential to curb risk taking. Conflicts emerge between classes of security holders and explain phenomena like seniority of claims. Firms for which risk taking is less attractive can afford a higher leverage. |
| Official URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3008399 |
| Export |
BibTeX
EP3 XML (ZORA)
|