Equilibrium Equity Premium and Interest Rate of a Large-Firm Economy in the Presence of Moral Hazard
We present an equilibrium model of a moral-hazard economy consisting of a very large firm and securities markets, where a stock and bonds are traded. We show that moral hazard problems can result in low interest rates and sometimes in high equity premium. We also obtain a number of striking results: the second-best real investment level and stock price are sometimes higher than those of the first-best economy. Moreover, comparative statics for both the first- and second-best cases suggest, holding other things constant, that the larger the social wealth, the lower the interest rate and the higher the market price of risk; and that low interest rates can also be resulted from low agents effort efficiency, low-profit production opportunities and high production risk.
Jaeyoung Sung Xuhu Wan
Department of Finance (M/C 168),University of Illinois at Chicago,601 South Morgan Street,Chicago,Il Department of Information and Systems Management,School of Business and Management,Hong Kong Univers
国际会议
大连
英文
1-39
2008-07-02（万方平台首次上网日期，不代表论文的发表时间）