Essays on Nonlinear Contracting under Uncertainty and Asymmetric Information : Trade-off between Risk Sharing and Moral Hazard Problem
The papers in this thesis explore optimal contracting under uncertainty and asymmetric information and the trade-off between the benefits of risk sharing and the drawbacks resulting from moral hazard problem in various agency relationships. The first paper analyzes the consequences of risk sharing and moral hazard problem when an entrepreneur, starting a business, shares not the total business risk, but only the risk associated with a certain area of the firm with an outside financier. The second paper introduces a nonlinear profit-and-loss-sharing arrangement with a fixed payment component that can eliminate (or at least alleviate) the adverse effects of the moral hazard problem in a principal-agent relationship. Paper 2 is presented in two parts. The agent (i.e., the entrepreneur) is assumed to be risk-neutral and risk-averse in the first and second parts, respectively. When the entrepreneur is risk-neutral, nonlinear profit and loss sharing can be arranged so that the incentives of the entrepreneur to extend effort are not diluted. The optimally arranged nonlinear profit and loss sharing is shown to be superior to debt or equity financing when the entrepreneur is risk-averse. The third paper presents such a nonlinear sharing of credit risks in a bank loan credit risk pooling arrangement that the negative effects of the moral hazard problem associated with credit risk transfer instruments are eliminated. It is also shown that the contributions of the participant banks to the loan pool can be arranged in such a way that they all benefit from the diversification of credit risk.
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