Skin in the Game and Moral Hazard

59 Pages Posted: 18 Aug 2011 Last revised: 11 Jun 2013

See all articles by Gilles Chemla

Gilles Chemla

Imperial College Business School; CNRS ; Centre for Economic Policy Research (CEPR)

Chris Hennessy

London Business School

Date Written: January 8, 2013


What determines securitization levels, and should they be regulated? To address these questions we develop a model where originators can exert unobservable effort to increase expected asset quality, subsequently having private information regarding quality when selling ABS to rational investors. Absent regulation, originators may signal positive information via junior retentions or commonly adopt low retentions if funding value and price informativeness are high. Effort incentives are below first-best absent regulation. Optimal regulation promoting originator effort entails a menu of junior retentions or one junior retention with size decreasing in price informativeness. Zero retentions and opacity are optimal amongst regulations inducing zero effort.

Keywords: securitization, skin in the game, risk-sharing, moral hazard

JEL Classification: G28, G32, D61, D8, K22

Suggested Citation

Chemla, Gilles and Hennessy, Christopher, Skin in the Game and Moral Hazard (January 8, 2013). Journal of Finance, Forthcoming, Available at SSRN: or

Gilles Chemla (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
London SW7 2AZ, SW7 2AZ
United Kingdom
+44 207 594 9161 (Phone)
+44 207 594 9210 (Fax)

CNRS ( email )

Dauphine Recherches en Management
Place du Marechal de Lattre de Tassigny
Paris, 75016
331 44054970 (Phone)

Centre for Economic Policy Research (CEPR)

United Kingdom

Christopher Hennessy

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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