Optimal Contracts, Aggregate Risk, and the Financial Accelerator
40 Pages Posted: 23 Oct 2014
There are 2 versions of this paper
Optimal Contracts, Aggregate Risk, and the Financial Accelerator
Privately Optimal Contracts and Suboptimal Outcomes in a Model of Agency Costs
Date Written: October 15, 2014
Abstract
This paper derives the optimal lending contract in the financial accelerator model of Bernanke, Gertler and Gilchrist (1999), hereafter BGG. The optimal contract includes indexation to the aggregate return on capital, household consumption, and the return to internal funds. This triple indexation results in a dampening of fluctuations in leverage and the risk premium. Hence, compared with the contract originally imposed by BGG, the privately optimal contract implies essentially no financial accelerator.
(A previous version of this paper was titled “Privately Optimal Contracts and Suboptimal Outcomes in a Model of Agency Costs”).
Keywords: agency costs, CGE models, optimal contracting
JEL Classification: C68, E44, E61
Suggested Citation: Suggested Citation
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