This paper develops a model of an unregulated banking system based around a private clearing house arrangement. Whilst such a system may dominate one with a public safety net in reducing moral hazard in lending and therefore the scope for individual bank insolvency, it also increases the...

The paper proposes a framework to analyze the effects of various bank bailout policies on bank managers' incentives first to lend prudently and second to disclose truthfully their non-performing loans. It is shown that tough bank closure rules have counterproductive effects on bank managers'...

The authors analyze incomplete long-term financial contracts between an entrepreneur with no initial wealth and a wealthy investor. Both agents have potentially conflicting objectives, the entrepreneur cares about both pecuniary and nonpecuniary returns from the project while the investor is...

This paper provides a first study of the optimal design of active monitors' exit options in a problem involving a demand for liquidity and costly monitoring of the issuer. Optimal incentives to monitor the issuer may involve restricting the monitor's right to sell her claims on the firm's...

There is a long normative 'Social Contract' tradition that attempts to characterize ex-post income inequalities that are agreeable to all 'behind a veil of ignorance.' This paper takes a similar normative approach to characterize social decision-making procedures. It is shown that quite...