We study a dynamic contracting problem in which size is relevant. The agent may take on excessive risk to enhance short … curb risk taking. Firms that are less prone to risk taking can afford a higher leverage …

work for broader issues in both macroeconomics and the theory of the firm. …

monitor managers and make sure they exert the effort necessary to reduce default risk. This gives rise to moral hazard. In …. If these become too high, investors give up on incentives, and default risk rises. Thus, moral hazard gives rise to … endogenous crises and fat tails in the distribution of aggregate default risk. Our model fits the stylized facts of the MBS …