This paper studies a model of firms with endogenous bilateral exposures and government bailouts. It is shown that the anticipation of bailouts makes firms less concerned with the counterparty choices of their counterparties. This “network hazard” gives rise to large central firms. Bailouts...

In a multi-agent contracting setting, agents' performances are related due to both correlating noise and effort spillover. We study the optimal linear contract in which the agents are risk averse. Putting compensation weights on peers' performances helps to filter out common noise, which relaxes...

This paper offers a new perspective on why business groups are formed. Specifically, we ask if the expectation of a government bailout lowers group-affiliated firms’ cost of capital. Using a quasi-natural experiment, we show that group-affiliated firms paid lower interest when a government...

This paper introduces a novel form of moral hazard specific to networks and illustrates this concept using simple models from coordination games, epidemics, supply chains, and financial networks. In these models, agents form beneficial links that also propagate costly contagion. Endogenously,...

We study a financial network characterized by the presence of depositors, banks and their shareholders. Belonging to a financial network is beneficial for both the depositors and banks' shareholders since the return to investment increases with the number of banks connected. However, the network...

We analyze the effects of lower bounds on wages, e.g., minimum wages or liability limits, on job design within firms. In our model, two tasks contribute to non-veriable firm value and affect an imperfect performance measure. The tasks can be assigned to either one or two agents. In the absence...

The paper shows that an IMF-like coinsurance arrangement among countries can play a useful role in the global financial system. The operation of the coinsurance arrangement is examined under different loan contracts. It shows that, if the IMF?s objective is to safeguard its resources and be...

The effects of public policy programs which aim at internalizing spill-overs due to successful innovation are analyzed in a sequential double-sided moral hazard doublesided adverse selection framework. The central focus lies in analyzing their impact on contract design. We show that in our...

We analyse a 2-period competitive insurance market which is characterized by the simultaneous presence of standard moral hazard and adverse selection with regard to consumer time preferences. It is shown that there exists an equilibrium in which patient consumers use high effort and buy a...

This paper analyses the relation between authority and incentives. It extends the standard principal / agent model by a project selection stage in which the principal can either delegate the choice of project to the agent or keep the authority. The agent's subsequent choice of e ort depends both...