Optimal state-contingent regulation under limited liability

Optimal Risk Sharing With Limited Liability∗

We solve the general problem of optimal risk sharing among a finite number of agents with limited liability. We show that the optimal allocation is characterized by endogenously determined ranks assigned to the participating agents and a hierarchical structure of risk sharing, where all agents take on risks only above the agent-specific thresholds determined by their ranks. When all agents have...

Information in tournaments under limited liability

The problem of designing tournament contracts under limited liability and alternative performance measures is considered. Under risk neutrality, only the best performing agent receives an extra premium if the liability constraint becomes binding. Under risk aversion, more than one prize is awarded. In both situations, performance measures can be ranked if their likelihood ratio distribution fun...

The State-contingent Approach to Production under Uncertainty the State-contingent Approach to Production under Uncertainty the State-contingent Approach to Production under Uncertainty

Chambers and Quiggin (2000, p i) claim that ‘the state-contingent approach provides the best way to think about all problems in the economics of uncertainty, including problems of consumer choice, the theory of the …rm, and principal–agent relationships.’ The purpose of this paper is to restate this claim, and to defend it in the light of recent developments in, and applications of, the state-c...

Optimal Taxation without State-Contingent Debt

Contingent Liability, Capital Requirements, and Financial Reform

Recently, it has been argued that banks hold an insufficient amount of capital. Put differently, banks issue too much debt relative to equity. This claim is particularly important because, all else equal, lower levels of capital put banks at greater risk of insolvency. As a result, some have advocated imposing capital requirements on banks. However, even if one accepts the proposition that bank...