Moral Hazard and Principle-
Agent dilemma.
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Moral Hazard and Principal-Agent Dilemma: Solutions and Real-World Examples, Slides of Banking and Finance
The principal-agent dilemma, specifically moral hazard, in the context of business management and investment. It discusses the lack of incentive for agents (managers) to maximize profits compared to principals (stockholders), and proposes solutions such as production of information through monitoring, government regulation, financial intermediation, and net worth and collateral. Real-world examples include the enron scandal and its consequences are also provided.
Typology: Slides
2012/2013
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Moral Hazard and Principle-
Agent dilemma.
Principal-agent
- Equity contracts- share in the profit of business
- The principals are stockholders who own the majority of a company’s equity
- An agent would be the firms manager’s
SOLUTIONS!!!
Solutions cont…
- Production of Information- Monitoring
- Fact 1
- Costly state verification
Solutions cont…
- Financial Intermediation
- Fact 3
- Venture Capital Firm
Moral Hazard
- Debt markets- fixed amounts periodically
- Safer
- Less need to monitor
SOLUTIONS!!!
Solutions cont…
- Net Worth and Collateral
- Fact 6&
- Incentive Compatible
Solutions cont…
- Monitoring & Enforcement of Restrictive Covenants - Fact 8 - Discourage undesirable Behavior - Encourage desirable behavior - Keep collateral valuable - Provide Information Docsity.com
The Real World:
- Enron
- 7 th^ largest US company
- Leader of energy market
- Owned 25%
- Estimated worth of $77 billion
How does this happen?
- Enron created many shell corporations that would consume these debts and contract on their balance sheets
- Arthur Andersen was being paid $1 million a day and did not want to loose it’s biggest client
- Shareholders just assumed everything was Docsity.com
The Fallout
- Top executives charged
- Some went to jail
- 1,000’s of employees lost retirements and 401k’s
- Both Enron and Arthur Andersen collapse
- At the time it was the largest bankruptcy in