Contracts and Markets

• Main Author: Maretto, Guido Tulio Andrea
• Format: Others
• Language: en
• Published: 2010
• Online Access: https://thesis.library.caltech.edu/5876/1/DissertationGuidoRevised.pdf; Maretto, Guido Tulio Andrea (2010) Contracts and Markets. Dissertation (Ph.D.), California Institute of Technology. doi:10.7907/FBS0-F288. https://resolver.caltech.edu/CaltechTHESIS:05282010-090118586 <https://resolver.caltech.edu/CaltechTHESIS:05282010-090118586>

I merge the standard Principal Agent model with a CAPM-type financial market, to study the interactions of contracts and financial markets. I prove existence of equilibrium in two models, a more general economy allowing for hidden type and action under generic mean variance preferences and a hidden action economy with Markowitz mean-variance preferences. I study economies for which markets have an insurance effect on compensation contracts. I show sufficient conditions for lower variance to obtain in large economies, even with asymmetric information. In this context I show the effect of markets' size on efficiency. I also study moral hazard economies, for which I prove existence of a unique pure strategy equilibrium, and I show that financial markets negatively affect the equilibrium returns of firms. In the final chapter I study the efficiency of securities issued under symmetric information. I find that small markets and low correlation of firms' returns generate inefficiency. I also show that the assumption of symmetry or independence is crucial to obtaining the insurance results in the previous Chapters.