In this insightful book, Thakor and Ramakrishnan explore how moral hazard affects the valuation of assets. They provide a framework for analyzing the impact of moral hazard on asset prices and show how different types of assets are affected in different ways. A must-read for anyone interested in financial economics. This work has been selected by scholars as being culturally important, and is part of the knowledge base of civilization as we know it. This work is in the "public domain in the United States of America, and possibly other nations. Within the United States, you may freely copy and distribute this work, as no entity (individual or corporate) has a copyright on the body of the work. Scholars believe, and we concur, that this work is important enough to be preserved, reproduced, and made generally available to the public. We appreciate your support of the preservation process, and thank you for being an important part of keeping this knowledge alive and relevant.

We provide an equilibrium asset pricing formula under moral hazard, which is defined as a firm's change of measure that is incontractible, on the assumption of a power utility function and an endogenous riskless rate. Moral hazard distorts asset prices by (1) moving the market price of diffusive risk in the opposite direction to an investor's marginal utility, (2) amplifying the market price of jump risk, and (3) stipulating a positive premium, called a "moral hazard premium" in this paper, on the riskless rate. Thus, the risk-free rate puzzle, which was explored first by Weil (1989), is further exaggerated under moral hazard. Financial markets alleviate the allocation conflict caused by moral hazard.

This book provides a comprehensive discussion of the issues related to risk, volatility, value and risk management. It includes a selection of the best papers presented at the Fourth International Finance Conference 2007, qualified by Professor James Heckman, the 2000 Nobel Prize Laureate in Economics, as a ?high level? one. The first half of the book examines ways to manage risk and compute value-at-risk for exchange risk associated to debt portfolios and portfolios of equity. It also covers the Basel II framework implementation and securitisation. The effects of volatility and risk on the valuation of financial assets are further studied in detail.The second half of the book is dedicated to the banking industry, banking competition on the credit market, banking risk and distress, market valuation, managerial risk taking, and value in the ICT activity. With its inclusion of new concepts and recent literature, academics and risk managers will want to read this book.

"An entrepreneur with an innovative investment project seeks for outside equity. Once the firm is up and running it generates two sources of value. One portion is observable and contractible to both the principal (venture capitalist) and the manager (entrepreneur), while the other portion is a bundle of real options wrapped in the timi’s assets, and it is only contractible for the manager. No matter if the firm operates either in a partnership or in a public model, moral hazard is given by the total value of real options and of the manager’s risk aversion. If the manager is an entrepreneur that contributes with intangible assets to the firm, the moral hazard depends on the value of real options and the percentage he receives of dividends. The greater the real options value is, the greater the percentage he must receive of dividends."--Resumen hoja 6.

Addressing the challenge of covering heath care expenses—while minimizing economic risks. Moral hazard—the tendency to change behavior when the cost of that behavior will be borne by others—is a particularly tricky question when considering health care. Kenneth J. Arrow’s seminal 1963 paper on this topic (included in this volume) was one of the first to explore the implication of moral hazard for health care, and Amy Finkelstein—recognized as one of the world’s foremost experts on the topic—here examines this issue in the context of contemporary American health care policy. Drawing on research from both the original RAND Health Insurance Experiment and her own research, including a 2008 Health Insurance Experiment in Oregon, Finkelstein presents compelling evidence that health insurance does indeed affect medical spending and encourages policy solutions that acknowledge and account for this. The volume also features commentaries and insights from other renowned economists, including an introduction by Joseph P. Newhouse that provides context for the discussion, a commentary from Jonathan Gruber that considers provider-side moral hazard, and reflections from Joseph E. Stiglitz and Kenneth J. Arrow. “Reads like a fireside chat among a group of distinguished, articulate health economists.” —Choice