Handout 5B - Financial contracting Control Rights as...

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Unformatted text preview: Financial contracting Control Rights as studied by Aghion and Boltun (1992) Assumptions: (1)The entrepreneur (E) and the investor (I) are risk neutral. (2)E has no wealth and borrows K from I in a competitive capital market. (E has bargaining power.) (3)The action chosen by E cannot be specified in the initial contract (Incomplete Contracts). (4)The contract allocates all monetary returns to I. There is also no signal. (Simplifying assumptions). Corporate Finance Professor Ho-Mou Wu 5B-1 Spring 2004 Aghion and Boltons Approach 5B-2 Spring 2004 Corporate Finance Professor Ho-Mou Wu exp ( , , ). i j j y ected return in state i when action is a i j g b = = = . i j j l private benefits of E in state i when action is a = = ......................(4) g g g g g g b b b b b b b b g g y l y l y l y l + + + + (1 ) ............... (5) g b g b Assume that qy q y K +- ). , ( * b for a g for a j state for action best first the a b g j = , ) , ( that implies definition by a a action...
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This note was uploaded on 01/23/2011 for the course FGB 780 taught by Professor Edwardchang during the Spring '09 term at Missouri State University-Springfield.

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Handout 5B - Financial contracting Control Rights as...

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