PROCEEDINGS IPMU '08

On Risk-shifting Incentive Problem Based on Option Approach

Hiroshi Inoue, Zhanwei Yang.

A typical problem in financial
contracting is the so-called risk-shifting
problem. In this paper, we analyze the
risk-shifting problem using a principal-agent
framework in which the principal
lends money to the agent for a finite
time of period. Extending the basic
intuition of early models that convexity
in the borrower’s payoff is responsible
for risk-shifting, a contract avoiding
risk-shifting is developed. In particular,
we use plural assets and the sum of the
all assets prices are used along with
basket option approach which extends
Ziegler’s results

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