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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