A Model of Moral-hazard Credit Cycles

  title={A Model of Moral-hazard Credit Cycles},
  author={Roger B. Myerson},
This paper considers a simple model of credit cycles driven by moral hazard in financial intermediation. Financial agents or bankers must earn moral-hazard rents, but the cost of these rents can be efficiently spread over an agent's entire career, by promising large late-career rewards if the agent has a consistently successful record. Dynamic interactions among different generations of financial agents can create credit cycles with repeated booms and recessions. In recessions, a scarcity of… CONTINUE READING

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