EC223 Lecture Notes - Lecture 13: Adverse Selection
Document Summary
Monday october 31- wednesday, november 2, 2016 lectures 13 & 14. Tools to solve moral hazard problem in equity contract (facts 1, 3, and 5) Tools to solve moral hazard in debt contracts (facts 5, 7, 8) Stocks are not the most important sources of external financing for businesses (12%) Issuing marketable debt and equity securities is not the primary way in which businesses finance their operations (15% + 12%) Indirect finance (involving the activities of financial intermediaries) is many times more important than direct financing (70%) Financial intermediaries, particularly banks, are the most important source of external funds used to finance businesses. The financial system is among the most heavily regulated sectors of the economy. Only large, well-established corporations have easy access to securities markets to finance their activities. A prevalent feature of debt contracts for both households and businesses is collateral: property pledged to a lender to guarantee payment, collateralized debt is known as secured debt.
