Venture Capital Finance-Eliminating Double Sided Moral Hazards through Trade-off between Economic and Behavioural Economic Aspects-A Case Analysis

Venture capital finance has two aspects,the economic aspect and the behavioural economic aspect.The economic aspect includes issues such as conflict of interest between the entrepreneur and the venture capitalist(VC),asymmetric information,moral hazard,and compensation issues for both the parties.The behavioural economic aspect is related to relational factors such as empathy and a feeling of fairness and trust shown by both the parties.Therefore,while deciding the financer,entrepreneur should consider both relational aspect and value add services of the financier and strike optimal trade-off.The ensuing case analysis has been carried out focusing on elimination of double-sided moral hazards through a proper trade-off between economy and behavioural economic theories(aspects).The performance of the venture can be enhanced by balancing both of these theories in practice.An equity distribution that represents economic reward is a source of motivation for both the parties to put optimal efforts towards the success of the venture.This was seen in the case analysis,when the parties perceived the initial equity distribution agreement as fair,the satisfaction level of all the parties increased,leading to the reduction in the possibility of double-sided moral hazard and ensuring the success of the venture.Moreover,the analysis shows that information sharing and two-way communication increases trust and improves decision quality.It further focusses on how feedback and proper work distribution results in efficiency of performance for each of the stakeholders,leading to reduced probability of double-sided moral hazards.

Study on the Price Design and Contract Stability of "Company + Farmer" Model with Time Preference under Double Moral Hazards

The double moral hazard of ＂company ＋ farmer＂ and the time preference cost of company and farmer was analyzed. According to static game model, it re-vealed that the reason for low compliance rate of ＂company ＋ farmer＂ model was the existence of market risk, namely, the fluctuation of market price, and the stable market price in contracts was actualy a kind of interval, instead of a specific value. Furthermore, the effect of default penalty, market transaction cost and time prefer-ence cost on the stability of contract was studied. The results showed that default penalty, market transaction cost and time preference cost had positive influence on the price interval range of a contract.

GAMES ANALYSIS OF INSURANCE PRICING UNDER CONSIDERING MORAL HAZARD

This paper first gives an explanation of moral hazard in the insurance field,and then offers a game theory model about insurance pricing according to the non zero sum game analysis between the insurer and the insured when moral hazard exists.On the basis of the game analysis,this paper also presents a lowest pricing formula and studies the cost of moral hazard simultaneously.

Prevention of the Member＇s Moral Hazard in a Dynamic Alliance

Moral hazard is an important factor threatening stability of dynamic alliance. Firstly, the paper describes the problem of moral hazard in dynamic alliance and introduces the Tirole Model of moral hazard prevention. Then, by introducing a third-party system into dynamic alliance, a model of incomplete information dynamic game theory is formulated in the principal-agent framework. The model shows the dynamic consistency between a member＇s income and the dynamic alliance＇s profit, and that moral hazard can be prevented by an allocation policy With both characteristics of incentive measures and supervision, which is designed by a third-party system. Finally, the composition of the third-party system is discussed.

A PENALTY FUNCTION METHOD FOR THE PRINCIPAL-AGENT PROBLEM WITH AN INFINITE NUMBER OF INCENTIVE-COMPATIBILITY CONSTRAINTS UNDER MORAL HAZARD

In this paper,we propose an iterative algorithm to find the optimal incentive mechanism for the principal-agent problem under moral hazard where the number of agent action profiles is infinite,and where there are an infinite number of results that can be observed by the principal.This principal-agent problem has an infinite number of incentive-compatibility constraints,and we transform it into an optimization problem with an infinite number of constraints called a semi-infinite programming problem.We then propose an exterior penalty function method to find the optimal solution to this semi-infinite programming and illustrate the convergence of this algorithm.By analyzing the optimal solution obtained by the proposed penalty function method,we can obtain the optimal incentive mechanism for the principal-agent problem with an infinite number of incentive-compatibility constraints under moral hazard.

Research on Credit Default Swaps Pricing Considering Moral Hazard Incentive under Reduce-Form Model

Equilibrium pricing of credit default swaps(CDS)promotes efficient identification of credit risk in the market,which in turn leads to efficient allocation of resources.However,even when CDS have been priced in equilibrium,i.e.,when premiums are equal to anticipated payments,the moral hazard incentives of CDS buyers increase with CDS transactions.Consequentially,it becomes an interesting research direction to study the impact of moral hazard incentives on the trading mechanism or pricing of derivatives(CDS).Most of the existing literature on the impact of moral hazard incentives in CDS pricing on derivatives trading mechanisms takes a macro perspective and focuses on the agreement risk effect.The literature exploring the analysis of the impact of moral hazard on the probability of agreement default from a micro perspective is not yet available.With this in mind,this paper focuses on the mechanisms by which“fraud”,an extreme manifestation of micro-moral hazard incentives,affects the probability of default.This paper introduces for the first time the concept of“claiming fraud”by credit protection buyers,which is different from the macro perspective of moral hazard incentives,and thus defines a specific extreme form of moral hazard incentives.Meanwhile,to address the intrinsic feature of the lack of economic explanatory power of the reduce-form model,this paper introduces a moral hazard incentive factor into the reduce-form model,and proposes a moral hazard state variable as a function of the asset value of the reference entity,which gives the reduce-form model strong economic explanatory power,and the default predictability is reduced by the description of the reduce-form model.In terms of the object of study,this paper considers the issue of moral hazard incentives in the presence of claiming fraud in two reference entities to further explore the impact of moral hazard incentives on default protection at the micro level in terms of cyclic default.Finally,based on the analysis of the results of the numerical simulation experiments,it is proposed that increasing the number of reference assets for CDS buyers will help to reduce the moral hazard incentives of the buyer,and thus the anticipated payments to the buyer,i.e.,we attempt to endogenize the credit risk of an asset by allowing the asset holder to choose the probability of the asset going up or down,which helps to understand the phenomenon of moral hazard incentives in CDS trading.

Health Analytics, Economics and Medicine toward a 21st Century Health Care System

After a review of recent developments in precision medicine, population health sciences and innovative clinical trial designs, and in health economics and policy, we show how innovations in health analytics can capitalize on the advances in biomedicine and health economics towards developing a data-driven and cost-effective 21st century health care system. In particular, we propose a mutually beneficial public-private partnership that combines individual responsibility with community solidarity in building this health care system.

The Application and Modification of Delegation-Agent Model in Agricultural Insurance

The delegation-agent models in agricultural insurance are established both under the circumstances of information symmetry and information asymmetry.Insurers choose effort level-a* according to the first order optimal condition of ∫{v(π-s(π))+λ11[u(s(π))]fa(π,a*)}dπ=λ11c'(a*)u(s(π)) at the present stage when the information is symmetric.While the information is asymmetric,the first order optimal condition changed into v'(π-s(π))u'(s(π))=λ21+μ21(1-fa(π,a)f(π,a)).In other words,the higher the output,the more and more income of insured.The paper also modifies the models,when the information is symmetric,the insurers determine the effort level of insured-a* based on the first order optimal condition of ∫{v(π-s(π))+λ12[u(s(π))]fa(π,a*)}dπ=λ12h'(a*)u(s(π));to the contrary,the first order optimal condition would change into v'(π*-s(π*))u'(s(π*))=λ22+μ22(1-fa(π,a)f(π,a))-λh(a)f(π,a)-μh'(a)f(π,a).The results show that the insured and the insurers would both benefit from the insurance when the effort cost function related to the expectation of the insured(agricultural producers).If the insured manage the objects of insurance more seriously,the rate of disasters would be lowered.Therefore,the insurance claimed against the insured would be lessened,and the benefits of the insurers would be increased at last.

J. M. Keynes＇ paradox： The saving glut

The present paper offers an opportunity to explore Keynes＇ contribution to our understanding of crisis by returning to him seminal contribution in the theory of the effective demand. The analysis contrasts this approach with the neoclassical orthodoxy regarding the theory of the interest rate and the relation between saving and investment. The author poses the fundamental question： Can a policy of stimulating saving promote investment？ By using the ＂Saving Paradox＂ presented in chapter sixteen, as a framework for interpreting Bernanke＇s description of the saving glut and the current account deficit of the U.S. economy, the author offers an answer that is useful for understanding the current situation. The author also shows how moral hazard plays a significant role in the current crisis.

Understanding the deterrence effect of punishment for marine information security policies non-compliance

In the organizational setting of marine engineering,a significant number of information security incidents have been arised from the employees’failure to comply with the information security policies(ISPs).This may be treated as a principal-agent problem with moral hazard between the employer and the employee for the practical compliance effort of an employee is not observable without high cost-.On the other hand,according to the deterrence theory,the employer and the employee are inherently self-interested beings.It is worth examining to what extent the employee is self-interested in the marine ISPs compliance context.Moreover,it is important to clarify the proper degree of severity of punishment in terms of the deterrent effect.In this study,a marine ISPs compliance game model has been proposed to evaluate the deterrence effect of punishment on the non-compliance behavior of employee individuals.It is found that in a non-punishment contract,the employee will decline to comply with the marine ISPs;but in a punishment contract,appropriate punishment will lead her to select the marine ISPs compliance effort level expected by the employer,and cause no potential backfire effect.

MORAL HAZARD STRATEGY AND QUALITY CONTRACT DESIGN IN A TWO-ECHELON SUPPLY CHAIN

Based on game theory and principal-agent theory, this paper focuses on how to control product quality and design quality contract in supply chain when moral hazard exists. We set up the supplier and buyer＇s expected profits function model, in which the supplier makes production process investment-level decision and decides on the product quality prevention level, whereas the buyer makes quality evaluation decision and decides on the product quality inspection level. The supplier with a moral hazard of reducing investment level may lack investment in the production process; thus, the buyer will pay the information rent to incentivize the supplier to improve the investment level. The buyer creates the moral hazard of exaggerating the product quality defective rate, who may overinvest in the inspection process. We use the optimal condition to solve supplier＇s first-best investment level, product quality prevention level, and buyer＇s first-best quality inspection level, internal penalty, and apportionment ratio of external failure cost. We also conduct a simulation test that shows the following： When the supplier improves its investment level, its product quality prevention level will increase, and the buyer＇s quality inspection level will decrease. With the improvement in the buyer＇s product quality inspection level, its internal penalty will increase, and the supplier＇s external failure cost will also increase while its expected profits will decrease. Hence, the buyer will design an incentive contract, the expected profits of which will increase, and the whole supply chain＇s joint expected profits function may become an inverse U shape. Finally, we develop a simulation example and propose suggestions for quality control strategy and contract design in the supply chain under the conditions of asymmetric information.

Non-performing loans(NPLs),liquidity creation,and moral hazard:Case of Chinese banks

This study analyzes the impact of non-performing loans(NPLs)on bank liquidity creation to investigate the existence of moral hazard problem in Chinese banks.It uses data from 197 listed and unlisted Chinese banks,spanning the period 2005 to 2014.Total liquidity creation by Chinese banks is declining,and NPLs ratio has started to increase following a continuous decline between 2005 and 2012.Using one-step system GMM estimation,fixed and random effect model,and pool data analysis,we find that liquidity creation by Chinese banks does not depend on NPLs ratio,i.e.,we did not find the evidence of moral hazard problem in Chinese banks.We repeated the analysis for small and large banks and the results of these sub-samples reinforced our findings for the aggregate sample.

Research on a Kind of Double-sided Moral Hazard Problem

This paper develops a kind of generalized double-sided moral hazard model of contract choice with Cobb-Douglas technology in a frame of principal-agent theory. The two parties, the principal and the agent, generally have different levels of production efficiency, relative importance factor and are risk-averse or risk-neutral. Using this model, we formally prove that the optimal contract maximizes the output net of the disutility of both the parties and carry out some simulations exercise under two special cases which help explain the double-sided moral hazard issues. By focusing on production efficiency, relative importance factor and risk attitude respectively, this paper analyzes the properties of optimal contracts under three cases.

First Best Efficiency in Group Incentives

This paper examines moral hazard problems in team setting. It is shown that there may exist budget balancing Nash equilibrium sharing rules that yield Pareto optimal (first best) efficiency provided that any of the following three conditions is satisfied: if peer pressure plays the role of mutual monitoring, or if agents over estimate the effects of their actions on jointed production, or if agents are sufficiently risk averse. The role played by the monitors in inducing first best efficiency is also discussed.

Blockchain,Enterprise Digitalization,and Supply Chain Finance Innovation

Digital supply chain finance is an innovative product created through the integration of the blockchain technology and traditional supply chain finance.This paper constructs the theoretical framework of mortgage financing from banks by enterprises in the supply chain network,and systematically analyzes the economic rationale governing the digital supply chain finance,along with its pros and cons compared with traditional supply chain finance.The findings show,when there are enough enterprises on the supply chain and sufficient qualified information about these enterprises,the consensus mechanism of the supply chain can reveal closeto-truth enterprise information and prevent information manipulation,malicious fraud,and other moral hazards so that banks can provide accessible and affordable financing services for enterprises on the chain with risks effectively controlled.Otherwise,if there are not enough enterprises on the chain and the credibility of their information cannot be guaranteed,banks will prefer traditional offline methods such as due diligence for risk control.This paper theoretically reveals that,along with the broad application of the blockchain technology in the supply chain and the resulting digitalization of enterprises,digital supply chain finance based on blockchain technology will become a more efficient and inclusive means of financial support.