Roger B. Myerson (2011) - A Model of Moral-Hazard Credit Cycles

Roger B. Myerson (2011)

A Model of Moral-Hazard Credit Cycles

Roger B. Myerson (2011)

A Model of Moral-Hazard Credit Cycles

Abstract

This paper considers a simple model of credit cycles driven by moral hazard in financial intermediation. Investment advisers or bankers must earn moral-hazard rents, but the cost of these rents can be efficiently spread over a banker's entire career, by promising large back-loaded rewards if the banker achieves a record of consistently successful investments. The dynamic interactions among different generations of bankers can create equilibrium credit cycles with repeated booms and recessions. We find conditions when taxing workers to subsidize bankers can increase investment and employment enough to make the workers better off.

The full paper is available at
http://home.uchicago.edu/~rmyerson/research/bankers.pdf

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