Anna Maria Menichini: Optimal multiple loan contracts under endogenous audits and contagion losses (with P. Simmons)
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A/EW/105, Alcuin East Wing, Campus West, University of York (Map)
Event details
Author: Anna Maria C. Menichini (Salerno)
Abstract: We propose a rationale for the joint financing of two independent projects based on the reduction in audit costs resulting from endogenous verification. This cost reduction occurs not only when joint financing offers coinsurance benefits, but, remarkably, also in the presence of contagion losses -where the failure of one project negatively impacts the other. This is because the cost-saving benefits from endogenous verification, specifically the optimal tailoring of audit intensity to joint reported outcomes, can offset the additional costs arising from contagion. We provide a detailed characterisation of the optimal contract, showing that under certain conditions it takes the form of standard debt. Furthermore, we conduct a comparative static analysis relating the optimality of joint financing to the quality of accounting information. Importantly, we find that, with fully transparent accounting information, joint financing always dominates single financing even under contagion. The results remain robust across scenarios involving simultaneous audits and multiple projects.
Host: Peter Simmons (Emeritus York)
Cluster: Micro Theory