Crowdfunding and bank financing: substitutes or complements?

In this paper, we analyze a firm choice between crowdfunding and bank financing. For many entrepreneurs, it is an important issue. We analyze a model where the choice of financing is affected by moral hazard problem regarding the choice of production scale that favors bank financing, and by the uncertainty about market demand that favors crowdfunding. We argue that long crowdfunding campaigns or campaigns with large targets usually are less efficient in mitigating moral hazard problem than small/short campaigns. We also argue that high-quality firms and firms with potentially large markets will tend to select bank financing while projects with largest amount of investment should select mixed financing where the firm uses a short crowdfunding campaign and a bank loan. Most of our model empirical predictions have not been directly tested so far while they are indirectly consistent with available evidence.

Targeted Sanctions and Deterrence in the Twenty-first Century

The use of sanctions is often associated with coercion and deterrence. The former implies that sanctions contribute to changing the behaviour of targets, while the latter suggests that the damage threatened by sanctions should discourage actors from embarking on certain policies. However, sanctions have evolved substantially over the last twenty years, thus this chapter discusses whether the emergence of targeted sanctions was enough to change the classical deterrence/sanctions relation. This chapter argues that while there are similarities with the past, there are elements of change that need to be carefully considered. On the one hand the imposition of a cost to certain policy actions, the existence of an audience and the potential impact on the wider society remain central problems for both comprehensive and targeted sanctions. On the other hand, targeted sanctions present unique features that directly interact with the concept of deterrence. First, sanctions do not target states and governments only, but also individuals and non-state actors. Second, targeted sanctions are designed to reduce their impact not only on innocent civilians, but there are clear boundaries of damage that can be inflicted on targets. Third, targeted sanctions can have a moral hazard problem, so that their imposition creates an incentive for actors to embark on the very actions that sanctions aim to deter.

Incentives in Brazilian Bolsa Família CCT Program: Adverse selection, moral hazard, improving mechanisms and simulations

The <em>Bolsa Família</em> CCT Program (BFP) has successfully reduced poverty in Brazil. However, the theoretical literature on associated economic incentives is scarce. A mechanism-design analysis identifies problems of adverse selection and moral hazard in the BFP. The paper proposes simple improving incentive-mechanisms. The Citizens’ Contribution Mechanism (CCM) requires beneficiaries to devote time to the PBF encouraging recipients with higher income to leave. The Graduation Mechanism (GM) offers financial incentives to ensure sustainable emancipation of qualified beneficiaries. The Human Capital Incentive Mechanism (HCM) increases transfers to efficient municipalities. We show that the CCM solves the adverse selection problem, the GM solves the moral hazard problem of beneficiaries and the HCM solves a moral hazard problem of local managers. A simulation based on 2010 census data shows that the mechanisms allow, within 6 years, significant increases in the reach and precision of the PBF and yields cost reductions of over R$4.6 billion.

Behavioral determinants of nonperforming loans in Bangladesh

PurposeOver the last ten years (2010–2019), the amount of nonperforming loans (NPLs) has been more than tripled in the banking industry of Bangladesh. Thus, this paper explores the behavioral dimensions, which contribute to the NPLs.Design/methodology/approachBy analyzing social, cultural, psychological, political, economic, internal control mechanism and law enforcement contexts of Bangladesh, this study identifies nepotism (NE), moral hazard (MH ), inadequate collateral (IC), poor credit assessment (CA), lack of proper monitoring (LPM), repayment flexibility (RF), business risk (BR) and lending interest rate (LIR) as the catalysts of raising NPLs. Next, a structured questionnaire survey has been performed in Bangladesh among bank officials who closely work in credit risk management, credit supervision, corporate finance and loan recovery department. Finally, partial least squares (PLS) path modeling, a variance-based technique of structural equation modeling, is used in this study as a statistical tool to analyze the data.FindingsThis study finds that moral hazard problem, lack of proper monitoring, inadequate collateral and nepotism have significant positive impact on the raising of NPLs. Unfortunately, this study does not find any statistical significance of poor credit assessment, business risk and repayment flexibility on the NPLs in Bangladesh. Finally, this study reveals that lending interest rate has significant positive impact on the NPLs. Hence, this study concludes that domestic lending interest rate is not lower enough, and so this double-digit interest rate affects negatively to loan repayment.Research limitations/implicationsThis study concludes that moral hazard problem of borrower, lack of board independence, lack of proper monitoring, form and extent of collateral, management lobbying, indecorous personal guarantee by management, dependent-independent directors and nepotism are extensively contributing for occurring NPLs in Bangladesh. These noninstitutionalized stimulators should adequately be scrutinized by regulatory bodies, policy makers and banks. Besides, LIR needs to be decreased in a convenient level for mitigating NPLs.Originality/valueThis study is the empirical evidence of behavioral dimensions related with the growth of NPLs in Bangladesh by taking direct response from knowledgeable bankers.

Costs of Job Rotation: Evidence from Mandatory Loan Officer Rotation

Job rotation inside an organization creates two conflicting effects. It disciplines agents by creating the fear that their successors may discover and report their hidden information. Thus, the agent takes actions that align with the principal’s objective. However, job rotation can create a moral hazard problem. If information is soft and therefore, nonverifiable, the principal cannot attribute blame to the agent or the successor. Agents shirk, thereby hurting performance. Thus, the importance of disciplining versus moral hazard effects depends on the availability of hard information. Using unique loan-level data, we show that job rotation hinders performance when the information is soft. This paper was accepted by Giesecke Kay, finance.

Delegating Pricing Authority to Sales Agents: The Impact of Kickbacks

We investigate a situation where a firm employing a sales agent faces moral hazard with respect to prospecting effort and the threat of collusion between agent and customer. We show that the firm should offer more pricing authority to the agent the more severe the moral hazard problem, although doing so further expands the agent’s discretion. Nevertheless, restricting the agent’s pricing authority such that he cannot sell to low-valuation customers is typically optimal to prevent collusion. We derive optimal collusion-proof contracts, describe conditions under which collusion arises in equilibrium, and study the optimal interaction between delegation, incentive pay, and the firm’s installed auditing technology. This paper was accepted by Juanjuan Zhang, marketing.

Optimal Performance Targets

We study a class of contracts that is becoming ever more common among executives, in which the manager earns a discrete bonus if performance clears an explicit threshold. These performance targets provide the firm with an additional instrument to resolve its moral hazard problem with its manager. The performance target can achieve first-best under risk neutrality, with a target precisely equal to the desired effort that the firm seeks to induce. The optimal bonus increases in risk. If the manager is sufficiently risk averse, the firm will shade the optimal target below equilibrium effort to provide a form of insurance to the manager, outside of the standard reduction in the bonus.