INVESTMENT, CONSUMPTION SMOOTHING WITH CREDIT GUARANTEE AND ADVERSE SELECTION

Liu, Xiang1; Yang, Zhaojun1,2

2022-12-01

10.3934/jimo.2022246

Journal of Industrial and Management Optimization   Impact Factor & Quartile

1547-5816

1553-166X

This paper develops a single-period model of investments with credit guarantee swaps including Fee-for-Guarantee Swaps (FGSs), Equity-for-Guarantee Swaps (EGSs) and Option-for-Guarantee Swaps (OGSs). Enter-prises have two types and high-quality enterprises suffer from adverse selection. The entrepreneurs are risk-averse while insurers are risk-neutral, taking on all default losses. We show that in pooling equilibria, high-quality enterprises are forced to transfer partial profits to low-quality ones. Even in separating equilibria, it is possible that high-quality enterprises suffer losses from adverse selection. As far as high-quality enterprises are concerned, OGS financing modes are the best, and they are more likely to reach separating equilibria than others. Only if the guarantee cost is feasible, the higher the strike price of the option, the higher the project value, and the optimal strike price makes guarantee cost arrive at its maximum feasible value.

  Credit guarantee adverse selection signalling game guarantee con tract design

SCI

English

First ; Corresponding

National Natural Science Foundation of China[72031003] ; Philosophy, Social Science Plan Project of Guangdong Province in China[GD19CYJ23]

Engineering ; Operations Research & Management Science ; Mathematics

Engineering, Multidisciplinary ; Operations Research & Management Science ; Mathematics, Interdisciplinary Applications

WOS:000938059100001

AMER INST MATHEMATICAL SCIENCES-AIMS

Web of Science

1.Southern Univ Sci & Technol, Dept Finance, Shenzhen, Peoples R China
2.Natl Ctr Appl Math Shenzhen, Shenzhen, Peoples R China

Liu, Xiang,Yang, Zhaojun. INVESTMENT, CONSUMPTION SMOOTHING WITH CREDIT GUARANTEE AND ADVERSE SELECTION[J]. Journal of Industrial and Management Optimization,2022.

Liu, Xiang,&Yang, Zhaojun.(2022).INVESTMENT, CONSUMPTION SMOOTHING WITH CREDIT GUARANTEE AND ADVERSE SELECTION.Journal of Industrial and Management Optimization.

Liu, Xiang,et al."INVESTMENT, CONSUMPTION SMOOTHING WITH CREDIT GUARANTEE AND ADVERSE SELECTION".Journal of Industrial and Management Optimization (2022).