RECOURSE AND NON RECOURSE MORTGAGE LOANS: A THEORETICAL ANALYSIS UNDER ASYMMETRIC INFORMATION

Transcription

1 RECORSE N NON RECORSE MORTGGE LONS: THEORETICL NLYSIS NER SYMMETRIC INFORMTION Pelimina and Incomlete ann en-shaha,* Eal Sulgani,** and Eat Tolows*** ecembe 007 bstact comaing evidence om motgage maets woldwide, one can see that while lendes in some maets onl oe ecouse motgage loan contacts, lendes in othe maets exclusivel oe non-ecouse motgage loans. Moeove, lendes in et othe maets oten oe boowes a menu o both ecouse and non-ecouse loans. This stud attemts to exlain this henomenon as an outcome o asmmetic inomation in the maet. We constuct a model o motgage lending whee boowes ae dieentiated in thei level o deault is. We show that when the deault is measued b the obabilit o deault is unobsevable to lendes, then the exogenous natue o the eament in the case o deault ma geneate thee ossible equilibia: non-ecouse loan ooling, ecouse loan ooling, and seaation in which the high low deault is te boowe sel-selects b choosing the non-ecouse ecouse te motgage loan. It tuns out that the aticula te o equilibium attained in the maet is essentiall a consequence o the evailing deault iss and the dieence in the amounts eaid b boowes in the case o deault unde the ecouse and non-ecouse settings. The model suggests that the legal amewo aect the equilibium in the motgage maet. *Facult o chitectue and Town Planning, Technion Isael Institute o Technolog, Technion Cit, Haia 3000, Isael; telehone: , ax: , dannb@technion.ac.il **The ison School o usiness, The Intediscilina Cente Hezlia; P.O. ox 67, Hezlia 4650, Isael; telehone: , ax: , sulgani@idc.ac.il ***Leon Recanati Gaduate School o usiness dministation, Tel viv nivesit; P.O. ox 39040, Tel viv 69978, Isael; telehone: , ax: , eatt@ost.tau.ac.il

2 Intoduction In this stud we examine the ole o ecouse and non-ecouse loans om an advese selection esective. Paticulal, we attemt to ovide an exlanation to the obsevation accoding to which cetain maets onl oe ecouse motgage loan contacts while othes onl oe non-ecouse ones, and, et, some maet oe a menu o both ecouse and non ecouse motgage loan contacts. Ou geneal aoach ollows the sceening model o Rothschild and Stiglitz 976. Moe seciicall, ou amewo continues the seies o studies o motgage deault unde asmmetic inomation [see, among othe, Pose and Yavas 00, en- Shaha and Feldman 003, and en-shaha 006], whee we assume that while motgage boowes ae awae o thei deault obabilit, lendes ma not distinguish between high and low deault is tes. Essentiall, we show that a sceening equilibium ma attain, whee high low deault is te boowes sel-select b choosing the non-ecouse ecouse te motgage loan. Intuitivel, the dieence in boowes deault obabilities geneates the single-cossing oet equied o seaation, i.e., aing o the loan and the accued inteest is alwas, ex ante, moe costl to the boowe, the lowe is one s deault-is, ceteis aibus. Inteestingl, howeve, it tuns out that, due to the natue o the equied eament unde deault, ooling equilibia ma also exist in the maet: I the exected eament equied unde deault o the ecouse loan is suicientl close to that equied unde the non-ecouse loan i.e., when the exected eament in the case o deault on the non-ecouse loan is elativel high comaed with that on the ecouse loan, then a ecouse loan ooling contact ma evail in the maet. Intuitivel, it is elativel moe costl o the low is boowe to shit awa om the ecouse loan to the non-ecouse loan as the latte caies elativel geate exected eiodic aments o the low is boowe comaed with the high is te because o the dieence in the obabilit o eaing the loan without deault. In contast, when the exected eament equied dditional studies o motgage deault unde asmmetic inomation include, o examle, uecne 000, Fishe and Yavas 007, and en-shaha et al. othcoming. Recall that unde the setting o Rothschild and Stiglitz 976, onl a seaating equilibium ma hold unde cetain cicumstances, but no ooling equilibium can exist.

3 unde deault on the ecouse loan is suicientl geate than that equied unde the nonecouse loan, then a non-ecouse loan ooling equilibium evails. Intuitivel, when the eament unde deault in the case o the ecouse loan is suicientl high comaed with that on the non-ecouse loan, then shiting awa om the non-ecouse to the ecouse loan must be accomanied b a substantial discount on the eiodical eaments when no deault occus. This, howeve, might be too costl on behal o the lendes, who might not be able to maintain non-negative oits in that case. Reament in the case o deault on a non-ecouse loan is mostl eected b the legal amewo in the econom. Theeoe, the legal amewo aects the equilibium in the motgage maet. It should be noted that while vaious studies in the liteatue examine the ole o non-ecouse and ecouse loans in the maet, to the best o ou nowledge, none o them analze the simultaneous ole o these contacts unde asmmetic inomation. Childs et al. 996, o examle, conside the contacting value o ecouse and cossdeault clauses ove non-ecouse loan contacts. The show that deault is can be educed b ove it ecent o non-ecouse deault is when two coss-deault assets ae uncoelated. In addition, Pavlov and Wachte 004 demonstate how lendes in some cicumstances unde-ice the ut otion contained in non-ecouse loans, which, in tun, leads to inlated asset ices. Finall, Smith and Wane 979 and Stulz and Johnson 985 stud the imlications o secued and unsecued debt unde a cooate setting. In section we develo the model and deive the equilibia. We summaize in Section 3. The Model Conside a two-eiod model whee a consume uchases a eal estate unit in the ist eiod and liquidates in the second eiod. To inance the tansaction, the consume assumes a motgage loan in the ist eiod and is exected to ea the entie debt incial lus inteest in the second eiod. enote the boowe s available income in the ist eiod io to uchasing the asset b 0. We assume that boowe s income 3

4 changes in the second eiod to eithe o with obabilit - and, esectivel, whee >. Moeove, we assume that i income mateializes, then the boowe cannot ea the debt in ull and deault is declaed. In ode to motivate and acilitate the analsis o ecouse and non-ecouse loans, we assume that utue income uncetaint is the sole souce o is. Paticulal, we assume that thee is no uncetaint with esect to the value o the asset in the second eiod and, moeove, that the value o the uchased asset in the ist eiod, denoted b, is exected to do to -, whee is a ositive constant. 3 Finall, denote the initial loan-to-value atio LTV o the loan b L and let the dolla value o the boowe s beneit om consuming and owning the housing sevices geneated b the asset whose cost is equal to be eesented b whee >. The boowe is acing two tes o motgage loans: ecouse and non-ecouse. While the ome allows the lende to usue all o the boowe s esidual assets when deault is execised, the latte oes the lende the eal estate asset onl as collateal in the case o deault. It thus ollows that, om the boowe s esective, the ex ante exected cost o deault unde the ecouse loan aangement is geate than that unde the non-ecouse loan. Equivalentl, om the lende s standoint, the ex ante income in the case o deault is geate smalle unde the non- ecouse loan. enote then the total amount to be eaid on the loan in the occuence o deault that is when boowe s income is insuicient to ea the entie debt on the loan b R and NR o ecouse and non-ecouse loans, esectivel, whee R > NR. Note that R and NR ma also eesent the lende s income om the loan i deault is execised unde the ecouse and non-ecouse contacts, esectivel. 4 The boowes exected utilit om the motgaged loan tansaction, V, is then 3 While this assumtion ignoes the uncetaint about the utue value o the motgaged asset, it allows us to not onl ocus on anothe souce o uncetaint i.e., boowe s income but also, as will soon be claiied, to cleal addess the ole o ecouse and non-ecouse loans unde asmmetic inomation. lso, one can view the lowe value attained o the asset in the second eiod as the oiginal value net o tansaction cost and deeciation. 4 It could be agued that the lielihood o deault is, to a cetain extent, ositivel coelated with one s oveall wealth and theeoe that R and NR should be a unction o the deault obabilit. While, the inclusion o the latte altes the actual deived solution, it doe not aect the intuition that is illustated in the model. 4

5 V 0,, [, L,,,, = [ L 0 L ] ] [ j j whee is the boowe s continuous and twice dieentiable utilit om cash low unction, [ > 0 and < 0 ], is a time eeence acto, and j, j={r,nr}, denotes the inteest ate on the ecouse and non-ecouse loans, esectivel. lso, j, j={r,nr}, is the total amount to be eaid on the loan i deault occus and the motgage contact is ecouse and non-ecouse, esectivel. Equation thus assets that the boowe with a ist-eiod income o 0 assumes a loan, the amount o which equals L, uchases the asset o the ice o, and attains a beneit om consuming and owning the housing sevices, the dolla value o which is equal to. In the second eiod, the boowe liquidates and attains a value equal to -. lso, i income aises, the boowe as o the debt, the sum o which equals L. Howeve, with obabilit, income dos to a level o, in which case deault occus and the boowe can a o onl j. 5 a Equation can then be simliied into V = [ L ] { [ L j ] } 0 j The boowe aces a is-neutal lende whose oit om the motgage loan tansaction, Π, is L j j Π = L. That is, the lende ovides a loan, the amount o which equals L in the ist eiod and obtains L j, j={r,nr}, i no deault occus with obabilit - and j, j={r,nr}, i deault occus with obabilit all comuted in esent value tems. 6 ],. 5 Following Equation, in ode o the net second eiod income unde deault to be non-negative, we equie that j -. 6 Note that, om the standoint o the boowe, the amount j ma include distess and othe schological and/o economic costs associated with deault. I that is the case, then the lende s income unde deault is, in act, smalle than j. This adjustment, howeve, caies no eect on the analsis. lso, it ollows om Equation that in ode o to be ositive, it is uthe equied that <- L/ 5

6 Conside now the case whee boowes ae dieentiated b thei deault is. Suose that, without loss o genealit, two tes o boowe exist in the maet: a low deault-is boowe also denoted b te whose deault obabilit equals and a high deault-is boowe also denoted b te whose deault obabilit equals, whee >. Futhe, suose that the shae o te one boowes within the entie boowing oulation is equal to λ, λ [0,]. Given thei exeience and exetise in the maet, lendes ecognize the deault obabilities and thei shae in the maet; howeve, the ae unable to diectl obseve and distinguish between the boowing tes. 7 We ague, howeve, that given boowes eeence o loan te, lendes ma oe loan contacts ecouse and non-ecouse motgage loans with vaing levels o inteest ate, such that the boowes choices ull eveal thei deault is. Paticulal, we then claim Poosition : Thee exists a cometitive seaating equilibium unde which the high low deault-is boowe selects a non-ecouse ecouse motgage loan with a elativel highe lowe inteest ate, that is, = R, = NR, and >. Poosition : Thee does not exist a cometitive seaating equilibium unde which the high low deault-is boowe selects ecouse non-ecouse motgage loan. Poos: Given,, and two motgage contacts dieentiated b the coulets, and,, a cometitive seaating equilibium equies that the ollowing ae satisied: low is boowes ee, ove, ; that is, 3 V = [ > [ = V, 0 0, L ] L ],,,, { { [ L [ L ] } ] } 7 The assumtion accoding to which the aametes λ,, and ae nown to lendes and insues is easonable, given thei exeience and exetise in the maet. Hence, though the cannot distinguish between the tes o boowes, the ae nowledgeable about the maet in which the oeate. 6

7 7 high-is boowes ee, ove, ; that is, 4 0 0,,, [ ] { [ ] } [ ] { [ ] },,, V L L L L V = = and lendes maintain zeo oits; that is, 5 0.,,,, = = Π = = Π L L L L Seaatel adding both sides o Inequalities 3 and 4 oduces ate e-aanging: 6. } ] [ { } ] [ { } ] [ { } ] [ { L L L L > Inequalit 6 can be uthe eaanged into 7. } ] [ { } ] [ { L L > Howeve, note that, given P >P, o Inequalit 7 to hold, it can neve be the case that both and >. In addition, note that o Equation 5 to hold, it also ollows that it can neve be the case that both and. Hence, <. Finall, i <, then, in ode o Inequalit to hold, it is also necessa that <. Hence in an seaating equilibium we must have < and < end o oo o Poosition. It thus ollows that i a seaating equilibium exists, it is the high low deault is boowe who sel-selects b choosing the non-ecouse ecouse loan. Howeve, due to the comlexit o the unctions in conditions 3-5, we cannot show the existence o the seaating equilibium in closed-om. Yet we can use a simulation in ode to demonstate a seciic case o this equilibium and theeb show its existence.

8 Paticulal, obseve the case whee =ln, =0.05, =0., NR =0, and R =38. Table esents the attained seaating equilibium: Table : emonstating a seaating equilibium between high and low is deault is boowes. The aametes values assumed in this examle ae: =89.79, =3.4, =00, L=0.85, =70.57 =0.0, and =0.9. Vaiable Low Ris oowe High Ris oowe i i i i, i, i i, j, j Π i, i, i Table thus demonstates that the high-is low is boowe is bette o with a geate lowe inteest ate and a lowe geate cost in case o deault, i.e. a nonecouse ecouse motgage loan. The high deault-is boowe thus sel-selects b choosing the non-ecouse loan with a elativel high inteest ate, while the low deault-is boowe sel-selects b choosing the ecouse loan with a elativel lowe inteest ate. Seaation on the deaultis dimension is then attained while cometition among lendes is maintained. Intuitivel, note that > geneates the single-cossing condition equied o seaation, namel, that aing o the loan and the accued inteest is alwas, ex ante, moe costl in utilit tems o the low deault-is boowe, ceteis aibus. Equivalentl, the exected cost in the case o deault is, ex ante, geate o the high is boowe, ceteis aibus. The high is boowe theeoe ots o a highe inteest ate loan that will be aid onl i deault does not occu in etun o a otential lowe cost to be incued in the case o deault i.e. the non-ecouse loan conditions. Note that in equilibium, ollowing Rothschild and Stiglitz 976, the high deault-is boowe attains his o he ist best contact, while the low deault-is boowe maintains a second best choice. 8

9 Recall that unde the tical setting o the sceening model a la Rothschild and Stiglitz 976, thee cannot exist a ooling equilibium in the maet because the uninomed at i.e. the lende in ou case can alwas oe a oitable contact that will be ound moe beneicial to the high qualit te. Note, howeve, that in ou amewo the costs associated with the ecouse and non-ecouse loans, R and NR, ae exogenousl detemined and cannot be endogenousl detemined o the use o sceening b the uninomed at. In othe wods, in ode to sceen boowes, the lende obtains R and NR as given and can onl adjust the coesonding inteest ates in the attemt to imose the sel selection ocess on the boowes. The latte, howeve, educes the degees o eedom maintained b the othe lendes in thei attemt to ool the high qualit te awa om a otential ooling equilibium contact. Hence, a ooling equilibium ma exist. Fomall, we then ague Poosition 3: Thee exists a ooling equilibium in which all boowes attain a ecouse loan contact. Poo: enote the inteest ate on the ecouse ooling loan contact b R. Then, o a ooling equilibium in which both boowe tes attain a ecouse loan, it is equied that the ollowing conditions ae jointl satisied 8 L R R L R R λ [ L ] λ[ L ] = 0 and that thee does not exist * 0 o which 9 V = [ [ = V and, 0 0 NR L ] L ],, *, R, R, { { [ L *] } [ L R ] } NR R 9

10 0 L * NR L * NR λ[ L ] λ[ L ] > 0. In Equation 8, it is equied that, b oeing the ooling ecouse loan, lendes in cometition geneate zeo oits. The conditions in 9 and 0 uthe equie that thee does not exist * 0 that ma be oeed within a non-ecouse loan contact and that is both moe attactive to the low is boowe and to the lendes, esectivel note that it ollows om Poosition that an non-ecouse loan that is eeed b the low is boowe is necessail also eeed b the high is one and hence, o a ooling equilibium to exist in equilibium, condition 0 equies that thee does not exist a nonecouse loan that is eeed b all boowes and also geneates a non-negative oit to lendes. Now, note that o conditions 9 and 0 to hold, it is equied that, while NR < R, the level o NR is et suicientl lage such that the non-ecouse loan cannot attact all boowes aticulal, the low is ones in the esence o the ecouse ooling contact. ue to the comlexit o the unctions in conditions 8-0, we cannot exlicitl show the existence o the ooling equilibium. We can once again, howeve, al a simulation in ode to demonstate a seciic case o this equilibium and theeb show its existence. Paticulal, obseve the case whee =ln, =0.05, =0.0, NR =, R =30, and λ=0.5. Table esents the attained seaating equilibium: Table : emonstating a ecouse loan ooling equilibium between high and low deault is boowes. The aametes values assumed in this examle ae: =89.79, =3.4, =00, L=0.85, =70.57 =0.0, and =0.9, R =30, NR =, R =7.4%, *=8.90%. Vaiable Low Ris oowe High Ris oowe i R R 7.4% 7.4% i, R, R i, NR,* Π i, R, R

11 Π i, NR,* In Table, we comae two loan contacts: ecouse loan with R and R and nonecouse loan with NR and *, whee the latte is attained such that it oes the highest level o * that is et to be chosen b the low is boowe [note that, R, R =, NR,*=.96]. The oit geneated b lendes is equal to zeo unde the ecouse loan ooling equilibium with R and R, howeve, it tuns out to be negative =-0.7 unde the otential altenative with NR and *. The latte thus cannot annihilate the ooling equilibium as it cannot both ool the low is boowes awa om the ooling contact and geneate a non-negative oit to lendes. In ode to geneate ositive oits unde the non-ecouse loan, the lende must incease the level o *, howeve, this in tun will uthe ush the low-is te boowe awa om the non-ecouse loan to the ecouse loan. Intuitivel, the ecouse loan ooling equilibium becomes ossible as a esult o two eatues o the maet: the exogenous natue o the dieence in the costs that accoman deault unde the ecouse and the non-ecouse contacts that is R and NR and the single cossing oet which is a b-oduct o the dieent levels o deault is exeienced b the boowes. ue to the single cossing oet it is elativel moe costl o the low is boowe to shit awa om the ecouse loan to the nonecouse loan as the latte caies geate eiodic ament as long as no deault taes lace. It ollows that i the level o NR is suicientl lage elative to R, then in ode to oduce non-negative oits unde the non-ecouse loan, lendes must chage a elativel high inteest ate on that loan. This, in tun, maes it moe diicult o lendes to attact the low-is boowes who ae geneall moe liel to a the inteest ate aments and avoid an otential deault. Finall, note that due to the natue o the exogenous dieence in the costs that coesond to the ecouse and non-ecouse loans, a non-ecouse loan ooling equilibium ma also evail in the maet: Poosition 4: Thee exists a ooling equilibium in which all boowes attain a nonecouse loan.

12 Poo: enote the inteest ate on the non-ecouse ooling loan contact b NR. Then, o a ooling equilibium in which both boowe tes attain a non-ecouse loan, it is equied that the ollowing conditions ae satisied L NR NR L NR NR λ [ L ] λ[ L ] = 0 and that thee does not exist ** 0 o which V = [ [ = V, 0 0 R L ] L ],, **, NR, NR,, { { [ L **] } [ L NR ] } and 3 L ** R L ] > 0. Conditions -3 ae equivalent to conditions 8-0 with the equied adjustments: Equation guaantees that, b oeing the ooling non-ecouse loan, lendes in cometition geneate zeo oits. The conditions in and 3 uthe equie that thee does not exist * 0 that ma accoman a otential ecouse loan contact and that is both moe attactive to the low is boowe and to the lendes, esectivel note that, in contast to the case descibed in Poosition 3, it ollows om oosition that, comaed with the high is boowe, it is less costl o the low is boowe to acquie the ecouse loan. Hence, o a non-ecouse loan ooling equilibium to exist, condition 3 equies that thee ma not exist a ecouse loan that is onl eeed low is boowes and that might oduce a non-negative oit to lendes. Fo conditions and 3 to hold, it is equied that the level o R is suicientl lage elative to NR such that an otential ecouse loan does not ool the low is boowes awa om the non-ecouse ooling contact. gain, due to the R NR

13 comlexit o the unctions in conditions -3, we cannot exlicitl show the existence o the non-ecouse loan ooling equilibium. We can once again, howeve, al a simulation in ode to demonstate an examle o this equilibium and theeb show its existence. Paticulal, obseve the case whee =ln, =0.05, =0.0, NR =.5, R =40, and λ=0.5. Table 3 esents the attained ooling equilibium: Table 3: emonstating a non-ecouse loan ooling equilibium between high and low deault is boowes. The aametes values assumed in this examle ae: =89.79, =3.4, =00, L=0.85, =70.57 =0.0, and =0.9, R =40, NR =.5, NR =9.0%, **=4.89%. Vaiable Low Ris oowe High Ris oowe i NR.5.5 NR 9.0% 9.0% i, NR, NR i, R,** Π i, NR, NR Π i, R,** In Table 3, we comae two loan contacts: non-ecouse loan with NR and NR and ecouse loan with R and **, whee the latte is attained such that it oes the highest level o ** that is et to be chosen b the low is boowe [note that, R, NR =, R,**=.954]. The total oit geneated b lendes unde the nonecouse ooling contact with NR and NR is equal to zeo lus.00 om the low is and minus.00 om the high is, while the otential altenative ecouse loan with R and ** ma not geneate an ositive oit desite being exclusivel chosen b the low is boowe te ollowing the unctions in Table 3, note that the ecouse loan might onl ool the low is te awa om the non-ecouse loan, in which case, howeve, it et does not geneate a ositive oit. Futhemoe, it ollows that in ode o the ecouse loan to geneate a ositive oit to lendes, the lende must incease the level o **, howeve, this in tun will uthe ush the low-is te boowe awa om 3

14 the ecouse loan to the non-ecouse loan. Hence, thee is no otential o a ecouse loan to annihilate the non-ecouse loan contact ooling equilibium. Intuitivel, note that due to the single cossing oet that is, <, low is boowes ae moe liel to ee the ecouse loan than do the high is boowes. Nonetheless, i the eament unde deault in the case o the ecouse loan R is suicientl high elative the equivalent eament in the case o the non-ecouse loan NR, then shiting awa om a non-ecouse to a ecouse loan must be accomanied b a substantial discount in the inteest ate. This, howeve, might be too costl on at o the lendes, who might not be able to maintain non-negative oits with this low inteest ate. 3 Summa While lendes in cetain maets onl oe ecouse motgage loan contacts, lendes in othe maets exclusivel oe non-ecouse motgage loans, and in et othe maets lendes oe both ecouse and non-ecouse loans. In this stud, we attemt to exlain these equilibia unde asmmetic inomation amewo. Essentiall, when boowes deault is is unobsevable to lendes, then thee exists a sceening equilibium, whee the high low deault is te boowe selselects b choosing the non-ecouse ecouse te motgage loan. Moeove, when the dieence in the cost caied b boowes in case o deault unde the ecouse and the non-ecouse motgage loan is elativel small lage a ooling equilibium ma evail whee onl ecouse non-ecouse loans ae oeed in the maet. Seveal emas should ollow the analsis. Fist, although in ou model we ee to onl two tes o boowe, ollowing Rothschild and Stiglitz 976, the extension o the model to a multi-te setting is immediate. lso, it should be noted that the natue o the costs aid unde deault in this stud is exogenous. In eect, this imlies that the loan-to-value vaiable in ou amewo is ixed and the onl choice vaiables ae the te o loan ecouse and non-ecouse and the accomanied inteest ate. Futue eseach ma uthe allow the loan-to-value atio to va among loans and, theeb, emit the cost o deault to be a unction o the chosen loan-to-value atio. 4

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16 Reeences en-shaha, ann, and avid Feldman, 003. Signaling-sceening equilibium in the motgage maet. Jounal o Real Estate Finance and Economics, 6: en-shaha, ann, 006. Sceening motgage deault is: uniied theoetical amewo. Jounal o Real Estate Reseach, 83:5-39. en-shaha, ann, Gilat enchetit, and Eal Sulgani, othcoming. The Isaeli motgage maet: Motgage insuance as a mechanism o sceening deault is. In: Motgage Maets Woldwide, ed. en-shaha, Leung, and Ong. Wile-lacwell. uecne, J. K., 000. Motgage deault with asmmetic inomation. Jounal o Real Estate Finance and Economics, 0:5-74. Childs, Paul., Steven H. Ott, and Timoth J. Riddiough, 996. The value o ecouse and coss-deault clauses in commecial motgage contacting. Jounal o aning and Finance, 03:5-36. Fishe, Lnn M., and bdullah Yavas, 007. The vale o equitable edemtion in commecial motgage contacting. Jounal o Real Estate Finance and Economics, 354:4-5. Pavlov, nde, and Susan, 004. Wachte. Robbing the ban: Non-ecouse lending and asset ices. Jounal o Real Estate Finance and Economics, 83: Pose, L., and. Yavas, 00. djustable and ixed motgages as a sceening mechanism o deault is. Jounal o ban Economics, 49: Rothschild, M., and J. E. Stiglitz, 976. Equilibium in cometitive insuance maets: n essa on the economics o imeect inomation. Quatel Jounal o Economics, 90: Smith, Cliod W., and Jeold. Wane, 979. On inancial contacting: n analsis o bond covenants. Jounal o Financial Economics, 7:7-6. Stulz, Rene M., and Heb Johnson, 985. n analsis o secued debt. Jounal o Financial Economics, 44:50-. 6