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Contract Design for Problem Asset Disposition
Author(s) -
Benveniste Larry,
Capozza Dennis R.,
Kormendi Roger,
Wilhelm William
Publication year - 1994
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/1540-6229.00630
Subject(s) - receivership , finance , business , incentive , asset (computer security) , corporation , real estate , principal (computer security) , principal–agent problem , moral hazard , asset management , economics , actuarial science , microeconomics , insolvency , corporate governance , computer security , computer science , operating system
As a result of declining real estate values and the receivership of numerous financial institutions, government regulators like the Resolution Trust Corporation (RTC) and Federal Deposit Insurance Corporation (FDIC) have large inventories of distressed assets. This paper develops a model of the principal/agent issues associated with management and disposition of problem assets. In the model, optimal contracts balance risk sharing with incentives for effort. We argue that the RTC will minimize the ultimate cost of the thrift crisis by placing managerial control of distressed assets in the private sector, while retaining full or partial ownership of the assets for risk‐sharing purposes. Recoveries are maximized, however, only when an asset manager is incented to expend a first‐best level of effort by indexing asset management and disposition contracts to market movements.