Next two class sessions

Tomorrow we will start talking about moral hazard, the principal-agent problem as exemplar of moral hazard, and do so to get concepts out there and real examples considered. I plan to avoid using a PowerPoint in this session so we can get more interaction in class.

On Wednesday we'll do the math of the principal-agent problem in chapter six in M&R, introducing that with the insurance model, and moving from there.  We'll also do the S&L example from the book and talk about bank moral hazard in the presence of deposit insurance.  (The same sort of moral hazard may be present in a takeover financed by "junk bonds.")  We'll also do a brief discussion of the S&L crisis of the late 1980s and ask the question - why did history repeat only much worse in the financial markets in the 2000s.

I will use a PowerPoint for the Wednesday class so you can see the equations and work through the algebra.  I will not be giving out an Excel homework - it simply takes too long to write so there is some expediency in this approach.

I will guarantee now that something on Moral Hazard will be present on Midterm 2, so I hope you take this seriously in spite of the lack of Excel homework.