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.