CHASSAGNON Arnold

We study capital markets in which investors compete by designing financial contracts to control an entrepreneur’s ability to side trade and default on multiple loans. We show that covenants may have anticompetitive effects: in particular, they prevent investors from providing additional funds and reduce the entrepreneur’s investment capacity. As a result, a large number of inefficient allocations is supported at equilibrium. We propose a subsidy mechanism similar to guarantee funds in financial markets that efficiently controls the entrepreneur’s side trading and sustains the competitive allocation as the unique equilibrium one.

We study a credit market in which multiple lenders sequentially offer financing to a single borrower under moral hazard. We show that restricting lenders to post single offers involves a loss of generality: none of the equilibrium outcomes arising in this scenario survives if lenders offer menus of contracts. This result challenges the approach followed in standard models of multiple lending. From a theoretical perspective, we offer new insights on equilibrium robustness in sequential common agency games.

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We study competition in capital markets subject to moral hazard when investors cannot prevent side trading. Perfect competition is impeded by entrepreneurs’ threat to borrow excessively from multiple lenders and to shirk. As a consequence, investors earn positive rents at equilibrium. We then analyze how investors’ ability to design financial contracts with covenants deals with this counterparty externality. We show that enlarging investors’ contracting opportunities generates a severe market failure: with covenants, market equilibria are indeterminate and Pareto ranked. Market outcomes are then determined by designing specific financial institutions. Information sharing systems restore efficiency but leave a positive rent to investors. A mechanism of investors-financed subsidies to entrepreneurs mitigates the threat of default and sustains the competitive allocation.

The subject of my thesis is a continuation of the principal-agent literature with adverse selection, in insurance, we study a more general model than the Rothschild-Stiglitz model, assuming only the continuity of the agents' preferences and the semi-continuity of the principals' profit functions. This model retains certain analogies with the standard model, and in particular the existence of a dominant revealing mechanism. But it allows us to obtain a multiplicity of equilibria, or even a continuum, whereas the standard model gives only a single equilibrium. The existence of new types of equilibrium in which the two agents obtain contracts that are indifferent to each other is emphasized. This eventuality imposes to distinguish between nash equilibria in contracts and in schedules. These results are obtained from a detailed analysis of the properties of the revealing mechanisms. We finally show, under the hypotheses of quasi-concavity of the utility and profit functions of the agents, that a separating equilibrium always exists for at least a certain average composition of the population. A second line of research applies the above general model to several specific economies. To this end, we develop a mathematical algorithm that converges to the contracted equilibrium that dominates in a pareto sense all equilibria in the model. The double sequence of individually profitable contracts that we construct, starting from the top-ranking contracts, and, by successive bullying of the agents whose contract induces jealousy, converges to a mechanism revealing a potential separating equilibrium. Let us point out a particularly new result when we relax the hypothesis of agents with the same risk aversion in the framework of the utility expectation model: the possibility of a competitive equilibrium with free entry and strictly positive profit.