Moral Hazard and the Soft Budget Constraint: A game-theoretic look at the primal cause of the sub-prime mortgage crisis

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dc.contributor.author Kotak, Akshay
dc.date.accessioned 2011-06-28T19:39:34Z
dc.date.available 2011-06-28T19:39:34Z
dc.date.issued 2010
dc.identifier.uri http://hdl.handle.net/1853/39401
dc.description The Tower is an official publication of the Georgia Tech Board of Student Publications and is sponsored by the Undergraduate Research Opportunities Program and the Price Gilbert Memorial Library System. This article is from Volume 2. en_US
dc.description.abstract This paper addresses one of the major causes of the sub-prime mortgage crisis prevalent in large American mortgage houses by the end of 2006. The moral hazard scenario and consequent malpractices are addressed with respect to the soft budget constraint. This analysis is done by first looking at the Dewatripont and Maskin model (1995), and then suitably modifying it to model the scenario at a typical mortgage lender. This simplistic model provides useful insight into how heightened bailout expectations, caused by precedent actions by the Federal Reserve, fueled risky behavior at banks who thought themselves to be "too-large-to-fail." en_US
dc.description.sponsorship Undergraduate Research Opportunities Program ; Price Gilbert Memorial Library System. en_US
dc.language.iso en en_US
dc.publisher Georgia Institute of Technology en_US
dc.relation.ispartofseries The Tower. Volume 2 en_US
dc.subject Sub-prime mortgage crisis en_US
dc.subject Mortgage lenders en_US
dc.title Moral Hazard and the Soft Budget Constraint: A game-theoretic look at the primal cause of the sub-prime mortgage crisis en_US
dc.type Article en_US
dc.description.advisor Emilson C. Silva, School of Economics, Georgia Institute of Technology


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