Footnote:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments January 2023 erstellt
Description:
Is excessive risk-taking in credit cycles driven by incentives or biased beliefs? I propose a framework suggesting that the two are actually related and, specifically, that procyclical overoptimism can arise rationally from risk-taking incentives. I show that when firms and banks have a limited liability payoff structure, they have lower incentives to pay attention to the aggregate conditions that generate risk. This leads to systematic underestimation of the accumulation of risk during economic booms and overoptimistic beliefs. As a result, agents lend and borrow excessively, further increasing downside risk. Credit cycles driven by this new "uninformed" risk taking are consistent with existing evidence such as high credit and as low risk premia predicting higher probability of crises and negative returns for banks. My model suggests that regulating incentives can decrease overoptimistic beliefs and thus mitigate boom-and-bust cycles