Chapter 2

Dynamic Security Design and Corporate Financing*

Yuliy Sannikov


This essay considers dynamic security design and corporate financing, with particular emphasis on informational microfoundations. The central idea is that firm insiders must retain an appropriate share of firm risk, either to align their incentives with those of outside investors (moral hazard) or to signal favorable information about the quality of the firm’s assets. Informational problems lead to inevitable inefficiencies—imperfect risk sharing, the possibility of bankruptcy, investment distortions, etc. The design of contracts that minimize these inefficiencies is a central question. This essay explores the implications of dynamic security design on firm operations ...

Get Handbook of the Economics of Finance SET:Volumes 2A & 2B now with O’Reilly online learning.

O’Reilly members experience live online training, plus books, videos, and digital content from 200+ publishers.