Unobservable Costly Effort in Security Design

Journal article


Robertson, M. (2024). Unobservable Costly Effort in Security Design. Economics Letters. 235. https://doi.org/10.1016/j.econlet.2024.111573
AuthorsRobertson, M.
Abstract

I introduce unobservable costly effort into the canonical signalling model of security design. The choice of effort determines the quality of the security and creates an additional optimisation problem the firm must solve. My main result is that both optimal effort and optimal profits are decreasing in the firm’s preference for liquidity. I also show that optimal effort is greater under symmetric information. My approach provides a theoretical explanation for empirical results that cannot be obtained within the standard signalling framework. In addition, I extend existing methods to solve signalling models with endogenous private information.

KeywordsSignalling; Security design; Securitisation; Adverse selection; Costly effort
Year2024
JournalEconomics Letters
Journal citation235
PublisherElsevier
ISSN1873-7374
Digital Object Identifier (DOI)https://doi.org/10.1016/j.econlet.2024.111573
Web address (URL)https://www.sciencedirect.com/science/article/pii/S0165176524000569
Publication dates
Print30 Jan 2024
Publication process dates
Accepted27 Jan 2024
Deposited16 Feb 2024
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Open
Accepted author manuscript
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Controlled
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