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Can Bailout Improve the Economic Welfare? A Structural Derivation of the Option Price
Institute of Social Science, University of Tokyo, Tokyo, Japan
- 1 Institute of Social Science, University of Tokyo, Tokyo, Japan
Theoretical Economics Letters·Volume 03 (2013)·Pages 105–107·Published 29 April 2013·DOI10.4236/tel.2013.32017
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Abstract
We developed a game-theoretic approach concerning the option pricing validity and tractability of which is ascertained by deriving the Black-Scholes formula. We also applied this approach to the welfare implications of the bailout policy. It is found that such a policy always worsens the economic welfare. This is because of the moral hazardous behavior of the buyer owing to the limited liability which is emphasized, for example, by Arrow [1] and Stiglitz and Weiss [2].
KeywordsOption Pricing by a Game-Theoretic ApproachMoral Hazard by Limited LiabilityWelfare Economics Concerning Bailout Policy
- K. J. Arrow, “Uncertainty and the Welfare Economics of Medical Care,” American Economic Review, Vol. 53, No. 5, 1963, pp. 941-973.
- J. E. Stiglitz and A. Weiss, “Credit Rationing in Markets with Imperfect Information,” American Economic Review, Vol. 71, No. 3, 1981, pp. 393-410.
- F. Black and M. Scholes, “The Pricing of Options and Corporate Liabilities,” Journal of Political Economy, Vol. 81, No. 3, 1973, pp. 637-659. doi:10.1086/260062