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Can Bailout Improve the Economic Welfare? A Structural Derivation of the Option Price

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DOI: 10.4236/tel.2013.32017    3,092 Downloads   4,754 Views
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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].

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M. Otaki, "Can Bailout Improve the Economic Welfare? A Structural Derivation of the Option Price," Theoretical Economics Letters, Vol. 3 No. 2, 2013, pp. 105-107. doi: 10.4236/tel.2013.32017.

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