TITLE:
Can Bailout Improve the Economic Welfare? A Structural Derivation of the Option Price
AUTHORS:
Masayuki Otaki
KEYWORDS:
Option Pricing by a Game-Theoretic Approach; Moral Hazard by Limited Liability; Welfare Economics Concerning Bailout Policy
JOURNAL NAME:
Theoretical Economics Letters,
Vol.3 No.2,
April
30,
2013
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].