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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    3,053 Downloads   4,693 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].

Conflicts of Interest

The authors declare no conflicts of interest.

Cite this paper

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.

References

[1] K. J. Arrow, “Uncertainty and the Welfare Economics of Medical Care,” American Economic Review, Vol. 53, No. 5, 1963, pp. 941-973.
[2] J. E. Stiglitz and A. Weiss, “Credit Rationing in Markets with Imperfect Information,” American Economic Review, Vol. 71, No. 3, 1981, pp. 393-410.
[3] 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

  
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