Univrsity Of Tehran Press Financial Research Journal 1024-8153 17 1 2015 03 21 Optimal design of securitization in a principal-agent relationship based on Bayesian inference for moral hazard Optimal design of securitization in a principal-agent relationship based on Bayesian inference for moral hazard 123 140 50708 10.22059/jfr.2015.50708 FA Ezatollah Abbasian Associate Prof., Faculty of Economic and Social Sciences, Bu Ali Sina University, Hamada, Iran 0000-0001-8364-6461 Mohsen Ebrahimi Associate Prof., Faculty of Economic and Social Sciences, Bu Ali Sina University, Hamada, Iran Elham Farzanegan Ph.D. Candidate in Economics, Faculty of Economic and Social Sciences, Bu Ali Sina University, Hamada, Iran 0000-0002-3725-3189 Journal Article 2014 05 02  In the securitization process, by selling the mortgage loans to risk-lover investors, originator can allocate the mortgage loans risk to them. In this case, originator may not have an incentive to screen out borrowers, resulting in the moral hazard problem. This paper, within a principal-agent framework, analyzes this agency problem. Investor, to reduce asymmetric information, uses compensation scheme for giving incentives to the originator and by using the Bayesʼ rule, deals with inferring various dimensions of undertaken effort, and incorporates her joint posterior beliefs of the pooled loans’ credit position data and inferred various dimensions of effort into the designing contract problem. The results indicate that the shape of optimal contract is a function of the information content of investors’ observations and inferred knowledge about efforts, suggesting that using additional information prevents originator’s opportunism, the originator more likely performs the obligated tasks when lending the loans to the applicants.  In the securitization process, by selling the mortgage loans to risk-lover investors, originator can allocate the mortgage loans risk to them. In this case, originator may not have an incentive to screen out borrowers, resulting in the moral hazard problem. This paper, within a principal-agent framework, analyzes this agency problem. Investor, to reduce asymmetric information, uses compensation scheme for giving incentives to the originator and by using the Bayesʼ rule, deals with inferring various dimensions of undertaken effort, and incorporates her joint posterior beliefs of the pooled loans’ credit position data and inferred various dimensions of effort into the designing contract problem. The results indicate that the shape of optimal contract is a function of the information content of investors’ observations and inferred knowledge about efforts, suggesting that using additional information prevents originator’s opportunism, the originator more likely performs the obligated tasks when lending the loans to the applicants. https://jfr.ut.ac.ir/article_50708_4ef58cecfd0f680fd2b92dd4ba89b06f.pdf