wall street occupations many finance jobs entail the risk of large losses and hard to monitor effort we analyze the equilibrium consequences of these features in a model with optimal dynamic contracting we show that finance jobs feature high compensation up or out promotion and long work hours and are more attractive than other jobs moral hazard problems are exacerbated in booms even though pay increases employees whose talent would be more valuable elsewhere can be lured into finance jobs while the most talented employees might be unable to land these jobs because they are too hard to manage

corporate social responsibility and profit volatility theory and empirical evidence corporate social responsibility csr implies extra care for the well being of stakeholders different from shareholders in our theoretical model we show that when this principle implies that more csr oriented companies incorporate stakeholders well being constraints it translates into higher sensitivity of profits to economic shocks our empirical analysis finds support for this hypothesis showing that csr attributes which relate to positive contributions to stakeholders well being significantly and positively affect idiosyncratic profit volatility our findings remain robust when controlled for endogeneity with instrumental variable estimates

repeated moral hazard and contracts with memory the case of risk neutrality we consider a repeated moral hazard problem where both the principal and the wealth constrained agent are risk neutral in each of two periods the agent can exert unobservable effort leading to success or failure incentives provided in the second period act as carrot and stick for the first period so that the effort level induced in the second period is higher after a first period success than after a failure if renegotiation cannot be prevented the principal may prefer a project with lower returns i e a project may be too good to be financed or similarly an agent can be overqualified this article offers a new perspective on dynamic moral hazard problems consider a riskneutral principal who can hire a risk neutral but wealth constrained agent the agent can exert unobservable effort which increases the likelihood of success in the one shot problem there is a well known trade off between effort incentives and rent extraction which leads to a downward distorted effort level compared to the first best solution we extend the standard model by assuming that there is a second period in which the principal can make an investment to continue the project and the agent can again exert unobservable effort it turns out that there are several interesting insights that so far have escaped the literature on repeated moral hazard which was focused on the case of risk averse agents in particular if the principal can commit not to renegotiate the second period incentives can be used to partially circumvent the limited liability constraint in the second period the principal induces the agent to choose a particularly high effort level following a first period success and a particularly low effort level following a first period failure the prospect of a higher second period rent following a first period success motivates the agent to exert more effort in the first period i e rents in the second period act as reward and punishment for the first period it should be emphasized that we assume no technological impact of a first period success or failure on the second period technology nevertheless an optimal dynamic contract exhibits memory hence if an outsider observed today a principal agent pair that was successful and another identical pair that was not successful he would be right to predict that the first pair also is more likely to succeed tomorrow in other words a serial correlation across periods which we sometimes refer to as a hot hand effect is generated endogenously merely based on incentive considerations 2

financial contracting theory meets the real world an empirical analysis of venture capital contracts we compare the characteristics of real world financial contracts to their counterparts in financial contracting theory we do so by studying the actual contracts between venture capitalists vcs and entrepreneurs the distinguishing characteristic of vc financings is that they allow vcs to separately allocate cash flow rights board rights voting rights liquidation rights and other control rights we describe and measure these rights we then interpret our results in relation to existing financial contracting theories we also describe the interrelation and the evolution across financing rounds of the different rights query 1 query 2

ambiguous incentives and the persistence of effort experimental evidence abstract when the assignment of incentives is uncertain we study how the regularity and frequency of rewards and risk attitudes influence participation and effort we contrast three incentive schemes in a real effort experiment in which individuals decide when to quit a continuous incentive scheme and two intermittent ones fixed and random in all treatments we introduce a regime shift by withdrawing monetary rewards after the same unknown number of periods in such an ambiguous environment we show that less able and more risk averse players are less persistent in effort intermittent incentives lead to a greater persistence of effort while continuous incentives entail exit as soon as payment stops randomness increases both earlier and later exiting this selection effect in terms of ability and risk attitudes combined with the impact of intermittent rewards on persistence lead to an increase in mean performance after the regime shift when incentives are intermittent

breakthroughs deadlines and self reported progress contracting for multistage projects we study the optimal incentive schemes for multistage projects staged financing pervasive in both venture capital and research grants arises as a feature of the optimal contract the nature of progress plays an important role when progress is tangible incentives are provided through a series of deadlines and a reward scheme that decreases over time early progress in one stage gives the agent more time and funding to complete the next one when progress is intangible unverifiable progress reports are used despite the fact that the information in the report has no social value the optimal contract involves a soft deadline wherein the principal guarantees funding up to a certain date if the agent reports progress at that date then the principal gives him a relatively short deadline to complete the project if not then a probationary phase begins in which the project is terminated at a constant rate until progress is reported we explore the implications for welfare and optimal project design

dynamic pricing in the presence of individual learning abstract this paper studies price dynamics in a setting in which a monopolist sells a new experience good over time to many buyers and the seller can neither price discriminate among the buyers nor commit to a price rule buyers learn from their own experiences about the effectiveness of the product individual learning generates ex post heterogeneity which affects the buyers purchasing decisions the monopolist s pricing strategy and efficiency when learning occurs through good news signals buyers receive a rent because of the possible advantageous belief caused by short lived deviations if a good news signal arrives the price can instantaneously increase or decrease depending on the arrival time of this signal the equilibrium is inefficient because the monopolist s incentive to exploit known buyers leads to inefficient early termination of exploration when learning occurs through bad news signals ex post heterogeneity has no such effect since only homogeneous unknown buyers purchase the experience good

agency and optimal investment dynamics agency problems limit firms access to capital markets curbing investment firms and investors seek contractual ways to mitigate these problems what are the implications for investment we present a theory of a firm s investment dynamics in the presence of agency problems and optimal long term financial contracts we derive results relating firms investment decisions current and past cash flows firm size capital structure and dividends among the results optimal investment is increasing in current and past cash flow and optimal investment is positively serially correlated over time after controlling for investment opportunities these results hold for a range of agency problems jel g30 g31 g32 g35 d82 d86 d92 copyright 2007 oxford university press

global inequality of opportunity how much of our income is determined by where we live suppose that all people in the world are allocated only two characteristics over which they have almost no control country of residence and income distribution within that country assume further that there is no migration the authors show that more than one half of variability in income of world population classified according to their household per capita in one percent income groups by country is accounted for by these two characteristics the role of effort or luck cannot play a large role in explaining global distribution of income

optimal dynamic capital budgeting i study optimal design of a dynamic capital allocation process in an organization in which the division manager with empire building preferences privately observes the arrival and properties of investment projects and headquarters can audit projects at a cost under certain conditions a budgeting mechanism with threshold separation of financing is optimal headquarters 1 allocate a spending account to the manager and replenish it over time 2 set a threshold such that projects below it are financed from the account while projects above are financed fully by headquarters upon an audit further analysis studies when co financing of projects is optimal and how the size of the account depends on past performance of projects

inducing environmental disclosures a dynamic mechanism design approach this paper studies the design of voluntary disclosure regulations for a firm that faces a stochastic environmental hazard the occurrence of such a hazard is known only to the firm the regulator if finding a hazard collects a fine and mandates the firm to perform costly remediation that reduces the environmental damage the regulator may inspect the firm at any time to uncover the hazard however because inspections are costly the regulator also offers a reward to the firm for voluntarily disclosing the hazard the reward corresponds to either a subsidy or a reduced fine depending on whether it is positive or negative thus the regulator needs to dynamically determine the reward and inspection policy that minimizes expected societal cost in the long run we model this problem as a dynamic adverse selection problem with costly state verification in continuous time despite the complexity and generality of this setup we show that the optimal regulation policy follows a very simple cyclic structure which we fully characterize in closed form specifically the regulator runs scheduled inspections periodically after each inspection the reward level decreases over time until a subsequent inspection takes place if a hazard is not revealed the reward level is reset to a high level restarting the cycle in contrast to the reward level the mandated remediation level is constant over time nonetheless when subsidies are not allowed in the industry we show that the regulator should dynamically adjust this remediation level which then acts as a substitute for a subsidy our analysis further reveals that optimal inspection frequency increases not only when the inspection accuracy decreases but also when the penalty for not disclosing the hazard increases

optimal contract to induce continued effort we consider a basic model of a risk neutral principal incentivizing a risk neutral agent to exert effort to raise the arrival rate of a poisson process the effort is costly to the agent is unobservable to the principal and affects the instantaneous arrival rate each arrival yields a constant revenue to the principal the principal therefore devises a mechanism involving payments and a potential stopping time to motivate the agent to always exert effort we formulate this problem as a stochastic optimal control model with an incentive constraint in continuous time over an infinite horizon although we allow payments to take general forms contingent on past arrival times the optimal contract has a simple and intuitive structure which depends on whether the agent is as patient as or less patient than the principal toward future income this paper was accepted by manel baucells decision analysis

optimal contracts with shirking i explicitly derive the optimal dynamic incentive contract in a standard continuoustime agency setting where the agent has a shirking action my solution generates two dynamic contracts new to the literature both contracts include phases when the agent frequently shirks in one contract the shirking phases are relaxation periods rewarding the agent for good performance in the other the shirking phases are suspension type arrangements punishing the agent for poor performance in addition i also explore the relationships between optimal contracting and taxes bargaining and renegotiation

multilateral resistance to migration the rate of migration observed between two countries does not depend solely on their relative attractiveness but also on the one of alternative destinations following the trade literature we term the influence exerted by other destinations on bilateral flows as multilateral resistance to migration and we show how it can be accounted for when estimating the determinants of migration rates in the context of a general individual random utility maximization model we propose the use of the common correlated effects estimator pesaran 2006 and apply it to high frequency data on the spanish immigration boom between 1997 and 2009 compared to more restrictive estimation strategies developed in the literature the bias goes in the expected direction we find a smaller effect of gdp per capita and a larger effect of migration policies on bilateral rates

the role of decentralized distributed generation in achieving universal rural electrification in south asia by 2030 this study is motivated by the goal of achieving universal energy access by 2030 and looks at electricity access for rural households in the south asian region the message access model is employed to assess the cost effectiveness of centralized and decentralized distributed generation ddg technologies delivery mechanisms are modelled to include mini grid and stand alone systems and the analysis includes an estimation of rural household electricity demand from lighting and appliances we assume two future demand scenarios with a minimum threshold and a higher threshold of electricity consumption of 65 and 420 kw h per household per year respectively we find that the cost of delivering electricity by centralized generation and grid distribution is up to four times the cost of stand alone and mini grid ddg options in the case of minimum threshold demand scenario these results are robust to alternate assumptions regarding costs of technologies we also estimate that public subsidy bill for kerosene can be substantially reduced if all households switch to electricity as their primary source of lighting thus promoting ddg options can reduce capital investments needed to meet access goals significantly and have an important role to play in meeting the goal of universal electrification by 2030

the relationship between firm growth size and age estimates for 100 manufacturing industries this study uses a sample of all firms operating in 100 manufacturing industries to examine some aspects of firm dynamics it finds that firm growth the variability of firm growth and the probability that a firm will fail decrease with firm age it also finds that firm growth decreases at a diminishing rate with firm size even after controlling for the exit of slow growing firms from the sample gibrat s law therefore fails although the severity of the failure decreases with firm size copyright 1987 by blackwell publishing ltd

monitoring for worker quality much nonmanagerial work is routine with all workers having similar output most of the time however failure to address occasional challenges can be very costly and consequently easily detected while challenges handled well pass unnoticed we analyze job assignment and worker monitoring for such guardian jobs if monitoring costs are positive but small monitoring is nonmonotonic in the firm s belief about the probability that a worker is good the model explains several empirical regularities regarding nonmanagerial internal labor markets low use of performance pay seniority pay rare demotions wage ceilings within grade and wage jumps at promotion

moral hazard in high office and the dynamics of aristocracy both aristocratic privileges and constitutional constraints in traditional monarchies can be derived from a ruler s incentive to minimize expected costs of moral hazard rents for high officials we consider a dynamic moral hazard model of governors serving a sovereign prince who must deter them from rebellion and hidden corruption which could cause costly crises to minimize costs a governor s rewards for good performance should be deferred up to the maximal credit that the prince can be trusted to pay in the long run we find that high officials can become an entrenched aristocracy with low turnover and large claims on the ruler dismissals for bad performance should be randomized to avoid inciting rebellions but the prince can profit from reselling vacant offices and so his decisions to dismiss high officials require institutionalized monitoring a soft budget constraint that forgives losses for low credit governors can become efficient when costs of corruption are low

resolution of financial distress under agency frictions abstract we introduce in a dynamic contracting framework with moral hazard the possibility of recapitalization as an alternative to liquidation when a firm is distressed this is achieved by considering a risk averse agent and by allowing but not requiring the latter to inject additional capital into the firm when necessary we show that firm recapitalization may arise in an optimal long term contract as a consequence we find that there are two mechanisms at a firm s disposal so as to deal with financial difficulties one corresponds to a recapitalization process the other to a liquidation one the choice of mechanism is based on a cost benefit analysis

taming systemically important financial institutions we model a systemically important financial institution sifi that is too big or too interconnected to fail without credible regulation and strong supervision the shareholders of this institution might deliberately let its managers take excessive risk we propose a solution to this problem showing how insurance against systemic shocks can be provided without generating moral hazard the solution involves levying a systemic tax needed to cover the costs of future crises and more importantly establishing a systemic risk authority endowed with special resolution powers including the control of bankers compensation packages during crisis periods

dynamic security design convergence to continuous time and asset pricing implications an entrepreneur with limited liability needs to finance an infinite horizon investment project an agency problem arises because she can divert operating cash flows before reporting them to the financiers we first study the optimal contract in discrete time this contract can be implemented by cash reserves debt and equity the latter is split between the financiers and the entrepreneur and pays dividends when retained earnings reach a threshold to provide appropriate incentives to the entrepreneur the firm is downsized when it runs short of cash we then study the continuous time limit of the model we prove the convergence of the discrete time value functions and optimal contracts our analysis yields rich implications for the dynamics of security prices stock prices follow a diusion reflected at the dividend barrier and absorbed at zero their volatility as well as the leverage ratio of the firm increase after bad performance stock prices and book tomarket ratios are in a non monotonic relationship a more severe agency problem entails lower price earning ratios and firm liquidity and higher default risk

optimal security design and dynamic capital structure in a continuous time agency model we derive the optimal dynamic contract in a continuous time principal agent setting and implement it with a capital structure credit line long term debt and equity over which the agent controls the payout policy while the project s volatility and liquidation cost have little impact on the firm s total debt capacity they increase the use of credit versus debt leverage is nonstationary and declines with past profitability the firm may hold a compensating cash balance while borrowing at a higher rate through the credit line surprisingly the usual conflicts between debt and equity asset substitution strategic default need not arise in this paper we consider a dynamic contracting environment in which a riskneutral agent or entrepreneur with limited resources manages an investment activity while the investment is profitable it is also risky and in the short run it can generate arbitrarily large operating losses the agent will need outside financial support to cover such losses and continue the project the difficulty is that while the probability distribution of the cash flows is publicly known the agent may distort these cash flows by taking a hidden action that leads to a private benefit specifically the agent may i conceal and divert cash flows for his own consumption and or ii stop providing costly effort which would reduce the mean of the cash flows therefore from the perspective of the principal or investors that fund the project there is the concern that a low cash flow realization may be a result of the agent s actions rather than the project s fundamentals to provide the agent with appropriate incentives investors control the agent s wage and may also withdraw their financial support for the project and force its early termination we seek to characterize an optimal contract in this framework and relate it to the firm s choice of capital structure we develop a method to solve for the optimal contract given the incentive constraints in a continuous time setting and study the properties of the credit line debt and equity that implement the contract as in the discrete time model of demarzo and fishman 2003 the continuous time setting offers several peter m demarzo is from stanford university and yuliy sannikov is from u c berkeley we

dynamic resource allocation with hidden volatility abstract we study a firm s internal resource allocation using a dynamic principal agent model with endogenous cash flow volatility the principal supplies the agent with resources for productive use but the agent has private control over both project volatility and resource intensity and may misallocate resources to obtain private benefits the optimal contract can yield either overly risky or overly prudent project selection it can be implemented with a constant pricing schedule i e a static decentralized linear mechanism giving the agent control over the resource quantities project risk and agent s equity share the implementation rationalizes the use of hurdle rates above a firm s cost of capital and transfer prices above marginal cost while showing that hurdle rates or transfer prices may not vary with the agent s risk choice

collateral taxes and leverage we quantify the importance of collateral versus taxes for firms capital structures we estimate a dynamic model in which a taxable firm seeks financing for investment and a dynamic contracting environment motivates endogenous collateral constraints optimal leverage stays a safe distance from the constraint balancing the tax benefit of debt with the cost of lost financial flexibility we estimate this flexibility cost to be 7 2 of firm assets a percentage that is comparable to the tax benefit models with different tax rates fit the data equally well and leverage responds to the tax rate only when taxes are low

financial and legal constraints to growth does firm size matter using a unique firm level survey database covering 54 countries we investigate the effect of financial legal and corruption problems on firms growth rates whether these factors constrain growth depends on firm size it is consistently the smallest firms that are most constrained financial and institutional development weakens the constraining effects of financial legal and corruption obstacles and it is again the small firms that benefit the most there is only a weak relation between firms perception of the quality of the courts in their country and firm growth we also provide evidence that the corruption of bank officials constrains firm growth

optimal contracts for experimentation this paper studies a model of long term contracting for experimentation we consider a principal agent relationship with adverse selection on the agent s ability dynamic moral hazard and private learning about project quality we find that each of these elements plays an essential role in structuring dynamic incentives and it is only their interaction that generally precludes efficiency our model permits an explicit characterization of optimal contracts

yuliy sannikov winner of the 2016 clark medal yuliy sannikov is an extraordinary theorist who has developed methods that offer new insights in analyzing problems that had seemed well studied and familiar for example decisions that might bring about cooperation and or defection in a repeated play prisoner s dilemma game or that affect the balance of incentives and opportunism in a principal agent relationship his work has broken new ground in methodology often through the application of stochastic calculus methods the stochastic element means that his work naturally captures situations in which there is a random chance that monitoring communication or signaling between players is imperfect using calculus in the context of continuous time games allows him to overcome tractability problems that had long hindered research in a number of areas he has substantially altered the toolbox available for studying dynamic games this essay offers an overview of sannikov s research in several areas

a model of moral hazard credit cycles this paper considers a simple model of credit cycles driven by moral hazard in financial intermediation financial agents or bankers must earn moral hazard rents but the cost of these rents can be efficiently spread over an agent s entire career by promising large late career rewards if the agent has a consistently successful record dynamic interactions among different generations of financial agents can create credit cycles with repeated booms and recessions in recessions a scarcity of trusted financial intermediaries limits investment and reduces employment under such conditions taxing workers to subsidize bankers may increase employment enough to make the workers better off

where on earth is everybody global matrices of bilateral migrant stocks spanning 1960 2000 are presented disaggregated by gender and based primarily on the foreign born definition of migrants more than one thousand census and population register records are combined to construct decennial matrices corresponding to the five census rounds between 1960 and 2000 for the first time a comprehensive picture of bilateral global migration over the second half of the 20th century emerges the data reveal that the global migrant stock increased from 92 million in 1960 to 165 million in 2000 quantitatively migration between developing countries dominates constituting half of all international migration in 2000 when the partition of india and the dissolution of the soviet union are accounted for migration between developing countries is remarkably stable over the period migration from developing to developed countries is the fastest growing component of international migration in both absolute and relative terms the united states has

large risks limited liability and dynamic moral hazard we study a continuous time principal agent model in which a risk neutral agent with limited liability must exert unobservable effort to reduce the likelihood of large but relatively infrequent losses firm size can be decreased at no cost or increased subject to adjustment costs in the optimal contract investment takes place only if a long enough period of time elapses with no losses occurring then if good performance continues the agent is paid as soon as a loss occurs payments to the agent are suspended and so is investment if further losses occur accumulated bad performance leads to downsizing we derive explicit formulae for the dynamics of firm size and its asymptotic growth rate and we provide conditions under which firm size eventually goes to zero or grows without bounds

dynamic moral hazard and risk shifting incentives in a leveraged firm i develop an analytically tractable model that integrates the risk shifting problem between bondholders and shareholders with the moral hazard problem between shareholders and the manager an optimal contract binds shareholders and the manager and this contract s flexibility allows shareholders to relax the manager s incentive constraint following a good profitability shock thus the optimal contract amplifies the upside and thereby increases shareholder appetite for risk shifting whereas some empirical studies find a positive relation between risk shifting and leverage others find a negative relation this model predicts a non monotonic relation between risk shifting and leverage and can reconcile these contradictory empirical findings

bringing it all back home return migration and fertility choices summary return migration exerts a wide ranging influence upon the countries of origin of the migrants we analyze whether returnees adjust their fertility choices to the norms that prevail in their previous countries of destination using egyptian household level data egyptian men migrate predominantly toward other arab countries characterized by a higher number of children per woman relying on a two step instrumental variable approach to control for the endogeneity of the migration decisions we show that return migration has a positive and significant influence on marital childbearing

climatic factors as determinants of international migration we examine environmental change as a potential determinant of international migration we distinguish between unexpected short run factors captured by natural disasters as well as long run climate change and climate variability captured by deviations and volatilities of temperatures and rainfall from and around their long run averages starting from a simple neo classical model we use a panel dataset of bilateral migration flows for the period 1960 2000 that allows us to control for numerous time varying and time invariant factors we find no direct impact of climatic change on international migration across our entire sample these results are robust when conditioning on characteristics of origin countries as well as when further considering migrants returning home and the potential endogeneity of our network variable in contrast there is evidence of indirect effects of environmental factors going through wages we further find strong evidence that natural disasters beget greater flows of migrants to urban environs

dynamic managerial compensation a variational approach abstract we study the optimal dynamics of incentives for a manager whose ability to generate cash flows changes stochastically with time and is his private information we show that distortions aka wedges under optimal contracts may either increase or decrease over time in particular when the manager s risk aversion and ability persistence are small distortions decrease on average over time for sufficiently high degrees of risk aversion and ability persistence instead distortions increase on average with tenure our results follow from a novel variational approach that permits us to tackle directly the full program thus bypassing some of the difficulties of the first order approach encountered in the dynamic mechanism design literature

dynamic contracts with moral hazard and adverse selection we study a novel dynamic principal agent setting with moral hazard and adverse selection persistent as well as repeated in the model an agent whose skills are his private information faces a finite sequence of tasks one after the other upon arrival of each task the agent learns its level of difficulty and then chooses whether to accept or refuse each task in turn and how much effort to exert although his decision to accept or refuse a task is publicly known the agent s effort level is his private information we characterize optimal contracts and show that the per period utility of the agent approaches his per period utility when his skills are publicly known as the discount factor and the time horizon increase

a theory of financing constraints and firm dynamics there is widespread evidence supporting the conjecture that borrowing constraints have important implications for firm growth and survival in this paper we model a multiperiod borrowing lending relationship with asymmetric information we show that borrowing constraints emerge as a feature of the optimal long term lending contract and that such constraints relax as the value of the borrower s claim to future cash flows increases we also show that the optimal contract has interesting implications for firm dynamics in agreement with the empirical evidence as age and size increase mean and variance of growth decrease and firm survival increases

workers trust funds and the logic of wage profiles this paper defines a concept a worker s trust fund which is useful in analyzing optimal age earnings profiles the trust fund represents what a worker loses if dismissed from a job for shirking in considering whether to work or shirk a worker weighs the potential loss due to forfeiture of the trust fund if caught shirking against the benefits from reduced effort this concept is used to show that the implicit bonding in upward sloping age earnings profiles is not a perfect substitute for an explicit up front performance bond or employment fee it is also shown that the second best optimal earnings profile in the absence of an up front employment fee pays total compensation in excess of market clearing in a variety of stylized cases

unilateral facilitation does not raise international labor migration from the philippines significant income gains from migrating from poorer to richer countries have motivated unilateral source country policies facilitating labor emigration however their effectiveness is unknown the authors conducted a large scale randomized experiment in the philippines testing the impact of unilaterally facilitating international labor migration the most intensive treatment doubled the rate of job offers but had no identifiable effect on international labor migration even the highest overseas job search rate that was induced 22 percent falls far short of the share initially expressing interest in migrating 34 percent the paper concludes that unilateral migration facilitation will at most induce a trickle not a flood of additional emigration

optimal long term financial contracting we develop an agency model of financial contracting we derive long term debt a line of credit and equity as optimal securities capturing the debt coupon and maturity the interest rate and limits on the credit line inside versus outside equity dividend policy and capital structure dynamics the optimal debt equity ratio is history dependent but debt and credit line terms are independent of the amount financed and in some cases the severity of the agency problem in our model the agent can divert cash flows we also consider settings in which the agent undertakes hidden effort or can control cash flow risk

a theory of political and economic cycles abstract we develop a theoretical framework in which political and economic cycles are jointly determined these cycles are driven by three political economy frictions policymakers are non benevolent they cannot commit to policies and they have private information about the tightness of the government budget and rents our first main result is that in the most favorable equilibrium to the households distortions to production emerge and never disappear even in the long run this result is driven by the interaction of limited commitment and private information on the side of the policymaker since in the absence of either friction there are no long run distortions to production our second result is that if the variance of private information is sufficiently large there is equilibrium turnover in the long run so that political cycles never disappear finally our model produces a long run distribution of taxes distortions and turnover where these all respond persistently to temporary economic shocks

managerial incentives and the role of advisors in the continuous time agency model we explore a continuous time agency model with double moral hazard using a venture capitalist vc entrepreneur relationship where the vc both supplies costly effort and chooses the optimal timing of the initial public offering ipo we show that optimal ipo timing is earlier under double moral hazard than under single moral hazard our results also indicate that the manager s compensation tends to be paid earlier under double moral hazard we derive several comparative static results notably that ipo timing is earlier when the need for monitoring by the vc is smaller and when the volatility of cash flows is larger the author 2013 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

a continuous time version of the principal agent problem this paper describes a new continuous time principal agent model in which the output is a diffusion process with drift determined by the agent s unobserved effort the risk averse agent receives consumption continuously the optimal contract based on the agent s continuation value as a state variable is computed by a new method using a differential equation during employment the output path stochastically drives the agent s continuation value until it reaches a point that triggers retirement quitting replacement or promotion the paper explores how the dynamics of the agent s wages and effort as well as the optimal mix of short term and long term incentives depend on the contractual environment the understanding of dynamic incentives is central in economics how do companies motivate their workers through piece rates bonuses and promotions how is income inequality connected with productivity investment and economic growth how do financial contracts and capital structure give incentives to the managers of a corporation the methods and results of this paper provide important insights to many such questions this paper introduces a continuous time principal agent model that focuses on the dynamic properties of optimal incentive provision we identify factors that make the agent s wages increase or decrease over time we examine the degree to which current and future outcomes motivate the agent we provide conditions under which the agent eventually reaches retirement in the optimal contract we also investigate how the costs of creating incentives and the dynamic properties of the optimal contract depend on the contractual environment the agent s outside options the difficulty of replacing the agent and the opportunities for promotion our new dynamic insights are possible due to the technical advantages of continuous time methods over the traditional discrete time ones continuous time leads to a much simpler computational procedure to find the optimal contract by solving an ordinary differential equation this equation highlights the factors that determine optimal consumption and effort the dynamics of the agent s career path are naturally described by the drift and volatility of the agent s pay offs the geometry of solutions to the differential equation allows for easy comparisons to see how the agent s wages effort and incentives depend on the contractual environment finally continuous time highlights many essential features of the optimal contract including the agent s eventual retirement in our benchmark model a risk averse agent is tied to a risk neutral principal forever after employment starts the agent influences output by his continuous unobservable effort input the principal sees only the output a brownian motion with a drift that depends on the agent s effort the agent dislikes effort and enjoys consumption we assume that the agent s utility function has the income effect that is as the agent s income increases it becomes costlier to compensate him for the effort also we assume that the agent s utility of consumption is bounded from below

incentives for research agents and performance vested equity based compensation abstract this paper studies the agency problem between a firm and its research employees in a dynamic optimal contracting setting we implement the optimal contract by a risky security which can be created using the equity of the firm and a sequence of performance based holding requirements this result provides a rationale for using performance vested equity based compensation in r d intensive start up firms

income fluctuation and asymmetric information an example of a repeated principal agent problem we examine a simple repeated principal agent model with discounting there are a risk averse borrower with an unobservable random income and a risk neutral lender the efficient contract is characterized it tends to the first best constant consumption contract as the discount factor tends to one and the time horizon extends to infinity if the time horizon is infinite and the contract is legally enforceable the borrower s utility becomes arbitrarily negative with probability one if the borrower has constant absolute risk aversion consumption is transferred between any two states at a constant interest rate which is less than the rate of time preference

on repeated moral hazard with discounting in this paper we analyze optimal contracts in an infinitely repeated agency model in which both the principal and agent discount the future we show that there is a stationary representation of the optimal contract when the agent s conditional discounted expected utility is used as a state variable this representation reduces the multi period problem to a static variational problem which can be analyzed using standard variational techniques this reduction is used to obtain several properties of the contract

calibrated incentive contracts this paper studies a dynamic agency problem which includes limited liability moral hazard and adverse selection the paper develops a robust approach to dynamic contracting based on calibrating the incentive properties of simple benchmark contracts that are attractive but infeasible due to limited liability constraints the resulting dynamic contracts are detail free and satisfy robust performance bounds independently of the underlying process for returns which need not be i i d or even ergodic publication abstract

managerial short termism turnover policy and the dynamics of incentives i study managerial short termism in a dynamic model of project development with hidden effort and imperfect observability of quality the manager can complete the project faster by reducing quality to preempt this behavior the prin cipal makes payments contingent on long term outcomes i analyze the dynamics of the optimal contract and its implications for the level of managerial turnover i show that optimal contracts might be stationary and entail no termination in general i show that the principal reduces the manager s temptation to behave myopically by reducing the likelihood of termination and deferring compensation the model predicts a negative relation between the rate of managerial turnover and the use of deferred compensation that is consistent with evidence of managerial compensation contracts received may 23 2016 editorial decision may 27 2017 by editor francesca cornelli

reward for luck in a dynamic agency model this paper studies a continuous time principal agent problem of a rm whose cash ows are determined by the manager s unobserved eort the rm s cash ows are further subject to persistent and publicly observable shocks that are beyond the manager s control while standard contracting models predict that compensation should optimally lter out these shocks empirical evidence suggests otherwise in line with this evidence our model predicts that the manager is rewarded for luck

getting it done dynamic incentives to complete a project a principal wants an agent to complete a project the agent undertakes unobservable effort which affects in each period the probability that the project is completed we characterize the contracts that the principal sets with and without commitment with full commitment the contract involves the agent s value and wage declining over time in order to give the agent incentives to exert effort the best sequentially rational equilibrium for the principal also involves the agent s wage declining over time while the worst sequentially rational equilibrium for the principal has a constant wage and is in fact the unique stationary equilibrium the best weakly renegotiation proof equilibrium for the principal is achieved by a constant wage that maximizes the principal s payoff conditional on wages being constant we compare these solutions to the efficient outcome

executive compensation a modern primer this article studies traditional and modern theories of executive compensation bringing them together under a simple unifying framework accessible to the general interest reader we analyze assignment models of the level of pay and static and dynamic moral hazard models of incentives and compare their predictions to empirical findings we make two broad points first traditional theories find it difficult to explain the data suggesting that compensation results from rent extraction by ceos however more modern shareholder value theories that arguably better capture the ceo setting do deliver predictions consistent with observed practices suggesting that these practices need not be inefficient second seemingly innocuous features of the modeling setup often made for tractability or convenience can lead to significant differences in the model s implications and conclusions on the efficiency of observed practices we close by highlighting apparent inefficiencies in executive compensation and additional directions for future research