debt futures and options optimal price linked financial contracts under moral hazard and limited liability this paper characterizes the optimal financial contract between a risk neutral entrepreneur and risk neutral lender investors when the entrepreneur has limited liability there is moral hazard and the investor payoff function can depend on both output and output price but is nondecreasing in output in this setting the optimal contract is a price contingent commodity bond that can be replicated by combining pure debt commodity futures and commodity call option contracts although a pure commodity bond contract is sometimes optimal a pure debt contract is almost never optimal various properties of the entrepreneur s optimal price contingent promised payment are described copyright 1993 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

screening ethics when honest agents care about fairness we analyze a principal s ability to discriminate between honest and dishonest agents who have private information about the circumstances of the exchange honest agents reveal circumstances truthfully as long as the mechanism is suciently fair the probability that an equilibrium allocation is chosen by an agent who is lying should not be too large without intolerance for lying the agent is given proper incentives if dishonest and zero rent if honest with even a small intolerance for lying the optimal mechanism is discontinuously altered it may still involve ethics screening whereby some allocation chosen by a dishonest agent is never chosen by an honest agent it happens either when the dishonest is overstating circumstances or when the principal is forced to allow for some suboptimal announcements due to an excessive intolerance for lying with limited intolerance for lying ethics screening allows for doing better than in the standard setup where the agent is dishonest with certainty even if honesty is unlikely however if intolerance for lying is too strong the principal cannot improve upon the standard setup

state contingent bank regulation with unobserved actions and unobserved characteristics abstract optimal bank regulation is studied in a model where bank quality is private information and bank portfolio choice is subject to moral hazard regulators wish to control bank risk solely because high risk adversely affects a bank incentives to improve its mean return numerical methods are developed to study the model capital regulation alone has a limited ability to separate types including ex post fines achieve separation at lower cost resulting in improved welfare low quality banks are fined on high returns in order to control risk taking high quality banks face fines on lower returns mainly to ensure truth telling by low quality banks high quality banks bear the full cost of regulation

financial contracting under imperfect enforcement we develop a model ofnancial contracting under imperfect enforcement financial contracts are designed to keep entrepreneurs from diverting project returns but enforce ment is probabilistic and penalties are limited the model rationalizes the prevalence of straight debt and common stock and its predictions are consistent with a host of empirical capital structure regularities across countries acrossrms and across time

liberalizing the energy markets of western europe a computable equilibrium model approach using a computable equilibrium model the short run effects of a radical liberalization of the west european natural gas and electricity markets are examined in each model country oil gas coal and electricity are produced traded and consumed there are world markets for oil and coal and well integrated competitive markets for gas and electricity in western europe gas and electricity are transported and traded across markets under the assumption of ideal third party access regimes for transportation and limited capacities in the transportation networks it is found that relative to the data year 1996 radical liberalization reduces the average end user price of natural gas by around 20 and the average end user price of electricity by around 50 the supply of electricity increases by around 20 mainly due to increased coal power production after such liberalization coal power emerges with the largest market share of electricity production in western europe

deductible contracts against fraudulent claims evidence from automobile insurance insurance fraud is now recognized as a significant resource allocation problem in many markets the object of this study is to verify how straight deductible contracts may affect the equilibrium level of falsification in automobile insurance this type of contract is observed in many markets even if it is not optimal under costly state falsification a higher deductible may create incentives to fraud or cheat particularly when the insured anticipates that the claim has a small probability of being audited to verify this proposition we estimate a loss equation for which one of the determinants is the amount of the deductible using a data set of claims filed for damages following an automobile accident with twenty insurance companies in quebec in 1992 because we have access only to reported losses a higher deductible also implies a lower probability of reporting small losses to isolate the fraud effect related to the presence of a deductible in the contract we jointly estimate a loss equation and a

screening when some agents are nonstrategic does a monopoly need to exclude we characterize the optimal screening mechanism for a monopolist facing consumers with privately known demands some of whom have limited abilities to misrepresent their preferences we show that consumers with better abilities to misrepresent information benefit from the presence of consumers who lack such abilities whenever the fraction of the latter group is positive there is no exclusion the firm supplies a positive quantity of the good to all consumers whose valuations exceed marginal cost of production our analysis is motivated by the evidence indicating that some individuals have limited ability to misrepresent themselves and imitate others

strategic default in the international coffee market this article studies strategic default on forward sale contracts in the international coffee market to test for strategic default we construct contract specific measures of unanticipated changes in market conditions by comparing spot prices at maturity with the relevant futures prices at the contracting date unanticipated rises in market prices increase defaults on fixed price contracts but not on price indexed ones we isolate strategic default by focusing on unanticipated rises at the time of delivery after production decisions are sunk and suppliers have been paid estimates suggest that roughly half of the observed defaults are strategic we model how strategic default introduces a trade off between insurance and counterparty risk relative to indexed contracts fixed price contracts insure against price swings but create incentives to default when market conditions change a model calibration suggests that the possibility of strategic default causes 15 8 average losses in output significant dispersion in the marginal product of capital and sizable negative externalities on supplying farmers

greenwash vs brownwash exaggeration and undue modesty in corporate sustainability disclosure corporate greenwashing has accelerated in recent years bringing in its wake growing skepticism about corporate green claims although a theory of the drivers and deterrents of greenwashing has begun to emerge it is static in nature and does not incorporate the full range of ways in which firms can misrepresent their environmental performance our contribution is threefold first we extend the theory of organizational information disclosure to incorporate the possibility of undue modesty about a firm s environmental social and governance practices second we hypothesize about the drivers of exaggeration and undue modesty based on which of a firm s stakeholders are salient at a given point in time to do so we place the firm within a dynamic context that has largely been missing in the prior literature third we test our hypotheses using a data set that allows us to directly compare corporate green claims against actual performance results reveal that corporate output growth deregulation and low profits under deregulation significantly affect the choice between greenwashing and brownwashing the effects of growth and profits are mitigated by external scrutiny

cost padding in regulated monopolies abstract this paper considers the regulated monopoly that pads or falsifies its costs to increase the cost reimbursement it receives from the regulator contrary to the standard literature on cost regulation the firm engages in cost reducing investment before it enters into a regulatory contract this pre contractual investment in cost reduction determines the firm type at the contracting stage the paper derives both the optimum incentive compatible falsification contract and the equilibrium type distribution with the distribution of cost types determined endogenously by the pre contractual investment choice an increase in the cost of falsification has two effects first there is a direct effect that reduces cost padding because it becomes more expensive to do so second there is an indirect effect that increases cost padding because the firm responds by choosing lower investments and lower investments are associated with more cost padding it is demonstrated that the direct effect will dominate and both expected levels of cost padding and expected costs for falsification will be reduced however the indirect effect increases real costs and despite the reduction in cost padding the net effect can reduce welfare it is determined that these conclusions are significantly different from those obtained when the distribution of cost types is exogenously fixed

a note on optimal procurement contracts with limited direct cost inflation abstract laffont and tirole s using cost observation to regulate firms j polit econ 94 1986 614 641 pioneering analysis identifies the optimal procurement contract when the supplier can readily inflate his innate production cost without detection when the buyer has some ability to limit such cost inflation an alternative contract can outperform the contract identified by laffont and tirole the alternative contract induces substantial pooling discontinuous production costs and effort supply and rent that varies non monotonically with innate cost

does increased extraction of natural gas reduce carbon emissions without an international climate agreement extraction of more natural gas could reduce emissions of co2 as more clean natural gas may drive out dirty coal and oil using a computable equilibrium model for the western european electricity and natural gas markets we examine whether increased extraction of natural gas in norway reduces global emissions of co2 we find that both in the short run and in the long run total emissions are reduced if the additional quantity of natural gas is used in gas power production in norway if instead the additional quantity is exported directly total emissions increase both in the short run and in the long run however if modest co2 taxes are imposed increased extraction of natural gas will reduce co2 emissions also when the additional natural gas is exported directed

private information and inventive activity abstract this paper examines incentives for investment in inventive activity in an environment subject to informational constraints on the one hand the inability of the public to monitor such investments suggests that inventors should bear a high share of the risk associated with their efforts on the other hand the very novelty of an invention could make it difficult to sell to a skeptical public this difficulty could induce an inventor to engage in costly signalling activity this papers considers this friction and the nature of contracts which balance the incentive to invent against the incentive to signal optimal contracts are interpreted in terms of financial arrangements between entrepreneurs and investors

does africa need a rotten kin theorem experimental evidence from village economies this paper measures the economic impact of social pressure to share income with kin and neighbors in rural kenyan villages the authors conduct a lab experiment in which they randomly vary the observability of investment returns the goal is to test whether subjects reduce their income in order to keep it hidden the analysis finds that women adopt an investment strategy that conceals the size of their initial endowment in the experiment although that strategy reduces their expected earnings this effect is largest among women with relatives attending the experiment parameter estimates suggest that women behave as though they expect to be pressured to share four percent of their observable income with others and substantially more when close kin can observe income directly although this paper provides experimental evidence from a single african country observational studies suggest that similar pressure from kin may be prevalent in many rural areas throughout sub saharan africa

costly distortion of information in agency problems anecdotal evidence suggests that agents often spend resources distorting information transmitted to principals we present a model where costly information distortion emerges as equilibrium behavior the information structure we focus on is intermediate between and encompasses the cases of private information and public information the agent can falsify the privately observed state at some cost although the principal can design contracts that induce no falsification these may involve excessive iinformation rents falsification can be beneficial in spite of the waste of resources involved because it helps reduce information rents we examine how optimal contract and equilibrium payoffs change as the information structure ranges from private to public information

contract design and costly verification games abstract in this paper the signalling subgame in costly verification models is studied in the context of the investor entrepreneur contract without assuming the possibility of commitment to verification it is shown that the game has a unique perfect bayesian equilibrium in mixed strategies implying that truth telling and deterministic verification are not an equilibrium behavior when the entire game starting from the stage of contract design is considered it is shown that the contract designed by the informed entrepreneur results in less verification cost than the one designed by the uninformed investor this could be taken as a normative criterion based upon which institutional arrangements as regards the distribution of bargaining initiative are to be designed

the economics of earnings manipulation and managerial compensation this article examines managerial compensation in an environment where managers may take a hidden action that affects the actual earnings of the firm when realized these earnings constitute hidden information that is privately observed by the manager who may expend resources to generate an inflated earnings report we characterize the optimal managerial compensation contract in this setting and demonstrate that contracts contingent on reported earnings cannot provide managers with the incentive both to maximize profits and to report those profits honestly as a result some degree of earnings management must be tolerated as a necessary part of an efficient agreement

hardball and the soft touch the economics of optimal insurance contracts with costly state verification and endogenous monitoring costs abstract we examine an environment of costly state verification in which insureds possess private information about the magnitude of an insurable loss insurers can verify the actual loss suffered only by incurring a positive resource cost and insureds may verification and may lead to more generous settlements optimal insurance contracts are shown to mitigate the incentives to evade by a combination of incentives which include the overpayment of easily monitored losses and undercompensation for claims exhibiting higher verification costs

robust contracting with additive noise abstract we investigate the idea that linear contracts are reliable because they give the same incentives for effort at every point along the contract we ask whether this reliability leads to a microfoundation for linear contracts when the principal is profit maximizing we consider a principal agent model with risk neutrality and limited liability in which the agent observes the realization of a mean zero shock to output before choosing how much effort to exert we show that such a model can indeed provide a foundation for reliable contracts and illustrate what elements are required in particular we must assume that the principal knows a lower bound but not an upper bound on the shocks

communicating the value of dispatchability for non utility generation projects electric utilities seeking to purchase power from nonutility generators nugs need to provide information to nug developers on the value to the utility power system of various attributes in order that the developers can design projects that maximize net benefits dispatchability is one key attribute this paper outlines three previous approaches to communicating to developers the value of dispatchability and describes a fourth approach the fourth approach presents a table of numbers representing the value of dispatchability as a function of the energy bid price and escalation rate it has the advantage of simplicity from the perspective of the developer while still providing a meaningful signal to the developer

optimal insurance under costly falsification and costly inexact verification abstract this paper integrates the often dichotomized models of costly state verification and costly claim falsification it is found that when verification is inexact it is possible for an optimal insurance contract to consist of both positive claim falsification and positive insurer verification provided that falsification cost and verification cost are sufficiently low and the insured is risk averse satisfying constant absolute risk aversion this result certainly contrasts with the common belief that falsification and verification are mutually exclusive in an optimal insurance contract some characteristics of the optimal falsification verification and indemnification profiles including implementability are analyzed

stock market reactions to customer and competitor orientations the case of initial public offerings recognizing that initial public offerings ipos represent the debut of private firms on the public stage this study investigates how pre ipo customer and competitor orientations ccos affect ipo outcomes building on information economics we propose that ccos influence investors sentiments toward an ipo and that both ipo specific variables which influence the credibility of cco information and facets of the organizational institutional and task environments which influence the appropriateness of cco information moderate this influence we test the framework using data collected from computer aided text analysis expert coders and secondary sources for 543 ipos across 43 industries between 2000 and 2004 a bayesian shrinkage model which accounts for industry specific effects and uses latent instrumental variables to address cco endogeneity shows that ccos positively influence ipo outcomes furthermore 1 underwriter reputation and venture funding positively moderate the effects of ccos 2 technological and market turbulence positively and institutional complexity negatively moderate the effect of customer orientation and 3 technological turbulence competitive intensity and institutional complexity positively moderate the effect of competitor orientation also accounting for endogeneity using latent instrumental variables substantially improves the predictive validity of the model relative to alternative model specifications

managers compensation and misreporting a costly state verification approach i introduction the use of stock options in compensation packages as a way of providing the firm management with the right incentives has been quite popular in the 1990s the favor encountered by options started however to decrease in the past few years the decline in the use of option grants in top executives compensation packages occurred mainly as a reaction to the recent accounting scandals which has prompted the design of alternative stock based compensation schemes e g restricted stock grants or indexed options as reported by hall and murphy 2003 the grant date value of options assigned to all employees of an average standard poor s 500 firm measured in millions of 2002 constant us increased from 22 in 1992 to 238 in 2000 and subsequently decreased to 141 in 2002 although percentages varied from year to year the ceos share of the total grant has fallen from about 7 in the mid 1990s to less than 5 in 2000 2002 1 the decline in the use of options for top management is widely confirmed according to a pearl meyer partners study for the new york times stock option grants that accounted for 52 of the pay of the average ceo of a major company in 2002 were down to an estimated 35 in 2003 a recent watson wyatt report states that the value of new stock option awards granted to ceos at large companies fell by nearly 60 between 2001 and 2003 with the average value of new stock option grants declining from us 10 2 million in 2001 to us 4 2 million in 2003 the decline in options has been softened by the sharp increase in restricted stock grants and other long term incentive award values 2 in this paper we aim to reevaluate the role of stock options as an ingredient of top management compensation packages able to align the interests of managers and shareholders avoiding misreporting of the firm value at the same time 3 in a costly state verification csv model with moral hazard we show that incentive compatible contracts inducing both incentive alignment and truthful revelation of the firm value must entail a strictly convex compensation schedule that is a fixed payment wage when the firm value is sufficiently low and a state contingent claim increasing in the firm value otherwise a simple and commonly observed way to achieve a convex compensation scheme is to design a remuneration including a fixed wage and a call option on the firm equity as we will show such remuneration allows on the one hand to preserve top management incentives providing for a compensation increasing in equity value and on the other hand to reduce the verification costs that must be incurred to avoid misreporting as verification is not needed in the region where the remuneration is fixed 4 options are by no means the only way to achieve a convex compensation however many other schemes having otherwise desirable properties over options do not have the convex shape discussed above for instance combining a fixed wage with restricted stock grants defines a compensation linearly increasing in the firm s equity value which does not allow to reduce misreporting verification costs that always have to be sustained in this case using an incentive compatible compensation scheme fixed wage plus call options we characterize the contract offered by the firm under the assumption of a deterministic and perfect audit technology showing that for any given value of the option package the manager should receive the largest possible number of options at the highest strike price allowing shareholders to reduce the expected verification cost furthermore the strike price of the option turns out to be determined by incentive compatibility i e the option value must be such that the manager is induced to exert the desired level of effort while the magnitude of the fixed wage is defined by individual rationality there are three main policy implications of our analysis

identifying and testing models of managerial compensation this article analyses the identification and empirical content of the pure moral hazard pmh and the hybrid moral hazard hmh principal agent models the pmh model has hidden actions while the hmh model has hidden information in addition to hidden actions in both models agents are risk averse and principals are risk neutral the article derives the equilibrium restrictions from the optimal contract and uses the restrictions to show that the models have empirical content for any given risk aversion parameter the models other parameters are non parametrically point identified the risk aversion parameter and hence the model are however only partially identified management s ability to manipulate accounting reports arises endogenously within hmh models but not in all versions of pmh models we use our framework to investigate whether shareholders contract with management recognizing that accounting reports are susceptible to manipulation and therefore endogenous to the incentives offered to management the data reject all models in which accounting reports are verifiable furthermore the version of the pmh in which accounting reports can be manipulated is rejected if expected compensation is restricted to be positive

costly monitoring loan contracts and equilibrium credit rationing this paper develops a model with asymmetrically informed agents and costly monitoring of loan contracts where an equilibrium can exhibit credit rationing borrowers are identical ex ante but some receive loans and others do not in contrast to existing credit rationing theories rationing does not occur here due to inflexible prices adverse selection or moral hazard optimizing behaviour produces a standard debt contract in equilibrium the aggregate quantity of loans and equilibrium interest rates respond differently depending on whether there is rationing in equilibrium

ceo replacement under private information this article examines the optimal ceo compensation and replacement policy when the ceo is privately informed about the firm s continuation value under his leadership ex ante moral hazard implies that the ceo must receive ex post quasi rents which endogenously biases him toward continuation our model shows that to induce bad ceos to quit it may be best to make continuation costly through steep incentive pay rather than simply rewarding quitting through severance pay incentive pay makes continuation attractive for good ceos who can expect high future on the job pay but unattractive for bad ceos who may instead prefer to take their outside option payoff our model generates novel empirical implications that jointly relate ceo compensation and turnover to corporate governance firm size cash flow risk and the informativeness of performance measurement jel g34

competition for talent under performance manipulation abstract we study the effects of introducing competition for ceos assuming that the talent of ceos is not observable and that they can misreport their performance without competition for talent firms maximize their profits by offering inefficiently low powered incentive contracts competition for talent removes those inefficiencies but it leads to excessively high powered incentive contracts causing efficiency losses that can be more severe than the inefficiencies that competition mitigates if misreporting is not a concern however then competition for talent has unambiguously positive effects on efficiency

a bid solicitation and selection method for developing a competitive spot priced electric market the electric utility industry is in the beginning throes of a transformation from a cost based regulated structure to a more market based less regulated system traditional unit commitment and economic dispatch methodologies can continue to provide reliable least cost solutions providing they are modified to accommodate a larger sphere of market participants this paper offers a method for an entity such as an independent system operator iso to solicit and evaluate bids for developing a spot priced electric market by replicating existing utility practices that are effective and efficient while creating an open and equitable competitive marketplace for electricity

optimal contracts under costly state falsification we examine an exchange economy with two agents one risk neutral with a certain endowment and a second risk averse with a random endowment the realization of the endowment is public but can be falsified by the second agent at a cost for a broad class of falsification cost functions the optimal no falsification contract is noncontingent on a left hand interval and strictly increasing with a slope strictly less than one on a right hand interval under a mild further restriction optimal no falsification contracts are in addition piece wise linear optimal contracts may in general require falsifying the state but for a set of the highest endowment realizations there is no falsification we find simple conditions under which the optimal contract is a no falsification contract the model has applications that include financial insurance and employment contracts and tax policy

are you a good employee or simply a good guy influence costs and contract design we develop a principal agent model with a moral hazard problem in which the principal has access to a hard signal the level of output and a soft behavioral signal the supervision signal about the agent s level of effort in our model the agent can initiate influence activities and manipulate the behavioral signal these activities are costly for the principal as they detract the agent from the productive task we show that the agent s ability to manipulate the behavioral signal leads to low powered incentives and increases the cost of implementing the efficient equilibrium as a result interestingly the fact that manipulation activities entail productivity losses may lead to the design of influence free contracts that deter manipulation and lead to high powered incentives this result implies that the optimal contract and whether manipulation is tolerated in equilibrium or not depends on the magnitude of the productivity based influence costs we show that it may be optimal for the principal not to supervise the agent even if the cost of supervision is arbitrarily low

the effect of earnings forecasts on earnings management we develop a theory of the association between earnings management and voluntary management forecasts in an agency setting earnings management is modeled as a window dressing action that can increase the firm s reported accounting earnings but has no impact on the firm s real cash flows earnings forecasts are modeled as the manager s communication of the firm s future cash flows we show that it is easier to prevent the manager from managing earnings if he is asked to forecast earnings we also show that earnings management is more likely to follow high earnings forecasts than low earnings forecasts finally our analysis shows that shareholders may not find it optimal to prohibit earnings management earlier results rationalize earnings management by violating some assumption underlying the revelation principle by contrast in our model the principal can make full commitments and communication is unrestricted nonetheless earnings management can be beneficial as it reduces the cost of eliciting truthful forecasts

to identify the critical success factors of sustainable supply chain management practices in the context of oil and gas industries ism approach abstract the concept of sustainable supply chain management sscm has been considered as an important organizational philosophy to achieve profits by reducing environmental risk and impact while improving the economic and social efficiency factors esef the objective of this paper is to present an approach to identify the critical success factors csfs of motivation and encouragement for the successful implementation of sscm practices in indian oil and gas industries 32 csfs were identified from the literature and opinions of academicians and industry practitioners the interpretive structural modeling ism methodology was used for establishing the mutual relationships among the drivers which not only helps in understanding the relative relationship between the csfs but also in determining their interdependence while implementing sustainability further the importance of csfs with respect to sustainability was identified based on their driving and dependence power by using micmac analysis global climatic pressure and ecological scarcity of resources was determined to be the most influential criterion that may force industries to implement sustainable practices an example of indian oil and gas industry has been presented to show the real world applicability of the proposed model this study may help academicians government regulators and practitioners to emphasize their efforts towards implementation of sscm at various levels of organization

optimal leverage and aggregate investment we analyze the optimal financing of investment projects when managers must exert unobservable effort and can also switch to less profitable riskier ventures optimal financial contracts can be implemented by a combination of debt and equity when the risk shifting problem is the most severe while stock options are also needed when the effort problem is the most severe worsening of the moral hazard problems leads to decreases in investment and output at the macroeconomic level moreover aggregate leverage decreases with the risk shifting problem and increases with the effort problem

auditing and competitive bidding in the public sector abstract this paper investigates the impact of a ministry s budget size on the choice between auditing a niskanen bureau and employing competitive bidding in the provision of a publicly funded good the ministry s marginal expected payoff increases fastest with budget size for auctioning as opposed to auditing however the ministry is shown to switch from a purely public provision to a competitive provision as the budget size increases even if expected fixed costs favor the audit the study contributes to the literature by extending the niskanen framework and by endogenizing the institutional arrangements for the provision of public sector goods

bidding with securities auctions and security design we study security bid auctions in which bidders compete for an asset by bidding with securities that is they offer payments that are contingent on the realized value of the asset being sold the value depends on investment by the winner thus creating the possibility of moral hazard such auctions are commonly used both formally and informally in formal auctions the seller generally restricts bids to an ordered set such as an equity share or royalty rate by restricting the bids standard auction formats such as first and second price auctions can be used in informal settings with competing buyers the seller does not commit to a mechanism upfront rather bidders offer securities and the seller chooses the most attractive bid based on his beliefs ex post we characterize equilibrium payoffs and bidding strategies in this setting and show that an informal mechanism yields the lowest possible revenues across all mechanisms we also determine the optimal formal mechanism and show that the security design is more important than the auction format we show that the revenue equivalence principle that expected revenues are independent of the auction format holds if the set of permissible securities is ordered and convex such as equity otherwise it need not hold for example when bidders offer standard debt securities a second price auction is superior on the other hand if bidders compete on the conversion ratio of convertible debt a first price auction yields higher revenues finally we examine how different forms of moral hazard impact our results

evaluating dispatchability features in competitive bidding in power systems competitive bidding for electric generating capacity is beginning to emphasize dispatchability the authors examine various aspects of the evaluation problem facing electric utilities recent private power contracts are used to illustrate the range and limits upon flexibility that are being offered only detailed production simulation models can capture the cost implications of the features being offered the value of the dispatchability was found to increase with the variable cost of operation the most important cost found was associated with projects offering only limited curtailment procedures for incorporating subtle dispatch effects in a broader evaluation framework are identified

overstatement and rational market expectation abstract when an agent overstates his her true performance a rational market can still correctly guess the true performance this paper shows however that such rational market expectation and a profit maximizing principal can exacerbate the lack of productive effort by the agent

investor protection optimal incentives and economic growth does investor protection foster economic growth to assess the widely held affirmative view we introduce investor protection into a standard overlapping generations model of capital accumulation better investor protection implies better risk sharing because of entrepreneurs risk aversion this results in a larger demand for capital this is the demand effect a second effect the supply effect follows from general equilibrium restrictions better protection i e higher demand increases the interest rate and lowers the income of entrepreneurs decreasing current savings and next period s supply of capital the supply effect is stronger the tighter are the restrictions on capital flows our model thus predicts that the positive effect of investor protection on growth is stronger for countries with lower restrictions cross country data provide support for this prediction as does the detailed examination of the growth experiences of south korea and india

strategic communication with lying costs i study a model of strategic communication between an uninformed receiver and an informed but upwardly biased sender the sender bears a cost of lying or more broadly of misrepresenting his private information the main results show that inflated language naturally arises in this environment where the sender almost always claims to be of a higher type than he would with complete information regardless of the intensity of lying cost there is incomplete separation with some pooling on the highest messages the degree of language inflation and how much information is revealed depend upon the intensity of lying cost the analysis delivers a framework to span a class of cheap talk and verifiable disclosure games unifying the polar predictions they make under large conflicts of interest i use the model to discuss how the degree of manipulability of information can affect the trade off between delegation and communication copyright 2009 wiley blackwell

corporate tax evasion with agency costs this paper examines corporate tax evasion in the context of the contractual relationship between the shareholders of a firm and a tax manager who possesses private information regarding the extent of legally permissible reductions in taxable income and who may also undertake illegal tax evasion using a costly state falsification framework we characterize formally the optimal incentive compensation contract for the tax manager and in particular how the form of that contract changes in response to alternative enforcement policies imposed by the taxing authority the optimal contract may adjust to offset at least partially the effect of sanctions against illegal evasion and we find a new and policy relevant non equivalence result penalties imposed on the tax manager are more effective in reducing evasion than are those imposed on shareholders

equilibrium subprime lending this paper develops an equilibrium model of a subprime mortgage market our goal is to offer a benchmark with which the recent subprime boom and bust can be compared the model is tractable and delivers plausible orders of magnitude for borrowing capacities as well as default and trading intensities we offer simple explanations for several phenomena in the subprime market such as the prevalence of teaser rates and the clustering of defaults in our model both nondiversifiable and diversifiable income risks reduce debt capacities thus debt capacities need not be higher when a larger fraction of income risk is diversifiable

the effect of risk on the ceo market this article presents a market equilibrium model of ceo assignment pay and incentives under risk aversion and moral hazard each of the three outcomes can be summarized by a single closed form equation in the presence of moral hazard assignment is distorted from positive assortative matching on firm size as firms with higher risk or disutility choose less talented ceos such firms also pay higher salaries in the cross section but economywide increases in risk or the disutility of being a ceo do not affect pay the strength of incentives depends only on the disutility of effort and is independent of risk and risk aversion if the ceo can affect firm risk incentives rise and are increasing in risk and risk aversion we calibrate the losses from various forms of poor corporate governance such as failures in monitoring and inefficiencies in ceo assignment jel g34 j33 this article presents a market equilibrium model of ceo assignment pay and incentives risk averse managers of different talents are hired in a competitive market by heterogeneous firms which vary in their size risk and level of effort required the level of pay drives the assignment of talent to firms the strength of incentives induces the efficient effort level and is determined by an optimal contracting approach our main contribution is to incorporate risk into a ceo market equilibrium in a tractable manner a large empirical literature has shown that risk is a firstorder determinant of compensation contracts demsetz and lehn 1985 garen 1994 core and guay 1999 oyer and schaefer 2004 peters 2009 peters and wagner 2009 but most theories assume risk neutrality this assumption is

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