do firms engage in risk shifting empirical evidence i empirically test whether firms engage in risk shifting contrary to what risk shifting theory predicts i find that firms reduce investment risk when they approach financial distress to identify the effect of distress on risk taking i use a natural experiment with exogenous changes to leverage risk reduction is most prevalent among firms that have shorter maturity debt bank debt and tighter bank loan financial covenants these findings suggest that debt composition and financial covenants serve as important mechanisms to mitigate debt equity agency conflicts such as risk shifting that are not explicitly contracted on received january 8 2015 accepted may 27 2016 by editor david denis

how do payments for environmental services affect land tenure theory and evidence from china we gratefully acknowledge the financial support from renmin university for the research on land market development in the forest tenure reform project no 11xnc002 the british academy reference sg121920 the cambridge humanities research grants scheme and the economy and environment program for southeast asia reference pco13 0308 009

a multiplicative model of optimal ceo incentives in market equilibrium this paper presents a unified theory of both the level and sensitivity of pay in competitive market equilibrium by embedding a moral hazard problem into a talent assignment model by considering multiplicative specifications for the ceo s utility and production functions we generate a number of different results from traditional additive models first both the ceo s low fractional ownership the jensen murphy incentives measure and its negative relationship with firm size can be quantitatively reconciled with optimal contracting and thus need not reflect rent extraction second the dollar change in wealth for a percentage change in firm value divided by annual pay is independent of firm size and therefore a desirable empirical measure of incentives third incentive pay is effective at solving agency problems with multiplicative impacts on firm value such as strategy choice however additive issues such as perk consumption are best addressed through direct monitoring jel d2 d3 g34 j3

introduction understanding structural transformation in africa summary the limitations of neo classical growth models have led to a resurgence of interest in dual economy models and structural change structural change entails the movement of labor from low productivity sectors like agriculture into more modern sectors of the economy because the share of the labor force in agriculture is so high in most of sub saharan africa the potential for structural change to lead to growth and poverty alleviation in africa appears to be enormous yet very little of this new literature on structural change focuses on africa this special issue begins to fill that gap the first half of this special issue contains five original contributions that provide new insights with respect to the nature of africa s growth over the past two decades the second half contains six original contributions that examine opportunities for structural transformation in africa

playing games in the forest state local conflicts of land appropriation this paper explores possible strategic interactions between the state and local community in games of tropical forestland appropriation three typical cases are discussed corresponding to a development over time of increased resource competition and market integration the local response to more state deforestation depends on the costs market and behavioral assumptions and less on the structure of the game cournot or stackelberg the state fuels local deforestation by providing infrastructure roads which reduces the net costs of agricultural expansion or when markets are imperfect and local behavior determined by survival needs the game structure is however important for total deforestation this paper explores possible strategic interactions between the state and local community in games of tropical forestland appropriation three typical cases are discussed corresponding to a development over time of increased resource competition and market integration the local response to more state deforestation depends on the costs market and behavioral assumptions and less on the structure of the game cournot or stackelberg the state fuels local deforestation by providing infrastructure roads which reduces the net costs of agricultural expansion or when markets are imperfect and local behavior determined by survival needs the game structure is however important for total deforestation

changing to gray decentralization and the emergence of volatile socio legal configurations in central kalimantan indonesia decentralization policy narratives articulated by donor agencies tend to describe decentralization as a technical process of policy design and implementation advocating decentralization as a solution to particular problems drawing on research carried out in the indonesian province of central kalimantan following the inception of a decentralization program this article examines how political processes at the national district and village levels have led to highly volatile socio legal configurations that create insecurity and heighten resource conflicts it concludes that while the politics surrounding decentralization in different domains have ensured that the patterns of governance inherited from the past remain precariously distant from the objectives of good governance decentralization has also opened up space for positive changes

coordination problems in local level resource management starting from the observation of important returns to scale effects in conservation of common property resources we identify some of the factors that impinge upon the chances of success of a decentralized group based management of local natural resources particular attention is paid to the influence of asset inequality among resource users in particular it is shown that by redistributing incentives among landowners land reform has an ambiguous impact on the latter s willingness to undertake conservation investments

designing payments for environmental services in theory and practice an overview of the issues abstract payments for environmental services pes have attracted increasing interest as a mechanism to translate external non market values of the environment into real financial incentives for local actors to provide environmental services es in this introductory paper we set the stage for the rest of this special issue of ecological economics by reviewing the main issues arising in pes design and implementation and discussing these in the light of environmental economics we start with a discussion of pes definition and scope we proceed to review some of the principal dimensions and design characteristics of pes programs and then analyze how pes compares to alternative policy instruments finally we examine in detail two important aspects of pes programs their effectiveness and their distributional implications pes is not a silver bullet that can be used to address any environmental problem but a tool tailored to address a specific set of problems those in which ecosystems are mismanaged because many of their benefits are externalities from the perspective of ecosystem managers pes is based on the beneficiary pays rather than the polluter pays principle and as such is attractive in settings where es providers are poor marginalized landholders or powerful groups of actors an important distinction within pes is between user financed pes in which the buyers are the users of the es and government financed pes in which the buyers are others typically the government acting on behalf of es users in practice pes programs differ in the type and scale of es demand the payment source the type of activity paid for the performance measure used as well as the payment mode and amount the effectiveness and efficiency of pes depends crucially on program design

status intertemporal choice and risk taking this paper takes the position that an individual s concern for relative status is expressed in her preferences we embed this hypothesis in an otherwise conventional model of economic growth and examine its consequences the model generates two kinds of equilibrium in the first all individuals always follow a deterministic consumption and investment strategy such a strategy must be linear in output is independent of payo s and technology and only depends on the discount factor this sort of equilibrium exists when the individual cares only about status and the individual production function is convex in investment in contrast the other kind of equilibrium involves convergence to a steady state in which there is persistent and endogenously generated gambling this kind of equilibrium exists in more plausible circumstances the individual has a utility function that may depend on consumption per se as well as implied status and individual production functions are concave we characterize the unique steady state in such a situation and prove that any dynamic equilibrium path must converge to it risk taking arises not from the presumption of a utility function with strictly convex segments as in friedman savage but naturally from a view of utility as depending on relative status our steady state is broadly consistent with the stylized facts that individuals both insure downside risk and to gamble over upside risk and generates similar patterns of risk taking and avoidance across environments with quite di erent overall wealth levels finally in contrast to friedman 1953 endogenous risk taking here is generally pareto ine cient

common property institutions and sustainable governance of resources abstract the literature on common property based resource management comprises many important studies that seek to specify the conditions under which groups of users will self organize and sustainably govern resources upon which they depend using three of the more comprehensive such studies and with an extensive review of writings on the commons this paper demonstrates that the enterprise of generating lists of conditions under which commons are governed sustainably is a flawed and impossibly costly research task for a way out the paper examines the relative merits of statistical comparative and case study approaches to studying the commons it ends with a plea for careful research design and sample selection construction of causal mechanisms and a shift toward comparative and statistical rather than single case analyses such steps are necessary for a coherent empirically relevant theory of the commons

human capital bankruptcy and capital structure we derive a firm s optimal capital structure and managerial compensation contract when employees are averse to bearing their own human capital risk while equity holders can diversify this risk away in the presence of corporate taxes our model delivers optimal debt levels consistent with those observed in practice it also makes a number of predictions for the cross sectional distribution of firm leverage consistent with existing empirical evidence it implies persistent idiosyncratic dierences in leverage across firms an important new empirical prediction of the model is that ceteris paribus firms with more leverage should pay higher wages

payments for environmental services as an alternative to logging under weak property rights the case of indonesia decentralization reforms in indonesia have led to local communities negotiating logging agreements with timber companies for relatively low financial payoffs and at high environmental cost this paper analyzes the potential of payments for environmental services pes to provide an alternative to logging for these communities and to induce forest conservation we apply a game theoretical model of community firm interactions that explicitly considers two stylized conditions present in the indonesian context i community rights to the forest remain weak even after decentralization and ii the presence of logging companies interested in the commercial exploitation of the forest intuition may suggest that pes design should focus on those communities with the lowest expected payments from logging deals however we show that these communities may not be able to enforce a pes agreement i e they may not be able to prevent logging activities by timber companies moreover some communities would conserve the forest anyway in these cases pes would not lead to additional environmental gains most important the introduction of pes may increase a community s expected payoff from a logging agreement a failure to consider this endogeneity in expected payoffs could lead to communities opting for logging agreements despite pes simply allowing communities to negotiate better logging deals our results indicate that pes design is a complex task and that the costs of an effective pes system could potentially be much higher than expected from observing current logging fees using data collected in indonesia on actual logging fees received by communities we illustrate how the theoretical results could be used in empirical analysis to guide pes design our results are likely to be useful in other cases where local people make resource use decisions but have weak property rights over these resources and where external commercial forces are present the results highlight the importance of understanding the details of the local context in order to design pes programs appropriately

managerial incentives on the near linearity of optimal compensation contracts are examined when outcomes depend on managers choices as well as efforts as the cost of effort shrinks relative to payoffs the optimal contract converges to a linear payoff if the control space of the agent has full dimensionality but not otherwise thus when the agent can trade expected return for greater correlation with other returns it is better to ignore relative performance when the cost of effort is small when the choices include all fair gambles and hedges the linear schedule is no more expensive than any other schedule that induces effort unfair gambles are examined as well

engaging simplifications community based resource management market processes and state agendas in upland southeast asia abstract in the struggle to secure resource rights for rural populations who gain their livelihoods from state claimed lands advocacy agendas highlight community interest in and capacity for sustainable resource management in the uplands of southeast asia the strategic simplifications of community based natural resource management cbnrm advocacy are being translated into legal frameworks and program initiatives which make rights conditional upon particular forms of social organization and livelihood as well as conservation outcomes when set in the context of agricultural intensification among both indigenous and migrant populations and the desire of many upland dwellers to claim the benefits of a fuller citizenship cbnrm offers a problematic basis for justice

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

recentralizing while decentralizing how national governments reappropriate forest resources summary decentralization initiatives have been launched in the majority of developing countries but these rarely lay the foundations necessary to reach decentralization s purported efficiency and equity benefits this paper uses a comparative empirical approach to show how central governments in six countries senegal uganda nepal indonesia bolivia and nicaragua use a variety of strategies to obstruct the democratic decentralization of resource management and hence retain central control effective decentralization requires the construction of accountable institutions at all levels of government and a secure domain of autonomous decision making at the local level

hugging trees claiming de facto property rights by blockading resource use this paper explores conflicts between two groups the industry and theenvironmentalists over whether an indivisible resource e g an ancient tree should be harvested or preserved in a complete information war ofattrition the environmentalists willingness to blockade harvest attemptsmay control resource use as effectively as if they held property rights optimal government intervention will override this ability for somebenefit cost combinations but may augment it for other combinations introducing uncertainty about the environmentalists benefits results inextended disputes and consequent lack of efficiency governmentintervention for welfare reasons generally reduces these efficiencylosses

on the endogeneity of resource comanagement theory and evidence from indonesia we examine theoretically the emergence of participatory comanagement agreements that share between state and user the management of resources and the benefits from use going beyond user user interactions our state user model addresses a critical question when will comanagement arise in order to consider the right baseline for evaluating comanagement s forest and welfare impacts we then compare our model s hypotheses concerning de facto rights negotiated agreements and transfers all endogenous with community level data including observed agreements in a protected indonesian forest these unique data could refute the model despite being limited but instead offer support

relational incentive contracts standard incentive theory models provide a rich framework for studying informational problems but assume that contracts can be perfectly enforced this paper studies the design of self enforced relational contracts i show that optimal contracts often can take a simple stationary form but that self enforcement restricts promised compensation and affects incentive provision with hidden information it may be optimal for an agent to supply the same inefficient effort regardless of cost conditions with moral hazard optimal contracts involve just two levels of compensation this is true even if performance measures are subjective in which case optimal contracts terminate following poor performance jel c73 d82 l14

empirical evidence of risk shifting in financially distressed firms this paper provides evidence of risk shifting behavior in the investment decisions of financially distressed firms using a real options framework i show that shareholders risk shifting incentives can reverse the expected negative relation between volatility and investment i test two hypotheses that are consistent with risk shifting behavior i volatility has a positive effect on distressed firms investment ii investments of distressed firms generate less value during times of high uncertainty empirical evidence using 40 years of data supports both hypotheses i further evaluate the effect of various firm characteristics on risk shifting and estimate the costs of the investment distortion

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

complexities of decentralization in a globalizing world in many developing countries decentralization programmes for natural resource management aim to induce incentives for sustainable resource management at the local level the effectiveness of such programmes has however suffered from weak property rights to the resource and by the presence of externalities growing economic integration among countries has exacerbated these problems by increasing the exposure of local user groups to commercial actors interested in resource extraction in this paper the interplay of decentralization and globalization in affecting environmental outcomes and community welfare is analysed through a game theoretic model of community firm interactions the results highlight the complexities of policy design first by raising the extractive value of the resource globalization may lead to communities negotiating resource extraction agreements with firms second with a lack of effective state enforcement of community resource rights communities may be unable to assume de facto ownership over the resource while commercial actors succeed in exploiting resources without community consent no single policy option provides a panacea to counteracting these negative effects instead a mix of policies combining incentive payments along with the provision of more secure property rights and poverty alleviation is shown to have the potential to improve both environmental outcomes and community welfare

optimal risk sharing and borrowing constraints in a continuous time model with limited commitment abstract we study a continuous time version of the optimal risk sharing problem with one sided commitment in the optimal contract the agent s consumption is a time invariant strictly increasing function of a single state variable the maximal level of the agent s income realized to date we characterize this function in terms of the agent s outside option value function and the discounted amount of time in which the agent s income process is expected to reach a new to date maximum under constant relative risk aversion we solve the model in closed form optimal consumption of the agent equals a constant fraction of his maximal income realized to date in the complete markets implementation of the optimal contract the alvarez jermann solvency constraints take the form of a simple borrowing constraint familiar from the bewley aiyagari incomplete markets models

property rights and liability for deforestation under redd implications for permanence in policy design reducing emissions from deforestation and forest degradation redd is critical in efforts to mitigate the effects of anthropogenic climate change despite uncertainty about the exact form of a future international redd system redd carbon property rights would need to be created and allocated with liability assigned for the potential loss of climate benefits in the event of carbon reversal from deforestation this commentary explores the links between forest property rights and liability to different redd policy options and their implications for permanence should national governments retain liability for permanence then project level activities that have individually assigned redd carbon rights may have a higher risk of carbon reversal than policies where rights are assigned to the state knowledge of pre existing forest rights is necessary for some policies implemented with government assigned redd rights in order to compensate for potential income losses from policy implementation

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

for better or for worse local impacts of the decentralization of indonesia s forest sector this paper quantifies the local impacts of mechanized logging on forest dependent communities in indonesia before and after decentralization a conceptual framework incorporates financial social enforcement rent seeking and environmental impacts using data from 60 communities in east kalimantan the empirical results suggest that significantly more households received financial and in kind benefits after decentralization compared to before many communities engaged in self enforcement activities against firms both before and after decentralization post decentralization a significantly higher proportion of households perceived community forest ownership there were few significant differences in perceived environmental impacts little evidence exists of a post decentralization trade off between environmental and financial contractual provisions

impatience versus incentives this paper studies the dynamics of long term contracts in repeated principal agent relationships with an impatient agent despite the absence of exogenous uncertainty pareto optimal dynamic contracts generically oscillate between favoring the principal and favoring the agent

optimal mortgage design this article studies optimal mortgage design in a continuous time setting with volatile and privately observable income costly foreclosure and a stochastic market interest rate we show that the features of the optimal mortgage are consistent with an option adjustable rate mortgage option arm under the optimal contract the borrower is given discretion of how much to repay until his balance reaches a certain limit the default rates and interest rate payment on the mortgage correlate positively with the market interest rate gains from using the optimal contract relative to simpler mortgages are the biggest for those who face more income variability buy pricey houses given their income level or make little or no down payment our model thus may help to explain a high concentration of option arms among riskier borrowers jel g20 g21 g33

land tenure and property rights theory and implications for development policy this article explores the nature of property rights systems their evolution and their effect on resource allocation it is argued that certain institutional arrangements for land rights have evolved in order to reduce uncertainty and increase efficiency in credit as well as in land markets of particular relevance to developing countries the article emphasizes the contribution of public sector infrastructure to effective land rights systems an appendix to the article presents a formal model analyzing the effects of security of land rights on land prices the intensity of cultivation and the use of credit empirical evidence from thailand supports several of the propositions derived from the model

governance institutions resource rights regimes and the informal mining sector regulatory complexities in indonesia summary this study examines how shifting resource governance regimes affect labor inequities in the small scale mining sector in indonesia it focuses on the implications of governance decentralization processes and mining regulation reforms for indigenous and migrant populations who rely on informal unlicensed mining for income in central kalimantan while the findings illustrate the territorially uneven impacts of recent reforms they highlight how dominant paradigms that prioritize the enforcement of property rights schemes have contributed to problems of livelihood insecurity and poor environmental governance the article urges for more nuanced attention to contested articulations of power as well as local resource rights and institutional arrangements to assist rural communities in reversing marginalization

symposium on management of local commons in the public image of industrially advanced countries the commons problem relates to global warming acid rain depletion of the ozone layer and the like in the developing countries the daily livelihood of the poor depends more substantially and directly on the local commons irrigation forestry grazing in shore fisheries and so on these restricted access common property resources usually involve small local communities which opens the possibility for local level community organizations to manage resources and resolve conflicts as an alternative to the polar opposites of private and state control which usually hog the limelight in public policy discussion in fact many developing countries have a long history of balanced resource management under highly informal local community institutions in these countries the erosion of the local commons set in only with major demographic and institutional changes in recent years often accelerated by private commercialization or bureaucratic appropriation of the traditional historical rights of local communities over these resources

economic development as self discovery in the presence of uncertainty about what a country can be good at producing there can be great social value to discovering costs of domestic activities because such discoveries can be easily imitated we develop a general equilibrium framework for a small open economy to clarify the analytical and normative issues we highlight two failures of the laissez faire outcome there is too little investment and entrepreneurship ex ante and too much production diversification ex post optimal policy consists of counteracting these distortions to encourage investments in the modern sector ex ante but to rationalize production ex post we provide some informal evidence on the building blocks of our model

intermediary asset pricing abstract we model the dynamics of risk premia during crises in asset markets where the marginal investor is a financial intermediary intermediaries face an equity capital constraint risk premia r

community industry contracting over natural resource use in a context of weak property rights the case of indonesia decentralization in indonesia has resulted in an increased influence of local communities over the terms of logging agreements with timber companies the outcomes of such community company negotiations vary significantly across communities what are the conditions that cause this variation and how can the outcomes be more effectively and efficiently influenced by third party actors such as the local government or ngos this paper addresses these questions by developing a game theoretic model to illustrate the strategic interactions between communities and companies the model allows for endogeneity of de facto property rights and bargaining positions we show that third party actions to improve the community s bargaining position by raising its reservation utility may result in an increase in the area logged and thereby harm the environment our results indicate that the strategy of intervention matters in particular strategies that raise the sensitivity of interventions to local logging threats are likely to be more cost effective in supporting communities and reducing forest degradation than more indiscriminatory strategies the model will be relevant to other situations where communities negotiate contracts over natural resource use with outside actors in a context of weak property rights a situation increasingly observed in other developing countries

value chain clusters and aquaculture innovation in bangladesh abstract farmers adopting and implementing innovations such as new technologies and new products often require collaborative inter segment innovation by other actors in other segments of the value chain such as wholesalers implementing new product innovations such as supply of commercial fish feed and chemicals and buying and marketing non traditional fish species we tested whether the clustering and thus economies of agglomeration with implied lower transaction costs encourage and facilitate farmers to innovate that potential determinant of farmer choices has not been studied in agriculture or aquaculture or indeed the food sector we use a unique data set from our own primary survey of the aquaculture value chain in bangladesh including micro data for 1500 fish farm households and 20 districts 77 villages for meso level data we calculate an index to include both horizontal agglomeration and vertical interconnections among actors in the value chain we find being in an area with a high clustering index is associated with a higher probability of farmers using more modern inputs and growing non traditional commodity fish species controlling for farmers other characteristics as well as proximity to cities

rewarding trading skills without inducing gambling this paper develops a model of active portfolio management in which fund managers may secretly gamble in order to manipulate their reputation and attract more funds we show that such trading strategies may expose investors to severe losses and are more likely to occur when fund managers are impatient their trading skills are scalable and generate higher prot per unit of risk we study investment management contracts that deter this behavior if investors are short lived then the manager must leave rents to investors in order to credibly commit not to gamble if investors are long lived contracts that increase but defer expected bonuses after an outstanding performance implement the rstbest our model can explain a number of observed dierences

overcoming successive bottlenecks the evolution of a potato cluster in china summary although the role of industrial policy in economic development is a frequent topic of debate in both the literature and the political arena most discussions focus on industrial policymaking at the national level using a case study of a potato cluster in china we show that industrial policymaking at the local level contributes greatly to economic development as well many of the industrial policies affecting the cluster including leveling land developing better varieties establishing a potato trade association lobbying for increasing freight car quotas and attracting processing firms were implemented at the local level highlighting the need for discussion of local industrial policymaking as a major determinant of cluster development as the case study demonstrates economic development is a continuous process with constantly evolving binding supply side and demand side constraints often after a local policy helps remove one binding constraint a new one emerges that in turn may require a new set of policies therefore the success of clusters depends upon local industrial policies that respond to emerging binding constraints at different stages of the cluster s development

formal informal sector interaction in rural credit markets abstract the majority of small cultivators in the less developed countries are not regarded as credit worthy by the formal sector financial institutions and are forced to borrow from the moneylenders in the informal credit market this paper shows that when such borrowers differ in their likelihood of default and the moneylenders are asymmetrically informed about the client specific degree of risk the policy of providing cheap credit through the formal sector can generate adverse composition effects which worsen the terms of credit and the availability of loans in the informal sector

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

corporate policies with permanent and transitory shocks we model the financing cash holdings and hedging policies of a firm facing financing frictions and subject to permanent and transitory cash flow shocks the permanent and transitory shocks generate distinct sometimes opposite effects on corporate policies we use the model to develop a rich set of empirical predictions in our model correlated permanent and transitory shocks imply less risk lower cash savings and a drop in the value of credit lines the composition of cash flow shocks affects the cash flow sensitivity of cash which can be positive or negative optimal hedging of permanent and transitory shocks may involve opposite positions

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

uncertainty shocks and balance sheet recessions this paper investigates the origin and propagation of balance sheet recessions i first show that in standard models driven by tfp shocks the balance sheet channel disappears when agents can write contracts on the aggregate state of the economy optimal contracts sever the link between leverage and aggregate risk sharing eliminating the concentration of aggregate risk that drives balance sheet recessions i then show that uncertainty shocks can help explain this concentration of aggregate risk and drive balance sheet recessions even with contracts on aggregate shocks the mechanism is quantitatively important and i explore implications for financial regulation

gold digging careers in rural east africa small scale miners livelihood choices rural livelihood studies over the past two decades have stressed directional movement away from smallholder agriculture and the diffuse ad hoc uncertain and low earning character of most rural non agricultural income diversification based on a recent survey of small scale mining in tanzania this article documents the higher risks greater potential earnings more elaborate division of labor and career trajectory of miners tracing cohort entry groups indicates that those willing to withstand the hardships of moving from one gold strike to another and time commitment to a career considered dangerous and alienated from agrarian traditions of the tanzanian countryside may be materially rewarded for their efforts

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

international lending with moral hazard and risk of repudiation in this paper i examine the constrained optimal pattern of capital flows between a lender and a borrower in an environment in which there are two impediments to forming contracts the first impediment to contracting arises from the assumption that lenders cannot observe whether borrowers invest or consume borrowed funds this assumption leads to a moral hazard problem in investment the second impediment arises from the assumption that the borrower as a sovereign nation may choose to repudiate his debts the optimal contract is shown to specify that the borrowing country experience a capital outflow when the worst realizations of national output occur this seemingly perverse capital outflow forms a necessary part of the optimal solution to the moral hazard problem in investment

self enforcing wage contracts we examine long term wage contracts between a risk neutral firm and a risk averse worker when both can costlessly renege and buy or sell labour at a random spot market wage a self enforcing contract is one in which neither party ever has an incentive to renege in the optimum self enforcing contract wages are sticky they are less variable than spot market wages and positively serially correlated they are updated by a simple rule around each spot wage is a time invariant interval and the contract wage changes each period by the smallest amount necessary to bring it into the current interval

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