limitation of liability and the ownership structure of the firm this paper models the optimal choice of shareholder liability if investors want managers to be monitored the monitors should be residual claimants shareholders and monitoring and firm value will increase as shareholders commit more of their wealth to the firm when liquidating wealth is costly contingent liability dominates direct investment as a wealth commitment device however if wealth is unobservable under this regime only relatively poor investors will hold shares in equilibrium this may be prevented at a cost by verifying shareholder wealth and restricting stock transfers comparative statics on various liability regimes are used to motivate actual contractual arrangements

the role of games in security design we contend that security design should be approached as a problem of game design that is contracts should specify the procedures that govern the behavior of contract participants in determining outcomes as well as the allocations resulting from those outcomes we characterize optimal contracts in two nested classes all contracts including those that depend on the state and state independent contracts we demonstrate that in situations in which the dependence of contracts on the state is limited contracts designed as games can improve the allocation of resources relative to nonstrategic allocation rules article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

non uniformity of job matching in a transition economy a nonparametric analysis for the czech republic this study explores the properties and development of the matching technology in the czech republic during the transition to a market economy nonparametric additive modelling allows us to assess flexible functional forms which comprise for instance ces and trans log specifications this enables us to evaluate the matching process locally for each combination of unemployment and vacancies rather than being restricted to global coefficients special interest is devoted to analysis and economic determinants of regional variation in the returns to scale of the matching function non linearities are found in the partial adjustment process of unemployment outflows and a negative coefficient on vacancies in some years moreover increasing returns to scale in job matching are found locally returns to scale are found to be negatively correlated to the share in employment in services and to outmigration positively correlated to the employment share in industry the unemployment rate and various measures of ac

renegotiation design with unverifiable information this paper considers a buyer seller relationship with observable but unverifiable investments and or random utility parameters in such situations it is known that contract renegotiation may prevent the implementation of first best outcomes in this paper we show however that efficient investments and optimal risk sharing can typically be achieved provided the initial contract is able to monitor the ex post renegotiation process specifically we focus on the following two features of renegotiation design first default options in case renegotiation breaks down second the allocation of all bargaining power to either contracting party moreover we show that these two features can be obtained in standard rubinstein bargaining games through contractual provisions such as specific performance clauses and penalties for delay or equivalently financial hostages refundable without interest

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

search intensity job advertising and efficiency this paper demonstrates that if both firms and workers search the other side of the market for job matches the equilibrium rate of unemployment is likely to be too high both sides ignore a positive externality of their search when they establish a job match they remove from the market a job searcher so they save society his search costs i show that there is no feasible wage rate that can internalize this externality under fairly weak restrictions on the technology of search

optimal security design how should new securities be designed traditional theories have little to say on this the literature on capital structure and general equilibrium theories with incomplete markets take the securities firms issue as exogenous this paper explicitly incorporates the transaction costs of issuing securities and develops a model where the instruments that are traded are chosen optimally and the economy s market structure is endogenous among other things it is shown that the firm s income stream should be split so that in every state all payoffs are allocated to the security held by the group that values them most this abstract was borrowed from another version of this item

seniority and maturity of debt contracts abstract this paper provides a model of how borrowers with private information about their credit prospects choose seniority and maturity of debt increased short term debt leads lenders to liquidate too often it also increases the sensitivity of financing costs to new information although better than average borrowers desire information sensitivity the model implies that short term debt will be senior to long term debt and that long term debt will allow the issue of additional future senior debt the model also has implications on the structure of leveraged buyouts and on how various types of lenders respond to potential defaults

optimal financial instruments debt and equity are developed as optimal financial instruments in a model where cash flows and control rights are allocated to investors endogenously when investment decisions must be made by a single party the debtholder s cash flows are fixed in order to provide the equityholder with efficient incentives for investment ownership of control may be transferred to the debtholder to attenuate the impact of asymmetric information concerning the investment opportunity on the efficiency of the decision making since the classic article by modigliani and miller 1958 a great deal of attention has been focused on the problem of determining the optimal capital structure of the firm spanning taxes and or transaction cost agency cost and signalling arguments have been offered as explanations for why a firm s cash flows might be split between debt and equity claimants in a particular way here we address the more basic question of the optimal design of the securities that firms issue the majority of the existing literature takes the form of the allowable financial instruments as given in defense of this approach it may be noted that to a first approximation firms have used two standard financial instruments debt and equity we argue here however that the characterization of the standard instruments used in much of the literature has been incomplete and that the incentives of decision makers within the firm cannot be completely understood until the problem is addressed from a more basic level than is typically done by concentrating on the cash flow characteristics of these instruments the equally important issue of the way the standard instruments distribute the control rights of the firm has been ignored as a consequence the objectives in corporate decision making have been assumed rather than developed endogenously we consider the allocation of cash flows and the distribution of control rights to optimal financial instruments in a security design problem by considering the design of securities in this way we are able to consider the

specialization productivity and financing constraints we analyze optimal financial contracts when the specificity of investments is endogenous specialization decreases the liquidation value of assets but improves the asset s long term productivity while the former is known to make financing more difficult we show that the latter can ease financing constraints and increase financing capacity by improving an entrepreneur s incentive to repay the overall impact of specialization on the terms of financing depends on which effect is more important specialization decisions interact with the nature of investments their timing the need for outside financing and an entrepreneur s ability to commit to a level of specialization 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

is there compelling evidence against increasing returns to matching in the labour market matching models of the labour market have been of particular interest in macroeconomics where the notion of thick market externalities can lead to multiple equilibria this has led to some recent interest in constructing empirical estimates of labor market matching functions this paper argues that existing estimates do not provide compelling evidence against the hypothesis of increasing returns in matching the assumption made in several studies that the relevant pool of job searchers is proportional to the stock of unemployment is a potentially important source of downward bias in returns to scale estimates we show the source of this bias theoretically and illustrate its magnitude by estimating canadian aggregate and regional labour market matching functions over the period 1978 88 this evidence suggests significant increasing returns to labor market matching

covenants and collateral as incentives to monitor although monitoring borrowers is thought to be a major function of financial institutions the presence of other claimants reduces an institutional lender s incentives to do this thus loan contracts must be structured to enhance the lender s incentives to monitor covenants make a loan s effective maturity and the ability to collateralize makes a loan s effective priority contingent on monitoring by the lender thus both covenants and collateral can be motivated as contractual devices that increase a lender s incentive to monitor these results are consistent with a number of stylized facts about the use of covenants and collateral in institutional lending modern finance theory suggests that financial intermediaries such as commercial banks insurance companies and finance companies monitor and control their borrowers on behalf of other investors 1 this article investigates how the loans made by these institutions can be structured so as to best enhance the institutions role as delegated monitors covenants and collateral are common features of loans made by financial institutions but these features are somewhat difficult to justify consider loan covenants clauses in a loan contract that require the borrower to take or refrain from various actions berlin and mester 1992 magee and sridhar 1994 and park 1994 show that by giving institutions the right to renegotiate or call loans when covenants are violated covenants serve as tripwires that enhance the flexibility and efficiency of financial contracting also as documented in smith and warner 1979 control rights from covenants reduce borrower adverse selection or moral hazard nevertheless by allowing institutions to demand repayment based on any information contractible or not

the effects of monetary policy news and surprises there is substantial agreement in the monetary policy literature over the effects of exogenous monetary policy shocks the shocks that are investigated however almost exclusively represent unanticipated changes in policy which surprise the private sector and which are typically found to have a delayed and sluggish effect on output in this paper we estimate a new keynesian model that incorporates news about future policies to try to disentangle the anticipated and unanticipated components of policy shocks the paper shows that the conventional estimates confound two distinct effects on output an effect due to unanticipated or surprise shocks which is smaller and more short lived than the response usually obtained in the literature and a large delayed and persistent effect due to anticipated policy shocks or news news shocks play a larger role in influencing the business cycle than unanticipated policy shocks although the overall fraction of economic fluctuations that can be attributed to monetary policy remains limited

estimating the benefits of contractual completeness i provide a revealed preference based framework that uses covenant prices and choices to quantitatively study how covenants generate firm benefits by completing debt contracts i use a rational expectations based panel estimator of covenant prices which does not require quasi experimental variation to circumvent the problem of endogenous covenant choices i find that firms surpluses exceed the spread paid on a loan leverage and interest rate covenants produce the largest benefits lending quantitative credence to several standard theories of covenants once covenants are chosen the benefits from fine tuning them are small thus rationalizing boilerplate covenants i conclude by discussing the extensions and limitations of my method 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

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

subgame perfect implementation this paper examines the use of stage mechanisms in implementation problems and provides a partial characterization of the set of subgam e perfect implementable choice rules it is shown that in many economic environments virtually an y choice rule can be implemented to illustrate the power of this approach the paper discusses a number of models in which it is possible to implement the first best although it wouldn t have been possible to do so without using stage mechanisms the diversity of these models suggests that subgame perfect implementation may find wide application copyright 1988 by the econometric society

returns to scale in a matching model of the labor market abstract this paper presents evidence on the degree of returns to scale in the labor market using a transcendental logarithmic model of the labor market matching technology the empirical results imply locally increasing returns to scale and are consistent with multiple equilibria thereby suggesting a potentially welfare enhancing role for macroeconomic policy intervention

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

production in entrepreneurial firms the effects of financial constraints on labor and capital i model the contrasting capital labor decisions of financially constrained and unconstrained firms i show that financially restricted firms use relatively more labor than physical capital because informed employees provide more efficient financing than uninformed capital suppliers i demonstrate that constrained firms cannot easily attract new employees to replace existing staff their greater employee retention aligns owner worker incentives and encourages workers to make firm specific investments constrained firms however gradually suffer from their inability to replace low quality workers such that their relative labor productivity decreases over time empirical tests utilizing instrumental variables confirm several implications of the theory

unemployment dynamics and labour market tightness an empirical evaluation of matching function models the implications of matching function models for the relationship between labour market tightness and the transition probability into employment are summarized these implications are then tested using monthly data for three canadian provinces british columbia ontario and quebec testing methods use flexible regression techniques so as to reduce the effect of any extraneous restrictions the results show rough concordance between theoretical assumptions and empirical facts evidence of non linearity in the estimated relationships favours a search theoretic model of labour markets over one based on queues and some quantitative results offer guidance to those using calibrated search models in theoretical analysis

default and renegotiation a dynamic model of debt we analyze the role of debt in persuading an entrepreneur to pay out cash e ows rather than to divertthem in the e rstpartof the paper we study the optimal debt contract specie cally the trade off between the size of the loan and the repayment under the assumption that some debt contract is optimal in the second part we consider a more general class of nondebt contracts and derive sufficient conditions for debt to be optimal among these

optimal design of securities under asymmetric information a firm must decide what security to sell to raise external capital to finance a profitable investment opportunity there is ex ante asymmetry of information regarding the probability distribution of cash flow generated by the investment in this setting we derive necessary and sufficient conditions for a security to be optimal uniquely optimal that is for pooling at this security to be an the unique equilibrium outcome using these conditions we show that the debt contract is uniquely optimal if and only if cash flows are ordered by strict conditional stochastic dominance finally we derive an equivalence relationship between optimal security designs and designs that minimize mispricing