This paper sets up a model to account for differences in total factor productivity due to differences in enforcement of contracts. Vertical specialization generates the need for intra-period credit, because final goods producers cannot pay their intermediate goods suppliers before they produce their final good. The paper shows that if there are enforcement problems, the capital distribution is ...

This paper investigates the equilibrium consequences of a contractual market with moral hazard where multiple principals compete each other to offer incentive contracts to agents who choose unobservable ex post actions. We show the following limit theorems: First, when the trade–off between incentive and risk sharing causes the moral hazard problem on the side of agents, the full insurance cont...

It is widely observed that many physicians working in public health facilities do not put in the required effort and/or time in their jobs. At the same time, many public physicians remain highly motivated, working long hours for little financial reward in providing quality health services. This mix of providertypes poses fundamental challenges in the design of compensation mechanisms and monito...

This article introduces the symposium on economic development theory. © 2007 Elsevier Inc. All rights reserved. JEL classification: O11; O12

We analyze how inequity aversion interacts with incentive provision in an otherwise standard moral hazard model with two risk averse agents. We find that behindness aversion (suffering only when being worse off) among agents unambiguously increases agency costs of providing incentives. This holds true if agents also suffer from being better off unless they account for effort costs in their comp...

This paper analyzes the relations among firm-level stock option portfolio incentives, investment, and firm value based on a sample of Finnish firms during the time period 1987 – 2000. Utilizing exact and complete information regarding stock option portfolio characteristics, we find some evidence that firm investment is increasing in the incentives to increase stock price (delta) and risk (vega)...

We investigate the timing of adoption of product and process innovation by using a differential game in which firms may invest in both activities. We consider horizontal product innovation that reduces product substitutability, and process innovation that reduces marginal cost. First, we demonstrate that the incentive for cost-reducing investment is relatively higher than the incentive to incre...

We highlight the ex ante risk-shifting incentives faced by a bank’s shareholders/managers when CoCos (contingent convertible capital) are part of the capital structure. The risk shifting incentive arises from the wealth transfers that the shareholders will receive upon the CoCo’s conversion under CoCo designs widely used in practice. Specifically we show that for principal writedown and nondilu...

Article history: Received 5 January 2014 Received in revised form 12 October 2014 Accepted 13 October 2014 Available online 28 October 2014 As an alternative version of the side-payment model, this paper presents a demonstration of how the necessity of winning majority support of shareholders influences the relation between a blockholder's monitoring incentive and a firm's dividend policy. When...

We analyze a model of trading under incomplete information similar to Chakraborty and Yilmaz (2004a, 2004b). We show that the possible presence of an informed insider in the market with long-lived private information generates an incentive for the insider to bluff or manipulate, i.e., undertake unprofitable trades early on in order to undertake profitable future trades at more favorable prices....