Economic unions, such as American states, Canadian provinces, or EU countries, face the problem of how to allocate union-wide corporate profits among its individual members when each member retains some taxing authority. This paper studies the normative properties of two common types of allocation mechanisms, separate accounting and formula apportionment, when firms have private cost informatio...

B ought to refrain from φing. Taking a 10% chance is taking a substantial chance of doing a deeply morally wrong thing. One should be very averse to risking doing a deeply wrong thing. It is better to do what is very likely a minorly wrong thing to do than to risk doing what is a deeply wrong thing to do. Suppose that B does φ, φing is in fact morally wrong, and a victim of B’s φing were to lat...

We study an economy where intermediaries compete over contracts in a nonexclusive insurance market affected by moral hazard. Our setting is the same as that developed in Bisin and Guaitoli [2004]. The present note provides a counterexample to the set of necessary conditions for high effort equilibria developed in Bisin and Guaitoli [2004] and suggests an alternative equilibrium characterization.

We extend the theoretical model of external corporate financing to the case when the buyers of the borrowing firm may default during the financing period. In our setup there is an asymmetric information and hence moral hazard between the lender and the borrower concerning the effrts of the borrower. We define the optimal debt contract in two cases. In the symmetric case the lender and the borro...

This paper reflects one of the important trends in macro thinking about corporate finance: There is an internal economic life of the firm where the most important decisions-employment, investment, production-are made. The players within the firm are the salaried managers of the firm and the workers. Quite separately, there are wealthy individuals and institutions who provide finance for these a...

We study how institutional design influences moral transgression. People are heterogeneous in their feelings of guilt and can share guilt with others. Institutions determine the number of supporters necessary for immoral outcomes to occur. With more supporters required, every supporter can share guilt more easily. This facilitates becoming a supporter. Conversely, an institution requiring more ...

Several empirical regularities in the prices of financial assets are at odds with the predictions of standard economic theory. I address these regularities and explore the extent to which they are resolved in the context of two markets organized in very different ways. The first setting is a neoclassical economy with incomplete markets and heterogeneous agents. Market incompleteness naturally a...

Did the unification of commercial and investment banking heighten risk in financial markets due to moral hazard of borrowers? In a simple intertemporal model with moral hazard and uninsured risk, we argue that if financial contracts are properly written, the integration in financial markets could give rise to greater risk sharing arrangement and could eliminate the equity risk premium attribute...

In this paper we review and extend the analysis of moral hazard response in two relatively unexamined empirical directions: (1) how insurance changes in one program affects employee participation in other programs at a point in time (inter-program moral hazard), and (2) how the consumption of program benefits now tends to affect employees behavior over time (benefits consumption capital). We de...