Martin Szydlowski
Assistant Professor
Finance Department

Research Interests
Financial Economics, Contract Theory, Information Economics

Contact Information
Carlson School of Management
321 19th Ave S.
Minneapolis, MN 55455




Incentives, Project Choice and Dynamic Multitasking, Theoretical Economics, forthcoming

Abstract: I study the optimal choice of investment projects in a continuous-time moral hazard model with multitasking. While in the first best, projects are invariably chosen by the net present value (NPV) criterion, moral hazard introduces a cutoff for project selection which depends on both a project's NPV as well as its risk-return ratio. The cutoff shifts dynamically depending on the past history of shocks, the current firm size, and the agent's continuation value. When the ratio of continuation value to firm size is large, investment projects are chosen more efficiently, and project choice depends more on the NPV and less on the risk-return ratio. The optimal contract can be implemented with an equity stake, bonus payments, as well as a personal account. Interestingly, when the contract features equity only, the project selection criterion resembles a hurdle rate.

The Market For Conflicted Advice, with Briana Chang, Journal of Finance, forthcoming

Abstract: We study decentralized markets in which advisers have conflicts of interest and compete for customers via information provision. We show that competition partially disciplines conflicted advisers. The equilibrium features information dispersion and sorting of heterogeneous customers and advisers: advisers with expertise in more information sensitive assets attract less informed customers, provide worse information, and earn higher profits. We further apply our framework to the market for financial advice and establish new insights: it is the underlying distribution of financial literacy that determines the consumers' welfare. When advisers are scarce, the fee structure of advisers is irrelevant for the welfare of consumers.

Moving the Goalposts, with Jeffrey Ely, Journal of Political Economy, forthcoming

Abstract: We study information as an incentive device in a dynamic moral hazard framework. An agent works on a task of uncertain difficulty, modeled as the duration of required effort. The principal knows the task difficulty and can provide information over time with the goal of inducing maximal effort. The optimal mechanism features moving goalposts: an initial disclosure makes the agent sufficiently optimistic that the task is easy in order to induce him to start working. If the task is indeed difficult the agent is told this only after working long enough to put the difficult task within reach. Then the agent completes the difficult task even though he never would have chosen to at the outset. The value of dynamic disclosure implies that principal prefers a random threshold over any deterministic scheme. We consider extensions to two-player pre-emption games and bandits.

On the Smoothness of Value Functions and the Existence of Optimal Strategies, with Bruno Strulovici, Journal of Economic Theory, (2015)

Abstract: We prove that the value function for the optimal control of any time-homogeneous, one-dimensional diffusion is twice continuously differentiable, under Lipschitz, growth, and non-vanishing volatility conditions. Under similar conditions, the value function of any optimal stopping problem is continuously differentiable. For the first problem, we provide sufficient conditions for the existence of an optimal control. The optimal control is Markovian and constructed from the Bellman equation. We also establish an envelope theorem for parametrized optimal stopping problems. Several applications are discussed, which include growth, dynamic contracting, and experimentation models.

Working Papers

Monitor Reputation and Transparency, with Ivan Marinovic

Abstract: We study the optimal disclosure policy of a regulator who oversees a monitor. Disclosures by the regulator that reduce the monitor's reputation may destroy the monitor's incentive to monitor firms and - as an unintended consequence - lead to an escalation of manipulation by the client firm's manager. By contrast, disclosures that increase monitor reputation boost monitor incentives and decrease the intensity of manipulation. When the regulator's disclosure policy aims to minimize the prevalence of manipulation, the optimal policy is opaque: it never reveals monitor quality in a deterministic fashion for any given reputation level. In fact, non-disclosure and disclosures with random delay dominate deterministic disclosure at any given reputation level.

Optimal Financing and Disclosure, R&R at Management Science

Abstract: How does a firm's disclosure policy depend on its choice of financing? In this paper, I study a firm that finances a project with uncertain payoffs and jointly chooses its disclosure policy and the security issued. I show that it is optimal to truthfully reveal whether the project's payoffs are above a threshold. This class of threshold policies is optimal for any prior belief, for any security, and any increasing utility function of the entrepreneur. I characterize how the optimal disclosure threshold depends on the underlying security, the prior, and the cost of investment. The optimal security design is indeterminate despite the presence of adverse selection. Among others, the optimum can be implemented with equity, debt, and options.

Ambiguity in Dynamic Contracts

Abstract: I study a dynamic principal agent model in which the effort cost of the agent is unknown to the principal. The principal is ambiguity averse, and designs a contract which is robust to the worst case effort cost process. Ambiguity divides the contract into two regions. After sufficiently high performance, the agent reaches the over-compensation region, where he receives excessive benefits compared to the contract without ambiguity, while after low performance, he enters the under-compensation region. Ambiguity also causes a disconnect between the current effort cost and the strength of incentives. That is, even when the agent is under-compensated, his incentives are as strong as in the over-compensation region, since the principal fears the agent might shirk otherwise. Under ambiguity, the agent's true effort cost does not need to equal the worst-case. I analyze the agent's incentives for this case, and show that the possibility of firing is detrimental to the agent's incentives. I study several extensions concerning the timing structure and the nature of the principle's ambiguity aversion.


FINA 4221: Principles of Corporate Finance (undergrad)
FINA 8812: Corporate Finance I (PhD)