We analyze programs to spur private capital to flow to greener projects. In contrast to the standard results from incentive regulation, we demonstrate that a planner, uninformed about entrepreneurs’ abatement costs, can nonetheless design schemes that achieve the first-best when outside investors are needed to fund the entrepreneurs’ projects. This happens because an entrepreneur imposes a higher agency cost on his investors when he attempts to claim a “bigger” contract from the planner. The financial frictions thereby limit the entrepreneur’s ability to extract information rent from the planner. An intuitively optimal scheme is consequently derived.
Using Individual Responsibility to Regulate Firms (Job Market Paper)
We study the Department of Justice's policy to hold individuals accountable for corporate harm against society. We could not confirm that imposing liability directly on managers leads managers to better internalize the regulatory costs for firms. We find that managers abandon projects that are profitable even after considering firms' regulatory costs. We analyze and quantify different mechanisms by which regulatory costs on firms (shareholders) and on managers impact firm outcomes and verify new predictions regarding regulation and firm outcomes, such as manager performance pay, in the data.
Regulating A Firm with Agency Problems with Eitan Goldman (Indiana University) and Matthias Kahl (UCLA)
How should one regulate a firm when its investment may cause a negative externality? In this paper we present a model on regulating a firm run by a manager and owned by a shareholder. The regulator can impose a penalty on the manager, the shareholder, or both. Our characterization of optimal regulation in the presence of an agency conflict demonstrates several key results. First, optimal regulation can take two forms. In one regulatory strategy fines are imposed on shareholders and they are lower if the shareholders fire the manager following a negative externality. In the other regulatory strategy fines are imposed only on the manager and no firing takes place. Second, as the agency conflict becomes more severe the “no firing” strategy that imposes a fine on the manager becomes more attractive. And third, we find that regulation costs are lower when the manager and the shareholder are separate entities.
Does Disclosure Deter Short Selling with Noisy Information with Miles Johnson (The Financial Times)
This paper studies the impact of disclosure on short selling. Using a confidential dataset on shorts on stocks traded in the Dutch stock market including both short positions large enough to trigger public disclosure and positions not large enough, we find that the quality of shorts increases discontinuously at the reporting threshold. we find strong evidence that short sellers increase security selection intensity when their short positions approach the reporting threshold. We rule out several alternative explanations including the explanation that positions reaching the reporting threshold move the market, the explanation that large short sellers have a higher quality of shorts, or the explanation that returns are time-varying and change discontinuously when positions reach the disclosure threshold. These results suggest transparency has an effect of disincentivizing shorting on noisy information.