I characterize the dynamics of incentives in an optimal contract with investment delegation, moral hazard, and uncertainty about the agent’s productivity. The principal increases the agent’s incentives after good performance in order to delegate more capital to an agent with higher perceived productivity, thus implementing a convex pay-for-performance scheme. Moreover, the principal commits to reduce the agent’s future incentives in order to mitigate ex ante investment distortions. Methodologically, I provide a duality-based strategy to overcome technical challenges common to continuous-time contracting models with state variables. I also derive a sufficient condition to verify the validity of the first-order approach.
In a continuous-time model, a risk-neutral decision-maker chooses the volatility of a state variable and is terminated when the variable falls below a threshold. I provide economically interpretable conditions under which the decision-maker becomes risk averse endogenously and minimizes volatility near termination, even if she faces myopic incentives to gamble for resurrection. The conditions introduce forward-looking incentives to preserve economic rents. I show these conditions are met in a wide range of apparently unrelated models, thus identifying forward-looking rents as a unifying economic mechanism behind endogenous risk aversion. I also provide conditions for the decision-maker to become risk loving endogenously.
I characterize the dynamics of incentives in an optimal contract with investment delegation, moral hazard, and uncertainty about the agent’s productivity. The principal increases the agent’s incentives after good performance in order to delegate more capital to an agent with higher perceived productivity, thus implementing a convex pay-for-performance scheme. Moreover, the principal commits to reduce the agent’s future incentives in order to mitigate ex ante investment distortions. Methodologically, I provide a duality-based strategy to overcome technical challenges common to continuous-time contracting models with state variables. I also derive a sufficient condition to verify the validity of the first-order approach.
We show non-financial corporations changed the quantity and composition of their bond issues in response to the European Central Bank’s corporate quantitative easing program. Eligible issuers shifted toward bonds meeting the program’s eligibility requirements. Moreover, demand for credit risk increased, and risk premia in the bond market dropped after the announcement. Eligible and ineligible firms increased total issuance and shifted toward bonds with riskier characteristics, namely unsecured and non-guaranteed bonds. Total issuance increased the most among those firms that were most exposed to the decline in risk premia. Firms also shifted away from short-maturity instruments and issued more fixed-coupon bonds.
We model credit competition between a bigtech platform and a bank lending to a merchant under limited commitment and asymmetric information about the merchant’s incentives to default. The platform leverages its control over a marketplace to enforce partial loan repayments, enabling it to serve certain unbanked borrowers. When directly competing with the bank, the platform gains an endogenous screening advantage as borrowers with stronger incentives to default self-select into bank loans to avoid the platform’s enforcement. Whereas the platform improves financial inclusion for unbanked borrowers, social welfare may decline because the bank tightens credit in response to adverse screening.
Using a model of index-linked rebalancing around reconstitution events, we show front-runners provide liquidity to index investors and benefit them. Index investors trade off execution costs against tracking-error concerns, while speculators maximize trading profit. In competitive markets, even loose index trackers optimally rebalance at index reconstitution, rationalizing concentrated reconstitution-day trading with little contemporaneous price impact. Empirically, index-linked investors bear small rebalancing costs relative to standard transaction-cost estimates and traders short sell shares to provide liquidity at reconstitution. We show fast-track additions increase IPO issue prices but impose costs on index investors when the newly-listed stocks are illiquid and hard to short.etadata]
We study whether regulated semiliquid funds can successfully democratize private assets and improve retail investors’ risk-adjusted performance. Using interval funds, which invest in illiquid assets while offering periodic redemptions, we show retail investors face a trade-off between agency frictions and liquidity premia. Managers generate positive risk-adjusted returns in illiquid, information-insensitive markets, especially credit, but underperform in liquid, information-sensitive strategies, consistent with weak flow-based incentives. Outperformance originates from distribution yields rather than NAV appreciation and is amplified by leverage and portfolio illiquidity. Retail investors benefit from co-investing alongside sophisticated investors, whose stable capital supports illiquid exposure and improves liquidity transformation.
We analyze the U.S. Treasury's issuance strategy as a measurable policy choice and show taxpayers would benefit if the Treasury actively managed its debt duration. The Treasury absorbs fiscal shocks through bills while maintaining predictable longer-term issuance, and does not adjust duration supply in response to market signals, instead tilting toward maturities with the highest fixed-rate costs relative to floating. Using the 2024-2025 buybacks, the Treasury lowered the nominal value of debt with no change in market value. Exploiting staggered ESA 2010 adoption, which introduced duration-management incentives in Europe, we find sovereigns reduced term spreads by 41 basis points.
We develop a forward-looking measure of corporate misconduct risk based on the portfolio holdings of ESG funds. These funds are incentivized to monitor misconduct, as they experience significant outflows following enforcement actions against portfolio companies. Our stock-level metric, prosocial overweight, captures the portfolio tilts of ESG funds relative to a synthetic benchmark of conventional active funds. Increases in prosocial overweight predict fewer future regulatory fines and lawsuits, even after controlling for public ESG ratings and news. However, they also predict lower risk adjusted returns, highlighting a trade-off for responsible investors. This predictive power reflects informed stock selection rather than shareholder engagement.
In this paper we contribute to the debate on macro-prudential regulation by assessing which structure of the financial system is more resilient to exogenous shocks, and which conditions, in terms of balance sheet compositions, capital requirements and asset prices, guarantee the higher degree of stability. We use techniques drawn from the theory of complex networks to show how contagion can propagate under different scenarios when the topology of the financial system, the characteristics of the financial institutions, and the regulations on capital are let vary. First, we benchmark our results using a simple model of contagion as the one that has been popularized by Gai and Kapadia (2010). Then, we provide a richer model in which both short- and long-term interbank markets exist. By doing so, we study how liquidity shocks (de)stabilize the system under different market conditions. Our results demonstrate how connectivity, the topology of the markets and the characteristics of the financial institutions interact in determining the stability of the system.