• How are the Tax Evasion Savings Distributed?  (with Juan Imbet and Marcelo Ortiz) (download)

We use a continuous-time moral hazard model in which a firm owner contracts an agent to reduce corporate tax expenses in an institutional setting with random audits by tax authorities. The model distinguishes between legal tax avoidance, characterized by a lack of audit risk yet persistent moral hazard, and illegal tax evasion, which introduces audit risk and contingent penalties in the event of detection. We show that a relevant fraction of the savings are paid to the manager in charge of the tax strategy, and how different institutional features influence this fraction, the intensity of tax evasion over time, and the overall tax revenue collection. Further, we show that the optimal contract for tax evasion generates a corporate Laffer curve in a setting without investment and managerial cash diversion.

• Optimal Dynamic Contract with Regulatory Shock  (download)

This paper investigates the impact of changes in the intensity of moral hazard on the optimal provision of incentives during a contractual relationship. We develop a continuous-time principal-agent model in which the agent’s benefit from diverting cash flow is subject to a persistent and exogenous shock. We interpret this shock as a new regulation that decreases the fraction of diverted cash flows accessible to the manager. Our results show that managerial compensation becomes compressed following such regulation, as a high-performing manager receives lower compensation, while an underperforming manager receives higher compensation. Furthermore, we demonstrate that this type of regulation leads to the over-retention of underperforming managers. Although reduced agency friction results in increased profitability, the unintended consequences of the regulation include higher compensation for underperformers and their over-retention. Nonetheless, we also show that a competitive labor market can help mitigate these adverse effects arising from a decrease in the severity of agency friction.

• Will Asset Managers Survive the Advent of Robots ? An Optimal Contracting Approach (download)

In this paper, we study the adoption of automation technology in asset management. We build a principal-agent model in continuous time in which delegation of asset management to an agent is subject to moral hazard and will become automatable at an uncertain time. While the characteristics and the advent of the automation technology are exogenous and publicly observable, automation may not be as efficient as the agent. We derive an optimal long-term contract that adjusts the provision of incentives to the availability of such a technology so that automation impacts the agent since the contracting date. Our model suggests that the empirically observed layoffs that accompany the emergence of an automation technology may have a contractual foundation. Compared to the situation where automation is never feasible, we predict that (1) some poor performers are kept employed longer only to be instantaneously substituted at the technology advent, and (2) bonuses are front-loaded and then dropped once the technology becomes available.