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Abstract:
Corporate governance is concerned with the resolution of collective action problems among dispersed investors and the reconciliation of conflicts of interest between various corporate claimholders. In this survey we review the theoretical and empirical research on the main mechanisms of corporate control, discuss the main legal and regulatory institutions in different countries, and examine the comparative corporate governance literature. A fundamental dilemma of corporate governance emerges from this overview: regulation of large shareholder intervention may provide better protection to small shareholders; but such regulations may increase managerial discretion and scope for abuse.

Abstract:
Corporate governance is concerned with the resolution of collective action problems among dispersed investors and the reconciliation of conflicts of interest between various corporate claimholders. In this survey we review the theoretical and empirical research on the main mechanisms of corporate control, discuss the main legal and regulatory institutions in different countries, and examine the comparative corporate governance literature. A fundamental dilemma of corporate governance emerges from this overview: large shareholder intervention needs to be regulated to guarantee better small investor protection; but this may increase managerial discretion and scope for abuse. Alternative methods of limiting abuse have yet to be proven effective.

Corporate governance, ownership, takeovers, block holders, boards

Abstract:
We argue that the root cause behind the recent corporate scandals associated with CEO pay is the technology bubble of the latter half of the 1990s. Far from rejecting the optimal incentive contracting theory of executive compensation, the recent evidence on executive pay can be reconciled with classical agency theory once one expands the framework to allow for speculative stock markets.

Abstract:
We argue that the root cause behind the recent corporate scandals associated with CEO pay is the technology bubble of the latter half of the 1990s. Far from rejecting the optimal incentive contracting theory of executive compensation, the recent evidence on executive pay can be reconciled with classical agency theory once one expands the framework to allow for speculative stock markets.

executive compensation, shareholders conflict

Abstract:
This Paper analyses the transmission mechanisms of monetary policy in a general equilibrium model of securities markets and banking with asymmetric information. Banks' optimal asset/liability policy is such that in equilibrium capital adequacy constraints are always binding. Asymmetric information about banks' net worth adds a cost to outside equity capital, which limits the extent to which banks can relax their capital constraint. In this context monetary policy does not affect bank lending through changes in bank liquidity. Rather, it has the effect of changing the aggregate composition of financing by firms. The model also produces multiple equilibria, one of which displays all the features of a 'credit crunch'. Thus, monetary policy can also have large effects when it induces a shift between equilibria.

Monetary policy, monetary policy, corporate finance, equity capital adequacy constraints

Abstract:
This paper analyzes the transmission mechanisms of monetary policy in a general equilibrium model of securities markets and banking with asymmetric information. Banks' optimal asset/liability policy is such that in equilibrium capital adequacy constraints are always binding. Asymmetric information about banks net worth adds a cost to outside equity capital, which limits the extent to which banks can relax their capital constraint. In this context monetary policy does not affect bank lending through changes in bank liquidity. Rather, it has the effect of changing the aggregate composition of financing by firms. The model also produces multiple quilibria, one of which displays all the features of a "credit crunch". Thus, monetary policy can also have large effects when it induces a shift from one equilibrium to the other.

monetary transmission, asymmetric information, capital constraint

Abstract:
We present a multiperiod agency model of stock based executive compensation in a speculative stock market, where investors are overconfident and stock prices may deviate from underlying fundamentals and include a speculative option component. This component arises from the option to sell the stock in the future to potentially overoptimistic investors. We show that optimal compensation contracts may emphasize short-term stock performance, at the expense of long run fundamental value, as an incentive to induce managers to pursue actions which increase the speculative component in the stock price. Our model provides a different perspective for the recent corporate crisis than the increasingly popular `rent extraction view` of executive compensation.

Abstract:
We present a multiperiod agency model of stock based executive compensation in a speculative stock market, where investors are overconfident and stock prices may deviate from underlying fundamentals and include a speculative option component. This component arises from the option to sell the stock in the future to potentially overoptimistic investors. We show that optimal compensation contracts may emphasize short-term stock performance, at the expense of long run fundamental value, as an incentive to induce managers to pursue actions which increase the speculative component in the stock price. Our model provides a different perspective on the recent corporate crisis than the `rent extraction view' of executive compensation.

Executive Compensation, Short-term Behavior, Speculative Market, Corporate Governance

Abstract:
The spectacular failure of top-rated structured finance products has brought renewed attention to the conflicts of interest of Credit Rating Agencies (CRAs). We model both the CRA conflict of understating credit risk to attract more business, and the issuer conflict of purchasing only the most favorable ratings (issuer shopping), and examine the effectiveness of a number of proposed regulatory solutions of CRAs. We find that CRAs are more prone to inflate ratings when there is a larger fraction of naive investors in the market who take ratings at face value, or when CRA expected reputation costs are lower. To the extent that in booms the fraction of naive investors is higher, and the reputation risk for CRAs of getting caught understating credit risk is lower, our model predicts that CRAs are more likely to understate credit risk in booms than in recessions. We also show that, due to issuer shopping, competition among CRAs in a duopoly is less efficient (conditional on the same equilibrium CRA rating policy) than having a monopoly CRA, in terms of both total ex-ante surplus and investor surplus. Allowing tranching decreases total surplus further. We argue that regulatory intervention requiring upfront payments for rating services (before CRAs propose a rating to the issuer) combined with mandatory disclosure of any rating produced by CRAs can substantially mitigate the conflicts of interest of both CRAs and issuers.

Credit rating agencies, conflicts of interest, ratings shopping

Abstract:
The spectacular failure of top-rated structured finance products has brought renewed attention to the conflicts of interest of Credit Rating Agencies (CRAs). We model both the CRA conflict of understating credit risk to attract more business, and the issuer conflict of purchasing only the most favorable ratings (issuer shopping), and examine the effectiveness of a number of proposed regulatory solutions of CRAs. We find that CRAs are more prone to inflate ratings when there is a larger fraction of naive investors in the market who take ratings at face value, or when CRA expected reputation costs are lower. To the extent that in booms the fraction of naive investors is higher, and the reputation risk for CRAs of getting caught understating credit risk is lower, our model predicts that CRAs are more likely to understate credit risk in booms than in recessions. We also show that, due to issuer shopping, competition among CRAs in a duopoly is less efficient than no competition under a monopoly CRA, in terms of both total ex-ante surplus and investor surplus. Allowing tranching decreases total surplus further. We argue that regulatory intervention requiring upfront payments for rating services (before CRAs propose a rating to the issuer) combined with mandatory disclosure of any rating produced by CRAs can substantially mitigate the conflicts of interest of both CRAs and issuers.

Abstract:
What makes a good leader? A good leader is able to coordinate his followers around a credible mission statement, which communicates the future course of action of the organization. In practice, leaders learn about the best course of action for the organization over time. While learning helps improve the organization's goals it also creates a time-consistency problem. Leader overconfidence is a valuable attribute in such a setting, since it slows down the leader's learning and thus improves the credibility of the mission statement. But overconfident leaders also inhibit communication with followers and leader overconfidence is costly when followers have sufficiently valuable signals.

leadership, CEO overconfidence, coordination games

Abstract:
This paper extends the classic two-armed bandit problem to a many-agent setting in which I players each face the same experimentation problem. The main change from the single- agent problem is that an agent can now learn from the current experimentation of other agents. Information is therefore a public good, and a free-rider problem in experimentation naturally arises. More interestingly, the prospect of future experimentation by others encourages agents to increase current experimentation, in order to bring forward the time at which the extra information generated by such experimentation becomes available. The paper provides an analysis of the set of stationary Markov equilibria in terms of the free-rider e ect and the encouragement e ect. The paper is a revision of our earlier paper, Bolton and Harris [7]. The main modification concerns the formulation of randomization in continuous time. C.f.Harris [12]. The earlier paper explored one formulation based on the idea of rapid alternation over the state space. The current paper explores a formulation which is the closest analogue of the discrete-time formulation. It is based on the idea of randomization at each instant of time.

Abstract:
In this paper we propose a theory of optimal property rights in a financial contracting setting. Following recent contributions in the property law literature, we emphasize the distinction between contractual rights, that are only enforceable against the parties themselves, and property rights, that are also enforeceable against third parties outside the contract. Our analysis starts with the following question: which contractual agreements should the law allow parties to enforce as property rights? Our proposed answer to this question is shaped by the overall objective of minimizing due diligence (reading) costs and investment distortions that follow from the inability of third-party lenders to costlessly observe pre-existing rights in a borrower's property. Borrowers cannot reduce these costs without the law's help, due to an inability to commit to protecting third-parties from redistribution. We find that the law should take a more restrictive approach to enforcing rights against third-parties when these rights are i) more costly for third-parties to discover, ii) more likely to redistribute value from third-parties, and iii) less likely to increase efficiency. We find that these qualitative principles are often reflected in observed legal rules, including the enforceability of negative covenants; fraudulent conveyance; corporate veil-piercing; and limits on assignability.

Abstract:
In this paper we propose a theory of optimal property rights in a financial contracting setting. Following recent contributions in the property law literature, we emphasize the distinction between contractual rights, that are only enforceable against the parties themselves, and property rights, that are also enforeceable against third parties outside the contract. Our analysis starts with the following question: which contractual agreements should the law allow parties to enforce as property rights? Our proposed answer to this question is shaped by the overall objective of minimizing due diligence (reading) costs and investment distortions that follow from the inability of third-party lenders to costlessly observe pre-existing rights in a borrower's property. Borrowers cannot reduce these costs without the law's help, due to an inability to commit to protecting third-parties from redistribution. We find that the law should take a more restrictive approach to enforcing rights against third-parties when these rights are i) more likely to redistribute value from third-parties ii) less likely to increase efficiency, and iii) more costly for third-parties to discover. We find that these qualitative principles are often reflected in observed legal rules, including the enforceability of negative covenants; fraudulent conveyance; corporate veil-piercing; and limits on assignability.

property rights, contracts, legal rules, covenants, bankruptcy

Abstract:
In the market for financial services, sellers may have better information than buyers regarding the match between a buyer's needs and the good's characteristics. This may lead to conflicts of interest and/or the underprovision of information by the seller. We compare two firm structures, specialized banking, where a unique financial product is provided, and one-stop banking, where several products are provided. We show that, although conflicts of interest may prevent information disclosure under monopoly, competition forces full information provision for sufficiently high reputation costs. Secondly, in the presence of market power, one-stop banks will provide reliable information and charge higher prices than specialized banks, providing a new justification for one-stop banks. Finally, if independent financial advisers are able to provide information, this increases product differentiation and hence market power, so it is in the interest of banks to promote external independent financial advice.

Conflicts of interest, information provision, one-stop

Abstract:
Current odious debt doctrine - using the term "doctrine" loosely, since it has never formally been adopted by a court or international decision maker - dates back to a 1927 treatise by a wandering Russian academic named Alexander Sack. Sack suggested that debt obligations are odious and therefore unenforceable if 1) they were incurred without the consent of the populace; 2) they did not benefit the populace; and 3) the lender knew or should have known about the absence of consent and benefit. The tripartite Sack definition, which quickly became the foundation of odious debt analysis, contemplates a debt-by-debt approach to questionable borrowing. As attractive as it is in theory, the debt-by-debt approach has a debilitating weakness: money is fungible. A loan that is ostensibly incurred for beneficent purposes often may simply free up other money for misuse.

The principal alternative to a debt-by-debt approach is focusing on the odiousness of the regime, rather than the nature of a particular loan. We argue in this article that a regime-centered strategy is the most promising way forward for odious debt doctrine. To make this case, we must first define what an odious regime is. Perhaps because the Sack definition does not home in directly on the regime, prior scholars have not defined what should or should not count as an odious regime. More surprising, even the few commentators who do call for regime-centered perspectives elide the definitional question. This article attempts to fill the vacuum. A regime is odious, we will argue, if it engages in either systematic suppression or systematic looting. Odious regimes sometimes suppress a subgroup of the population, as with blacks in Apartheid South Africa and Jews in Nazi Germany, and sometimes suppress the entire population, as with Idi Amin's Uganda. The suppression often, but not always, is accompanied by looting. Every odious regime, in our view, is marked by one, the other or both.

After developing our definition, we consider how the definition might be operationalized. We propose that two existing institutions, the United Nations and the International Monetary Fund, share responsibility for identifying odious regimes. The UN, in our view, is best positioned to determine whether a regime is engaging in systematic suppression, while the IMF would assess concerns about looting and other, similar financial depredations. If the UN found evidence of systematic suppression, its declaration of odiousness, which could be made either while the regime was in place or after a new regime had emerged, would render obligations of the regime unenforceable. We envision the IMF policing a regime's looting by imposing conditionalities on access to IMF assistance as well as invalidating the regime's debt.

Odious debt doctrine, legal history, international law, politics, systematic suppression, systematic looting, tyranny, UN, United Nations, IMF, International Monetary Fund, sovereign debt, national debt, repayment, forgiveness

Abstract:
This paper is concerned with the general question of the provision of information by financial intermediaries to their customers. Specifically, it analyses the different ways the market can be organized and its effects on pricing and the level of information investors obtain. We find that market structure depends on the reputation costs, switching costs for customers, and the existence of market power. This provides a new justification for the presence of one-stop banks. In addition, we find that information access such as the internet may promote integration.

Abstract:
In an environment characterized by weak contractual enforcement, sovereign lenders can enhance the likelihood of repayment by making their claims more difficult to restructure ex post. We show however, that competition for repayment among lenders may result in a sovereign debt that is excessively difficult to restructure in equilibrium. This inefficiency may be alleviated by a suitably designed bankruptcy regime that facilitates debt restructuring.

Sovereign debt, Debt restructuring, Bankruptcy, Sovereign Debt Restructuring Mechanism, Working Paper

Abstract:
This paper provides an overview of key elements of corporate bankruptcy codes and practice around the world that are relevant to the debate on sovereign debt restructuring. It highlights four components common to most bankruptcy reorganization institutions: a stay on debt collection efforts to prevent a costly run for the assets, broad enforcement of absolute priority, majority voting among creditors on the proposed reorganization plan, and new higher priority financing to keep the firm going while its liabilities are restructured. The paper argues that these components ought to be present in any sovereign debt restructuring procedure.

Bankruptcy, sovereign debt

Abstract:
The spectacular failure of top-rated structured finance products has brought renewed attention to the conflicts of interest of Credit Rating Agencies (CRAs). We model both the CRA conflict of understating credit risk to attract more business, and the issuer conflict of purchasing only the most favorable ratings (issuer shopping), and examine the effectiveness of a number of proposed regulatory solutions of CRAs. We find that CRAs are more prone to inflate ratings when there is a larger fraction of naive investors in the market who take ratings at face value, or when CRA expected reputation costs are lower. To the extent that in booms the fraction of naive investors is higher, and the reputation risk for CRAs of getting caught understating credit risk is lower, our model predicts that CRAs are more likely to understate credit risk in booms than in recessions. We also show that, due to issuer shopping, competition among CRAs in a duopoly is less efficient (conditional on the same equilibrium CRA rating policy) than having a monopoly CRA, in terms of both total ex-ante surplus and investor surplus. Allowing tranching decreases total surplus further. We argue that regulatory intervention requiring upfront payments for rating services (before CRAs propose a rating to the issuer) combined with mandatory disclosure of any rating produced by CRAs can substantially mitigate the conflicts of interest of both CRAs and issuers.

Abstract:
This paper examines the relation between ownership, corporate form, and innovation for a cross-section of private and publicly traded innovating firms in the US and 15 European countries. A striking novel observation emerges from our analysis: while most innovating firms in the US are publicly traded conglomerates, a substantial fraction of innovation is concentrated in private firms and in business groups in continental European countries. We find virtually no variation across US industries in the corporate form of innovating firms, but a substantial variation across industries in continental European countries, where business groups tend to be concentrated in industries with a slower and more fundamental innovation cycle and where intellectual protection of innovators seems to be of paramount importance. Our findings suggest that innovative companies choose the corporate form most conducive to R&D, as predicted by the Coasian view of how firms form. This is especially true in Europe, where there are fewer regulatory hurdles to the formation of business groups and hybrid corporate forms. It is less the case in the US, where conglomerates are generally favored.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
This paper examines the relation between ownership, corporate form, and innovation for a cross-section of private and publicly traded innovating firms in the US and 15 European countries. A striking novel observation emerges from our analysis: while most innovating firms in the US are publicly traded conglomerates, a substantial fraction of innovation is concentrated in private firms and in business groups in continental European countries. We find virtually no variation across US industries in the corporate form of innovating firms, but a substantial variation across industries in continental European countries, where business groups tend to be concentrated in industries with a slower and more fundamental innovation cycle and where intellectual protection of innovators seems to be of paramount importance. Our findings suggest that innovative companies choose the corporate form most conducive to R&D, as predicted by the Coasian view of how firms form. This is especially true in Europe, where there are fewer regulatory hurdles to the formation of business groups and hybrid corporate forms. It is less the case in the US, where conglomerates are generally favored.

governance, innovation, patents

Abstract:
A growing and deepening divide has opened up between countries where economic development has "taken off" and those caught in a vicious cycle of institutional backwardness and macroeconomic instability. This "Great Divide" is visible in almost every measure of economic performance, such as GDP growth, investment, government finances, growth in inequality and general institutional infrastructure, and increasingly in measures of financial development. Countries that have made it to the "right" side of the divide (Hungary, Poland, Slovenia, the Baltic States) have pursued a remarkable diversity of policies aimed at financial development. Yet, strikingly, the basic financial architectures of these frontrunners today are remarkably similar: strongly dominated by commercial banks, increasingly foreign owned, which lend primarily to government. Stock markets are highly volatile and illiquid, and their sustainability is in question as the numbers of listed firms are stagnating or even falling. Enterprises rely most on internally generated funds, and essentially all external long-term finance comes from foreign direct investment. This article finds little evidence that finance has lead to increased growth in the transition countries; in fact, financial expansion has in some countries lead to soft budget constraints and undermined growth. Financial development and growth appear to be jointly determined by fiscal and monetary discipline, at the macro level, and contract enforcement, at the micro level. These factors, in turn, seem related to underlying variables like income inequality and recent experience of rule of law.

Economic transition, financial development, fiscal discipline, rule of law

Abstract:
In some markets, such as the market for drugs or for financial services, sellers have better information than buyers regarding the matching between the buyer's needs and the good's actual characteristics. Depending on the market structure, this may lead to conflicts of interest and/or the under-provision of information by the seller. This paper studies this issue in the market for financial services. The analysis presents a new model of competition between banks, as banks' price competition influences the ensuing incentives for truthful information revelation. We compare two different firm structures, specialized banking, where financial institutions provide a unique financial product, and one-stop banking, where a financial institution is able to provide several financial products which are horizontally differentiated. We show first that, although conflicts of interest may prevent information disclosure under monopoly, competition forces full information provision for sufficiently high reputation costs. Second, in the presence of market power, one-stop banks will use information strategically to increase product differentiation and therefore will always provide reliable information and charge higher prices than specialized banks, thus providing a new reason for the creation of one-stop banks. Finally, we show that, if independent financial advisers are able to provide reliable information, this increases product differentiation and therefore market power, so that it is in the interest of financial intermediaries to promote external independent financial advice.

Abstract:
We propose a model of costly decision making based on time-costs of deliberating current and future decisions. We model an individual decision-maker's thinking process as a thought-experiment that takes time, and lets the decision maker ‘think ahead’ about future decision problems in yet unrealized states of nature. By formulating an intertemporal, state-contingent, planning problem which may involve costly deliberation in every state of nature, and by letting the decision maker deliberate ahead of the realization of a state, we attempt to capture the basic observation that individuals generally do not think through a complete action plan. Instead, individuals prioritize their thinking and leave deliberations on less important decisions to the time or event when they arise.

Abstract:
We propose a model of bounded rationality based on time-costs of deliberating current and future decisions. We model an individual decision maker's thinking process as a thought-experiment that takes time and let the decision maker "think ahead" about future decision problems in yet unrealized states of nature. By formulating an intertemporal, state-contingent, planning problem, which may involve costly deliberation in every state of nature, and by letting the decision-maker deliberate ahead of the realization of a state, we attempt to capture the basic idea that individuals generally do not think through a complete action-plan. Instead, individuals prioritize their thinking and leave deliberations on less important decisions to the time or event when they arise.

Abstract:
In an environment characterized by weak contractual enforcement, sovereign lenders can enhance the likelihood of repayment by making their claims more difficult to restructure. We show within a simple model how competition for repayment between lenders may result in sovereign debt that is excessively difficult to restructure in equilibrium. Alleviating this inefficiency requires a sovereign debt restructuring mechanism that fulfills some of the functions of corporate bankruptcy regimes, in particular the enforcement of seniority and subordination clauses in debt contracts.

Sovereign debt, seniority, debt dilution, collective action clause, sovereign default

Abstract:
In an environment characterized by weak contractual enforcement, sovereign lenders can enhance the likelihood of repayment by making their claims more difficult to restructure. We show within a simple model how competition for repayment between lenders may result in sovereign debt that is excessively difficult to restructure in equilibrium. Alleviating this inefficiency requires a sovereign debt restructuring mechanism that fulfills some of the functions of corporate bankruptcy regimes, in particular the enforcement of seniority and subordination clauses in debt contracts.

Abstract:
This paper proposes a simple homogeneous dynamic model of investment and corporate risk management for a financially constrained firm. Following Froot, Scharfstein, and Stein (1993), we define a corporation's risk management as the coordination of investment and financing decisions. In our model, corporate risk management involves internal liquidity management, financial hedging, and investment. We determine a firm's optimal cash, investment, asset sales, credit line, external equity finance, and payout policies as functions of the following key parameters: 1) the firm's earnings growth and cash-flow risk; 2) the external cost of financing; 3) the firm's liquidation value; 4) the opportunity cost of holding cash; 5) investment adjustment and asset sales costs; and 6) the return and covariance characteristics of hedging assets the firm can invest in. The optimal cash inventory policy takes the form of a double-barrier policy where i) cash is paid out to shareholders only when the cash-capital ratio hits an endogenous upper barrier, and ii) external funds are raised only when the firm has depleted its cash. In between the two barriers, the firm adjusts its capital expenditures, asset sales, and hedging policies. Several new insights emerge from our analysis. For example, we find an inverse relation between marginal Tobin's q and investment when the firm draws on its credit line. We also find that financially constrained firms may have a lower equity beta in equilibrium because these firms tend to hold higher precautionary cash inventories.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
We consider a model of liquidity demand arising from a possible maturity mismatch between asset revenues and consumption. This liquidity demand can be met with either cash reserves (inside liquidity) or via asset sales for cash (outside liquidity). The question we address is, what determines the mix of inside and outside liquidity in equilibrium? An important source of inefficiency in our model is the presence of asymmetric information about asset values, which increases the longer a liquidity trade is delayed. We establish existence of an immediate-trading equilibrium, in which asset trading occurs in anticipation of a liquidity shock, and sometimes also of a delayed-trading equilibrium, in which assets are traded in response to a liquidity shock. We show that, when it exists, the delayed-trading equilibrium is Pareto superior to the immediate-trading equilibrium, despite the presence of adverse selection. However, the presence of adverse selection may inefficiently accelerate asset liquidation. We also show that the delayed-trading equilibrium features more outside liquidity than the immediate-trading equilibrium although it is supplied in the presence of adverse selection. Finally, long term contracts do not always dominate the market provision of liquidity.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
What makes a good leader? A good leader is able to coordinate his followers around a credible mission statement, which communicates the future course of action of the organization. In practice, leaders learn about the best course of action for the organization over time. While learning helps improve the organization's goals it also creates a time-consistency problem. Leader resoluteness is a valuable attribute in such a setting, since it slows down the leader's learning and thus improves the credibility of the mission statement. But resolute leaders also inhibit communication with followers and leader resoluteness is costly when followers have sufficiently valuable signals.

Abstract:
We propose a model of equilibrium contracting between two agents who are boundedly rational in the sense that they face time-costs of deliberating current and future transactions. We show that equilibrium contracts may be incomplete and assign control rights: they may leave some enforceable future transactions unspecified and instead specify which agent has the right to decide these transactions. Control rights allow the controlling agent to defer time-consuming deliberations on those transactions to a later date, making her less inclined to prolong negotiations over an initial incomplete contract. Still, agents tend to resolve conflicts up-front by writing more complete initial contracts. A more complete contract can take the form of either a finer adaptation to future contingencies, or greater coarseness. Either way, conflicts among contracting agents tend to result in excessively complete contracts in the sense that the maximization of joint payoffs would result in less up-front deliberation.

Abstract:
This paper centres around the question of ownership of firms and managerial competition and how these affect manager and employees' incentives to invest in human capital. We argue that employee's incentives in human capital investment are affected by both ownership and competition since both ownership structure and competition provide bargaining chips to employees. Ownership provides protections which may improve or dull employees' incentives for human capital investment. When there is fierce market competition and no lock-in the allocation of ownership does not play a role (as one might expect), provided that human and physical assets are sufficiently complementary. If asset complementarity is low, ownership matters even in the absence of lock-in. In general, the most efficient ownership arrangement is that which maximizes managerial competition inside the firm.

Abstract:
We present a multiperiod agency model of stock-based executive compensation in a speculative stock market, where investors have heterogeneous beliefs and stock prices may deviate from underlying fundamentals and include a speculative option component. This component arises from the option to sell the stock in the future to potentially overoptimistic investors. We show that optimal compensation contracts may emphasize short-term stock performance, at the expense of long-run fundamental value, as an incentive to induce managers to pursue actions which increase the speculative component in the stock price. Our model provides a different perspective on the recent corporate crisis than the rent extraction view of executive compensation.

Abstract:
For at least two decades now, commentators have suggested that international policymakers should establish a sovereign bankruptcy regime. In 2002, the debate intensified when the International Monetary Fund (IMF) explicitly endorsed the sovereign bankruptcy concept, and offered a detailed proposal for what the Fund refers to as a "Sovereign Debt Restructuring Mechanism." In this Article, we consider the arguments in favor of sovereign bankruptcy, assess the IMF's SDRM, and develop our own sovereign bankruptcy framework. Perhaps the single most important theme of our analysis is the importance of promoting adherence to absolute priority wherever possible. Contrary to much of the criticism of sovereign bankruptcy, which worries that this approach would seriously undermine creditors' entitlements, we argue that sovereign bankruptcy can actually assure greater adherence to absolute priority than the status quo. Because it is often impracticable to lend to sovereigns on a collateralized basis, creditors currently have great difficulty assuring that their priorities will be honored. Even ostensibly collateralized obligations, moreover, may not guarantee priority treatment, as evidenced by the subversion of priorities when Ecuador restructured its debt in 1999.

We argue in this Article that the classification and voting rules of a sovereign bankruptcy regime can be used to address this problem. As a baseline, we propose that the SDRM or other framework enforce strict, first-in-time absolute priority. Bonds issued first would have priority over those issued later. The only exceptions to first-in-time priority would involve trade debt (which would always be treat as a priority obligation) and collateralized lending (which would be given priority treatment under some circumstances). Against this backdrop, we propose a two step classification and voting process for confirming a restructuring plan. The debtor would first make a proposal as to how much its overall debt would be scaled back - that is, how large the overall "haircut" to creditors would be. If a majority of all creditors approved the haircut, the second step would simply entail reducing the creditors' claims in this amount, starting with the lowest priority creditors and working up the priority hierarchy. This two step approach not only would reinforce the creditors' priorities within the SDRM; it also would clarify their priorities outside of the restructuring process.

The Article proceeds as follows. Part I explores the principal alternatives to sovereign bankruptcy - collective action provisions and the status quo - and explains why neither is an adequate substitute for an SDRM. In Part II, we provide a brief overview of the IMF's current proposal, and note some of its principal shortcomings - most importantly, its inadequate consideration of the SDRM's ex ante effects. Parts III-VII then develop our proposal. Part III takes up the question whether to impose a stay on litigation. Part IV then gets to the heart of the SDRM, and outlines the classification and voting scheme. Part V addresses the issue of interim financing. In Part VI, we argue that oversight should be vested in existing bankruptcy and insolvency courts. We then complete the discussion by discussing opt-out in Part VII, and tie the analysis together with a brief conclusion.

Bankruptcy, sovereign bankruptcy, bankruptcy framework, sovereign debt restructuring mechanism

Abstract:
We show how the willingness-to-pay problem and lack of exclusivity in sovereign lending may result in an equilibrium sovereign debt structure that is excessively difficult to restructure. A bankruptcy regime for sovereigns can alleviate this inefficiency but only if it is endowed with far-reaching powers to enforce seniority and subordination clauses in debt contracts. A bankruptcy regime that makes sovereign debt easier to restructure without enforcing seniority may decrease welfare.

Abstract:
We present a multiperiod agency model of stock based executive compensation in a speculative stock market, where investors have heterogeneous beliefs and stock prices may deviate from underlying fundamentals and include a speculative option component. This component arises from the option to sell the stock in the future to potentially overoptimistic investors. We show that optimal compensation contracts may emphasize short-term stock performance, at the expense of long run fundamental value, as an incentive to induce managers to pursue actions which increase the speculative component in the stock price. Our model provides a different perspective on the recent corporate crisis than the 'rent extraction view' of executive compensation.

Executive Compensation, Over-investment, Short-term Behavior, Speculative Markets

Abstract:
This paper develops a dynamic general equilibrium model of an agricultural economy in which poor farmers borrow from rich farmers. Because output is stochastic (we allow for idiosyncratic and aggregate shocks) there may be default ex-post. We compare equilibria with and without political intervention. Intervention takes the form of a moratorium and is decided by majority rule. When bad economic shocks are highly likely, state contingent debt moratoria always improve ex-post efficiency and may also improve ex-ante efficiency. Moreover the threat of moratoria enhances efficiency. When adverse macro shocks are unlikely, state contingent moratoria always improve ex-ante welfare by completing incomplete debt contracts.

Abstract:
Responding to a critique that our earlier article on predatory pricing moved too swiftly and decisively to implement modern strategic theory in antitrust enforcement, we urge that (1) strategic theory is robust and provides a solid foundation for legal policy, (2) the several elements of our proposed rule effectively distinguish between predation and competition, and thereby avoid over enforcement risks, (3) claims that post trial evidence in three relatively recent cases disproves the feasibility of a strategic approach to predatory pricing are without foundation, the courts having made no attempt in those cases to evaluate the facts within a strategic framework. Finally, we elaborate and extend our previous analysis of predatory pricing in our defense of the economic robustness of strategic theory in Part I and in our development of the proposed legal rule in Part II.

Predatory pricing, strategic theory, below-cost pricing, recoupment, efficiencies defense, robustness of strategic theory, business justification, reputation effect, test market predation, cost-signalling, financial market predation, pricing below-cost, Brooke Group v. Brown & Williamson

Abstract:
This paper proposes a model of financial markets and corporate finance, with asymmetric information and no taxes, where equity issues, bank debt, and bond financing coexist in equilibrium. The relationship banking aspect of financial intermediation is emphasized: firms turn to banks as a source of investment mainly because banks are good at helping them through times of financial distress. This financial flexibility is costly since banks face costs of capital themselves (which they attempt to minimize through securitization). To avoid this intermediation cost, firms may turn to bond or equity financing, but bonds imply an inefficient liquidation cost and equity an informational dilution cost. We show that in equilibrium the riskier firms prefer bank loans, the safer ones tap the bond markets, and the ones in between prefer to issue both equity and bonds. This segmentation is broadly consistent with stylized facts.

Abstract:
This paper proposes a new legal rule on predatory pricing based on strategic analysis. The Supreme Court's decision in Brooke with its emphasis on closely analyzing the scheme of predation and recoupment calls for such an analysis. At the same time economic development over the last 20 years of a rigorous analysis of predatory pricing provides the tools required to achieve a more effective legal policy. Economics can now explain when predation can be rational, or in Brooke's terms when it can enable profitable recoupment, casting new light on earlier examples of predatory pricing. The further challenge for legal analysis is to develop workable legal rules to guide enforcement agency policy and judicial decisions. To accomplish this we propose a structured rule of reason, including a fully specified efficiencies defense. Under such an approach enforcement would focus on cases where market structure and conduct makes predation plausible and where anticompetitive effects have occurred, or are dangerously probable. Equally important, the finding of predation would be subject to an efficiencies justification where below-cost pricing is necessary to achieve significant efficiencies, including dynamic efficiencies.

Abstract:
It is widely accepted that only the protection of private property rights and competition by rival firms provide adequate incentives to perform for managers and employees. However, it is not entirely clear how ownership interacts with competition. This paper centres around the question of ownership of firms and managerial competition and how these affect managers and employees' incentives to invest in human capital.

Abstract:
This paper proposes a model of financial markets and corporate finance, with asymmetric information and no taxes, where equity issues, Bank debt and Bond financing may all co-exist in equilibrium. The paper emphasizes the relationship Banking aspect of financial intermediation: firms turn to banks as a source of investment mainly because banks are good at helping them through times of financial distress. The debt restructuring service that banks may offer, however, is costly. Therefore, the firms which do not expect to be financially distressed prefer to obtain a cheaper market source of funding through bond or equity issues. This explains why bank lending and bond financing may co-exist in equilibrium. The reason why firms or banks also issue equity in our model is simply to avoid bankruptcy. Banks have the additional motive that they need to satisfy minimum capital adequacy requeriments. Several types of equilibria are possible, one of which has all the main characteristics of a "credit crunch." This multiplicity implies that the channels of monetary policy may depend on the type of equilibrium that prevails, leading sometimes to support a "credit view" and other times the classical "money view."

Abstract:
Within an optimal contracting framework, we analyze the optimal number of creditors a company borrows from. We also analyze the optimal allocation of security interests among creditors and intercreditor voting rules that govern renegotiation of debt contracts. The key to our analysis is the idea that these aspects of the debt structure affect the outcome of debt renegotiation following a default. Debt structures that lead to inefficient renegotiation are beneficial in that they deter default, but they are also costly if default is beyond a manager's control. The optimal debt structure balances these effects.

Abstract:
This paper develops a model of the breakup or unification of nations. In each nation the decision to separate is taken by majority voting. A basic trade-off between the efficiency gains of unification and the costs in terms of loss of control on political decisions is highlighted. The model emphasizes political conflicts over redistribution policies. The main results of the paper are i) when income distributions vary across regions and the efficiency gains from unification are small, separation occurs in equilibrium; and ii) when all factors of production are perfectly mobile, all incentives for separation disappear.