Information collection and processing in financial institutions is challenging. This can delay the observation by traders of the exact capital charges and constraints of their institution. During this delay, traders face preference uncertainty. In this context, we study optimal trading strategies and equilibrium prices in a continuous centralized market. We focus on liquidity shocks, during which preference uncertainty is likely to matter most. Preference uncertainty generates allocative inefficiency, but need not reduce prices. Progressively learning about preferences generate round–trip trades, which increase volume relative to the frictionless market. In a cross section of liquidity shocks, the initial price drop is positively correlated with total trading volume. Across traders, the number of round–trips is negatively correlated with trading profits and average inventory.

Deadlines and late penalties are widely used to incentivize effort. Tighter deadlines and higher penalties induce higher effort, but increase the agent's risk. We model how these contract terms affect the work rate and time-to-completion in a procurement setting, characterizing the efficient contract design. Using new micro-level data on Minnesota highway construction contracts that includes day-by-day information on work plans, hours worked and delays, we find evidence of ex post moral hazard: contractors adjust their effort level during the course of the contract in response to unanticipated productivity shocks, in a way that is consistent with our theoretical predictions. We next build an econometric model that endogenizes the completion time as a function of the contract terms and the productivity shocks, and simulate how commuter welfare and contractor costs vary across different terms and shocks. Accounting for the traffic delays caused by construction, switching to a more efficient contract design would increase welfare by 22.5% of the contract value while increasing the standard deviation of contractor costs—a measure of risk—by less than 1% of the contract value.

We estimate an equilibrium model of ticket resale in which consumers ’ and brokers ’ decisions in the primary market reflect rational expectations about the resale market. Estimation is based on a unique dataset that merges transaction details from both the primary and secondary markets for tickets to major rock concerts. In our model, the presence of a resale market permits tickets to be traded from low-value to high-value consumers, but it also stimulates costly efforts by consumers and brokers to obtain underpriced tickets in the primary market. We estimate that observed levels of resale increase allocative efficiency by 5 % on average, but that a third of this increase is offset by increases in costly rent-seeking in the primary market and transaction costs in the resale market.

This article studies empirically the links between international trade and labour income risk faced by manufacturing sector workers in the U.S. We use longitudinal data on workers to estimate time-varying individual income risk at the industry level. We then combine our estimates of persistent labour income risk with measures of exposure to international trade to analyse the relationship between trade and labour income risk. We also study risk estimates from various subsamples of workers, such as those who switched to a different manufacturing industry (or out of the manufacturing sector altogether). Finally, we use these estimates to conduct a welfare analysis evaluating the benefits or costs of trade through the income risk channel. We find import penetration to have a statistically significant association with labour income risk in the U.S. Our welfare calculations suggest that these effects are economically significant.

This article investigates the options market around a revision in the financial analysts’ consensus recommendation. The results demonstrate that options investors trade in the correct direction of the upcoming revision approximately 3 days prior to the announcement. We find this behavior in option-implied prices, implied volatilities, and options trading volume. Tests confirm that the options market leads the stock market before the financial analysts’ revision. Moreover, using all firms with outstanding options, an out-of-sample analysis produces a profitable zero-cost trading strategy net of transaction costs based on the relative valuations between the synthetic and the underlying equity security.

We show that wrongful discharge laws—laws that protect employees against unjust dismissal—spur innovation and new firm creation. Wrongful discharge laws, particularly those that prohibit employers from acting in bad faith ex post, limit employers' ability to hold up innovating employees after the innovation is successful. By reducing the possibility of holdup, these laws enhance employees' innovative efforts and encourage firms to invest in risky but potentially mould-breaking projects. We develop a model and provide supporting empirical evidence of this effect using the staggered adoption of wrongful discharge laws across U.S. states.

This study examines the extent to which agency-based models and asymmetric information theories explain dividend smoothing around the world. Tests on a cross-section of more than two thousand firms from twenty-four countries show that managers of firms with low market-to-book ratios and less cash engage in greater dividend smoothing. Further, firms with highly-concentrated ownership structure and strong corporate governance smooth dividends less. In addition, managers of firms in industries facing high levels of competition smooth dividends more. We also determine that the extent of legal protections provided to shareholders and the culture of the country in which the firm is incorporated, as well as tax regime, have additional explanatory power for dividend smoothing. Our results are most consistent with the simultaneous presence of agency and information asymmetry effects in the decision to smooth dividends.