This paper considers a securities market in which orders are channeled through professional broker-dealers such as London's market makers or the large banks operating on continental exchanges. If these dual-capacity dealers can judge the motives behind their customers' orders, they can trade profitably on their own account (even if they cannot “front run,” that is, trade on their own account before executing a customer order). It is shown that the dealers have an incentive to satisfy roughly half of their customers' orders from their own inventory if they are sure that orders are liquidity-motivated and not based on inside information. As a result of dual-capacity dealing, transaction costs for liquidity-motivated traders in the aggregate fall, but they rise for those traders who are unable to convince any dealer that they have no inside information. The liquidity of the main market worsens, even though its effective liquidity for customers whose orders are partly filled from broker-dealer inventories improves.

Trading systems differ in their degree of transparency, here defined as the extent to which market makers can observe the size and direction of the current order flow. We investigate whether greater transparency enhances market liquidity by reducing the opportunities for taking advantage of uninformed participants. We compare the price formation process in several stylized trading systems with different degrees of transparency: various types of auction markets and a stylized dealer market. We find that greater transparency generates lower trading costs for uninformed traders on average, although not necessarily for every size of trade.

Trading systems differ in their degree of transparency, here defined as the extent to which marketmakers can observe the size and direction of the current order flow. The authors investigate whether greater transparency enhances market liquidity by reducing the opportunities for taking advantage of uninformed participants. They compare the price formation process in several stylized trading systems with different degrees of transparency: various types of auction markets and a stylized dealer market. The authors find that greater transparency generates lower trading costs for uninformed traders on average, although not necessarily for every size of trade.

In this paper I examine the ability of the monocentric models to predict the mean length of commute in urban areas. I compare actual mean commute with that which is predicted by monocentric models and find that actual commuting distance is about eight times greater than that predicted by the model. Next I calculate the volume of commuting which would result if people chose their houses and jobs at random, making no effort to economize on commuting. This overpredicts actual commuting by about 25 percent.

In this paper I examine the ability of the monocentric models to predict the mean length of commute in urban areas. I compare actual mean commute with that which is predicted by monocentric models and find that actual commuting distance is about eight times greater than that predicted by the model. Next I calculate the volume of commuting which would result if people chose their houses and jobs at random, making no effort to economize on commuting. This overpredicts actual commuting by about 25 percent.

This article presents a model of information monitoring and market making in a dealership market. We model how intensively dealers monitor public information to avoid being picked off by professional day traders when monitoring is costly. Price competition among dealers is hampered by their incentives to share monitoring costs. The risk of being picked off by the day traders makes dealers more competitive. The interaction between these effects determines whether a firm quote rule improves trading costs and price discovery. Our empirical results support the prediction that professional day traders prefer stocks with small spreads, but offer less support for the prediction that their trading leads to wider spreads.

The paper examines the impact of executive compensation on private securities litigation. We find that incentive pay in the form of options increases the probability of securities class action litigation, holding constant a wide range of firm characteristics. We further document that there is abnormal upward earnings manipulation during litigation class periods and that insiders exercise more options and sell more shares during class periods, but that this activity is largely driven by pre-existing option holdings of the managers. Our results suggest that option-based compensation may have the unintended side effect of giving executives an incentive to focus excessively on the short term share price.

Economists have long argued that a strong linkage between compensation and performance is essential for resolving the agency problem created by the separation of ownership and control. In particular Michael C. Jensen and Kevin J. Murphy (1990) were very influential in giving impetus to the view that such incentives were in need of strengthening. Compared to accounting benchmarks, the stock price is more forward looking, and it is responsive to all value-relevant information, including informal and unverifiable items of news. This makes stock and/or option awards an important part of optimal incentives, and constitutes a primary reason for seeking a public listing, as argued by Bengt Holmstrom and Jean Tirole (1993). Until recently, however, theories of optimal executive compensation have generally ignored the possibility that the stock price can be manipulated or falsified. It is becoming increasingly clear that this is an important issue. In a spate of recent scandals, companies have misled the investing public by vastly overstating their profitability and prospects, and substantive restatements of company accounts have become increasingly commonplace. A growing body of empirical evidence suggests that executive pay in its current form may be at least in part responsible. Recent studies finding a link between unusual movements in performance measures (such as accounting yardsticks and publicly disclosed price-sensitive information) and compensation include Daniel Bergstresser and Thomas Philippon (2006), Natasha Burns and Simi Kedia (2006), and Peng and Roell (forthcoming). Thus, the benefits of stock-based incentives should be weighed against their side effects. This paper models optimal executive compensation in a setting where managers are in a position to influence the public perception of Manipulation and Equity-Based Compensation