In this paper, we build a simple formal model of cash holdings that can explain this and other empirical regularities. Our model is based on the well-known “lemons” problem associated with equity issuance. We show that firms with poor growth opportunities and those with excellent opportunities will not hold excess cash, whereas firms with opportunities in the middle range will hold excess cash. We derive empirical implications relating excess cash to the extent of asymmetric information, growth opportunities, value of assets in place, and cash holding costs. Received March 29, 2017; editorial decision June 12, 2017 by Editor Uday Rajan.

[This paper provides an explanation for the observed widespread use of a money good with little intrinsic value. The explanation derives from the result that if agents expect some particular good to play the role of money, then sequential, pairwise trading leads to an economy-wide Pareto optimal allocation.]

There is wide agreement that before the recent financial crisis, financial institutions took excessive risk in their investment strategies. At the same time, regulators complained that banks did not reveal the extent of their difficulties in a timely fashion thus reducing the effectiveness of government intervention to prevent or mitigate the deleterious effects of the financial crisis. The purpose of this paper is to investigate how regulators can best use certain tools at their disposal to motivate banks to take less risk and to provide adverse information to regulators early. We argue that two tools, namely (i) allowing bank payouts to equity holders even when banks report they are in trouble and (ii) constraining banks’ future investment strategy when they are in trouble can achieve both goals. We show that, in some cases, it is optimal to use both of these tools in combination. That is, in such cases it is optimal to allow equity payouts when banks report they are in trouble, even though such payouts increase the incentive for banks to take excessive risk and even though these payments are financed by taxpayers. We also show that the more socially costly is constraining the bank’s portfolio selection or the more complex are the bank’s assets, the more likely it is that allowing larger payouts and fewer constraints is optimal. Finally we discuss how changes in bank capital requirements interact with inducing disclosure and preventing excessive risk taking.

This paper addresses the question of what determines where in a firm's hierarchy investment decisions are made. We present a simple model of a CEO and a division manager to analyze when the CEO will choose to allocate decision-making authority over an investment decision to a division manager. Both the CEO and thedivision manager have private information regarding the profit maximizing investment level. Because the division manager is assumed to have a preference for “empire”, neither manager will communicate her information fully to the other. We show that the probability of delegation increases with the importance of the division manager's information and decreases with the importance of the CEO's information. A somewhat counterintuitive result is that, in some circumstances, increases in agency problems result in increased willingness of the CEO to delegate the decision. We also characterize situations in which the CEO prefers to commit to an allocation of authority ex ante, instead of deciding based on her private information.Finally, even though the division manager is biased toward larger investments, we show that under certainconditions, the average investment will be smaller when the decision is delegated. These results help explain some findings in the empirical literature. A number of other empirical implications are developed.

A dynamic, equilibrium model of long term (implicit) labour contracts under incomplete but symmetric information is developed. Workers are assumed to be risk averse and of unknown ability or productivity. Risk neutral firms learn, as do workers, about each worker's productivity by observing the worker's output over time. It is shown that equilibrium contracts provide for wages which never decline with age and increase only when the worker's market value increases above his current wage. In addition to characterizing the equilibrium wage contract, we also derive some of its implications for the behaviour of aggregate wages across various groups of workers. These implications explain some findings in the recent empirical literature on age-earnings profiles. In particular our model can explain why earnings may be positively related to experience even after controlling for productivity, as some empirical studies have indicated.

As part of our ongoing research into capital budgeting processes as responses to decentralized information and incentive problems, we focus in this paper on when a level of a managerial hierarchy will delegate the allocation of capital across projects and time to the level below it. In our model, delegation is a way to save on costly investigation of proposed projects. Therefore, it is more extensive the larger are the costs of such investigations. This delegation takes advantage of the fact that the lower-level manager's preferences are assumed to be similar (though not identical) to those of the higher level.

This paper investigates the determinants of security design. We consider the assignment of both cash flows and voting rights, focusing on corporate control. We postulate that a conflict of interest exists between contestants for control and outside investors. The conflict arises because private benefits of control give contestants an incentive to acquire control even when this reduces firm value. Security design is a tool for resolving these conflicts and maximizing firm value. Our main result is that a single voting security is optimal.

In this paper, we derive conditions under which the simple majority voting rule for electing controlling management and one share-one vote constitute a socially optimal corporate governance rule. We also show that other majority rules and/or multiple classes of shares are not socially optimal. Finally we show that an entrepreneur would choose to issue two securities, one with only cash flow claims and no votes and one with only votes and no cash flow claims, if this were allowed. This scheme, regardless of the majority rule adopted, is not socially optimal.