We analyze the role of debt in persuading an entrepreneur to pay out cash flows, rather than to divert them. In the first part of the paper we study the optimal debt contract—specifically, the trade-off between the size of the loan and the repayment—under the assumption that some debt contract is optimal. In the second part we consider a more general class of (nondebt) contracts, and derive sufficient conditions for debt to be optimal among these.

This article reexamines the negative seniority‐earnings relationship for academic economists. The empirical results show that the anomalous negative seniority effect found in earlier academic market studies holds in the absence of direct measures of research productivity. The negative effect, however, eventually disappears as more comprehensive measures of publishing, citations, and other productivity measures are included in the wage equation to control for the quantity and quality of faculty productivity. Faculty with greater seniority appear to be rewarded relatively less simply because many have been relatively less productive than their colleagues with less seniority at similar stages in their careers.