[We analyze corporate lending when loan officers must be incentivized to prospect for loans and to transmit the soft information they obtain in that process. We explore how this multitask agency problem shapes loan officers' compensation, banks' use of soft information in credit approval, and their lending standards. When competition intensifies, prospecting for loans becomes more important and banks' internal agency problems worsen. In response to more competition, banks lower lending standards, may choose to disregard soft and use only hard information in their credit approval, and in that case reduce loan officers to salespeople with steep, volume-based compensation. Our model generates "excessive lending" as banks' optimal response to an internal agency problem.]

[This article examines the optimal CEO compensation and replacement policy when the CEO is privately informed about the firm's continuation value under his leadership. Ex ante moral hazard implies that the CEO must receive ex post quasi rents, which endogenously biases him toward continuation. Our model shows that to induce "bad" CEOs to quit, it may be best to make continuation costly (through steep incentive pay) rather than simply rewarding quitting (through severance pay). Incentive pay makes continuation attractive for "good" CEOs, who can expect high future on-the-job pay, but unattractive for "bad" CEOs, who may instead prefer to take their outside option payoff. Our model generates novel empirical implications that jointly relate CEO compensation and turnover to corporate governance, firm size, cash-flow risk, and the informativeness of performance measurement.]

[This article shows that investors financing a portfolio of projects may use the depth of their financial pockets to overcome entrepreneurial incentive problems. Competition for scarce informed capital at the refinancing stage strengthens investors' bargaining positions. And yet, entrepreneurs' incentives may be improved, because projects funded by investors with "shallow pockets" must have not only a positive net present value at the refinancing stage, but one that is higher than that of competing portfolio projects. Our article may help understand provisions used in venture capital finance that limit a fund's initial capital and make it difficult to add more capital once the initial venture capital fund is raised.]

This paper argues that banks must be sufficiently levered to have first-best incentives to make new risky loans. This result, which is at odds with the notion that leverage invariably leads to excessive risk taking, derives from two key premises that focus squarely on the role of banks as informed lenders. First, banks finance projects that they do not own, which implies that they cannot extract all the profits. Second, banks conduct a credit risk analysis before making new loans. Our model may help understand why banks take on additional unsecured debt, such as unsecured deposits and subordinated loans, over and above their existing deposit base. It may also help understand why banks and finance companies have similar leverage ratios, even though the latter are not deposit takers and hence not subject to the same regulatory capital requirements as banks.

We analyze corporate lending when loan officers must be incentivized to prospect for loans and to transmit the soft information they obtain in that process. We explore how this multi-task agency problem shapes loan officers' compensation, banks' use of soft information in credit approval, and their lending standards. When competition intensifies, prospecting for loans becomes more important and banks' internal agency problems worsen. In response to more competition, banks lower lending standards, may choose to disregard soft and use only hard information in their credit approval, and in that case reduce loan officers to salespeople with steep, volume-based compensation. Our model generates “excessive lending” as banks' optimal response to an internal agency problem.

This paper shows that active investors, such as venture capitalists, can affect the speed at which new ventures grow. In the absence of product market competition, new ventures financed by active investors grow faster initially, though in the long run those financed by passive investors are able to catch up. By contrast, in a competitive product market, new ventures financed by active investors may prey on rivals that are financed by passive investors by “strategically overinvesting” early on, resulting in long-run differences in investment, profits, and firm growth. The value of active investors is greater in highly competitive industries as well as in industries with learning curves, economies of scope, and network effects, as is typical for many “new economy” industries. For such industries, our model predicts that start-ups with access to venture capital may dominate their industry peers in the long run.

We develop an equilibrium model of contracting, bargaining, and search in which the relative scarcity of venture capital affects the bargaining power of entrepreneurs and venture capitalists. This in turn affects the pricing, contracting, and value creation in start-ups. The relative scarcity of venture capital is endogenous and depends on the profitability of venture capital investments, entry costs, and transparency of the venture capital market. Supply and demand conditions also affect the incentives of venture capitalists to screen projects ex ante. We characterize both the short- and long-run dynamics of the venture capital industry, which provides us with a stylized picture of the Internet boom and bust periods. Our model is consistent with existing evidence and provides a number of new empirical predictions.

This article examines the optimal CEO compensation and replacement policy when the CEO is privately informed about the firm’s continuation value under his leadership. Ex ante moral hazard implies that the CEO must receive ex post quasi rents, which endogenously biases him toward continuation. Our model shows that to induce “bad” CEOs to quit, it may be best to make continuation costly (through steep incentive pay) rather than simply rewarding quitting (through severance pay). Incentive pay makes continuation attractive for “good” CEOs, who can expect high future on-the-job pay, but unattractive for “bad” CEOs, who may instead prefer to take their outside option payoff. Our model generates novel empirical implications that jointly relate CEO compensation and turnover to corporate governance, firm size, cash-flow risk, and the informativeness of performance measurement.

We analyze the interaction between financial institutions’ internal compensation policy, the quality of loans, and their securitization decision. We show when mandatory deferred bonus pay makes incentives more commensurate with the longer term risk of their transactions and hence improves the quality of loans. We also show when it has the opposite effect. We further analyze when mandatory deferred compensation can complement a policy that requires financial institutions to retain a minimum exposure to their originated loans, and we discuss the impact of a tax on short-term bonus pay. Generally, our framework allows us to study the interaction of financial institutions’ internal agency problems with the external agency problem that arises from securitization.

We provide a formal analysis of the notion that conglomerates are more ‘entrenched’ as they have ‘deeper pockets’. Using the financial contracting model of Bolton and Scharfstein (1990), we can isolate two effects that confirm this conjecture: the pooling of cash flows, which allows to smooth out repayments, and the ability to obtain better credit terms. For less profitable business segments, the internal capital market operated in a conglomerate may, however, work in the opposite direction, increasing the sensitivity of operations to own cash flows and increasing the likelihood of exit.