Two trade-offs arise in an agency relationship when the same accounting signal is used for both performance evaluation and investment evaluation. Using the signal for performance evaluation, (1) directly influences the informativeness of the signal for investment evaluation, (2) induces manipulation, which, in turn, lowers the informativeness of the signal for investment evaluation. The principal can increase her welfare by delegating the investment decision to the agent, setting up multiple control systems, or using the outcome of the investment for performance evaluation. We show the implications of using each alternative on incentive contracts, equilibrium effort, and manipulation levels.

Exchange-mandated discrete pricing restrictions create a wedge between the underlying equilibrium price and the observed price. This wedge permits a competitive market maker to realize economic profits that could help recoup fixed costs. The optimal tick size that maximizes the expected profits of the market maker can equal to $1/8 for reasonable parameter values. The optimal tick size is decreasing in the degree of adverse selection. Discreteness per se can cause time-varying bid-ask spreads, asymmetric commissions, and market breakdowns. Discreteness, which imposes additional transaction costs, reduces the value of private information. Liquidity traders can benefit under certain conditions.

[Exchange-mandated discrete pricing restrictions create a wedge between the underlying equilibrium price and the observed price. This wedge permits a competitive market maker to realize economic profits that could help recoup fixed costs. The optimal tick size that maximizes the expected profits of the market maker can be equal to $1/8 for reasonable parameter values. The optimal tick size is decreasing in the degree of adverse selection. Discreteness per se can cause time-varying bid-ask spreads, asymmetric commissions, and market breakdowns. Discreteness, which imposes additional transaction costs, reduces the value of private information. Liquidity traders can benefit under certain conditions.]

This paper analyses the sustainability of inter-generational transfers in Samuelson's consumption-loan model when agents are imperfectly informed about past events. We find that with mild informational constraints, transfers cannot be supported by pure-strategy equilibria. Mixed strategies allow transfers to be sustained even if agents have little information, so that a version of the Folk theorem holds. However, these equilibria are not robust. If each agent's utility function is subjected to a small random perturbation as in Harsanyi (1973), these mixed strategy equilibria unravel, and only the zero-transfer allocation survives as the unique rationalizable outcome. This result is an example of mixed strategy equilibrium of an extensive form game which cannot be purified.

The goal of this paper is the derivation and application of a direct characterization of the inverse of the covariance matrix central to portfolio analysis. Such a characterization, in terms of a few primitive constructs, provides the basis for new and illuminating expressions for key concepts as the optimal holding of a given risky asset and the slope of the risk-return efficiency frontier faced by the individual investor. The building blocks of the inverse turn out to be the regression coefficients and residual variance obtained by regressing the asset's excess return on the set of excess returns for all other risky assets.

The goal of this paper is the derivation and application of a direct characterization of the inverse of the covariance matrix central to portfolio analysis. Such a characterization, in terms of a few primitive constructs, provides the basis for new and illuminating expressions for key concepts as the optimal holding of a given risky asset and the slope of the risk‐return efficiency frontier faced by the individual investor. The building blocks of the inverse turn out to be the regression coefficients and residual variance obtained by regressing the asset's excess return on the set of excess returns for all other risky assets.