Abstract: We consider an economy where production generates externalities, which can be reduced by additional firm level expenditures. This requires firms to raise outside financing, leading to deadweight loss due to a standard agency problem vis-à-vis outside investors. Policy is constrained as firms are privately informed about their marginal cost of avoiding externalities. We first derive the optimal linear pollution tax, which is strictly lower than the Pigouvian tax for two reasons: First, higher firm outside financing creates additional deadweight loss; second, through redistributing resources in the economy, a higher tax reduces average productive efficiency. We analyze various instruments that achieve a more efficient allocation, in particular, nonlinear pollution taxes, which can no longer be implemented through a tradable permit scheme alone, and grants tied to loans, which are frequently observed in practice.
Abstract: In markets as diverse as that for specialized industrial equipment or that for retail financial services, sellers or intermediaries may earn profits both from the sale of products and from the provision of pre-sale consultation services. We study how a seller optimally chooses the costly quality of pre-sale information, next to the price of information and the product price, and obtain clear-cut predictions on when information is over- and when it is underprovided, even though we find that information quality does not satisfy a standard single-crossing property. Buyers who are a priori more optimistic about their valuation end up paying a higher margin for information but a lower margin for the product when they subsequently exercise their option to purchase at a pre-specified price.
Supplement with some additional material: Supplement to "Pre-Sale Information".
Older (working paper) version: Price Discrimination and the Provision of Information.
Abstract: This article studies a continuous time principal-agent problem of a firm whose cash flows are determined by the manager's unobserved effort. The firm's cash flows are further subject to persistent and publicly observable shocks that are beyond the manager's control. While standard contracting models predict that compensation should optimally filter out these shocks, empirical evidence suggests otherwise. In line with this evidence, our model predicts that the manager is “rewarded for luck.”
Dynamic Multitasking and Managerial Investment Incentives (with Sebastian Pfeil), r&r (2nd round) Journal of Financial Economics, AFA 2015 Meetings Paper.
Abstract: We study long-term investment in a dynamic agency model with multitasking. The manager’s short-term task determines current performance which deteriorates if he invests in the firm's future profitability, his long-term task. The optimal contract dynamically balances incentives for short- and long-term performance such that investment is distorted upwards (downwards) relative to first-best in firms with high (low) technological returns to investment. These distortions decrease as good performance relaxes the endogenous financial constraints arising from the agency problem, implying negative (positive) investment-cash flow sensitivities. Investment distortions and cash flow sensitivities increase in absolute terms with short-term performance pay and external financing costs.
Only time will tell: A theory of deferred compensation (with Roman Inderst and Marcus Opp) - resubmitted to Econometrica, ES-NASM 2017, ES-EM 2017, AFA 2018, FIRS 2018 Meetings Paper.
Abstract: This paper provides a complete characterization of optimal contracts in principal-agent settings where the agent's action has persistent effects. We model general information environments via the stochastic process of the likelihood-ratio. The martingale property of this performance metric captures the information benefit of deferral. Costs of deferral may result from both the agent's relative impatience as well as her consumption smoothing needs. If the relatively impatient agent is risk neutral, optimal contracts take a simple form in that they only reward maximal performance for at most two payout dates. If the agent is additionally risk-averse, optimal contracts stipulate rewards for a larger selection of dates and performance states: The performance hurdle to obtain the same level of compensation is increasing over time whereas the pay-performance sensitivity is declining.
Abstract: Our paper evaluates recent regulatory proposals mandating the deferral of bonus payments and claw-back clauses in the financial sector. We develop a parsimonious principal-agent framework to analyze the optimal timing and contingency of deferred compensation if the agent's action has persistent effects. For general information processes, optimal deferral times depend on the trade-off between the cost of agent impatience and the benefit of more informative performance signals. We apply this framework to the financial sector, in particular to cases in which the action of the agent, such as a bank CEO, affects the arrival-time distribution of bank failure. In equilibrium, compensation contracts with "short-term" payout dates can reflect lower risk-taking incentives (and hence less frequent bank failures) than contracts with "long-term" payouts. Regulatory interference in the timing of optimal compensation contracts, such as a mandated minimum-deferral requirement, typically increase risk-taking. However, this can be mitigated if deferral requirements are coupled with restrictions on the contingency of bonus payments; in other words, through clawback provisions.
Abstract: By collecting personalized data about individual preferences, firms and political campaigners (senders) are able to better tailor their communication to the preferences and orientations of individual consumers and voters (receivers). This paper characterizes equilibrium persuasion through selective disclosure based on the information that senders acquire about the preferences of receivers. We derive positive and normative implications depending on: the extent of competition among senders, whether receivers are wary of senders collecting personalized data, whether firms are able to personalize prices, and whether receivers make individual or collective decisions. We find that privacy laws requiring senders to obtain consent to acquire information are beneficial when there is little or asymmetric competition among firms or candidates, when receivers are unwary, and when firms can price discriminate. Otherwise, policy intervention has unintended negative welfare consequences.
Regulating Cancellation Rights with Consumer Experimentation (with Roman Inderst and Sergey Turlo), EEA 2017 Meetings Paper - submitted.
Abstract: Embedding consumer experimentation with a product or service into a market environment, we find that unregulated contracts induce too few returns or cancellations, as they do not internalize a pecuniary externality on other firms in the market. Forcing firms to let consumers learn longer by imposing a commonly observed statutory minimum cancellation or refund period is socially effcient only when firms appropriate much of the market surplus, while it backfires otherwise. Interestingly, cancellation rights are a poor predictor of competition, as in the unregulated outcome firms grant particularly generous rights when competition is neither too low nor too high.