The Economics of Deferral and Clawback Requirements (with Roman Inderst and Marcus Opp), Journal of Finance, 2022, 77 (4), 2423-2470.

Abstract:  We analyze the effects of regulatory interference in compensation contracts, focusing on recent mandatory deferral and clawback requirements restricting incentive compensation of material risk-takers in the financial sector. Moderate deferral requirements have a robustly positive effect on equilibrium risk-management effort only if the bank manager's outside option is sufficiently high, else, their effectiveness depends on the dynamics of information arrival. Stringent deferral requirements unambiguously backfire. We characterize when regulators should not impose any deferral regulation at all, when it can achieve second-best welfare, when additional clawback requirements are of value, and highlight the interaction with capital regulation.

Harvard Law School Forum on Corporate Governance post can be found here.


Dynamic Multitasking and Managerial Investment Incentives (with Sebastian Pfeil), Journal of Financial Economics, 2021, 142 (2), 954-974. 

Abstract: We study non-contractible intangible investment in a dynamic agency model with multitasking. The manager’s short-term task determines current performance, which deteriorates with investment in the firm’s future profitability, his long-term task. The optimal contract dynamically balances incentives for short- and long-term performance. Investment is distorted upwards (downwards) relative to first-best in firms with high (low) returns to investment. These distortions decrease as good performance relaxes endogenous financial constraints, implying negative (positive) investment-cash flow sensitivities. Our results shed light on how corporate investment policies, liquidity management, and executive compensation structure differ across industries with different returns to intangible investment.

The Online Appendix with some supplementary material can be found here.


Only Time Will Tell: A Theory of Deferred Compensation (with Roman Inderst and Marcus Opp)Review of Economic Studies, 2021, 88 (3), 1253-1278.

Abstract: This article characterizes optimal compensation contracts in principal-agent settings in which the consequences of the agent’s action are only observed over time. The optimal timing of pay trades off the costs of deferred compensation arising from the agent’s relative impatience and potential consumption smoothing needs against the benefit of exploiting additional informative signals. By capturing this information benefit of deferral in terms of the likelihood ratio dynamics, our characterization covers general signal processes in a unified setting. With bilateral risk neutrality and agent limited liability, optimal contracts are high-powered and stipulate at most two payout dates. If the agent is additionally risk-averse, payouts are contingent on performance exceeding a hurdle that is increasing over time. We obtain clear-cut predictions on how the duration of optimal compensation depends on the nature of information arrival as well as agent characteristics and derive implications for the maturity structure of securities in financial contracting settings.


Persuasion through Selective Disclosure: Implications for Marketing, Campaigning, and Privacy Regulation (with Roman Inderst and Marco Ottaviani), Management Science, 2020, 66 (11), 4958-4979. 

Abstract: This paper introduces a modeling framework to study selective disclosure of information by firms or political campaigners (senders), based on the personal information that they acquire about the preferences and orientations of consumers and voters (receivers). We derive positive and normative implications depending on: the extent of competition among senders, whether receivers are wary of senders collecting personalized data, and whether firms are able to personalize prices. We show how both senders and receivers can benefit from selective disclosure. Privacy laws requiring senders to obtain consent to acquire personal information that enables such selective disclosure increase receiver welfare if and only if there is little or asymmetric competition among senders, when receivers are unwary, and when firms can price discriminate.


Taxing Externalities under Financing Constraints (with Roman Inderst and Ulf Moslener), Economic Journal, 2017, 127 (606), 2478-2503.

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.

Supplementary material: Working paper versionOnline Appendix.


Pre-Sale Information (with Roman Inderst), Journal of Economic Theory, 2011, 146 (6), 2333-2355.

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.


Reward for Luck in a Dynamic Agency Model (with Sebastian Pfeil), Review of Financial Studies, 2010, 23 (9), 3329-3345.

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.”


Working Papers

Worker Runs (with Vladimir Vladimirov)

Abstract: The voluntary departure of hard-to-replace skilled workers worsens firm prospects, thus, increasing remaining workers' incentives to leave. We develop a model of collective turnover in which firms design compensation to limit the risk of such "worker runs." To achieve cost-efficient retention, firms may use fixed or dilutable variable pay -- such as stock option/bonus pools -- that promises remaining workers more when others leave but gets diluted otherwise. The optimal mix of fixed and dilutable pay depends on firms' relative risk exposure and their financial constraints. Compensating (identical) workers differently and financing investments with debt can improve collective retention. 


Negotiating Compensation (with Vladimir Vladimirov)

Abstract: We investigate compensation design in tight labor markets. With private information about firm productivity, firms prefer competing for workers by raising fixed wages. However, workers in better bargaining positions often prefer negotiating for higher bonuses or option pay. We characterize when such differences in preferred compensation structure occur and show that they determine whether workers extract higher compensation by negotiating as opposed to attracting additional job offers. Our analysis of negotiations and competition with endogenous compensation structure has implications for firms' external financing needs and investor base and extends to other applications such as mergers and acquisitions.


Regulating Cancellation Rights with Consumer Experimentation (with Roman Inderst and Sergey Turlo)EEA 2017 Meetings Paper.

Abstract: This paper analyzes the welfare implications of regulating consumers' rights of product return and contract cancellation. The key feature of our model of consumer experimentation is that, after returning a product, consumers turn back to the market and thereby exert a positive pecuniary externality on other firms. As a consequence, in the unregulated market equilibrium, there are always too few such cancellations and returns. A mandatory extension of consumers' rights of cancellation and return, in the form of commonly observed statutory minimum refund periods, increases efficiency only when consumers' share of the surplus is low, and it exacerbates the market failure when it is high. We also show that the generosity of consumers' cancellation rights is not a good predictor of market performance or competition in the market.


Disliking to Disagree (with Kiryl Khalmetski and Mark T. Le Quement) - new version coming soon, EEA 2018 Meetings Paper.

Abstract: Abundant experimental and field evidence suggests that people tend to dislike open disagreement. We propose a formalization of perceived disagreement and study the implications of perceived disagreement aversion in disclosure games involving agents with different priors. Across a variety of settings, the ideal conditions for disclosure involve identical prior variances and differing prior means. When equilibrium disclosure is partial, it is biased towards evidence that is congruent with the most confident agent's prior bias. Perceived disagreement aversion leads to assortative matching in prior beliefs that provides a theoretical basis for echo chambers. Equilibria may feature higher average perceived or actual disagreement than a hypothetical full disclosure scenario. Perceived disagreement aversion arises endogenously within simple games of delegation and competitive authority assignment.


Work in Progress

Dividend Regulation and Risk-Taking in Banks (with Sebastian Pfeil)