Venture capitalists deliver investments to entrepreneurs in stages. This paper shows staged financing is efficient. Staging lets investors abandon ventures with low early returns, and thus sorts good projects from bad. The primary implication from staging is that it is efficient to invest more...

Compensation not only provides incentives to existing managers but attracts new managers to the firm. This paper examines the dual incentive and sorting effects of performance pay in a simple contracting model of endogenous participation. The main result is that sorting dampens optimal...

Despite the clear prescription from economic theory that a firm should set price based only on variable costs, firms routinely factor fixed costs into pricing decisions. We show that full-cost pricing (FCP) can help firms uncover their optimal price from economic theory. FCP marks up variable...

Much of the production in firms takes place over time. This paper seeks to understand the value of interim performance information on long projects. In particular, the model explores the sorting effects of performance evaluations. Conducting an interim performance evaluation increases efficiency...

It is a common practice for firms to conduct performance evaluations of their employees and yet to withhold this information from those employees. This paper argues that firms strategically withhold performance information to retain workers. In particular, if the worker enjoys high outside...

Despite the clear prescription from economic theory that a firm should set price based only on variable costs, firms routinely factor fixed costs into pricing decisions. We show that full-cost pricing (FCP) can achieve the optimal price. FCP marks up variable cost with the contribution margin...

We study how biases in financial reporting affect managers' incentives to develop innovative projects and to make appropriate investment decisions. Conservative reporting practices impose stricter verification standards for recognizing good news, and reduce the chance that risky innovations will...

Why do reputable audit firms fail? This paper provides a formal theory of auditor reputation formation. Even under well-functioning reputation mechanisms, an auditor with a strong reputation has incentives to shirk. Above a threshold-reputation, the market belief about the auditor's ability...

This study defines reporting conservatism as a higher verification standard for probable gains compared to losses and builds a model that endogenously generates optimal behavior resembling an asymmetric preference for gains versus losses. Our model considers the setting where one party produces...