For financial contracting with costly state verification, it is shown that arrangements involving an ex ante commitment to monitoring regardless of returns tend to dominate if the borrower's initial wealth is small and the investment outlay is large, arrangements involving conditioning of...

The paper develops an integrated model of optimal nonlinear income taxation, public-goods provision and pricing in a large economy. With asymmetric information about labour productivities and publicgoods preferences, the multidimensional mechanism design problem becomes tractable by requiring...

The paper studies insurance with moral hazard in the context of a Walrasian system of contingent-claims markets. The insurance buyer is modelled as a Cournot monopolist. Price-taking agents condition their expectations on market prices, as in models of rational-expectations equilibrium with...

This paper studies the relation between discrete-time and continuous-time principal-agent models. We derive the continuous-time model as a limit of discrete-time models with ever shorter periods and show that optimal incentive schemes in the discrete-time models approximate the optimal incentive...

The paper studies the relative efficiency of intermediated finance and direct finance in a variant of Diamond's (1984) model of ''financial intermediation as delegated monitoring''. Project sizes are taken to be variable so a choice must be taken on whether to fund a small number of projects on...

Under constraints of Bayesian interim incentive compatibility and individual rationality, the paper characterizes second-best allocations for the provision of a public good. If benefit and cost functions do not depend on the number of participants, it is always beneficial to have more...

The paper takes issue with the suggestion of Holmström and Milgrom (1987) that optimal incentive schemes in Brownian-motion models of principal-agent relations with effort costs depending on mean returns are linear in cumulative total returns. In such models, if actions are restricted to...

This paper studies the relation between Bayesian mechanism design and the Ramsey-Boiteux approach to the provision and pricing of excludable public goods. For a large economy with private information about individual preferences, the two approaches are shown to be equivalent if and only if, in...

The paper discusses the role of banks and markets in the allocation of risks in an economy. Starting from a discussion of risk allocation in the Arrow-Debreu model, it criticizes the view that banks and markets are substitutes. Instead it is argued that markets are made by intermediaries and...

The paper extends Diamond's (1984) analysis of financial intermediation to allow for risk aversion of the intermediary. It shows that, as in the case of risk neutrality, the agency costs of external funds provided to an intermediary are relatively small if the intermediary is financing many...