Incentive compensation induces correlation between the portfolio of managers and the cash flow of the firms they manage. This correlation exposes managers to risk and hence gives them an incentive to hedge against the poor performance of their firms. We study the agency problem between...

Time inconsistency provides a motivation for linear Ramsey taxation in a Mirrleesian economy. Moreover, such a motivation overturns some classic results from the Ramsey taxation literature; specifically, indirect taxation may neither be useless (i.e., redundant) nor uniform.

In this paper we identify conditions under which the introduction of a pay-as-you-go social security system is ex-ante Pareto-improving in a stochastic overlapping generations economy with capital accumulation and land. We argue that these conditions are consistent with many calibrations of the...

3.Finally we consider the case where the government's information is even more limited, as not only the linear taxes on trades but also the lump-sum tax cannot depend on the ex-post realization of the individual income shocks. In this case the second best cannot typically be attained, but we...

We investigate the trade-off between the risk-sharing gains enjoyed by more interconnected firms and the costs resulting from an increased risk exposure. We find that when the shock distribution displays “fat” tails, extreme segmentation into small components is optimal, while minimal...