We study the optimal dynamics of incentives for a manager whose ability to generate cash .ows changes stochastically with time and is his private information. We show that, in general, the power of incentives (or "pay for performance") may either increase or decrease with tenure. However, risk...

We characterize a firm's profit-maximizing turnover policy in an environment where managerial productivity changes stochastically over time and is the managers' private information. Our key positive result shows that the productivity level that the firm requires for retention declines with the...

We characterize the firm's optimal contract for a manager who faces costly effort decisions and whose ability to generate profits for the firm changes stochastically over time. The optimal contract is obtained as the solution to a dynamic mechanism design problem with hidden actions and...

In a three-period finite competitive exchange economy with incomplete financial markets and retrading, we study the possibility of controlling asset price volatility through financial innovation. We first give sufficient conditions on preferences and endowments implying that whatever is the...

Consider an agent (manager, artist, etc.) who has imperfect private information about his productivity. At the beginning of his career (period 1, short run"), the agent chooses among publicly observable actions that generate imperfect signals of his productivity. The actions can be ranked...

In the model there are two types of financial auditors with identical technology, one of which is endowed with a prior reputation for honesty. We characterize conditions under which there exists a "two-tier equilibrium" in which "reputable" auditors refuse bribes offered by clients for fear of...

Why do some markets remain illiquid even when there is a positive gain from trade? In order to understand the real determinants of market liquidity in decentralized markets, we are going to analyze this question in a competitive market setting when both search frictions and adverse selection...

We study second-degree price discrimination in markets where the product traded by the monopolist is access to other agents. We derive necessary and sufficient conditions for the welfare and the profit-maximizing mechanisms to employ a single network or a menu of non-exclusive networks. We...

This paper investigates the possibility that wealth (holdings of money) serves as a signal of ability to produce high quality products for agents who cannot directly observe the quality of the products. A producer's wealth may advertise past success in selling products to agents who knew the...