We consider the security design problem of a lender who can assess the borrower s project prior to making an accept or reject decision. The lender s subjective assessment is represented by a private signal. Unless the lender extracts the full surplus from the project, her cutoff signal above...

Future wage payments drive a wedge between total firm output and the output share received by the firm s owners, thus potentially distorting strategic decisions by the firm s owners such as, e.g., whether to continue the firm, sell it, or shut it down. Using an optimal contracting approach, we...

This paper considers the potential cost of subjective judgment and discretion in credit decisions. We show that subjectivity and discretion in the evaluation of borrowers create an incentive problem on the part of the lender. The lender s incentives to accept or reject a borrower depend only on...

We offer a novel explanation for the use of collateral based on the dual function of banks to provide credit and assess the borrower s credit risk. There is no moral hazard or adverse selection on the part of borrowers the only inefficiency is that banks cannot contractually commit to providing...

This paper compares optimal financial contracts with centralized and decentralizedfirms. Under centralized contracting headquarters raises funds on behalf of multiple projects and then allocates the funds on the firm s internal capital market. Under decentralized contracting each project raises...

This paper considers the potential cost of subjective judgement and discretion in credit decisions. We show that subjectivity and discretion in the evaluation of borrowers create an incentive problem on the part of the lender. The lender s incentives to accept or reject a borrower depend only on...

This paper shows that investors financing a portfolio of projects may use the depth of their financial pockets to overcome entrepreneurial incentive problems. Competition for scarce informed capital at the refinancing stage strengthens investors’ bargaining positions. And yet, entrepreneurs’...

We consider an imperfectly competitive loan market in which a local relationship lender has an information advantage vis-à-vis distant transaction lenders. Competitive pressure from the transaction lenders prevents the local lender from extracting the full surplus from projects, so that she...

This paper considers the potential cost of subjective judgment and discretion in credit decisions. We show that subjectivity and discretion in the evaluation of borrowers create an incentive problem on the part of the lender. The lender s incentives to accept or reject a borrower depend only on...

We examine the relation between optimal venture capital contracts and the supply and demand for venture capital. Both the composition and type of financial claims held by the venture capitalist and entrepreneur depend on the market structure. Moreover, dierent market structures involve dierent...