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...

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, different market structures involve...

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...

We offer a novel explanation for collateral based on the notion that lenders make discretionary credit decisions that are too conservative. There is no borrower asymmetricinformation or moral hazard. Rather, the problem is that if lenders cannot extract the full surplus from the projects they...

We study a model in which a CEO can entrench himself by hiding information from theboard that would allow the board to conclude that he should be replaced. Assuming thateven diligent monitoring by the board cannot fully overcome the information asymmetry visagrave;-vis the CEO, we ask if there is...

An important question for firms in dynamic industries is how to induce a CEO to revealinformation that the firm should change its strategy, in particular when a strategy change might cause his own dismissal. We show that the uniquely optimal incentive scheme from this perspective consists of...

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

We consider the joint optimal design of CEOs severance pay and on-the-job pay in a modelin which the CEO has interim private information about the likely success of his strategy. The board faces a tradeoff between reducing the likelihood that the firm forgoes an efficient strategy change and...

We examine the role of leverage in tender offers for widely held firms. Leverage allows raiders to appropriate part of the value gains arising from takeovers, hence reducing the takeover premium and mitigating the free-rider problem. Leveraged takeovers may thus be profitable even if target...