A multi-divisional firm can engage in quot;winner-pickingquot; to redistribute scarce funds efficiently across divisions. But there is a conflict between rewarding winners (investing) and producing resources with which to reward winners (incentives). Managers in winning divisions are tempted to...

The paper presents a simple model arguing that the pecking order theory is an extreme when there is only asymmetric information about value. We show how asymmetric information about both, value and risk, transforms the adverse selection logic underlying the pecking order into a general theory of...

The paper presents a simple model arguing that the pecking order theory is an extreme when there is only asymmetric information about value. We show how asymmetric information about both, value and risk, transforms the adverse selection logic underlying the pecking order into a general theory of...

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 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...

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...