We study a simple static economy with collateralized loan contracts and an incomplete asset market. We study whether economic forces operate to keep asset price equal to fundamentals in this economy. We find that asset prices may be higher than the valuation of any agent in the economy, i.e.,...

A commitment to an ex-post inefficient bailout can be ex-ante optimal because it can mitigate rollover problems without an actual bailout. Reinforcement between illiquidity and insolvency create beneficial multiplier effects that overwhelm the adverse effect of moral hazard. Committing to bail...

We show that stock-based CEO compensation can create a "race to the bottom" among firms that escalates short-termist pressure. More informative stock prices reduce the agency cost of incentivizing managers. Also, shortening a firm's project maturity improves stock price informativeness by...