This paper examines the optimal consumption and investment problem for a quot;largequot; investor, whose portfolio choices affect the instantaneous expected returns on the traded assets. Alternatively, our analysis can be interpreted in terms of an optimal growth problem with nonlinear...

We study the portfolio selection problem of an investor who can optimally exert costly effort for more income. The possibility of generating more income, if necessary, increases the risk-taking appetite of the investor. We find the optimal allocation to the risky security as a proportion of...

We show that a possible explanation for the widespread use of options in compensation contracts might be that they provide a way to screen executives. In particular, we consider the problem of a risk-neutral firm that tries to hire a risk-averse executive. There are several types of executives,...

We consider continuous-time models in which the agent is paid at the end of the time horizon by the principal, who does not know the agent's type. The agent dynamically affects either the drift of the underlying output process, or its volatility. The principal's problem reduces to a calculus of...

The finance literature has shown that option grants can help to screen out low-ability executives. In this paper we develop a framework that allows us to analyze when options are likely to be optimal for this purpose. We consider a dynamic setting with asymmetric information, in which...

We study effects of using Sharpe ratio as a performance measure for compensating money managers in a dynamic and frictionless market setting. First, we demonstrate that with such a performance measure, the manager's focus on the short horizon performance is detrimental to the investor's long...

Existing studies of household stock trading using administrative data offer conflicting results: discount brokerage accounts exhibit excessive trading, while retirement accounts show inactivity. This paper uses population-wide data from PSID and SCF to examine the overall extent of household...

When the compensation risk can be hedged away completely, the manager will try to maximize the market value of the compensation. When the risk can be hedged partially, numerical examples for a CARA manager illustrate how incentive effects depend on the relative size of systematic and specific...

In the context of complete financial markets, we study dynamic measures for the risk associated with hedging a given liability C at time t=T. This measure is defined as the maximum, over different probability measures (scenarios), of the minimum, over all admissible portfolio strategies, of the...

We study the problem of finding the minimal price needed to dominate European-type contingent claims under proportional transaction costs in a continuous-time diffusion model. The result we prove has already been known in special cases - the minimal super-replicating strategy is the least...