The traditional agency problem advocates 100 percent share ownership when managers are risk-neutral, and managers either have enough wealth to buy the firm outright or have access to perfect capital markets. This paper says that delegation to the disinterested managers may sometimes explain the...

Bond covenants may constrain managers from acquiescing to union wage demands. Yet, because high wages and high levels of worker discipline are substitutes, unions can win higher wages by raising the cost of detecting slack workers. In this case, shareholders may be better off delegating to a CEO...

If a bank faces potential insolvency, it will be tempted to reject good loans and accept bad loans to shift risk onto its creditors. We analyze effectiveness of buying up toxic mortgages in troubled banks, buying preferred stock, and buying common stock. If bailouts for banks that are deemed...

This paper uses the option pricing arguments of Merton (1974) to demonstrate that even solvent banks will be reluctant to sell volatile, toxic assets at market prices. Banks' shareholders have insolvency puts that give them limited liability in the event of default. The insolvency puts are more...

This study solves the optimal managerial compensation problem when shareholders are either naiuml;vely optimistic or rational. The results suggest that boards of directors should decrease option grants to CEOs when equity is likely to be irrationally overvalued at the date when the CEO's options...

When a bank is deemed quot;too-big-to-failquot; by regulators, it may be tempted to buy risky assets. This paper analyzes bank bailouts involving the purchases of toxic assets, preferred stock, and common stock when the government wants to encourage efficient lending. It finds that preferred...

When a bank is deemed quot;too-big-to-failquot; by regulators, it may be tempted to buy risky assets. This paper analyzes bank bailouts involving the purchases of toxic assets, preferred stock, and common stock when the government wants to encourage efficient lending. It finds that preferred...

In some cases, the incentives of the manager will affect the behavior of the firm’s employees. A manager with low-powered incentives will discourage employees from engaging in destructive rent-seeking activities. Union members will need to cooperate with this poorly compensated manager if the...

The Legacy Loans Program (LLP) is an elaborate way of slicing the Federal Deposit Insurance Corporation's (FDIC's) receivership assets. At best, the financial structure is irrelevant to the FDIC's expected long-run recovery rates. Yet, it may boost short-term prices by creating bond insurance...