We propose an equilibrium occupational choice model, where agents can choose to work in the real sector (become entrepreneurs) or to become informed dealers in financial markets. Agents incur costs to become informed dealers and develop skills for valuing assets up for trade. The financial...

We propose a model where investors can choose to acquire costly information that allows them to identify good assets and purchase them in opaque over the counter (OTC) markets. Uninformed investors trade on an organized exchange and only have access to an asset pool that has been (partially)...

Many believe that compensation, misaligned from shareholders' value due to managerial entrenchment, caused financial firms to take creative risks before the Financial Crisis of 2008. We argue instead that even in a classical principal-agent setting without entrenchment and with exogenous...

We study the relationship between compensation and risk-taking among finance firms using a neglected insight from principal-agent contracting with hidden action and risk-averse agents. If the sensitivity of pay to stock price or slope does not vary with stock price volatility, then total...