The expectations hypothesis of the term structure of interest rates implies that the spread between short and long bond yields should forecast next period's change in the long yield. Regression based tests have systematically rejected the expectations hypothesis, with estimated coefficients far...

This paper analyzes the dynamics of firms' credit ratings, in the context of a multi-period moral hazard problem, in which borrowers have incentives to repudiate their debt obligations. Borrowers with short credit histories face the poorest incentives, and (depending on initial conditions) for...

This paper reverses the standard conclusion that asymmetric information plus competition results in insufficient insurance provision. Risk-tolerant individuals take few precautions and are disinclined to insure, but are drawn into a pooling equilibrium by the low premiums created by the presence...

Despite being theoretically appealing, the standard q-theory of investment performs very poorly in empirical work. This paper extends the q-theory to include the possibility that costs associated with the risk of insolvency affect the firm's investment decisions. Using aggregate data for the UK...

This paper shows that costly state verification creates a bias against risky activities in the policy relevant sense that everyone may gain if entry to them is subsidised. The result holds even in the presence of private insurance. In fact, it may be preferable to ban private insurance and rely...