We argue that capital misallocation arises endogenously due to incomplete consumption insurance. We model risk-averse entrepreneurs with heterogeneous productivity who face idiosyncratic output shocks and choose how much capital to rent before uncertainty unfolds. We show that incomplete markets...

We introduce a continuous-time principal-agent model where the agent can privately influence both the drift and diffusion of the cash flows. The total diffusion is the product of the agent's volatility choice and a stochastic volatility process that is unobservable to the principal. This model...

This paper proposes a simple analysis for examining an agent's optimal decisions in a principal-agency problem. Unlike the standard approach, the target firm's expected return and risk are modeled as a parametric curve in terms of a critical business decision. A general condition is derived for...

We propose a tractable equilibrium model to examine how margin requirements affectasset prices, market volatility, and market participants' welfare. Weshow that margin requirements can have opposite effects on market volatility whenthey constrain different investors and thus can help explain why...