Commitment is therefore more valuable when quality is known more precisely. Incentives then are easier to provide because the agent has less room to manipulate the beliefs of the principal. Moreover, in contrast to results under one-period commitment, wage volatility declines as experience...

In a model with multiple Pareto-ranked equilibria we add trade in assets that pay based on the realization of a sunspot. Asset trading restricts the equilibrium set in a way that raises welfare by eliminating equilibria with a high likelihood of disasters. When the probability of a disaster is...

Stock-market crashes tend to follow run-ups in prices. These episodes look like bubbles that gradually inflate and then suddenly burst. We show that such bubbles can form in a Zeira-Rob type of model in which demand size is uncertain. Two conditions are sufficient for this to happen: A declining...

The Q-theory of investment says that a firm's investment rate should rise with its Q. We argue here that this theory also explains why some firms buy other firms. We find that 1. A firm's merger and acquisition (Mamp;A) investment responds to its Q more -- by a factor of 2.6 -- than its direct...

We study 114 years of U.S. stock market data and find That there are large cohort effects in stock prices, effects that we label 'organization capital,' That cohort effects grew at a rate of 1.75% per year, That the debt-equity ratio of all vintages declined, That three big technological waves...

Aside from the equilibrium that Hotelling (1931) displayed, his model of non-renewable resources also contains a continuum of bubble equilibria. In all the equilibria the price of the resource rises at the rate of interest. In a bubble equilibrium, however, the consumption of the resource peters...

We solve a long-term contracting problem with symmetric uncertainty about the agent's quality, and a hidden action of the agent. As information about quality accumulates, incentives become easier to provide because the agent has less room to manipulate the principal's beliefs. This result is...