We examine the problem of motivating privately informed managers to engage in entrepreneurial activity to improve the quality of the firm's investment opportunities. The firm's investment and compensation policy must balance the manager's incentives to provide entrepreneurial effort and to...

This paper studies a simple two-stage model of conflict in which two players allocate resources between arms and domestic production in the first stage and subsequently engage in peace negotiations trying to avoid war. War is costly and war damages depend on arms buildup. Peace also comes with...

Trust is vital for market development, but how can trust be enhanced in a marketplace? A common view is that more trusting may help to build trust, especially in less developed economies. In this paper, we argue that more trusting may lead to less trust. We set up a rational expectation model in...

Renegotiation plays an important role in contract theory, but the empirical study of renegotiation is almost non-existent in the literature. Using a unique dataset from the Chinese banking industry, we find that the large majority of managerial incentive contracts are renegotiated after...

We consider a two-stage model in which two firms first invest in R&D to reduce their marginal production costs, and then either compete or collude in the output market. When they collude, they bargain over a cartel agreement to divide the collusive profit. If bargaining breaks down, they revert...

Using a simple game-theoretical model, this paper provides a new explanation for why large firms in developing economies may willingly pay higher wages than market wage rate. We show that large firms can strategically create entry barriers to the modern sector by setting high wage standards....