What is so special about banks that their demise often triggers government intervention? In this paper we develop a simple model where, even ignoring interconnectedness issues, the failure of a bank causes a larger welfare loss than the failure of other institutions. The reason is that agents in...

We analyze noncontractible investments in a model with shading. A seller can make an investment that affects a buyer's value. The parties have outside options that depend on asset ownership. When shading is not possible and there is no contract renegotiation, an optimum can be achieved by giving...

This paper gives a brief discussion of some recent work on the theory of the firm. Particular emphasis is placed on the rol e that a firm's capital structure can play in keeping management in c heck (via the market for corporate control). Some directions for futu re research are suggested.

It is commonly thought that a widely held corporation that is not being run in the interest of its shareholders will be vulnerable to a takeover bid. We show that this is false, since shareholders can free ride on the raider's improvement of the corporation, thereby seriously limiting the...

Parties often regulate their relationships through “continuing” contracts that are neither long-term nor short-term but usually roll over. We study the trade-off between long-term, short-term, and continuing contracts in a two period model where gains from trade exist in the first period,...

"Why are contracts incomplete? Transaction costs and bounded rationality cannot be a total explanation since states of the world are often describable, foreseeable, and yet are not mentioned in a contract. Asymmetric information theories also have limitations. We offer an explanation based on...