The existence of nominal wage and debt contracts is a puzzle. In a model with strategic complementarities, where imperfectly competitive firms inefficiently underinvest, nominal wage or debt contracts are shown to be preferred to indexed contracts. Nominal contracts are an optimal arrangement...

In a model with incomplete markets, and agents privately producing a circulating media of exchange to coordinate trade, it is shown that closing another market can be Pareto-improving. Producing private money is costly because contracts with the money issuers must be enforced, creating agency...

A defining characteristic of bank loans is that they are not resold once created. Yet, in 1989 about $240 billion of commercial and industrial loans were sold, compared to trivial amounts five years earlier. Selling loans without explicit guarantee or recourse is inconsistent with theories of...

The period prior to the U.S. Civil War saw the introduction and rapid diffusion of the railroad. It was also the Free Banking Era (1838-1863) during which some states allowed relatively free entry into banking. Banks in all states issued distinct private monies, called bank notes, which...

In efficient markets the price should reflect the arrival of private information. The mechanism by which this is accomplished is arbitrage. A privately informed trader will engage in costly arbitrage, that is, trade on his knowledge that the price of an asset is different from the fundamental...

In the last ten to fifteen years financial derivative securities have become an important, and controversial, product for commercial banks. The controversy concerns whether the size, complexity, and risks associated with these securities, the difficulties with accurately reporting timely...

The dynamic behavior of security prices is studied in a setting where two agents trade strategically and learn from market prices. Each trader receives a private signal about fundamentals, the significance of which depends on the signal received by the other trader. In trading, each agent wants...

The existence of nominal wage and debt contracts is a puzzle. In a model with strategic complementarities, where imperfectly competitive firms inefficiently underinvest, nominal wage or debt contracts are shown to be preferred to indexed contracts. Nominal contracts are an optimal arrangement...

Security baskets and index-linked securities are securities whose values are functions of the cash flows or values of other assets. Intermediaries create security baskets by pooling or bundling more primitive assets such as mortgages, credit card receivables and other loans, or equities as in...

We consider a model of the stock market with delegated portfolio management. All agents are rational: some trade for hedging reasons, some investors optimally contract with portfolio managers who may have stock-picking abilities, and portfolio managers trade optimally given the incentives...