Traditional asset-pricing theories assume complete market participation, despite considerable empirical evidence that most investors participate in a limited number of markets. The authors show that once the participation decision is endogenized, market properties change dramatically. First,...

Economists have believed for a long time that financial systems are fragile in the sense that small shocks can cause serious disruption. Research has focused on phenomena, such as bank runs, which affect the stability of individual institutions. Only recently has there been interest in the...

Traditional theories of asset pricing assume there is a complete market participation, in the sense that all investors participate in all markets. In that case, preferences shocks typically have only a small effect on asset prices and are not an important determinant of asset price volatility....

There is some empirical evidence that high tax bracket investors hold the equity of unlevered firms while law tax bracket investors hold levered firms. It has been suggested that an extension of the Miller model can provide a theory which is consistent with this observation. However, it has been...

A linear duopoly model is used to consider investment and financing decisions. Bankruptcy is assumed to cause a delay in investment which is not costly in itself. However, the imperfect competition in the product market means this delay puts the bankrupt firm at a strategic disadvantage which...

The firm can be regarded as consisting of several groups of investors and managers whose interests are regulated by the contracts between them. This survey covers the literature that looks at the nature of optimal financial contracts in the face of various asymmetries of information, control and...

A welfare analysis of a simple noisy rational expectations model is carried out. It is shown that the more information prices convey, the worse off everybody can be. However, the equilibrium where everybody is uninformed may not be Pareto optimal: imposing a tax on information gathering which...

A welfare analysis of a simple noisy rational expectations model is carried out. It is shown that the more information prices convey, the worse off everybody is. However, the equilibrium where everybody is uninformed may not be Pareto optimal: imposing a tax on information gathering which...