In this paper, we show that whenever the agent's outside option is nonzero, the optimal contract in the continuous-time principal-agent model of Sannikov (2008) is reflective at the lower bound. This means the agent is never terminated or retired after poor performance. Instead, the agent is...

In this paper, we consider economies in which agents are privately informed about their skills, which are evolving stochastically over time. We require agents' preferences to be weakly separable between the lifetime paths of consumption and labor. However, we allow for intertemporal...

Pecuniary externalities often serve as a rationale for government intervention into financial markets. This article reviews the theory of market provision of liquidity in a Diamond-Dybvig economy and examines whether or not the possibility of retrade leads to pecuniary externalities and market...

In this article, we describe a time-consistency problem that can arise in the government's policy toward insolvent financial firms. We present this problem using a simple model in which shareholders of a large financial firm can raise low-cost debt financing and take on an excessive amount of...

asset income tax in this system is zero.