We claim that the stock market encourages business creation, innovation, and growth by allowing the recycling of ``informed'' capital. Due to incentive problems, financing new innovative businesses requires entrepreneurs either to sustain a tight relationship with monitors (banks, venture...

This paper develops a tractable general equilibrium model in which money markets provide structural funding to some banks. When bank default risk becomes significant, retail deposit insurance creates an asymmetry between banks that operate in savings-rich regions, which can remain financed at...

In this paper we argue that firms' financial distress should play a greater role in the macroeconomic analysis of the business cycle. We provide a nontechnical account of a general equilibrium model that exhibits financially-driven equilibrium cycles. We show that the empirical evidence is...

Social contacts help workers to find jobs, but those jobs need not be in the occupations where workers are most productive. Hence social contacts can generate mismatch between a worker's occupational choice and his comparative productive advantage. Thus economies with dense social networks can...

This paper characterizes the optimal securities for venture capital finance in an environment with multiple investment stages and double-sided moral hazard in the relationship between entrepreneurs and venture capitalists. We show that if the conditions relevant for continuation into later...

The literature on financial imperfections and business cycles has focused on propagation mechanisms. In this paper we model a pure reversion mechanism, such that the economy may converge to a two-period equilibrium cycle. This mechanism confirms that financial imperfections may have a dramatic...