"Limits of Arbitrage" theories hypothesize that the marginal investor in a particular asset market is a specialized arbitrageur rather than a diversified representative investor. We examine the mortgage-backed securities (MBS) market in this light. We show that the risk of homeowner prepayment,...

International Macroeconomics has long sought an explanation for current account fluctuations that matches the data. The approaches have typically focused on better models and new macroeconomic variables. We demonstrate the limitations of this approach by showing that idiosyncratic shocks are an...

A key open question in economics is the practical, portable modeling of bounded rationality. In this short note, I report ongoing progress that is more fully developed elsewhere. I present some results from a new model in which the decision-maker builds a simplified representation of the world....

This article presents a market equilibrium model of CEO assignment, pay, and incentives under risk aversion and moral hazard. Each of the three outcomes can be summarized by a single closed-form equation. In the presence of moral hazard, assignment is distorted from positive assortative matching...

This article develops a framework that delivers tractable (i.e., closed-form) optimal contracts, with few restrictions on the utility function, cost of effort, or noise distribution. By modeling the noise before the action in each period, we force the contract to provide correct incentives...

The distribution of city populations has attracted much attention, in part because it constrains models of local growth. However, there is no consensus on the distribution below the very upper tail, because available data need to rely on "legal" rather than "economic" definitions for medium and...