We offer a novel explanation for the use of collateral based on the dual function of banks to provide credit and assess the borrowers credit risk. There is no moral hazard or adverse selection on the part of borrowers the only inefficiency is that banks cannot contractually commit to providing...

We consider the security design problem of a lender who can assess the borrower s project prior to making an accept or reject decision. The lender s subjective assessment is represented by a private signal. Unless the lender extracts the full surplus from the project, her cutoff signal above...

Future wage payments drive a wedge between total firm output and the output share received by the firm s owners, thus potentially distorting strategic decisions by the firm s owners such as, e.g., whether to continue the firm, sell it, or shut it down. Using an optimal contracting approach, we...

We offer a novel explanation for the use of collateral based on the dual function of banks to provide credit and assess the borrower s credit risk. There is no moral hazard or adverse selection on the part of borrowers the only inefficiency is that banks cannot contractually commit to providing...

This paper compares optimal financial contracts with centralized and decentralizedfirms. Under centralized contracting headquarters raises funds on behalf of multiple projects and then allocates the funds on the firm s internal capital market. Under decentralized contracting each project raises...

This paper considers the potential cost of subjective judgement and discretion in credit decisions. We show that subjectivity and discretion in the evaluation of borrowers create an incentive problem on the part of the lender. The lender s incentives to accept or reject a borrower depend only on...

We study optimal financial contracting for centralized and decentralized firms. Under centralized contracting, headquarters raises funds on behalf of multiple projects. Under decentralized contracting, each project raises funds separately on the external capital market. The benefit of...