We study the relative strengths and weaknesses of principles based and rules based systems of regulation. In the principles based systems there is clarity about the regulatory objectives but the process of reverse-engineer these objectives into meaningful compliance at the firm level is...

Just as it may be optimal to regulate firms that produce negative externalities, it may be optimal to provide subsidy to firms that produce positive externalities. This paper studies the optimal provision of subsidy to maximize the value of these externalities, and also whether there are policy...

This paper analyzes the problem of designing optimal financial regulation when regulatory arbitrage allows competition from other regulators, and whether regulatory harmonization as a means to curb regulatory arbitrage is desirable. We find (i) that regulatory arbitrage and competition matter in...

This paper analyzes how debt forgiveness and exchange offers resolve inefficiencies associated with debt overhang in a dynamic setting. In a static model debt forgiveness and exchange offers are equivalent -- in a dynamic model they are not. Debt forgiveness is feasible as a means to restructure...

We study two issues: the relationship between loan monitoring and loan risk and the corporate value of banks' investments in loan monitoring systems. We find that dynamic monitoring of loans, where the bank is scanning in real time for events that may be of relevance to loan quality, tend to...

We address the problem of optimal form and timing of FDI subsidy, and the impact of competition on these. We find that the optimal subsidy must include an element of discouragement against delaying the timing of the investment for the firm to prevent the firm from extracting rent from the host...

Separating good and bad borrowers is a key role of banks. To do this, banks need monitoring systems and they need to monitor risky loans. We show that the investment in monitoring systems encourages risk taking, which leads to higher regulatory costs for the bank. This effect is so strong that...

This paper analyzes the theoretical link between governance (defined loosely as the degree of protection offered to outside shareholders), and the cost of borrowing. We find, consistent with empirical evidence, that improvements in governance reduce the likelihood of default. Also, we find that...