We put forward a general equilibrium model that links the cross-section variation of expected returns to firms’ life cycle dynamics. In the model all assets have the same exposure to short-run consumption risks, but di¤er in their exposure to long-run consumption risks (Bansal and Yaron...

We develop a firm-dynamics model with moral hazard, which arises because some productivity shocks are privately observed by firm managers only. We characterize the optimal contract and its implications for firm size, growth, and managerial pay-performance sensitivity, which allow us toquantify...

We present a general equilibrium-mechanism design model with two-sided limited commitment that accounts for the observed heterogeneity in firms' investment, payout and CEO-compensation policies. In the model, shareholders cannot commit to holding negative net present value projects, and managers...

We extend the neoclassical investment model Hayashi (1982) to allow for limited commitment on compensation contracts. We consider three types of limited commitment: i) managers cannot commit to compensation contracts that provide lower continuation utility than their outside options; ii)...

We propose to measure growth opportunities by firms' exposure to idiosyncratic volatility news. Theoretically, we show that the value of a growth option increases in idiosyncratic volatility but its response to volatility of aggregate shocks can be either positive or negative depending on option...

We put forward an equilibrium model that links the cross-sectional variation in expected equity returns to firms' life cycle dynamics. The model features two sources of risks: short and long-run fluctuations in aggregate consumption, as in Bansal and Yaron (2004). Growth assets in the model are...

We present a dynamic general equilibrium model with heterogeneous firms. Owners of firms delegate investment decisions to managers, whose consumption and investment decisions are private information. We solve the optimal contracts and characterize the implied general equilibrium. Our calibrated...

We present a dynamic general equilibrium model with heterogeneous firms. Owners of firms delegate investment decisions to managers, whose consumption and investment decisions are private information. We solve the optimal contracts and characterize the implied general equilibrium. Our calibrated...

We present a dynamic general equilibrium model with heterogeneous firms. Owners of the firms delegate investment decisions to managers, whose consumption and investment are private information. We solve the optimal incentive compatible contracts and characterize the implied firm dynamics....