For financial contracting with costly state verification, it is shown that arrangements involving an ex ante commitment to monitoring regardless of returns tend to dominate if the borrower's initial wealth is small and the investment outlay is large, arrangements involving conditioning of...

This paper studies the relation between discrete-time and continuous-time principal-agent models. We derive the continuous-time model as a limit of discrete-time models with ever shorter periods and show that optimal incentive schemes in the discrete-time models approximate the optimal incentive...

The paper studies the relative efficiency of intermediated finance and direct finance in a variant of Diamond's (1984) model of ''financial intermediation as delegated monitoring''. Project sizes are taken to be variable so a choice must be taken on whether to fund a small number of projects on...

Under constraints of Bayesian interim incentive compatibility and individual rationality, the paper characterizes second-best allocations for the provision of a public good. If benefit and cost functions do not depend on the number of participants, it is always beneficial to have more...

The paper takes issue with the suggestion of Holmström and Milgrom (1987) that optimal incentive schemes in Brownian-motion models of principal-agent relations with effort costs depending on mean returns are linear in cumulative total returns. In such models, if actions are restricted to...

The paper discusses the role of banks and markets in the allocation of risks in an economy. Starting from a discussion of risk allocation in the Arrow-Debreu model, it criticizes the view that banks and markets are substitutes. Instead it is argued that markets are made by intermediaries and...

The paper reviews the literature on the role of the financial system for corporate finance and control and takes stock of our understanding of the issues. Topics covered include the information efficiency of organized markets, the significance of information efficiency for corporate control, the...

This paper studies the impact of wage growth on the evolution of employment in an intertemporal general-equilibrium model with endogenous productivity growth. For real wage growth above laissez-faire levels, we obtain steady-state equilibria in which productivity grows at the same rate as wages,...

The paper studies insurance with asymmetric information in a system of contingent-claims markets with a finite number of risk averse agents. If the informed trader is a price taker, equilibrium prices disclose his information and, conditional on this information, equilibrium outcomes are...

We develop a model of endogenous growth in an economy with competitive markets. Technical change arises from the intentional actions of entrepreneurs looking for profits. Opportunities for such profits stem from inframarginal rents. This provides a counterexample to the widespread view that...