I study the optimal choice of investment projects in a continuous-time moral hazard model with multitasking. While in the first best, projects are invariably chosen by the net present value (NPV) criterion, moral hazard introduces a cutoff for project selection which depends on both a project's...

We prove that under standard Lipschitz and growth conditions, the value function of all optimal control problems for one-dimensional diffusions is twice continuously differentiable, as long as the control space is compact and the volatility is uniformly bounded below, away from zero. Under...

In dynamic models driven by diffusion processes, the smoothness of the value function plays a crucial role for characterizing properties of the solution. However, available methods to ensure such smoothness have limited applicability in economics, and economists have often relied on either...

I study the optimal choice of investment projects in a continuous time moral hazard model with multitasking. While in the first best, projects are invariably chosen by the net present value (NPV) criterion, moral hazard introduces a cutoff for project selection which depends on both a...

The article develops a dynamic model that nests the rational expectations (RE) and differences of opinion (DO) approaches to study how investors use prices to update their valuations. When investors condition on prices (RE), investor disagreement is related positively to expected returns, return...

Regulatory restrictions and market frictions can constrain the aggregate quantity of long and short positions in a security. When these constraints bind, we refer to the security as scarce, and its price becomes distorted relative to its value in a frictionless market. We show that an otherwise...

Motivated by the insight of Keynes (1936) on the importance of higher-order beliefs in financial markets, we examine the role of such beliefs in generating drift in asset prices. We show that in a dynamic setting, a higher-order difference of opinions is necessary for heterogeneous beliefs to...

The empirical evidence on investor disagreement and trading volume is difficult to reconcile in standard rational expectations models. We develop a dynamic model in which investors disagree about the interpretation of public information. We obtain a closed-form linear equilibrium that allows us...

Firm-specific information can affect expected returns if it affects investor uncertainty about risk-factor loadings. We show that a stock's expected return is decreasing in factor-loading uncertainty, controlling for the average level of its factor loading. When loadings are persistent, learning...