This paper develops a model of the credit market where the equilibrium lending mechanism, as well as the economy's aggregate investment and output, are endogenously determined. It focuses on two crucial elements. One is the micro theory of optimal lending mechanism. Instead of imposing a...

We construct a general equilibrium model with private information in which borrowers and lenders enter into long-term dynamic credit relationships. Each new generation of ex ante identical individuals is divided in equilibrium into workers and entrepreneurs. Workers save through financial...

A large and increasing fraction of the value of executives' compensation is accounted for by security grants. However, in most models of executive compensation, the optimal allocation can be implemented through a sequence of state-contingent cash payments. Security awards are redundant. In this...

M. Jensen and K. Murphy (1990,J. Polit. Econ.98, 225ï¾–264) argue that the observed payï¾–performance sensitivity of CEO compensation is too low to be consistent with formal agency theory. This paper uses a dynamic agency model to offer a resolution of the Jensen and Murphy puzzle. We...

In a dynamic model of the labor market with moral hazard, equilibrium layoff is modeled as termination of an optimal long-term contract. Termination, together with compensation (current and future), is used as an incentive device to induce worker efforts. I then use the model to study...

What determines the firm's choice of its mechanism of investment financing? How is the choice of the firm's financing mechanism at the micro level related to the economy's business cycle movements at the aggregate level? This paper develops a model of the credit market where the equilibrium...

This paper is concerned with evaluating alternative unemployment insurance (UI) schemes in a dynamic economy with moral hazard. We consider changes in the size and duration of UI benefits, and the effects of experience rating, and use a dynamic contracting approach to determine a benchmark...

I construct an equilibrium model of the labor market where workers and firms enter into dyamic contracts that can potentially last forever, but are subject to optimal terminations.  Upon a termination, the firm hires a new worker, and the worker who is terminated receives a termination...

#abstract# We develop a credit market model with adverse selection where risk-neutral borrowers self select because lenders make use of a costly screening technology. The model has some features which are similar to the Rothschild-Stiglitz adverse selection model. If an equilibrium exists it is...