We study how financial system architecture evolves through the development of banks and financial markets. The predominant existing view is that banks and markets compete, which often contradicts actual patterns of development. We show that banks and markets exhibit three forms of interaction:...

This paper develops a theory in which heterogeneity in bank capital choices arises in a general equilibrium despite ex ante identical banks. In a future state, the credit market is partially frozen in a crisis - high-capital banks have continued access to funding liquidity but low-capital banks...

While much is made of the ills of “short-termism” in executive compensation, in reality very little is known empirically about the extent of short-termism in CEO compensation. This paper develops a new measure of CEO pay duration that reflects the vesting periods of different components of...

In extant theories of why banks exist, banks originate and hold loans, and this skin in the game is essential for the provision of intermediation services. In reality, loans are traded in secondary markets, raising the question: does trading diminish the value of the bank's core intermediation...

We show the anticipation of a bailout of distressed firms worsens ex ante adverse selection, causing a market freeze and inviting government intervention - a "bailout trap." When firms of heterogenous qualities raise financing, high-quality firms are willing to bear adverse selection costs...