We derive the optimal compensation contract in a principal-agent setting in which outcome is used to provide incentives for both effort and risky investments. To motivate investment, optimal compensation entails rewards for high as well as low outcomes, and it is increasing at the mean outcome...

Traditional life-cycle models conclude that individuals should be fully invested in stocks when young -- in stark contrast to observed stock holdings -- and then gradually replace stocks with bonds as retirement is approaching. We show that a carefully specified and calibrated model of...

In a rich, calibrated life-cycle model, we show that well-designed mandatory pension plans significantly improve the welfare of individuals procrastinating on savings or not investing in stocks, and even improve rational individuals' welfare through a return tax advantage and fair annuitization....

We characterize the solution to the consumption and investment problem of a time-additive power utility investor in a continuous-time dynamically complete market with stochastic changes in the opportunity set. It is demonstrated that under stochastic interest rates the investor optimally hedges...

With constrained portfolios contingent claims do generally not have a unique price that rules out arbitrage opportunities. Earlier studies have demonstrated that, when there are no constraints on the hedge portfolio, a no-arbitrage price interval for any contingent claim exists. I consider the...

We study the consumption and investment choice of a price-taking utility-maximizing investor having access to trade in stocks and interest-rate dependent assets with a stochastically evolving term structure of interest rates. We derive explicit expressions for the optimal investment strategy of...

This paper generalizes the stochastic duration concept of Cox, Ingersoll, and Ross (1979) to multi-factor diffusion models of the term structure of interest rates. The stochastic duration has time as its unit and measures the sensitivity of the price of a bond (or portfolio of bonds) with...