We develop a stylized model of efficient contracting in which firms compete for CEOs. The optimal contracts are designed to retain and insure CEOs. The retention motive explains pay-for-luck in executive compensation, while the insurance feature explains asymmetric pay-for-luck. We show that the...

It is established that the standard principal-agent model cannot explain the structure of commonly used CEO compensation contracts if preferences with constant relative risk aversion are postulated. However, we demonstrate that this model has potentially a high explanatory power with preferences...

This paper shows that the informativeness principle, as originally formulated by Holmstrom (1979), does not hold if the first-order approach is invalid. We introduce a "generalized informativeness principle" that takes into account non-local incentive constraints and holds generically, even...

We describe a new type of bank liability, reverse convertible bonds, that help prevent bank runs that lead to bank failures (ex-post), and inefficient risk-taking (ex-ante). These bonds are short-term debt that automatically convert into equity following a missed debt repayment. They can be...

The informativeness principle demonstrates that a contract should depend on informative signals. This paper studies how it should do so. Signals that indicate the output distribution has shifted to the left (e.g. weak industry performance) reduce the threshold for the manager to be paid; those...

The paper presents a theory of optimal transparency when financial institutions are exposed to rollover risk. Transparency enhances the stability of the financial system during crises but has destabilizing effects in normal economic times. Thus, the regulator optimally increases transparency...

We present a theory of optimal transparency when banks are exposed to rollover risk. Disclosing bank-specific information enhances the stability of the financial system during crises, but has a destabilizing effect in normal economic times. Thus, the regulator optimally increases transparency...

This paper shows that the informativeness principle does not automatically extend to settings with limited liability. Even if a signal is informative about effort, it may have no value for contracting. An agent with limited liability is paid zero for certain output realizations. Thus, even if...

We propose a new methodology to identify non-compliance with FASB guidance with respect to the dividend yield and the volatility rate for stock option valuation disclosures. The FASB gives firms some flexibility in choosing these parameters. Accordingly, we take into account a number of...