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Contracts and Incentives

Paper Session

Sunday, Jan. 7, 2018 1:00 PM - 3:00 PM

Loews Philadelphia, Regency Ballroom C1
Hosted By: American Finance Association
  • Chair: Brett Green, University of California-Berkeley

Only Time Will Tell: A Theory of Deferred Compensation

Florian Hoffmann
,
University of Bonn
Roman Inderst
,
Goethe University Frankfurt
Marcus Opp
,
Stockholm School of Economics

Abstract

We characterize optimal contracts in settings where the principal observes informative signals over time about the agent's one-time action. If both are risk-neutral contract relevant features of any signal process can be represented by a deterministic informativeness process that is increasing over time. The duration of pay trades off the gain in informativeness with the costs resulting from the agent's liquidity needs. The duration is shorter if the agent's outside option is higher, but may be non-monotonic in the implemented effort level. We discuss various applications of our characterization, such as to compensation regulation or the optimal maturity structure of an entrepreneur's financing decisions.

Do Economists Swing for the Fences after Tenure?

Jonathan Brogaard
,
University of Washington
Joseph Engelberg
,
University of California-San Diego
Edward Van Wesep
,
University of Colorado-Boulder

Abstract

Using a sample of all academics who pass through top 50 economics and finance departments from 1996 through 2014, we study whether the granting of tenure leads faculty to pursue riskier ideas. We use the extreme tails of ex-post citations as our measure of risk and find that both the number of publications and the portion consisting of “homeruns” peak at tenure and fall steadily for a decade thereafter. Similar patterns hold for faculty at elite (top 10) institutions and for faculty who take differing time to tenure. We find the opposite pattern among poorly-cited publications: their numbers rise post-tenure.

The Paradox of Pledgeability

Jason Donaldson
,
Washington University-St. Louis
Denis Gromb
,
HEC Paris
Giorgia Piacentino
,
Columbia University

Abstract

We develop a model in which collateral serves to protect creditors from the claims of other creditors. We find that borrowers rely most on collateral when cash flow pledgeability is high, because this is when it is easy to take on new debt, diluting existing creditors. Creditors thus require collateral for protection against being diluted. This causes a collateral rat race that results in all borrowing being collateralized. But collateralized borrowing has a cost: it encumbers assets, constraining future borrowing and investment, i.e. there is a collateral overhang. Our results suggest that the absolute priority rule, by which secured creditors are senior to unsecured creditors, may have an adverse effect—it may trigger the collateral rat race.
Discussant(s)
Felipe Varas
,
Duke University
Michael Powell
,
Northwestern University
Hongda Zhong
,
London School of Economics
JEL Classifications
  • G3 - Corporate Finance and Governance