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Acknowledgments: The helpful comments of Maitreesh Ghatak (the editor), two anonymous referees, Peter ABSTRACT We examine the characteristics of endogenously-determined optimal incentive contracts for agents who envy each other and work for a risk-neutral (non-envious) principal. Envy makes each agent care not only about absolute consumption but also about(More)
We develop a model of the dynamic interaction between CEO over-confidence and dividend policy. The model shows that an overcon-fident CEO views external financing as costly and hence builds financial slack for future investment needs by lowering the current dividend payout. Consistent with the main prediction, we find that the level of dividend payout is(More)
An enduring puzzle is why credit rating agencies (CRAs) use a few categories to describe credit qualities lying in a continuum, even when ratings coarseness reduces welfare. We model a cheap-talk game in which a CRA assigns positive weights to the divergent goals of issuing firms and investors. The CRA wishes to inflate ratings but prefers an unbiased(More)
Acknowledgments: We thank seminar participants at Duke University (April 2001) and at the Colorado Finance Conference (2002) in Estes Park for helpful comments on an earlier version of this paper. We are grateful to Arnoud Boot and particularly an anonymous referee for incisive comments. ABSTRACT We model agents whose preferences exhibit envy. An envious(More)
This paper develops a theory of the relationship between the leverage ratios of banks and borrowers who take loans to purchase houses. The bank's payoff depends primarily on the value of the house that serves as collateral backing the loan. The analysis is in the context of a two-period model in which house prices and the capital structure decisions of(More)
We posit that screening IPOs requires specialized labor which, in the short run, is in fixed supply. Hence, a sudden increase in demand for IPO financing increases the compensation of IPO screening labor. Increased compensation results in reduced screening which encourages sub-marginal firms to enter the IPO market, further increasing the demand for(More)
In this paper, we model the effect of labor market constraints on the Initial Public Offering (IPO) activity of investment banks. We posit that identifying project quality requires specialized screening labor that takes time to train. Positive shocks to economy's production frontier stimulate new equity issues. At this higher level of demand, screening(More)
This paper develops a theory of " infectious leverage " in financial markets in which the lender's payoff depends heavily on the value of the collateral backing the loan. There are two main results. First, leverage is an " infectious " phenomenon in that high leverage among borrowers also leads to high leverage among lenders. There is thus a multiplicative(More)