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We develop a two-tiered agency model that shows how rent-seeking behavior on the part of division managers can subvert the workings of an internal capital market. By rent-seeking, division managers can raise their bargaining power and extract greater overall compensation from the CEO. And because the CEO is herself an agent of outside investors, this extra(More)
1 We study how intermediation and asset prices in over-the-counter markets are affected by illiquidity associated with search and bargaining. We compute explicitly the prices at which investors trade with each other, as well as marketmakers' bid and ask prices, in a dynamic model with strategic agents. Bid–ask spreads are lower if investors can more easily(More)
We provide the impact on asset prices of search-and-bargaining frictions in over-the-counter markets. Under natural conditions, prices are lower and illiquidity discounts higher when counterparties are harder to find, when sellers have less bargaining power, when the fraction of qualified owners is smaller, or when risk aversion, volatility, or hedging(More)
This paper examines the impact of managerial entrenchment on corporate financing decisions. We build a dynamic contingent claims model in which financing policy results from a trade-off between tax benefits, agency conflicts, and contracting frictions. In our setting, managers do not act in the best interest of shareholders, but rather pursue private(More)
This paper provides a model of optimal investment timing in a decentralized firm under conditions of agency and asymmetric information. Using a real options approach, we show that an underlying option to invest can be decomposed into two components: a manager's option and an owner's option. The terms of the manager's option are determined by an optimal(More)
We propose a model of addiction based on three premises: (i) use among addicts is frequently a mistake; (ii) experience sensitizes an individual to environmental cues that trigger mistaken usage; (iii) addicts understand and manage their susceptibil-ities. We argue that these premises find support in evidence from psychology, neuroscience, and clinical(More)
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This paper provides an analysis of a non-cooperative but bilateral bargaining game between agents in a network. We establish that there exists an equilibrium that generates a cooperative bargaining division of the reduced surplus that arises as a result of non-pecuniary externalities between agents. That is, we provide a non-cooperative justification for a(More)
In a study of the European telecommunication-sector bond market, we find empirical evidence that a firm's new bond issue can temporarily inflate yield spreads of other bonds in its sector. We show that this effect seems unrelated to new fundamental information about the bond's issuer. Our results imply that an issuance of 15.5 billion Euros by Deutsche(More)