Peter M. DeMarzo

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We propose a boundedly-rational model of opinion formation in which individuals are subject to persuasion bias; that is, they fail to account for possible repetition in the information they receive. We show that persuasion bias implies the phenomenon of social influence, whereby one’s influence on group opinions depends not only on accuracy, but also on how(More)
We derive the optimal dynamic contract in a continuous-time principal-agent setting, and implement it with a capital structure (credit line, long-term debt, and equity) over which the agent controls the payout policy. While the project’s volatility and liquidation cost have little impact on the firm’s total debt capacity, they increase the use of credit(More)
A good reputation can be an effective bond for honest behavior in a community of traders if members of the community know how others have behaved in the past even if any particular pair of traders meets only infrequently. In a large community, it would be impossibly costly for traders to be perfectly informed about each other's behavior, but there exist(More)
We develop an agency model of financial contracting. We derive long-term debt, a line of credit, and equity as optimal securities, capturing the debt coupon and maturity; the interest rate and limits on the credit line; inside versus outside equity; dividend policy; and capital structure dynamics. The optimal debt-equity ratio is history dependent, but debt(More)
We characterize the optimal long-term financial contract in a setting in which a risk-neutral agent with limited capital seeks external financing for a project which pays stochastic cash flows over many periods. These cash flows are unobservable and unverifiable by outside investors. The agent can be induced to pay investors via the threat of the loss of(More)
We examine the pervasive view that “equity is expensive,” which leads to claims that high capital requirements are costly and would affect credit markets adversely. We find that arguments made to support this view are either fallacious, irrelevant, or very weak. For example, the return on equity contains a risk premium that must go down if banks have more(More)
In this paper we study the effects of transaction costs on asset prices. We assume an overlapping generations economy with a riskless, liquid bond, and many risky stocks carrying proportional transaction costs. We obtain stock prices and turnover in closed-form. Surprisingly, a stock’s price may increase in transaction costs, and a more frequently traded(More)