We demonstrate a novel link between relationship-specific investments and risk in a setting where division managers operate under moral hazard and collaborate on joint projects. Specific investments increase efficiency at the margin. This expands the scale of operations and thereby adds to the compensation risk borne by the managers. Accounting for this investment/risk link overturns key findings from prior incomplete contracting studies.
In many industries, product design and manufacturing lead times are sufficiently long that both the quality level of a product and the amount of inventory produced must be determined before a firm knows what the actual demand will be. In this paper, we conduct a theoretical analysis of such a setting. We first consider a centralized channel and characterize the optimal decisions by establishing relationships that must hold between the elasticity of cost of quality and the elasticity of revenue and show that quality and inventory are strategic substitutes.
We consider the problem faced by a service platform that needs to match supply with demand, but also to learn attributes of new arrivals in order to match them better in the future. We introduce a benchmark model with heterogeneous workers and jobs that arrive over time. Job types are known to the platform, but worker types are unknown and must be learned by observing match outcomes. Workers depart after performing a certain number of jobs. The payoff from a match depends on the pair of types and the goal is to maximize the steady-state rate of accumulation of payoff.
Post-2008 financial regulatory changes largely have been a failure. They have produced high compliance costs, while constructing regulatory mechanisms that are unlikely to achieve their intended objectives. Furthermore, financial regulation increasingly has adopted processes that are inconsistent with adherence to the rule of law, which not only threaten the fundamental norms on which our democracy is founded but also undermine the effectiveness of regulation.
Ethics in business is a major topic both in the social sciences and in business itself. Anthropologists, long attendant to the intersection of ethics and practice, are particularly well suited to offer vital insights on the subject. This timely collection considers a range of ethical issues in business through the examination of anthropologically informed theory and case examples.
Recent bank regulations have imposed large compliance costs on banks of all sizes, and have increased the costs of borrowing to both consumers and companies. But in this summary of his recent book, the author argues that the problems with banking system regulation go well beyond the excessive costs. Indeed, Dodd-Frank and other post-crisis regulatory reforms have failed to address the major shortcomings that produced the crisis of 2007–2009. Most importantly, excessive housing finance risk was not dealt with adequately, and is already on the rise again.
The incentive contracts of delegated investment managers may have unintended negative consequences for asset prices. I show that managers who are compensated for relative performance optimally shift their portfolio weights towards those of the benchmark when volatility rises, putting downward price pressure on overweight stocks and upward pressure on underweight stocks. In quarters when volatility rises most (top quintile), a portfolio of aggregate-underweight minus aggregate-overweight stocks returns 3% to 8% per quarter depending on the risk adjustment.
Columbia Business School’s position in the heart of New York City places it at the most important nexus of the global financial industry. It’s no coincidence that finance and economics are at the very core of Columbia Business School’s research and scholarship.
We introduce a tractable dynamic monitoring technology into a continuous-time moral hazard problem and study the optimal long-term contract between principal and agent. Monitoring adds value by allowing the principal to reduce the intensity of performance-based incentives, reducing the likelihood of costly termination. We present a novel characterization of optimal dynamic incentive provision when performance-based incentives may decline continuously to zero. Termination happens in equilibrium only if its costs are relatively low.