We show that the availability of credit ratings (or other public information) increases the allocative efficiency of cash flows by reducing costly retention, but reduces lending standards and can lead to an oversupply of credit. These findings are in contrast to regulators' view of credit ratings as a "disciplining device." Moreover, improved screening does not solve the problem; as banks' screening technology becomes more precise,...

We study a bargaining model in which a buyer makes frequent offers to a privately informed seller, while gradually learning about the seller’s type from “news.” We show that the buyer’s ability to leverage this information to extract more surplus from the seller is remarkably limited. In fact, the buyer gains nothing from the ability to negotiate a better price despite the fact that a...

We study the optimal allocation of tasks over the life cycle of an innovative project. Innovation requires two complementary activities, research and development, both subject to moral hazard. Agents also privately observe the quality of discoveries, so the principal must elicit truthful reports to avoid costly mistakes. Assigning both tasks to a single "solo operator" avoids free-riding but creates a double-deviation problem: the agent can...

We study how artificial intelligence affects welfare in general equilibrium when production requires both finding and solving problems. Unsolved problems are unexploited opportunities or unmet needs that agents find in a congested sector. Problems are solved in layered hierarchies in which agents can ask for help. Firms may adopt a replicable AI agent in either activity. AI deployed in solving problems splits the human knowledge...

We study how supply disruptions interact with monopoly pricing, inventory management, and consumer stockpiling in a continuous-time model. Preemption incentives---consumers prefer to stock up before a price hike while the firm prefers to hike before consumers stock up---lead to an equilibrium with gradual stockpiling and endogenous uncertainty over the timing of a price hike, which can trigger a run at the disruption onset. Consumer storage...

Due diligence is common practice prior to the execution of large transactions. We propose a model of due diligence and analyze its effect on prices, payoffs, and deal completion. In our model, if the seller accepts an offer, the acquirer has the right to gather information and chooses when to execute the transaction. In equilibrium, the acquirer engages in “too much” due diligence. Our quantitative...