We show theoretically that, in the presence of persistent productivity shocks, the reliance on self-enforcing contracts due to limited legal enforcement may provide a possible rationale why countries with the worse rule of law might exhibit: (i) higher aggregate TFP volatilities, (ii) larger dispersion of firm-level productivity, and (iii) greater wage inequality. We also provide suggestive empirical evidence consistent with the model’s aggregate implications. Finally,...

We study a continuous-time model of joint leverage and liquidity management, when shareholders cannot commit to future financial policies. Our model yields a closed-form characterization of equilibrium financial policies and asset pricing dynamics. While shareholders typically resist debt reductions to avoid subsidizing creditors in canonical models (i.e., the “leverage ratchet effect”), our model predicts that shareholders can use cash to reduce a portion of outstanding...

We study optimal contracting for innovation projects involving initial exploration followed by exploitation upon success, integrating the experimentation literature with dynamic corporate finance. The shape of the exploitation payoff frontier — not just its level — determines the optimal contract for experimentation and its duration. When the exploitation stage involves moral hazard and limited liability, the principal's continuation profit is inverted U-shaped in the agent's...

I analyze a dynamic model of concurrent bargaining in which multiple prospective buyers compete to trade with an informed seller. When the seller maintains confidentiality over buyers' past offers, buyers may engage in competitive ``price experimentation'': buyers risk early losses to subsequently acquire informational advantages over competitors and expect to earn future information rents. Due to price experimentation, the seller may benefit from maintaining confidentiality...