Loan rates are usually viewed as prices that shape borrower incentives, but they can also serve another role in a principal-agent problem by determining how informative repayment is about unobservable effort inside the bank. I study how the two roles interact: because loan rates move repayment probabilities differently for different borrowers, the bank designs its wage contract and its loan rate menu jointly. I show...

The vast majority of regulatory debates about the benefits of centralized trading assume that the set of securities designed by financial intermediaries is immune to the market structure in which trade occurs. In this paper, we consider a regulator who redesigns the market structure for certain financial contracts by introducing an exchange to increase liquidity, understanding that security design is endogenous. For a given market...

We develop a theory of financial innovation in which both market structure and the payoffs of the claims being traded are determined endogenously. Intermediaries use the cash flows of an underlying asset to design securities for investors. Demand for securities arises as investors choose markets then trade using strategies represented by quantity-price schedules. We show that intermediaries create increasingly riskier asset-backed securities when facing deeper...