In a continuous-time model, a risk-neutral decision-maker chooses the volatility of a state variable and is terminated when the variable falls below a threshold. I provide economically interpretable conditions under which the decision-maker becomes risk averse endogenously and minimizes volatility near termination, even if she faces myopic incentives to gamble for resurrection. The conditions introduce forward-looking incentives to preserve economic rents. I show these conditions...

We develop a model of index-linked rebalancing around reconstitution events. Index trackers trade off execution costs against tracking-error concerns, while speculators maximize profits given expected index-linked demand. The model shows speculators effectively act as liquidity providers at index reconstitution, and trading costs decline as speculator competition increases. With enough competition, even loose index trackers optimally rebalance at index reconstitution. The model rationalizes concentrated reconstitution-day trading...

I characterize the dynamics of incentives in an optimal contract with investment delegation, moral hazard, and uncertainty about the agent’s productivity. The principal increases the agent’s incentives after good performance in order to delegate more capital to an agent with higher perceived productivity, thus implementing a convex pay-for-performance scheme. Moreover, the principal commits to reduce the agent’s future incentives in order to mitigate ex ante...