We propose a simple model of the evolution of institutions, where leaders’ actions have a persistent effect by shaping the norms of the institutions they lead. This can lead to different long-run behaviors even for institutions with the same formal rules. The early history of leaders plays a crucial role in determining which outcome prevails. Every period, a leader decides to respect or abuse their...

We derive fundamental limits to demand analysis in financial markets from two foundational principles of asset pricing: (i) investors value assets for their payoffs, and (ii) prices satisfy no arbitrage. Given these principles, we show that (iii) asset demand curves are not structural objects and that even perfectly exogenous supply shocks provide incorrect price variation for demand estimation. The only exception is the knife-edge case...

We study the joint design of two prominent micro-prudential policy tools: bank
regulation that enforces operational standards via rules, and market discipline through
information disclosure. Disclosure can be state-contingent but creates a trade-off between
incentives and the ex-post protection of weak banks. Hence, regulators use rules
to maintain incentives and imperfect disclosure to provide ex-post insurance. In the
optimal design, there...

We consider a dynamic adverse selection model where privately informed sellers of divisible assets can choose how much of their asset to sell at each point in time to competitive buyers. With commitment, delay and lower quantities are equivalent ways to signal higher quality. Only the discounted quantity traded is pinned down in equilibrium. With spot contracts and observable past trades, there is a unique and fully separating...

We develop a rational theory of liquidity sentiments in which the market outcome in any given period depends on agents' expectations about market conditions in future periods. Our theory is based on the interaction between adverse selection and resale considerations giving rise to an intertemporal coordination problem that yields multiple self-fulfilling equilibria. We construct "sentiment" equilibria in which sunspots generate fluctuations in prices, volume, and...

We study contractual arrangements that support an efficient use of time in a knowledge-
intensive economy in which agents endogenously specialize in either production or consulting.
The resulting market for advice is plagued by informational problems, since both the diffi-
culty of the questions posed to consultants and the knowledge of those consultants are hard to
assess. We show that spot...