Debt and the Optimal Incentives Over Time

Using a backward stochastic differential equation (BSDE) framework, we examine the principal-agent problem in a finite-horizon continuous-time setting where the agent’s effort is a continuous choice, and the principal can impose non-pecuniary punishments. We show that the agent’s optimal incentive...

Uploaded: Oct 3, 2025

Jun Aoyagi, Yuki Sato

When Silicon Valley Meets Wall Street: A Theory of Financial Overengineering

We study a model `a la Kyle (1985) where a trading firm hires a financial engineer to develop proprietary technology for an informational edge. The signal produced through this hiring is firm-specific and non-contractible, leading to a bilateral monopoly in...

Uploaded: Oct 3, 2025

Dongkyu Chang (City University of Hong Kong), Keeyoung Rhee, Aaron Yoon (Northwestern University)

Capital Structure and ESG Integration

We analyze how borrowers’ capital structure affects their incentives to integrate ESG. Borrowers may pursue socially valuable but financially underperforming projects to reduce expected payments to outside investors. These financial gains are amplified when the payoffs of investor-held securities are...

Uploaded: Oct 2, 2025

Bo Hu, Makoto Watanabe, Jun Zhang

A Model of Supplier Finance

We develop a theoretical model of supplier finance where an intermediary (e.g., a large buyer) pools trade credit and allocates liquidity across heterogeneous suppliers. Optimal supplier finance creates profit-driven liquidity cross-subsidization and explains selective supplier inclusion as an equilibrium outcome....

Uploaded: Sep 24, 2025

Itay Goldstein, Chong Huang, Liyan Yang

Open Banking under Maturity Transformation

This paper examines how the shift from closed banking to open banking --- where borrower data become accessible to more financial institutions --- affects lending competition, credit availability, and resource allocation in underbanked markets. We develop a common-value auction model...

Uploaded: Sep 16, 2025

Snehal Banerjee, Martin Szydlowski

Trading against Algorithms: Price Dynamics and Risk-sharing in a Market with Q-learners

We study pricing dynamics and risk-sharing in a market with rational investors and a Q-learning trader. The Q-learner’s trading generates a feedback loop in prices: their demand for the risky security depends on their perceived benefit from trading, which in...