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...

We study whether regulators should reveal stress test results that contain imperfect information about banks' financial health. Although disclosure restores market confidence in banks, it misclassifies some healthy banks as risky. This encourages banks to choose portfolios deemed safe by...

We develop a model of bailout stigma in which accepting a bailout signals a firm's balance-sheet weakness and reduces its funding prospects. To avoid stigma, high-quality firms withdraw from subsequent financing after receiving bailouts or refuse bailouts altogether to send...

We analyze how borrowers’ capital structure affects their incentives to integrate ESG. Borrowers may undertake socially valuable but financially underperforming projects when doing so lowers expected repayments to outside investors. This repayment saving is larger under more repayment-sensitive securities—such as...

We analyze how blockchain-based financing affects capital allocation to provide early guidance for DeFi regulation. Competition with conventional financial firms raises borrowing costs, incentivizing DeFi firms to shirk their responsibility for managing investors’ funds. While blockchain technology enables collective monitoring,...

Due diligence is common practice prior to the execution of large transactions. We propose a model of due diligence and analyze its effect on prices, payoffs, and deal completion. In our model, if the seller accepts an offer, the acquirer...