When firms make a decision about irreversible investment, they may not have complete confidence about their perceived probabilitymeasure describing future uncertainty. Theymay think other probabilitymeasures perturbed from the original one are also possible. Such uncertainty, characterized by not a single probability measure but a set of probability measures, is called “Knightian uncertainty.” ...

This paper provides a dynamic rational expectations equilibrium model in which investors have heterogeneous information and investment opportunities. Informed investors privately receive advance information about future earnings that is unrelated to current earnings. In response to good advance information, stock prices increase and informed investors act as trend chasers, increasing their inve...

I study asset prices in a two-agent production economy in which the worker has private information about her labor productivity. The shareholder offers an incentive compatible long-term labor contract, which partially insures the worker against labor income risk. I compare the model’s performance to settings with a competitive labor market, and with static labor contracts. My model successfully...

We study the dynamic general equilibrium of an economy where risk averse shareholders delegate the management of the firm to risk averse managers. The optimal contract has two main components: an incentive component corresponding to a non-tradable equity position and a variable “salary” component indexed to the aggregate wage bill and to aggregate dividends. Tying a manager’s compensation to th...

In the standard real options approach to investment under uncertainty, agents formulate optimal policies under the assumptions of risk neutrality or perfect capital markets. However, in most situations, corporate executives face incomplete markets either because they receive compensation packages that restrict their portfolios or because cash flows from the firm’s investment opportunities are n...

We study the dynamic general equilibrium of an economy where risk averse shareholders delegate the management of the firm to risk averse managers. The optimal contract has two main components: an incentive component corresponding to a non-tradable equity position and a variable ’salary’ component indexed to the aggregate wage bill and to aggregate dividends. Tying a manager’s compensation to th...

Payments systems operate virtually unnoticed in our daily lives and yet are crucial to a wellfunctioning economy and financial system. Because they explicitly link financial institutions, payments systems provide a way to transmit risk within, and between, financial systems. Ideally, payments systems should be designed and operated so as not to add risk in the event of a crisis. The author exam...

Article history: Received 16 July 2012 Received in revised form 23 August 2013 Accepted 3 September 2013 Available online 13 September 2013 The global financial crisis has caused controversial discussions about the capital base of the banking industry in Europe. Dividend cuts and omissions have been suggested as one possibility to improve the financial strength of banks by retaining earnings. H...

The purpose of this study is to identify the determinants of dividend policy in Malaysian financial institutions. Panel data set were constructed from 33 financial institutions in Malaysia for a period of 10 years (2001-2010). The results show a statistically significant positive relationship between dividend policy and profitability, which implies that Malaysian financial institutions distribu...

This paper empirically estimates a balanced-growth consistent, dynamic, structural model of intertemporal consumption and asset pricing that allows for, but does not assume, the GulPesendorfer preferences of temptation and self-control, using synthetic panel data constructed from the Consumer Expenditure Survey. One novelty of our model is that the cross-sectional distribution of wealth-consump...