Moral hazard and the quest for linear contracts

30 min or 60 min fine. This note derives three conditions under which affine or piecewise-linear contracts emerge in the classical principal-agent model of \cite{Holmstrom1979}. Specifically, augmenting fixed pay with equity or call options is optimal when: (1) the agent...

Uploaded: Aug 3, 2025

Fenghua Song, Anjan Thakor

The Color of Finance: Can Bank Capital Requirements Influence Transition to a Green Economy?∗

Using a general equilibrium model in which brown (polluting) and green (clean-energy) firms compete and seek financing from banks, non-banks, or the capital market, we examine the effects of higher capital requirements on brown bank loans designed to discourage such...

Uploaded: Aug 2, 2025

Christian Opp, Xingtan Zhang

Environmental Disclosures in Global Supply Chains

Economies committed to environmental goals, such as mitigating global warming, face the challenge that pollution and emissions largely originate from activities in foreign countries. While governments may attempt to tax domestic firms’ sourcing of inputs from brown international firms, such...

Uploaded: Aug 1, 2025

Zhaohui Chen, Juraj Foldes

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: Aug 1, 2025

Milena Wittwer

Imperfect Competition and Moral Hazard in Financial Markets

I develop a model to compare the effects of moral hazard and imperfect competition in intermediary asset pricing, motivated by empirical evidence from rich trade-level data in Canadian stock markets. Intermediaries invest in multiple risky assets on behalf of their...

Uploaded: Jul 30, 2025

Agostino Capponi, Michael Lee, Brian Zhu

Privacy-Enhanced Payment Systems

Technological innovations enable digital privacy, but pose fundamental conflicts between freedom and control. We study the design of privacy-enhanced payment systems, valued for legitimate transactions but vulnerable to illicit financial activities. We distinguish two dimensions of privacy: identity privacy, the...