Probability Pricing

This paper extends traditional cash-flow pricing to analyze the willingness-to-pay for changes in probabilities, that is, probability pricing. We show that an agent’s willingness-to-pay for an arbitrary probability perturbation can be expressed as a cash-flow pricing formula for hypothetical cash...

Uploaded: Aug 4, 2025

Martin Dumav, William Fuchs, Jangwoo Lee

Exploitation Payoffs and Incentives for Exploration

We study a dynamic moral hazard problem involving initial exploration followed by exploitation, merging experimentation with dynamic corporate finance. We show how the methods and conclusions of the experimentation literature change when considering the exploitation phase’s non-monotonic payoff structure that...

Uploaded: Aug 4, 2025

Marcus Opp

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...