Papers by Bengt Holmström
The intertemporal CAPM predicts that an asset's price is equal to the expectation of the product ... more The intertemporal CAPM predicts that an asset's price is equal to the expectation of the product of the asset's payoff and a representative consumer's intertemporal marginal rate of substitution. This paper develops an alternative approach to asset pricing based on corporations' desire to hoard liquidity. Our corporate finance approach suggests new determinants of asset prices such as the distribution of wealth within the corporate sector and between the corporate sector and the consumers. Also, leverage ratios, capital adequacy requirements, and the composition of savings affect the corporate demand for liquid assets and thereby interest rates. The paper first sets up a general model of corporate demand for liquid assets, and obtains an explicit formula for the associated liquidity premia. It then derives some implications of corporate liquidity demand for the equity premium puzzle, for the yield curve, and for the state-contingent volatility of asset prices. 1 The intertemporal consumption-based asset pricing model (e.g., Rubinstein
Columbia University Press eBooks, Dec 31, 2009
The U.S. corporate governance system has recently been heavily criticized, largely as a result of... more The U.S. corporate governance system has recently been heavily criticized, largely as a result of failures at Enron, WorldCom, Tyco and some other prominent companies. Those failures and criticisms, in turn, have served as catalysts for legislative change (Sarbanes-Oxley Act of 2002) and regulatory change (new governance guidelines from the NYSE and NASDAQ). In this paper, we consider two questions. First, is it clear that the U.S. system has performed that poorly; is it really that bad? Second, will the changes lead to an improved U.S. corporate governance system? We first note that the broad evidence is not consistent with a failed U.S. system. The U.S. economy and stock market have performed well both on an absolute basis and relative to other countries over the past two decades. And the U.S. stock market has continued to outperform other broad indices since the scandals broke. Our interpretation of the evidence is that while parts of the U.S. corporate governance system failed under the exceptional strain of the 1990s, the overall system, which includes oversight by the public and the government, reacted quickly to address the problems. We then consider the effects that the legislative, regulatory, and market responses are likely to have in the near future. Our assessment is that they are likely to make a good system better, though there is a danger of overreacting to extreme events.
This is an extensively revised version of two earlier papers that circulated as "A Theory of Firm... more This is an extensively revised version of two earlier papers that circulated as "A Theory of Firm Scope" and "Vision and Firm Scope." Some of the material presented here formed part of the first author's
Asymmetric information can reduce trade (possibly to zero) due to adverse selection. Symmetric in... more Asymmetric information can reduce trade (possibly to zero) due to adverse selection. Symmetric information can facilitate trade. We show that trade between agents is maximized, and welfare highest, when neither party to a transaction has any information about the future payoffs of the securities used to trade. Trade is best implemented by debt which preserves ignorance because it provides the smallest incentive for private information production, which creates adverse selection. Debt's value is also least sensitive to public signals. In this economy policies that increase transparency would reduce welfare. Finally, even if there is adverse selection in the market, debt maximizes the amount of trade. For the economy as a whole there is a systemic risk of using debt to provide liquidity: an aggregate shock, if bad enough, can be made worse by triggering private information production, causing adverse selection when debt becomes information-sensitive. + Thanks to participants at the 2009 Yale Cowles Foundation Summer Economic Theory Conference, and at the New York Fed Liquidity Working Group meeting, and to Yukitoshi Matsushita for comments and suggestions. 2 Demarzo and Duffie (1999) is also related; they study the optimal security to be issued by a privately-informed issuer, and provide conditions under which that security is debt. Also, there is a large literature on debt in firms' capital structures has developed based on agency issues in corporate finance. Townsend (1979) and Hart and Moore (1995, 1998) argue that debt is optimal for monitoring or controlling borrowing firms whose returns are not observable or verifiable, respectively. Also, see, e.g., Myers and Majluf (1984), Aghion and Bolton (1992), and Bolton and Scharfstein (1990). The settings studied by these authors are not that of trading or liquidity provision, that is, the focus is the primary market not the secondary market. Also, in most cases, these papers assume ex ante asymmetric information while we ask how security design can prevent asymmetric information from arising in the first place.
Cambridge University Press eBooks, Sep 21, 2009
The American Economic Review, Apr 1, 2017
Banks produce short-term debt for transactions and storing value. The value of this debt must not... more Banks produce short-term debt for transactions and storing value. The value of this debt must not vary over time so agents can easily trade it at par like money. To produce money-like safe liquidity, banks keep detailed information about their loans secret, reducing liquidity if needed to prevent agents from producing costly private information about the banks' loans. Capital markets involve information revelation, so they produce risky liquidity. The trade-off between less safe liquidity and more risky liquidity determines which firms choose to fund projects through banks and which ones through capital markets.
Sivumäärä 107 Kieli suomi Asiasanat COVID-19, rajoitustoimet, talouskasvu, talouspolitiikka Tiivi... more Sivumäärä 107 Kieli suomi Asiasanat COVID-19, rajoitustoimet, talouskasvu, talouspolitiikka Tiivistelmä Raportissa esitetään arvio koronakriisin vaikutuksista ja toimenpiteistä, joilla Suomen taloudelle aiheutuvia vaurioita voidaan pienentää ja palauttaa Suomi kestävän kasvun, korkean työllisyyden ja kestävän julkisen talouden uralle. Suomen talous ajautuu syvään taantumaan koronakriisin myötä. On syytä varautua vuoden 2008 finanssikriisin jälkeistä aikaa muistuttavaan kehitykseen. Tuotannon, tulojen ja työn menetyksen ohella kriisi aiheuttaa terveyden ja hyvinvoinnin heikkenemistä nyt ja tulevaisuudessa. Ongelmat johtuvat sekä epidemian taltuttamiseksi asetetuista rajoituksista että pelosta. Näiden poistaminen on talouden toipumisen ehto. Tämän täytyy kuitenkin tapahtua turvallisesti, mikä edellyttää vahvaa panostusta testaamiseen ja erilaisiin suojatoimiin. Talouspolitiikan ensimmäinen tehtävä on vähentää niitä välittömiä haittoja, joita rajoitustoimista ja pelosta aiheutuu ennen kaikkea yrityssektorin toimintakyvylle. Kasvun käynnistämiseen rajoitusten lieventämisen jälkeen tarvitaan tuntuva elvytyspanos. Talouspolitiikan vaativin vaihe tulee tämän jälkeen. Kriisi johtaa julkisen talouden velkaantumisen jo lähivuosina kestämättömälle uralle. Minimivaatimus on velan bkt-suhteen kasvun pysäyttäminen, mikä vaatii rankkaa julkisen talouden sopeuttamista. Menojen leikkaamisen ja verojen korottamisen tarvetta voidaan lieventää rakennepolitiikalla. Hallituksen tulisikin elvytystoimista päättämisen yhteydessä päättää tarvittavan "kipupaketin" tavoitteista ja määrittää prosessi toimenpiteiden valmistua ja rivakkaa toimeenpanoa varten. Kustantaja Valtioneuvosto Julkaisun myynti/jakaja Sähköinen versio: julkaisut.valtioneuvosto.fi Julkaisumyynti: vnjulkaisumyynti.fi
Econometrica, 1979
It is proved that Groves' scheme is unique on restricted domains which are smoothly connected, in... more It is proved that Groves' scheme is unique on restricted domains which are smoothly connected, in particular convex domains. This generalizes earlier uniqueness results by Green and Laffont and Walker. An example shows that uniqueness may be lost if the domain is not smoothly connected.
This report is a joint product of its authors. We had several discussions and out of these emerge... more This report is a joint product of its authors. We had several discussions and out of these emerged a shared interpretation of the essential features of the Nordic model and of the challenges it is facing. The group is similarly in agreement on the need for reform and on the main directions that reform should take. The group is for me a "dream team"; all those who were approached joined the team. Seppo Honkapohja has acted as chairman. The participants are eminent economists and thoroughly familiar with the policy issues confronting the Nordic countries. This report should be of considerable interest to all those who want to have a good understanding of the Nordic model. Pasi Sorjonen and other staff from ETLA have assisted the group in its work. The efficiency and speed of the editing by Kimmo Aaltonen and Laila Riekkinen has been amazing. We are grateful to a number of colleagues for their help and advice. Financial support of the TT-foundation is gratefully acknowledged. Helsinki 4 December 2007 Sixten Korkman 4.5 Easy fixes? 4.6 Save or adjust? Endnotes 5 WELFARE SERVICES: RISING COSTS AND INCREASING DEMAND 5.1 Services become more costly-the Baumol effect 5.2 More is expected-the Wagner effect 5.3 Preferences for leisure 5.4 An easy fix-bring services back to the family? 5.5 Combining the service and demographic challenges 5.6 Why not increase taxes? 5.7 The difficult road: what are the remedies to the service challenge? Endnotes 6 THE LABOUR MARKET: ENOUGH WORKERS WORKING ENOUGH? 6.1 Make more people work-the extensive margin counts! 6.2 Work more hours, not less! 6.3 Unemployment benefits, workfare and activation Endnotes 7 WAGE BARGAINING WITH MORE FLEXIBILITY 7.1 Uniform pay increases: for and against 7.2 Coordination and decentralization of wage formation 7.3 Wage formation and productivity 7.4 Taking stock-some conclusions Endnotes 8 THE PROPER SCOPE OF THE PUBLIC SECTOR 8.1 The virtues of competition 8.2 External effects and private organization 8.3 The case for government provided servicesmissions versus profit maximization 8.4 The costs of bureaucracy 8.5 The future of public services-leveraging the private sector 8.6 Conclusion Endnotes GUIDELINES FOR REFORM References Economic performance refl ects many factors-economic and non-economic Many features of the Nordic model amount to mechanisms designed to give some compensation to those suff ering from negative eff ects of structural change
Proceedings - Economic Policy Symposium - Jackson Hole, 2008
Journal of Accounting Research, 1980
Journal of Accounting Research Vol. 18 Supplement 1980 Printed in USA Discussion of Economically ... more Journal of Accounting Research Vol. 18 Supplement 1980 Printed in USA Discussion of Economically Optimal Performance Evaluation and Control Systems BENGT R. HOLMSTROM* Recent developments in agency theory promise to be quite helpful ...
Oxford University Press eBooks, Feb 1, 2016
RePEc: Research Papers in Economics, Sep 1, 1982
Both the normative and the positive uses of Pareto dominance become more complicated if the agent... more Both the normative and the positive uses of Pareto dominance become more complicated if the agents have private information that affect their utilities. Specifically, how can the consulting economist suggest a Pareto improvement if he does not fully know the preferences of the agents? And can the agents identify and agree to a Pareto improvement if they do not know each other’s preferences? In situations with incomplete information, the normative and the positive implications of Pareto improvements can be different. For instance, the agents may be aware of an improvement that the consulting economist is unaware of, given his ignorance of their preferences. This paper formally sorts out the impact of private information upon Pareto efficiency. The greatest impact of this paper is its taxonomy or classification of different notions of Pareto efficiency as distinguished by the state of knowledge and the potential for strategic behavior by the agents. The taxonomy provides a precise lan...
The Quarterly Journal of Economics, 1994
We analyze twenty years of personnel data from one firm. The hierarchical stnicture is quite simp... more We analyze twenty years of personnel data from one firm. The hierarchical stnicture is quite simple and stable. Career movements surest that the employee's rate of learning and the firm's learning about ability are important. There are promotion "fast tracks." Exit rates vary little with tenure or salary. The firm has personnel policies like those described in the internal labor markets literature, although several theoretical preconditions for ILMs, such as ports of entry and exit, are lacking. Job levels are important to compensation, but there is also substantial individual variation in pay within levels. Our companion paper (in this issue) explores the wage policy of tbis firm.
MIT Sloan Management Review
Most people accept that innovating involves risk. If a gene therapy patient dies, regulators stif... more Most people accept that innovating involves risk. If a gene therapy patient dies, regulators stiffen controls, but they don't make gene therapy impossible. Similarly, the United States must apply balance in addressing business ...
In this paper we introduce a new characteristic of a security, its "information sensitivity" (IS)... more In this paper we introduce a new characteristic of a security, its "information sensitivity" (IS). This measure has two components, the first component measures a security's expected monetary loss in low payoff states relative to its price ("tail risks") and the other component measures the expected monetary profit in high payoff states. We apply this measure in different illustrative applications. (i) IS captures the incentive of an agent to produce information about the payoff of the security. (ii) We use IS to solve an optimal security design problem and show that it is optimal for a buyer to purchase debt when he faces a seller who can acquire information and there is never information acquisition in equilibrium. Even if information cost is zero the optimal debt contract makes the seller indifferent between acquiring and not acquiring information. (iii) We use IS to formalize the notion that it is easier to buy than to sell a security. (iv) IS can explain the optimality of securitization. (v) IS is a sufficient statistic for expected utility maximization and a pricing factor if agents have a linear reference point utility function.
BIS Working Papers Series, 2015
Money markets are fundamentally different from stock markets. Stock markets are about price disco... more Money markets are fundamentally different from stock markets. Stock markets are about price discovery for the purpose of allocating risk efficiently. Money markets are about obviating the need for price discovery using over-collateralised debt to reduce the cost of lending. Yet, attempts to reform credit markets in the wake of the recent financial crisis often draw on insights grounded in our understanding of stock markets. This can be very misleading. The paper presents a perspective on the logic of credit markets and the structure of debt contracts that highlights the information insensitivity of debt. This perspective explains among other things why opacity often enhances liquidity in credit markets and therefore why all financial panics involve debt. These basic insights into the nature of debt and credit markets are simple but important for thinking about policies on transparency, on capital buffers and other regulatory issues concerning banking and money markets.
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Papers by Bengt Holmström