Search Results
Briefing
Removing Conflict of Interest for Agents of Homebuyers
In real estate transactions, sellers' agents have weak incentives to market homes sufficiently long to secure top prices for their clients. Buyers' agents, however, face completely backward incentives: They get paid more when their clients pay more for their homes. We discuss an a la carte compensation model for buyers' agents that eliminates this conflict of interest.
Working Paper
Optimal Incentive Contracts with Job Destruction Risk
We study the implications of job destruction risk for optimal incentives in a long-term contract with moral hazard. We extend the dynamic principal-agent model of Sannikov (2008) by adding an exogenous Poisson shock that makes the match between the firm and the agent permanently unproductive. In modeling job destruction as an exogenous Poisson shock, we follow the Diamond-Mortensen-Pissarides search-and-matching literature. The optimal contract shows how job destruction risk is shared between the rm and the agent. Arrival of the job-destruction shock is always bad news for the rm but can be ...
Working Paper
On the optimality of Ramsey taxes in Mirrlees economies
In this paper, we show that a simple, linear capital tax? the kind used in the Ramsey analysis? can be optimal in a Mirrlees economy with private information. We extend the Mirrlees approach to optimal taxation by studying taxes side-by-side with another institution, rather than in isolation. We consider an implementation in which agents use unsecured credit and personal bankruptcy to obtain insurance. Taxes are levied to fund government expenditures. An optimal tax system consists of lump-sum taxes and a simple Ramsey tax on wealth. In Mirrlees private information environments, optimal ...
Journal Article
Optimal Institutions in Economies with Private Information: Exclusive Contracts, Taxes, and Bankruptcy Law
In economies with private information, it is typically optimal to prohibit or otherwise discourage a subset of trades that individual agents want to enter. Economists often refer to such optimal distortions as wedges. In this article, we use a simple private-information Mirrleesian economy to, first, show examples of these wedges and, second, discuss institutions that may be used to implement them in practice. We discuss and compare three such institutions: exclusive contracts, taxes, and bankruptcy law. Our analysis underscores the multiplicity of possible implementations and, therefore, the ...
Journal Article
Cyclical Properties of Bank Margins: Small versus Large Banks
We study cyclical properties of the net interest margin (NIM) in the US banking sector in the aggregate as well as separately for small and large banks. In the aggregate and among large banks, NIM is countercyclical. Among small banks, however, NIM is procyclical. Further, we find that this result is driven by differences in the cyclical dynamics of small and large banks' funding costs rather than asset yields.
Working Paper
Optimal personal bankruptcy design : A Mirrlees approach
In this paper, we develop a normative theory of unsecured consumer credit and personal bankruptcy based on the optimal trade-off between incentives and insurance. First, in order to characterize this trade-off, we solve a dynamic moral hazard problem in which agents' private effort decisions influence the life-cycle profiles of their earnings. We then show how the optimal allocation of individual effort and consumption can be implemented in a market equilibrium in which (i) agents and intermediaries repeatedly trade in secured and unsecured debt instruments, and (ii) agents obtain ...
Briefing
Real Estate Commissions and Home Search Efficiency
In the U.S. residential housing market, homebuyers' agents typically offer free house showings and collect a commission equal to 3 percent of the price of the home bought by their clients. Our analysis shows that, by deviating from cost basis, this compensation structure may lead to elevated home prices, overused agent services and prolonged home searches. We explain that shifting to a simple a la carte compensation structure may improve home search efficiency and social welfare.
Journal Article
Pecuniary Externalities, Segregated Exchanges, and Market Liquidity in a Diamond-Dybvig Economy with Retrade
Pecuniary externalities often serve as a rationale for government intervention into financial markets. This article reviews the theory of market provision of liquidity in a Diamond-Dybvig economy and examines whether or not the possibility of retrade leads to pecuniary externalities and market failure. The answer hinges on the credibility of market participants' commitment to not enter into hidden transactions with non-participants. If such commitment is not credible, then unrestricted, hidden retrade leads to a pecuniary externality and market under-provision of liquidity. If such commitment ...
Working Paper
Real Estate Commissions and Homebuying
We construct a model of home search and buying in the U.S. housing market and evaluate the commission paid to homebuyers' agents. In the model, as in reality, homebuyers enjoy free house showings without having to pay their agents out of pocket. Buyers' agents receive a commission equal to 3% of the house price only after a home is purchased. We show this compensation structure deviates from cost basis and may lead to elevated home prices, overused agent services, and prolonged home searches. Based on the model, we discuss policy interventions that may improve housing search efficiency and ...
Journal Article
Optimal Contracts for Housing Services Purchases
In this article, we study tradeoffs associated with homeownership and renting. We consider a model in which housing capital generates housing services, but also requires regular maintenance. A household wants to purchase a flow of housing services. Maintenance on the house providing this flow to the household can be performed by the household itself or by an outside property manager. We abstract from taxes or other government distortions. The household contracts with a bank/landlord that has funds sufficient to make a lumpy housing investment. We do not assume that the bank/landlord can ...