Publications

Risk Taking by Entrepreneurs (with Hugo Hopenhayn), with Technical Appendix,
American Economic Review, Vol. 99, No. 5, December 2009, pp. 1808-30.
Entrepreneurs bear substantial risk, but empirical evidence shows no sign of a positive
premium. This paper develops a theory of endogenous entrepreneurial risk taking
that explains why self-financed entrepreneurs may find it optimal to invest in risky
projects offering no risk premium. Consistently with empirical evidence, the model
predicts that poorer entrepreneurs are more likely to undertake risky projects. It also
finds that incentives for risk taking are stronger when agents are impatient.

Working Papers

Moral Hazard and Sorting in a Market for Partnerships (with Ayca Kaya, March 2010)
This paper incorporates two-sided moral hazard in an otherwise frictionless matching
market for partnerships and examines how unobservability of the effort choices of the
matched partners impacts the equilibrium sorting patterns. We find that the direction of
this impact depends on whether unobservable effort and observable type are complements
or substitutes: when they are complements (i.e.marginal products of effort are increasing
in types), moral hazard favors negative sorting, and, conversely, when effort and type are
substitutes, moral hazard favors positive sorting.

Incentives and the Structure of Teams (with April Franco and Matthew Mitchell, May 2010)
2009 version
This paper studies the relationship between moral hazard and the matching structure
of teams formed within firms. We show that team incentive problems may, in the absence of
complementarities or anti-complementarities in produc tion technology, generate monotone
matching predictions. We also derive sufficient conditions on the primitives of the model
leading to the optimality of positive and negative matching of team members.

Preferences for Risk in a Dynamic Model with Discrete Adjustments
This paper characterizes the solution to a consumption/savings decision problem in the presence of
discrete adjustments. A number of recent studies have suggested that the presence of discrete adjustments
may help explain known anomalies of consumer’s risk behavior, such as simultaneous purchase of insurance
and lotteries or the equity premium puzzle, because they (i) create incentives for gambling and (ii) amplify risk
aversion with respect to small risks. This paper argues that even though these pre dictions naturally arise in
static models, they do not necessarily extend to a dynamic setup. I show that (i) the possibility of choosing
when to make the discrete adjustment can eliminate the gambling motive and that (ii) the agents, who plan to
make the discrete adjustment in the future, become more tolerant to small risks than the agents with the same
wealth levels in the model without discreteness.

Public and Private Equity in a General Equilibrium Model of Occupational Choice
Recent empirical evidence has documented that over the past decade the total value of the public
equity traded in the US had risen significantly compared to the total value of private equity, while
their relative returns have not changed much. These trends would be hard to reconcile within a
standard representative agent portfolio choice model. This paper develops a general equilibrium
occupational choice model which can account for the observed dynamics of relative quantities and
prices of public and private equity. It argues that the relative returns to two assets have changed little
because an increase in the available quantity of public equity was accompanied by an increase in the
demand for public equity driven by the changes in the occupational structure of the population and rising
wealth inequality. Both of these effects are derived in the model endogenously and caused by the
improvements in the technologies allowing private firms to go public.

Between-Firm Redistribution of Profit in Competitive Industries: Why Labor Market Policies May Not Work
Empirical studies document differences in firms' response to the introduction of various labor market policies.
In particular, large and mature firms tend to participate more actively in targeted employ ment subsidy programs
(under which firms receive subsidies for hiring disadvantaged workers). This paper offers an explanation for this
phe nomenon and argues that it might have important consequences for policy making. Namely, such behavior of
firms may indicate that large and mature firms benefit from the introduction of a new subsidy program, while small
and young firms incur indirect costs. In this case, the policy implicitly redistributes profit from young to mature firms
and may discourage startups. The resulting decrease in the number of operating firms is likely to have a significant
impact on the policy's outcomes. These effects become more pronounced as heterogeneity between young and
mature firms increases.