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Milton Harris’ Research

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Working Papers

“Bank Regulation with Private-Party Risk Assessments”
(with Christian C. Opp and Marcus M. Opp)

Credit ratings are an integral part of world-wide regulatory frameworks such as the recently proposed Basel III. Yet regulators’reliance on credit ratings has been criticized, not least because of the poor accuracy of ratings of structured products in the years leading up to the recent …nancial crises. Consistent with these criti- cisms the Dodd-Frank Act abolishes regulatory reliance on ratings and mandates that regulators …nd alternative risk measures to regulate …nancial institutions. In this paper we propose a model to analyze the optimal regulatory reliance on credit ratings provided by an independent, pro…t-maximizing rating agency, and the po- tential e¤ectiveness of using market-based risk measures. We …nd that reliance on market prices instead of credit ratings may be generically ine¤ective, since equilib- rium prices in markets, in which banks are marginal, re‡ect government bailouts, and thus tend to reveal little information about actual risk exposures. Optimal re- liance on credit ratings not only depends on banks’leverage, CRAs’expertise and asset complexity, but also the social value added banks provide when holding debt securities to maturity rather than selling them to investors outside the banking system.

"How to Get Banks to Take Less Risk and Disclose Bad News"
(with Artur Raviv)

There is wide agreement that before the recent financial crisis, financial institutions took excessive risk in their investment strategies. At the same time, regulators complained that banks did not reveal the extent of their difficulties in a timely fashion thus reducing the effectiveness of government intervention to prevent or mitigate the deleterious effects of the financial crisis. The purpose of this paper is to investigate how regulators can best use certain tools at their disposal to motivate banks to take less risk and to provide adverse information to regulators early. We argue that two tools, namely restricting bank payouts to equity holders when banks report they are in trouble and constraining banks’ future investment strategy when they are in trouble can achieve both goals. We show that, in some cases, optimal use of these tools involves allowing equity payouts, even though these payments are financed by taxpayers. We also show that the more socially costly is constraining the bank’s portfolio selection or the more complex are the bank’s assets, the more likely it is that allowing larger payouts and fewer constraints is optimal.

“Intellectual Property Contracts: Theory and Evidence from Screenplay Sales” (with S. Abraham Ravid and Suman Basuroy)

This paper presents a model of intellectual property contracts. We explain why many intellectual property contracts are contingent on eventual production or success, even without moral hazard on the part of risk-averse sellers. The explanation is based on differences of opinion between buyers and sellers, and reputation building through multiple transactions. Our model predicts that more reputable sellers will be offered a very different mix of cash and contingency payments than inexperienced sellers. We also discuss the probability of sales as a function of seller and product characteristics. The theoretical model is tested on a data base of screenplay contracts.

Publications

“Rating Agencies in the Face of Regulation,” with Christian C. Opp and Marcus M. Opp, Journal of Financial Economics, 108, #1, April, 2013, 46-61..

“Control of Corporate Decisions: Shareholders vs. Management,” with Artur Raviv, Review of Financial Studies, 23, #11, November, 2011, 4115-4147.

A Theory of Board Control and Size, with Artur Raviv, Review of Financial Studies, 21, #4, July, 2008, 1797-1832.

“Allocation of Decision-making Authority,” with Artur Raviv, Review of Finance, 9, #3, September, 2005, 353-383.

Handbook of the Economics of Finance, Volumes 1A, 1B, editor with George Constantinides and René Stulz, Amsterdam: Elsevier-North Holland, October, 2003.
Dynamic Economic Analysis, New York: Oxford University Press, April, 1987.

“Organization Design,” with Artur Raviv, Management Science, 48, #7, July, 2002, 852-865.

“Capital Budgeting and Delegation,” with Artur Raviv, Journal of Financial Economics, 50, #3, December, 1998, 259-289 (lead article).

“Review of ‘Firms, Contracts, and Financial Structure,’ by Oliver Hart,” Review of Financial Studies, 9, #4, Winter, 1996, 1271-1277.

“The Capital Budgeting Process: Incentives and Information,” with Artur Raviv, Journal of Finance, 51, #4, September, 1996, 1139-1174.

“The Role of Games in Security Design,” with Artur Raviv, Review of Financial Studies, 8, #2, Summer, 1995, 327-367.

“Differences of Opinion Make a Horse Race,” with Artur Raviv, Review of Financial Studies, 6, #3, 1993, 473-506.

“Financial Contracting Theory,” with Artur Raviv, in J.-J. Laffont, Advances in Economic Theory, Sixth World Congress, Vol. II, Cambridge, UK: Cambridge University Press, 1992, 64-150.

“The Theory of Capital Structure,” with Artur Raviv, Golden Anniversary Invited Review Article, The Journal of Finance, 46, March, 1991, 297-355.  Reprinted in K. Keasey, S. Thompson and M. Wright, Corporate Governance, Elgar Reference Collection, International Library of Critical Writings in Economics, vol. 106, Cheltenham, U.K. and Northampton, Mass.: Elgar, 1999, 268-326.

“Allocation Mechanisms for Asymmetrically Informed Agents,” with Robert M. Townsend in R. M. Townsend, Financial Structure And Economic Organization: Key Elements And Patterns In Theory And History, Cambridge, Mass. and Oxford: Blackwell, 1990, 175-211.

“Capital Structure and the Informational Role of Debt,” with Artur Raviv, The Journal of Finance 45, June, 1990, 321-349 (lead article and second-place winner in the Smith-Breeden awards for best papers in The Journal of Finance in 1990).

“The Design of Securities,” with Artur Raviv, Journal of Financial Economics 24, October, 1989, 255-287.  Reprinted in M. J. Brennan, The Theory of Corporate Finance,Elgar Reference Collection, International Library of Critical Writings in Financial Economics, no. 1, Cheltenham, U.K.: Elgar., 1996, 387-419.

“Corporate Governance: Voting Rights and Majority Rules,” with Artur Raviv, Journal of Financial Economics, 20, January/March, 1988, 203-236.

“Corporate Control Contests and Capital Structure,” with Artur Raviv, Journal of Financial Economics, 20, January/March, 1988, 55-86.

“On the Duration of Agreements,” with Bengt Holmström, International Economic Review, 28, June, 1987, 389-406.

“A Sequential Signalling Model of Convertible Debt Call Policy,” with Artur Raviv, The Journal of Finance, 40, 5, December, 1985, 1263-1281.

“Allocation Mechanisms, Asymmetric Information, and the ‘Revelation Principle’,” with Robert M. Townsend, in George R. Feiwel, Issues in Contemporary Microeconomics and Welfare, London: Macmillan, 1985, 379-394.

“Job Matching With Finite Horizon and Risk Aversion,” with Yoram Weiss, Journal of Political Economy, 92, 4, August, 1984, 758-779.

“Microeconomic Developments and Macroeconomics,” with Bengt Holmström, American Economic Review, 73, 2, May, 1983, 223-227.

“Comment on ‘Pricing a Product Line’ by S. Oren, S. Smith, and R. Wilson,” Journal of Business, 57, 1, part 2, January, 1984, S109-S110.

“Comment on ‘Models in Managerial Accounting’ by Joel Demski and David Kreps,” Journal of Accounting Research, 20, Supplement, 1982, 149-152.

“Pricing Schemes When Demand is Unobservable,” in Martin Shubik and Richard Englebrecht-Wiggans, Auctions, Bidding, and Contracting: Uses and Theory, New York: New York University Press, 1983, 195-203.

“A Theory of Wage Dynamics,” with Bengt Holmström, Review of Economic Studies, LXIX, July, 1982, 315-333.

Asymmetric Information, Incentives and Intrafirm Resource Allocation,” with Charles Kriebel and Artur Raviv, Management Science, 28, 6, June, 1982, 604-620.

“A Theory of Monopoly Pricing Schemes with Demand Uncertainty,” with Artur Raviv, American Economic Review, 71, 3, June, 1981, 347-365.

“Allocation Mechanisms and the Design of Auctions,” with Artur Raviv, Econometrica, 49, 6, November, 1981, 1477-1499.

“Resource Allocation Under Asymmetric Information,” with Robert M. Townsend, Econometrica, 49, 1, January, 1981, 33-64.  Reprinted in D. K. Levine and S. A. Lippman, The Economics of Information, Elgar Reference Collection, International Library of Critical Writings in Economics, vol. 53, Aldershot, U.K.: Elgar, 1995, 119-50.  Reprinted in R. M. Townsend, Financial Structure And Economic Organization: Key Elements And Patterns In Theory And History, Cambridge, Mass. and Oxford: Blackwell, 1990, 212-251.

“Comment on ‘Equilibrium in a Pure Currency Economy’ by Robert E. Lucas,” in J.H. Kareken and N. Wallace, Models of Monetary Economies, Minneapolis: Federal Reserve Bank of Minneapolis, 1980, 157-160.

“Expectations and Money in a Dynamic Exchange Model,” Econometrica, 47, 6, November, 1979, 1403-1419.

“Optimal Incentive Contracts with Imperfect Information,” with Artur Raviv, Journal of Economic Theory, 20, 2, April, 1979, 231-259.

“Some Results on Incentive Contracts with Applications to Education and Employment, Health Insurance, and Law Enforcement,” with Artur Raviv, American Economic Review, 68, 1, March, 1978, 20-30.  Reprinted in M. E. Ricketts, Neoclassical Microeconomics, Schools of Thought in Economics Series, no. 3, Aldershot, U.K.: Elgar, 1988, 220-30.

“Dynamic Aspects of Air Quality Control Costs,” with W. Dolde, D. Epple, L. Lave, and S. Leinhardt, Journal of Environmental Economics and Management, 4, 4, December, 1977, 313-334.

“Optimal Planning Under Transaction Costs: The Demand for Money and Other Assets,” Journal of Economic Theory, 12, 2, April, 1976, 298-314.

“A Mutual Primal-Dual Linear Programming Algorithm,” Naval Research Logistics Quarterly, 17, 2, June, 1970, 199-206.