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Milton Harris’ Research

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Working Papers

“Rating Agencies in the Face of Regulation” (with Christian C. Opp and Marcus M. Opp)

This paper develops a theoretical framework to shed light on variation in credit
rating standards over time and across asset classes. Our analysis focuses on the in-
teraction between the existing issuer-pays model of S&P, Moody’s, and other major
rating agencies, and the regulatory use of ratings, such as the use of credit ratings
to determine bank capital requirements. Absent regulation, the rating agency in
our model publishes informative ratings, but rating precision is suboptimal. The
magnitude of the deviation from the social optimum is directly linked to the quality
distribution of issuers, the complexity of assets, and issuers’outside options. We
show that introducing rating-contingent regulation that favors highly rated secu-
rities may mitigate or amplify this suboptimal behavior, but if su¢ ciently large,
leads to regulatory arbitrage, rating in‡ation, and a complete breakdown of dele-
gated information acquisition. We characterize the determinants of these outcomes
and reconcile them with evidence from the empirical literature.

“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 based on two key features of the market for IP, namely differences of opinion between buyers and sellers about sellers’ ability to produce valuable properties and the evolution of buyers’ beliefs, i.e., the reputations of sellers, through multiple transactions.  The model explains why many intellectual property contracts are contingent on eventual production or success, even when there is no moral hazard on the part of risk-averse sellers and the presence of a risk-neutral buyer.  Our model predicts that more reputable sellers should be offered a very different mix of cash and contingency payments than inexperienced sellers. We also relate the type of contract offered to the opportunity cost of the seller and discuss the probability of a sale taking place as a function of seller and product characteristics.  The theoretical model is applied to a data base of screenplay sales, and we find that our theory can explain the diversity of contractual features observed in the data.

Publications

“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.