Essays on private information: moral hazard, selection and capital structure

This dissertation explores the implications of private information on the trade-off between incentives to work and risk-sharing, and on the choice of capital structure and performance of entrepreneurial firms. In Chapter 1 we characterize optimal dynamic contracts in environments with limited commitment and moral hazard. We study the implications of such contracts for the evolution of consumption and effort of the two agents who participate in an infinitely repeated risk-sharing arrangement. In these environments, we show the extent to which moral hazard restricts risk-sharing allocations prescribed in a limited enforceability environment. To put it differently, we investigate how the need to sustain a risk-sharing relationship in the presence of limited commitment restricts the punishments and rewards associated with optimal effort provision. We find that optimal contracts preserve some limited commitment properties even when there is private information. We also find that the steady state distribution of consumption is not degenerate. The need to provide incentives for work increases the variability of consumption near the bounds.

In Chapter 2, which is a joint work with Dzmitry Asinski, we contribute to the growing empirical literature focusing on the effects of capital structure on the performance of small business start-ups in their first years of existence. In contrast to most of the existing studies, we explicitly recognize potential endogeneity of the capital structure. Business financing is a choice that can be affected by unobservables and can also affect performance. This can lead to biased and inconsistent estimates. Our econometric specification allows joint modeling of capital structure and performance of business start-ups. We use a unique data set collected by the National Federation of Independent Business (NFIB) Foundation. Our results demonstrate that controlling for endogeneity of capital structure leads to qualitatively different results compared to a simple model assuming exogeneity. We find that outside equity has a negative effect on survival probability but positive effect on growth. Debt has a positive effect only on some measures of performance but not others.