Pub Date : 2025-08-26DOI: 10.1016/j.jedc.2025.105168
Chamon Wieles , Jan Kwakkel , Willem L. Auping , J.W. van den End
We analyse shock and parameter uncertainty in a Dynamic Stochastic General Equilibrium (DSGE) model by exploratory modelling and analysis (EMA). This method evaluates in a novel way the performance of monetary policy under deep uncertainty about the shock and model parameters. Scenarios are designed based on the outcomes of interest for the policymaker. We assess the performance of different policies on their objectives in the scenarios. This maps out the policy trade-offs and supports the central bank in making robust policy decisions. We find that in response to a negative supply shock, policies with low interest rate smoothing and a strong response to inflation most obviously contribute to price stability under deep uncertainty.
{"title":"Scenario discovery to address deep uncertainty in monetary policy","authors":"Chamon Wieles , Jan Kwakkel , Willem L. Auping , J.W. van den End","doi":"10.1016/j.jedc.2025.105168","DOIUrl":"10.1016/j.jedc.2025.105168","url":null,"abstract":"<div><div>We analyse shock and parameter uncertainty in a Dynamic Stochastic General Equilibrium (DSGE) model by exploratory modelling and analysis (EMA). This method evaluates in a novel way the performance of monetary policy under deep uncertainty about the shock and model parameters. Scenarios are designed based on the outcomes of interest for the policymaker. We assess the performance of different policies on their objectives in the scenarios. This maps out the policy trade-offs and supports the central bank in making robust policy decisions. We find that in response to a negative supply shock, policies with low interest rate smoothing and a strong response to inflation most obviously contribute to price stability under deep uncertainty.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"179 ","pages":"Article 105168"},"PeriodicalIF":2.3,"publicationDate":"2025-08-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145003799","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-08-22DOI: 10.1016/j.jedc.2025.105166
Thorsten Glück , Zeno Adams
We examine the disruptions to global commodity flows following the default of a commodity trading firm. The physical commodity network is operated by a handful of large traders that are responsible for the timely delivery of raw materials and inputs to industrial production. We propose a model to simulate the resilience and response time of the network following a shock. Our results suggest that a number of commodity traders carry significant systemic risk. The forced removal of a trader from the network has considerable implications for the prices and availability of physical commodities over a period up to 12 months.
{"title":"Systemic risk of commodity traders","authors":"Thorsten Glück , Zeno Adams","doi":"10.1016/j.jedc.2025.105166","DOIUrl":"10.1016/j.jedc.2025.105166","url":null,"abstract":"<div><div>We examine the disruptions to global commodity flows following the default of a commodity trading firm. The physical commodity network is operated by a handful of large traders that are responsible for the timely delivery of raw materials and inputs to industrial production. We propose a model to simulate the resilience and response time of the network following a shock. Our results suggest that a number of commodity traders carry significant systemic risk. The forced removal of a trader from the network has considerable implications for the prices and availability of physical commodities over a period up to 12 months.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"179 ","pages":"Article 105166"},"PeriodicalIF":2.3,"publicationDate":"2025-08-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144908132","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-08-14DOI: 10.1016/j.jedc.2025.105165
M'hamed Gaïgi , Vathana Ly Vath , Simone Scotti
The fishery industry is facing increasing challenges in the exploitation of marine resources. Marine resources are classic examples of common-property resources subject to fundamental problems of economic waste and over-exploitation, which may lead to resource destruction, including extinction. The past decades have highlighted the relevance of ecological catastrophes, such as the fate of the cod population in the Northwest Atlantic. These events do not occur with a constant frequency, but are clustered over time. Our objective is to study a harvesting management problem under the assumption that unexpected ecological disasters may occur in clusters. We model this clustering phenomenon using marked Hawkes processes. We characterize our value function as the unique solution to a Hamilton-Jacobi-Bellman inequality. We describe the optimal harvesting strategy by identifying the harvesting and non-harvesting regions. Our results are counterintuitive, challenging the generally accepted belief that, when facing an increasing risk of decimation due to disasters, the optimal harvesting policy should lead to a reduction in harvesting activity. These findings offer valuable insights into the fragile nature of fish resources, potentially explaining the collapse of fisheries in the Northwest Atlantic. Governments and international authorities must take action against the causes of such disasters, such as pollution and the overexploitation of marine resources, in order to reduce the risk of further decimation and to better assess and address the true cost of marine resource extinction. We further enrich our study with numerical analysis, providing additional insights into the optimal harvesting policy.
{"title":"Optimal harvesting under uncertain environment with clusters of catastrophes","authors":"M'hamed Gaïgi , Vathana Ly Vath , Simone Scotti","doi":"10.1016/j.jedc.2025.105165","DOIUrl":"10.1016/j.jedc.2025.105165","url":null,"abstract":"<div><div>The fishery industry is facing increasing challenges in the exploitation of marine resources. Marine resources are classic examples of common-property resources subject to fundamental problems of economic waste and over-exploitation, which may lead to resource destruction, including extinction. The past decades have highlighted the relevance of ecological catastrophes, such as the fate of the cod population in the Northwest Atlantic. These events do not occur with a constant frequency, but are clustered over time. Our objective is to study a harvesting management problem under the assumption that unexpected ecological disasters may occur in clusters. We model this clustering phenomenon using marked Hawkes processes. We characterize our value function as the unique solution to a Hamilton-Jacobi-Bellman inequality. We describe the optimal harvesting strategy by identifying the harvesting and non-harvesting regions. Our results are counterintuitive, challenging the generally accepted belief that, when facing an increasing risk of decimation due to disasters, the optimal harvesting policy should lead to a reduction in harvesting activity. These findings offer valuable insights into the fragile nature of fish resources, potentially explaining the collapse of fisheries in the Northwest Atlantic. Governments and international authorities must take action against the causes of such disasters, such as pollution and the overexploitation of marine resources, in order to reduce the risk of further decimation and to better assess and address the true cost of marine resource extinction. We further enrich our study with numerical analysis, providing additional insights into the optimal harvesting policy.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"179 ","pages":"Article 105165"},"PeriodicalIF":2.3,"publicationDate":"2025-08-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144864595","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We develop a theoretical dynamic trading model with heterogeneous agents to examine how introducing a dark pool—running in parallel to a traditional lit exchange organized as a limit order market—primarily affects execution risk and price settings, and how these changes, in turn, influence the welfare of different trader types. Our model’s computational simulations show that the addition of a dark pool reduces liquidity on the traditional lit exchange. This liquidity reduction is evidenced by longer order execution times and a wider effective spread in the traditional lit exchange, driven by the migration of trading activity to the dark pool. We also identify two opposing channels that influence traders’ performance: the execution delay channel and the price improvement channel. Regarding the execution delay channel, dark orders lead to longer execution times for impatient traders (who seek to trade quickly) and shorter execution times for speculators (who wait for favorable execution prices relative to the asset’s fundamental value). This is because dark orders generally have longer (shorter) execution times than market (limit) orders. Regarding the price improvement channel, dark orders offer more favorable prices for impatient traders than market orders, while dark orders can result in less advantageous pricing for speculators. This is because dark orders are typically executed at the midquote of the bid and ask prices from the limit order market. Ultimately, the effect on execution risk, price improvement, and welfare for both impatient traders and speculators depends on which of these two opposing channels prevails.
{"title":"Execution risk and price improvement under dark pools","authors":"Alejandro Bernales , Daniel Ladley , Evangelos Litos , Marcela Valenzuela","doi":"10.1016/j.jedc.2025.105163","DOIUrl":"10.1016/j.jedc.2025.105163","url":null,"abstract":"<div><div>We develop a theoretical dynamic trading model with heterogeneous agents to examine how introducing a dark pool—running in parallel to a traditional lit exchange organized as a limit order market—primarily affects execution risk and price settings, and how these changes, in turn, influence the welfare of different trader types. Our model’s computational simulations show that the addition of a dark pool reduces liquidity on the traditional lit exchange. This liquidity reduction is evidenced by longer order execution times and a wider effective spread in the traditional lit exchange, driven by the migration of trading activity to the dark pool. We also identify two opposing channels that influence traders’ performance: the execution delay channel and the price improvement channel. Regarding the execution delay channel, dark orders lead to longer execution times for impatient traders (who seek to trade quickly) and shorter execution times for speculators (who wait for favorable execution prices relative to the asset’s fundamental value). This is because dark orders generally have longer (shorter) execution times than market (limit) orders. Regarding the price improvement channel, dark orders offer more favorable prices for impatient traders than market orders, while dark orders can result in less advantageous pricing for speculators. This is because dark orders are typically executed at the midquote of the bid and ask prices from the limit order market. Ultimately, the effect on execution risk, price improvement, and welfare for both impatient traders and speculators depends on which of these two opposing channels prevails.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"179 ","pages":"Article 105163"},"PeriodicalIF":2.3,"publicationDate":"2025-08-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144886056","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-08-06DOI: 10.1016/j.jedc.2025.105162
Markku Lanne, Savi Virolainen
We introduce a new smooth transition vector autoregressive model with a Gaussian conditional distribution and transition weights that, for a pth order model, depend on the full distribution of the preceding p observations. Specifically, the transition weight of each regime increases in its relative weighted likelihood. This data-driven approach facilitates capturing complex switching dynamics, enhancing the identification of gradual regime shifts. In an empirical application to the macroeconomic effects of a severe weather shock, we find that in monthly U.S. data from 1961:1 to 2022:3, the shock has stronger impact in the regime prevailing in the early part of the sample and in certain crisis periods than in the regime dominating the latter part of the sample. While the overall evidence is somewhat mixed, this may lend some support to overall adaptation of the U.S. economy to severe weather over time.
{"title":"A Gaussian smooth transition vector autoregressive model: An application to the macroeconomic effects of severe weather shocks","authors":"Markku Lanne, Savi Virolainen","doi":"10.1016/j.jedc.2025.105162","DOIUrl":"10.1016/j.jedc.2025.105162","url":null,"abstract":"<div><div>We introduce a new smooth transition vector autoregressive model with a Gaussian conditional distribution and transition weights that, for a <em>p</em>th order model, depend on the full distribution of the preceding <em>p</em> observations. Specifically, the transition weight of each regime increases in its relative weighted likelihood. This data-driven approach facilitates capturing complex switching dynamics, enhancing the identification of gradual regime shifts. In an empirical application to the macroeconomic effects of a severe weather shock, we find that in monthly U.S. data from 1961:1 to 2022:3, the shock has stronger impact in the regime prevailing in the early part of the sample and in certain crisis periods than in the regime dominating the latter part of the sample. While the overall evidence is somewhat mixed, this may lend some support to overall adaptation of the U.S. economy to severe weather over time.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"178 ","pages":"Article 105162"},"PeriodicalIF":2.3,"publicationDate":"2025-08-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144810461","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-08-05DOI: 10.1016/j.jedc.2025.105158
Yingjie Niu , Zian Tang , Jinqiang Yang
We consider the optimal tax and borrowing plan of a government that worries about model uncertainty and seeks robust decisions. Quantitative implications show that the presence of model uncertainty makes the government more willing to borrow and enlarges its debt capacity. Under the worst-case scenario, the marginal benefit of taxation and the optimal tax rate decreases first and then increases. This is due to the game between two opposing effects induced by ambiguity. Moreover, the government should engage more in financial hedging while the amount of holdings is no longer linear in the debt-to-GDP ratio.
{"title":"Robust p theory of taxes and debt management","authors":"Yingjie Niu , Zian Tang , Jinqiang Yang","doi":"10.1016/j.jedc.2025.105158","DOIUrl":"10.1016/j.jedc.2025.105158","url":null,"abstract":"<div><div>We consider the optimal tax and borrowing plan of a government that worries about model uncertainty and seeks robust decisions. Quantitative implications show that the presence of model uncertainty makes the government more willing to borrow and enlarges its debt capacity. Under the worst-case scenario, the marginal benefit of taxation and the optimal tax rate decreases first and then increases. This is due to the game between two opposing effects induced by ambiguity. Moreover, the government should engage more in financial hedging while the amount of holdings is no longer linear in the debt-to-GDP ratio.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"178 ","pages":"Article 105158"},"PeriodicalIF":2.3,"publicationDate":"2025-08-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144781657","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-08-05DOI: 10.1016/j.jedc.2025.105154
Peter Burgold , Anne Ernst , Natascha Hinterlang , Marius Jäger , Nikolai Stähler
In this paper, we compare the economic and welfare implications of two carbon pricing policies, namely the European Cap and Trade (CaT) regime and the Chinese Tradeable Performance Standard (TPS). The former sets an economy-wide emissions target and forces firms to purchase sufficient certificates. The latter sets an emissions intensity and requires firms with a higher intensity to either abate or buy emissions allowances from firms with lower-than-target intensities. It can be shown that TPS is equivalent to CaT when carbon pricing revenues are redistributed to firms according to output. In a dynamic two-agent general equilibrium model with heterogenous production sectors, we show that TPS outperforms a CaT regime that redistributes carbon revenues to households in a lump-sum manner, both, in terms of output gains and welfare due to lower costs on the production side. However, CaT with labor tax reduction increases welfare most because it alleviates distortions on the production side and improves the income situation of all households.
{"title":"Cap and trade versus tradable performance standard in a production network model with sectoral heterogeneity","authors":"Peter Burgold , Anne Ernst , Natascha Hinterlang , Marius Jäger , Nikolai Stähler","doi":"10.1016/j.jedc.2025.105154","DOIUrl":"10.1016/j.jedc.2025.105154","url":null,"abstract":"<div><div>In this paper, we compare the economic and welfare implications of two carbon pricing policies, namely the European Cap and Trade (CaT) regime and the Chinese Tradeable Performance Standard (TPS). The former sets an economy-wide emissions target and forces firms to purchase sufficient certificates. The latter sets an emissions intensity and requires firms with a higher intensity to either abate or buy emissions allowances from firms with lower-than-target intensities. It can be shown that TPS is equivalent to CaT when carbon pricing revenues are redistributed to firms according to output. In a dynamic two-agent general equilibrium model with heterogenous production sectors, we show that TPS outperforms a CaT regime that redistributes carbon revenues to households in a lump-sum manner, both, in terms of output gains and welfare due to lower costs on the production side. However, CaT with labor tax reduction increases welfare most because it alleviates distortions on the production side and improves the income situation of all households.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"178 ","pages":"Article 105154"},"PeriodicalIF":2.3,"publicationDate":"2025-08-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144781658","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-08-05DOI: 10.1016/j.jedc.2025.105161
Benjamin Hemingway
The introduction of an unremunerated retail central bank digital currency (CBDC) is currently under consideration by several central banks. Motivated by the decline in transactional cash usage and the increase in online sales in the UK, this paper provides a theoretical framework to study the underlying drivers of these trends and the welfare implications of introducing an unremunerated retail CBDC. I develop a cash credit model with physical and digital retail sectors, endogenous entry of firms and directed consumer search. Calibrating to UK data between 2010 and 2022 the model suggests that there are positive welfare gains from introducing an unremunerated retail CBDC, but these have likely declined over time.
{"title":"The role of central bank digital currency in an increasingly digital economy","authors":"Benjamin Hemingway","doi":"10.1016/j.jedc.2025.105161","DOIUrl":"10.1016/j.jedc.2025.105161","url":null,"abstract":"<div><div>The introduction of an unremunerated retail central bank digital currency (CBDC) is currently under consideration by several central banks. Motivated by the decline in transactional cash usage and the increase in online sales in the UK, this paper provides a theoretical framework to study the underlying drivers of these trends and the welfare implications of introducing an unremunerated retail CBDC. I develop a cash credit model with physical and digital retail sectors, endogenous entry of firms and directed consumer search. Calibrating to UK data between 2010 and 2022 the model suggests that there are positive welfare gains from introducing an unremunerated retail CBDC, but these have likely declined over time.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"179 ","pages":"Article 105161"},"PeriodicalIF":2.3,"publicationDate":"2025-08-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144827238","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-07-31DOI: 10.1016/j.jedc.2025.105159
Zhiming Zhao , Wenjie Chen , Pengfei Luo
We develop an investment and financing model in which a controlling shareholder holds write-down equity and extracts private benefits by diverting the firm's cash flows. The model highlights how write-down equity affects investment and financing decisions, and the aggregate agency costs arising from investment, financing, and private benefits diversion. We find that the write-down equity causes the controlling shareholder to delay investment, choose conservative debt financing, and reduce credit spreads. Additionally, under an exogenous capital structure, there exists an optimal write-down ratio that completely eliminates agency costs related to investment. An increase in the write-down ratio reduces agency costs from private benefits diversion. Conversely, under the optimal capital structure, increasing the write-down ratio increases agency costs related to financing and private benefits diversion. Thus, the write-down equity is an effective financial instrument to reduce agency conflicts between the controlling shareholder and principals (i.e., minority shareholders and debtholders), especially for firms with debt financing constraints.
{"title":"Investment, capital structure and agency costs with write-down equity","authors":"Zhiming Zhao , Wenjie Chen , Pengfei Luo","doi":"10.1016/j.jedc.2025.105159","DOIUrl":"10.1016/j.jedc.2025.105159","url":null,"abstract":"<div><div>We develop an investment and financing model in which a controlling shareholder holds write-down equity and extracts private benefits by diverting the firm's cash flows. The model highlights how write-down equity affects investment and financing decisions, and the aggregate agency costs arising from investment, financing, and private benefits diversion. We find that the write-down equity causes the controlling shareholder to delay investment, choose conservative debt financing, and reduce credit spreads. Additionally, under an exogenous capital structure, there exists an optimal write-down ratio that completely eliminates agency costs related to investment. An increase in the write-down ratio reduces agency costs from private benefits diversion. Conversely, under the optimal capital structure, increasing the write-down ratio increases agency costs related to financing and private benefits diversion. Thus, the write-down equity is an effective financial instrument to reduce agency conflicts between the controlling shareholder and principals (i.e., minority shareholders and debtholders), especially for firms with debt financing constraints.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"178 ","pages":"Article 105159"},"PeriodicalIF":2.3,"publicationDate":"2025-07-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144781742","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-07-31DOI: 10.1016/j.jedc.2025.105160
Yuqian Zhang , Zhaojun Yang
We address a dynamic contracting model in which a principal hires an agent to manage a project. The key new ingredient is that either the principal or the agent can dynamically control the project risk. Increasing the risk has three effects: (i) a positive drift effect due to the risk premium, (ii) a negative drift effect that captures inefficiencies arising from risk-shifting, and (iii) a mechanical mean-preserving spread effect. We show that if the principal instead of agent controls the risk, we get a higher contract efficiency. The higher the agent's promised value, the more pronounced the advantage. The non-contractibility of risk induces the agent's risk-taking behavior. The contract efficiency in the exogenous no-savings environment is higher than that in the endogenous one due to additional costs of no-savings incentives. These findings contribute to the allocation of control rights, bringing forth a corporate governance perspective.
{"title":"Dynamic incentive contracts with controllable risk","authors":"Yuqian Zhang , Zhaojun Yang","doi":"10.1016/j.jedc.2025.105160","DOIUrl":"10.1016/j.jedc.2025.105160","url":null,"abstract":"<div><div>We address a dynamic contracting model in which a principal hires an agent to manage a project. The key new ingredient is that either the principal or the agent can dynamically control the project risk. Increasing the risk has three effects: (i) a positive drift effect due to the risk premium, (ii) a negative drift effect that captures inefficiencies arising from risk-shifting, and (iii) a mechanical mean-preserving spread effect. We show that if the principal instead of agent controls the risk, we get a higher contract efficiency. The higher the agent's promised value, the more pronounced the advantage. The non-contractibility of risk induces the agent's risk-taking behavior. The contract efficiency in the exogenous no-savings environment is higher than that in the endogenous one due to additional costs of no-savings incentives. These findings contribute to the allocation of control rights, bringing forth a corporate governance perspective.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"178 ","pages":"Article 105160"},"PeriodicalIF":2.3,"publicationDate":"2025-07-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144767175","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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