Copyright (c) 2009 All rights reserved. http://works.bepress.com/leonidas_delarosa Recent documents in Leonidas Enrique de la Rosa en-us Tue, 15 Sep 2009 13:41:00 PDT 3600 http://works.bepress.com/leonidas_delarosa/6 http://works.bepress.com/leonidas_delarosa/6 Mon, 02 Mar 2009 14:19:33 PST The current financial crisis has been deepened by the fact that investors are very uncertain about the risks entailed by many financial instruments. Creating a public institution to identify and quantify these risks, subject to transparency and accountability, will prove very valuable in the medium- and long-run. Private credit-rating agencies were not, and in my opinion could not be expected to be, up to the job. Leonidas E. de la Rosa http://works.bepress.com/leonidas_delarosa/5 http://works.bepress.com/leonidas_delarosa/5 Thu, 02 Oct 2008 02:49:04 PDT In this paper, I study the effects of overconfidence in an investment-decision agency setting. Principal and agent agree on some investment rule that is contingent on a public signal. In a standard common-priors setting, the optimal contract provides full insurance to the agent: the principal pays a fixed wage to the agent and implements the efficient investment rule. When the agent overestimates his ability (the expected revenue of the project following a decision to invest), however, he is willing to "wager" on success against the relatively pessimistic principal and hence bears some project risk in equilibrium. In addition, because what the principal considers to be the optimal investment rule is too conservative according to the agent's beliefs and the agent holds some stake in the project, he will accept a lower fixed payment in exchange for a more liberal investment rule. A straightforward interpretation of this result is that the principal is transferring some control to the agent. It is somewhat counterintuitive that the principal will surrender more control to an agent with whom she disagrees more sharply. Leonidas E. de la Rosa Information Economics Psychology and Economics http://works.bepress.com/leonidas_delarosa/4 http://works.bepress.com/leonidas_delarosa/4 Tue, 27 May 2008 04:28:57 PDT The relationship between the informational environment and the cost of equity capital has received considerable interest in finance and accounting research as well as in financial reporting regulation. Recent papers have demonstrated that increased public disclosure may decrease firms' cost of capital, at least if the additional information pertains to systematic risk. The discussion has focused on the impact of information on the cost of capital subsequent to the release of the information (the ex-post cost of capital). We show that the reduction in the ex-post cost of capital is offset by an equal increase in the cost of capital for the period leading up to the release of the information (the preposterior cost of capital). Thus, within the class of models framing the recent discussion, there is no impact on the ex-ante cost of capital covering the full time span of the firm. The extent to which information is made publicly or privately available affects the timing of the resolution of uncertainty and when the information is reflected in equilibrium prices, but there is no impact on initial equilibrium prices.In efficient economies with only public information, there is no impact of the information system choice on the investors' ex-ante expected utilities either. In the partially revealing rational expectations equilibrium of an economy with private investor information, however, the rational investors may actually benefit from a higher ex-post cost of capital (at the expense of the liquidity traders). Peter O. Christensen Information Economics http://works.bepress.com/leonidas_delarosa/3 http://works.bepress.com/leonidas_delarosa/3 Tue, 02 Oct 2007 08:56:28 PDT We study the effects of overconfidence in a two-period investment-decision agency setting. Under common priors, agent risk aversion implies inefficiently low first-period investment. In our model, principal and agent disagree about the profitability of the investment decision conditional on a given public signal. An overconfident agent believes that the principal will update her beliefs upwards more often than not. As a consequence, the agent overestimates the benefits of learning from first-period investment. This implies that agent overconfidence mitigates the agency problems arising from the agent's career concerns, even though an overconfident agent bears more project and reputational risk in equilibrium. Leonidas E. de la Rosa Psychology and Economics http://works.bepress.com/leonidas_delarosa/2 http://works.bepress.com/leonidas_delarosa/2 Mon, 03 Sep 2007 05:33:42 PDT In this paper, I study the effects of overconfidence in an investment-decision setting. A risk-averse agent privately observes information relevant to an investment decision, which he can then report to a principal. In a standard common-priors setting, the optimal contract provides full insurance to the agent: the principal pays a fixed wage to the agent, asks him to reveal his information, and implements the efficient investment rule. When the agent overestimates the expected revenue of the project following investment, however, he is willing to "wager" on success against the (relatively pessimistic) principal, and hence bear some project risk in equilibrium. In addition, because what the principal considers to be the optimal investment rule is too conservative according to the agent's beliefs and the agent holds some stake in the project, he will accept a lower fixed payment in exchange for a more liberal investment rule. This can be interpreted as the principal transferring some control to the agent. It is somewhat counterintuitive that the principal will surrender more control to an agent with whom she disagrees more sharply. Leonidas E. de la Rosa Psychology and Economics http://works.bepress.com/leonidas_delarosa/1 http://works.bepress.com/leonidas_delarosa/1 Thu, 12 Apr 2007 02:31:21 PDT In this paper, I study the effects of overconfidence on incentive contracts in a moral-hazard framework in which principal and agent knowingly hold asymmetric beliefs regarding the probability of success of their enterprise. Agent overconfidence can have conflicting effects on the equilibrium contract. On the one hand, an overconfident agent disproportionately values success-contingent payments, and thus prefers higher-powered incentives. On the other hand, if the agent is overconfident in particular about the extent to which his actions affect the likelihood of success, lower-powered incentives are sufficient to induce any given effort level. If the agent is overall moderately overconfident, the latter effect dominates; because the agent bears less risk in this case, he actually benefits from his overconfidence. If the agent is significantly overconfident, the former effect dominates; the agent is then exposed to an excessive amount of risk, which is harmful to him. An increase in overconfidence---either about the base probability of success or the extent to which effort affects it---increases the effort level implemented in equilibrium. Leonidas E. de la Rosa Psychology and Economics