"A Multiplicative Model of Optimal CEO Incentives in Market Equilibrium" (web appendix, data on scaled wealth-performance sensitivity,slides), with Alex Edmans and Augustin Landier, Review of Financial Studies, vol. 22, 2009, p. 4881-4917.
| A neoclassical model of both total salary and incentives quantitatively explains various apparently paradoxical features of the data, such as the negative empirical scaling of the Jensen-Murphy incentives with firm size and their seemingly low level. |
"The Age of Reason: Financial Decisions over the Life-Cycle with Implications for Regulation", with Sumit Agarwal, John C. Driscoll, and David Laibson (2009), forthcoming, Brookings Papers on Economic Activity.
The young and the old make the most mistakes, and people reach maximal performance at age 53.
"Rank-1/2: A Simple Way to Improve the OLS Estimation of Tail Exponents", with Rustam Ibragimov (2009), forthcoming, Journal of Business Economics and Statistics. Technical Appendix.
To estimate a Pareto exponent with an OLS regression, it's best to specify it with log(Rank-1/2)=a-b log(Size).
"Power Laws in Economics and Finance", (2009), Annual Review of Economics, 1, p. 255-93.
Most "laws" in economics are power laws: a survey of theory and empirics on power laws.
"Power Laws", (2008), Entry for The New Palgrave Dictionary of Economics, 2nd Edition.
A short survey on power laws.
"Is CEO Pay Really Inefficient? A Survey of New Optimal Contracting Theories", with Alex Edmans (2009), European Financial Management, 15(3), p. 486-496.
"Why Has CEO Pay Increased So Much?", with Augustin Landier, Quarterly Journal of Economics, vol. 123(1), 2008, p. 49-100, Technical Appendix.
| A tractable model of CEO pay. An upshot: the six-fold rise in CEO pay between 1980 and 2003 can be fully attributed to the six-fold increase in market capitalization of large companies during that period. |
"Limits of Arbitrage: Theory and Evidence from the Mortgage-Backed Securities Market", with Arvind Krishnamurthy and Olivier Vigneron, Journal of Finance, vol. 62(2), April 2007, p. 557-595, Technical Appendix.
| A "limits of arbitrage" model explains patterns of risk premia in MBS. |
"Costly
Information Acquisition: Experimental Analysis of a Boundedly Rational
Model (Formerly, The Allocation of Attention: Theory and Evidence)", with David Laibson, Guillermo Moloche and Stephen Weinberg, American Economic Review,
vol. 96 (4), September 2006, p. 1043-1068, Technical Appendix.
| An experimental investigation of the following "Directed cognition" boundedly rational algorithm: "At each decision point, agents act as if their next set of search operations were their last opportunity for search." |
"Institutional Investors and Stock Market Volatility", with Parameswaran Gopikrishnan, Vasiliki Plerou and H. Eugene Stanley, Quarterly Journal of Economics, 121 (2), May 2006, p. 461-504.
| The trades of large institutional investors in illiquid markets explain many patterns in the extreme behavior of returns and trading volume. |
"Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets", with David Laibson, Quarterly Journal of Economics, 121 (2), May 2006, p. 505-540.
| If enough consumers are boundedly rational, firms will "shroud" some information about easy to forget dimensions (e.g., the cost of the ink cartridge), even in a competitive equilibrium. |
"The Evolution of City Size Distributions", with Yannis Ioannides, Handbook of Regional and Urban Economics, volume 4, Chapter 53, V. Henderson and J-F. Thisse eds, 2004, North-Holland, p.2341-2378.
| A survey of the literature on Zipf's law and Gibrat's law for cities. |
"A Theory of Power Law Distributions in Financial Market Fluctuations", with Parameswaran Gopikrishnan, Vasiliki Plerou and H. Eugene Stanley (2003), Nature, vol. 423, p. 267-70.
| A theory in which the trades of large funds explain the power law fluctuations of returns, volumes, number of trades, and the link between them. |
"The 6D Bias and the Equity Premium Puzzle", with David Laibson, NBER Macroeconomics Annual, 2002, vol. 16, pp. 257-312.
| A model of limited attention, in which investors update their information every D periods. |
"Zipf's Law for Cities: An Explanation",
Xavier Gabaix, Quarterly Journal of Economics, 114 (3), August 1999, p.739-67.
| Zipf's law says the size of city number N is proportional to 1/N. Why does this hold empirically? Suppose that cities follow Gibrat's law, with a vanishingly small friction. Then, their steady state distribution is Zipf, with an exponent of 1. |
Working Papers
"Dynamic Incentive Accounts," with Alex Edmans, Tomasz Sadzik and Yuliy Sannikov (2009), Technical Appendix.
Incentives are optimally provided via what we call dynamic incentive accounts.
"Tractability in Incentive Contracting" (web appendix), with Alex Edmans (2009).
A class of very tractable closed form optimal
contracts: We extend Holmstrom Milgrom to settings that do not require
exponential utility nor Gaussian noise.
"Variable Rare Disasters: An Exactly Solved Framework for Ten Puzzles in Macro-Finance" (2009), Technical Appendix.
Ten puzzling features of the macro-finance data are natural outcomes of a model where investors have time-varying perceptions of the risk of economic disaster.
"Rare Disasters and Exchange Rates", with Emmanuel Farhi (2009).
"Linearity-Generating Processes: A Modelling Tool Yielding Closed Forms for Asset Prices", (2009), Technical Appendix.
The paper explains how, by "twisting" regular processes, simple closed forms for stocks and bonds obtain systematically.
"Linearity-Generating Processes, Unspanned Stochastic Volatility, and Interest-Rate Option Pricing", (2009), with Peter Carr and Liuren Wu
We present a tractable way to price options on on any bond portfolios, including both caps and swaptions, using LG processes.
"Disasterization: A Simple Way to Fix the Asset Pricing Properties of Macroeconomic Models".
"Crash Risk in Currency Markets," with Emmanuel Farhi, Samuel Fraiberger, Romain Ranciere, and Adrien Verdelhan (2009).
We measure the importance of crash risk in currencies via new analytical results and options data.
"The Area and Population of Cities: New Insights from a Different Perspective on Cities," with Hernan Rozenfeld, Diego Rybski, and Hernan Makse (2009).
We build cities ''from the bottom up'' by clustering areas obtained from high-resolution data, and find that a beautiful Zipf's law for population and for areas, for cities above 12,000 inhabitants in the USA and 5,000 inhabitants in Great Britain.
"Learning in the Credit Card Market", with Sumit Agarwal, John C. Driscoll, and David Laibson (2008).
Like rational agents, consumers learn, but like
myopic agents, consumers respond to recent events more than events that
occurred just a few months ago.
"Regularity Conditions to Ensure the Existence of Linearity-Generating Processes", with Patrick Cheridito (2008).
"The Granular Origins of Aggregate Fluctuations," (2009), Technical Appendix.
Shocks to large firms appear to explain to non-trivial fraction of aggregate fluctuations.
"Competition and Prices: Insights from Extreme Value Theory", with D. Laibson, D. Li, H. Li, S. Resnick, C. de Vries (2009).
How the prices respond, or not, to the intensity of competition, particularly when consumers are confused.
"Bounded Rationality and Directed Cognition", with David Laibson (2005), Technical Appendix.
We propose a simple boundedly rational model.