Browsing by Author "Albert, Michael Joseph"

Cremer and McLean 1985 shows that if buyers valuations are suciently correlated, there is a mechanism that allows the seller to extract the full surplus from the buyers. However, in practice, we do not see the Cremer-McLean mechanism employed. In this thesis, I demonstrate that one reason that the Cremer-McLean mechanism

is not implemented in practice is because the mechanism requires very precise assumptions about the underlying distributions of the buyers. I demonstrate that a small mis-estimation of the underlying distribution can have large and signicant effects on the outcome of the mechanism. I further prove that the Cremer-McLean mechanism cannot be approximated by a simple second price auction, i.e. there is no approximating factor when using a second price auction with reserve in either outcome or expectation for the Cremer-McLean mechanism. Further, I show that there is no mechanism that approximates the Cremer-McLean mechanism for bidders with

regular distributions in a single item auction if the correlation among buyers is not considered. Finally, I introduce a new mechanism that is robust to distribution mis-estimation and show empirically that it outperforms the Cremer-McLean mechanism on average in cases of distribution mis-estimation and I show that the mechanism can

be determined in polynomial time in the number of types of the buyers.

This dissertation explores the role of executive compensation in determining the capital structure decisions of a firm. CEOs experience a large personal cost of default that interacts through the risk adjusted probability of default with their compensation contract. Since default happens in a particularly costly state of the world for a CEO whose compensation contract consists primarily of pay for performance elements, i.e. a CEO who has a large personal equity stake in the firm, a large pay performance sensitivity is negatively and significantly associated with firm leverage choice. I document this effect in detail for the first time, and I show that it is both statistically robust and significant in magnitude, approximately 1\% of firm value. I show that this effect is driven by the stock holdings of the CEO, not the option holdings. I provide a simple principal agent model that explains the observed negative relationship and makes additional predictions on the relationship of other firm characteristics to pay performance sensitivity and leverage. I then test and confirm these predictions empirically using a standard OLS framework and an instrumental variable approach to control for endogeneity in the compensation contract. I also look at leverage adjustment speeds and show that CEOs with higher pay performance sensitivity adjust leverage upwards towards target values more slowly and downwards more quickly than their peers, and I interpret this as direct evidence that CEOs are actively managing personal risk through firm leverage choice.