Mark M. Westerfield

Buying In and Selling Out: The Dynamic Returns to Investing in Expertise

with Felix Zhiyu Feng

The Optimal Duration of Incentives and Projects

with Felix Zhiyu Feng and Robin Luo

Capital Commitment

with Elise Gourier and Ludovic Phalippou
Journal of Finance (Forthcoming)
Awarded Netspar Research Grant RG2012.04

We quantify the capital commitment problem of limited partners in private equity. Investors are willing to pay a significant premium to adjust quantity commitment but not to resolve timing uncertainty. Commitment risk premiums do not disappear even if investments are spread across multiple funds.

Setbacks, Shutdowns, and Overruns

with Felix Zhiyu Feng, Curtis R. Taylor, and Feifan Zhang
Econometrica 2024, 92: 815-847

We investigate optimal project management when problems are discovered in the natural course of development instead of as the result of shirking. The sponsor induces work via a soft deadline and a linear bonus for early delivery: a time-budget contract.

Asset Allocation with Private Equity

with Arthur Korteweg
Foundations and Trends in Finance 2022, 13: 95-204

We survey the literature on the private equity partnership arrangement from the perspective of an outside investor (limited partner). We consider the particular institutional details of private equity, and we identify 27 open questions to help guide private equity research forward.

Dynamic Resource Allocation with Hidden Volatility

with Felix Zhiyu Feng
Journal of Financial Economics 2021, 140: 560-582

We study firms' internal resource allocation when a manager privately controls volatility and may extract private benefits. The optimal contract is implemented with a constant pricing schedule, and prices are not risk-adjusted. We apply the model to internal capital markets and transfer pricing.

Market Selection

with Leonid Kogan, Stephen Ross, and Jiang Wang
Journal of Economic Theory 2017, 168: 209-236

We establish straightforward necessary and sufficient conditions for agents making inferior forecasts to survive and to affect prices in a general setting with minimal restrictions on endowments, beliefs, or utility functions.

Optimal Dynamic Contracts with Moral Hazard and Costly Monitoring

with Tomasz Piskorski
Journal of Economic Theory 2016, 166: 242-281

We introduce a tractable dynamic monitoring technology into a continuous-time moral-hazard problem. Our results help explain empirical findings on the linkage between termination, performance, pay-performance sensitivity, and monitoring.

Looking for Someone to Blame: Delegation, Cognitive Dissonance, and the Disposition Effect

with David H. Solomon and Tom Y. Chang
Journal of Finance 2016, 71(1): 267-302
Media: Financial Times, CNN Money, Psychology Today, The Motley Fool, Value Walk.

Investors in most assets are more likely to sell gains than losses, but mutual fund investors do the opposite. Using brokerage data and an experiment, we argue that cognitive dissonance can explain these results and the effects of delegation more generally.

Resource Accumulation Through Economic Ties: Evidence from Venture Capital

with Yael Hochberg and Laura Lindsey
Journal of Financial Economics 2015, 118(2): 245-267
Featured in the Harvard Law School Forum on Corporate Governance and Financial Regulation

We characterize VC firm resources using factor analysis, and we develop a methodology to distinguish motives for coinvestment. Coinvestment is not based on resource similarity; instead it serves to mix value-added resources with capital.

Portfolio Choice with Illiquid Assets

with Andrew Ang and Dimitris Papanikolaou
Management Science 2014, 60(11): 2737-2761
Winner of the Roger F. Murray Prize, Second Place for 2011 (Awarded by the Q-group)

We present a simple model of illiquidity based on trading restrictions of uncertain duration. Uncertainty over trading opportunities is much more important than the simple inability to trade.

Disagreement and Learning in a Dynamic Contracting Model

with Tobias Adrian
Review of Financial Studies 2009, 22(10): 3839-3871
Winner of the CRA International Award for 2007 (Awarded by the Western Finance Association)

We present a dynamic contracting model with disagreement and learning. The interaction between incentive provision and learning creates an intertemporal source of “disagreement risk” that alters optimal risk sharing.

High Water Marks: High Risk Appetites? Convex Compensation, Long Horizons, and Portfolio Choice

with Stavros Panageas
Journal of Finance 2009, 64(1): 1-36
Lead Article

With an indefinite horizon, convex compensation (e.g. high-water marks and other "option-like" contracts) do not generate unbounded risk-taking. In a simple portfolio choice model, we show that risk neutral managers act as CRRA investors.

The Price Impact and Survival of Irrational Traders

with Leonid Kogan, Stephen Ross, and Jiang Wang
Journal of Finance 2006, 61(1): 195-229
Winner of the FAME Research Prize for 2004 (Awarded by the Swiss Finance Institute)
Winner of the Smith-Breeden Prize, First Place for 2006 (Awarded by the American Finance Association)

Price impact and survival are two independent concepts; neither is sufficient for the other. In a simple GE economy, we demonstrate that irrational traders can survive and/or have price impact.