In Chapter 1, I study a model of financial contracting with private information, limited liability, and the assumption that the firm’s collateral can only be liquidated continuously by resorting to the services of a costly third party. An optimal contract may take the form of a multi-level discounted debt, in which the firm defaults from the smallest bundle of loans and gradually increases its liquidation as the realized cash flow gets lower. Whether the firm will seek for a bankruptcy court is state-dependent and relies on both the cost of introducing the court and the firm’s start-up liquidity shortage.

In Chapter 2, I try to find out what is the optimal retail contract between a manufacturer and a retailer who privately observes the retail demand that is materialized after th...[ Read more ]

In Chapter 1, I study a model of financial contracting with private information, limited liability, and the assumption that the firm’s collateral can only be liquidated continuously by resorting to the services of a costly third party. An optimal contract may take the form of a multi-level discounted debt, in which the firm defaults from the smallest bundle of loans and gradually increases its liquidation as the realized cash flow gets lower. Whether the firm will seek for a bankruptcy court is state-dependent and relies on both the cost of introducing the court and the firm’s start-up liquidity shortage.

In Chapter 2, I try to find out what is the optimal retail contract between a manufacturer and a retailer who privately observes the retail demand that is materialized after the contracting stage. Return policies are applied by the manufacturer to prevent the retailer from misreporting the realized demand. When the order quantity is sufficiently high, the optimal contract can be implemented by a buy-back contract, otherwise the optimal contract does not exist. The optimal order quantity under the linear-cost assumption is lower than the first-best quantity, meaning that supplies are rationed due to the adverse selection problem.

In Chapter 3, I build a model with boundedly rational investors and firms strategically choosing whether to offer normal or fraudulent products, with evidence from experiment and survey. Competition leads to a separating equilibrium in which an honest firm sells a normal product to sophisticated investors, while a dishonest firm targets only naive investors. The honest firm has limited incentive to disclose information about financial fraud, since doing so may induce the dishonest firm to deviate and compete for the normal product market. Policy instruments may also trigger the honest firm to strategically shroud information and thus cannot ensure an improvement in investors’ welfare.