Martin Szydlowski Assistant Professor of Finance 




Working Papers
Incentives, Project Choice and Dynamic Multitasking
Abstract: I study the optimal choice of investment projects in a continuoustime moral hazard model with multitasking. While in the first best, projects are invariably chosen by the net present value (NPV) criterion, moral hazard introduces a cutoff for project selection which depends on both a project's NPV as well as its riskreturn ratio. The cutoff shifts dynamically depending on the past history of shocks, the current firm size, and the agent's continuation value. When the ratio of continuation value to firm size is large, investment projects are chosen more efficiently, and project choice depends more on the NPV and less on the riskreturn ratio.
The optimal contract can be implemented with an equity stake, bonus payments, as well as a personal account. Interestingly, when the contract features equity only, the project selection criterion resembles a hurdle rate.
Ambiguity in Dynamic Contracts
Abstract: I study a dynamic principal agent model in which the effort cost of the agent is unknown to the principal. The principal is ambiguity averse, and designs a contract which is robust to the worst case effort cost process. Ambiguity divides the contract into two regions. After sufficiently high performance, the agent reaches the overcompensation region, where he receives excessive benefits compared to the contract without ambiguity, while after low performance, he enters the undercompensation region. Ambiguity also causes a disconnect between the current effort cost and the strength of incentives. That is, even when the agent is undercompensated, his incentives are as strong as in the overcompensation region, since the principal fears the agent might shirk otherwise.
Under ambiguity, the agent's true effort cost does not need to equal the worstcase. I analyze the agent's incentives for this case, and show that the possibility of firing is detrimental to the agent's incentives. I study several extensions concerning the timing structure and the nature of the principle's ambiguity aversion.
On the Smoothness of Value Functions and the Existence of Optimal Strategies, with Bruno Strulovici
Abstract: We prove that the value function for the optimal control of any timehomogeneous, onedimensional diffusion is twice continuously differentiable, under Lipschitz, growth, and nonvanishing volatility conditions. Under similar conditions, the value function of any optimal stopping problem is continuously differentiable. For the first problem, we provide sufficient conditions for the existence of an optimal control. The optimal control is Markovian and constructed from the Bellman equation. We also establish an envelope theorem for parametrized optimal stopping problems. Several applications are discussed, which include growth, dynamic contracting, and experimentation models.
Work in Progress
Equilibrium Access to Financing and Dynamic Capital Structure, with Briana Chang Abstract: This paper presents an equilibrium model of debt rollover risk. Firms enter the debt market to finance a project which has exante identical present value. However, their ability to repay debt in the future depends on past cash flows, which are not perfectly verifiable, and introduce asymmetric information in the market for shortterm debt. This gives rise to endogenous rollover risk, which may discourage using shortterm debt even if it has a lower interest rate, and distorts firms' equilibrium decision to finance via short or longterm debt.Robust Approximation of Dynamic Contracts in Continuous Time Abstract: I analyze a discretetime principalagent model in which the principal is concerned about misspecification in the relation between the agent's effort and signals during each period. In particular, the principal only knows that the true relation lies in a neighborhood of a given reference. I characterize the limit contract as the period length shrinks to zero, and show how this limit varies with different assumptions about the misspecification and how it relates to the optimal contract in Sannikov (2008).Teaching
FINA 4221: Principles of Corporate Finance (undergrad)  
