Carlson School of Management  
Martin Szydlowski
Assistant Professor of Finance


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Carlson School of Management
University of Minnesota
321 19th Ave South
Minneapolis, MN, 55455

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Curriculum Vitae

Working Papers

Incentives, Project Choice and Dynamic Multitasking

Abstract: I study the optimal choice of investment projects in a continuous-time 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 risk-return 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 risk-return 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 over-compensation region, where he receives excessive benefits compared to the contract without ambiguity, while after low performance, he enters the under-compensation region. Ambiguity also causes a disconnect between the current effort cost and the strength of incentives. That is, even when the agent is under-compensated, his incentives are as strong as in the over-compensation region, since the principal fears the agent might shirk otherwise. Under ambiguity, the agent's true effort cost does not need to equal the worst-case. 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
(submitted)

Abstract: We prove that the value function for the optimal control of any time-homogeneous, one-dimensional diffusion is twice continuously differentiable, under Lipschitz, growth, and non-vanishing 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 ex-ante 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 short-term debt. This gives rise to endogenous rollover risk, which may discourage using short-term debt even if it has a lower interest rate, and distorts firms' equilibrium decision to finance via short- or long-term debt.

Robust Approximation of Dynamic Contracts in Continuous Time

Abstract: I analyze a discrete-time principal-agent 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)
FINA 8812: Corporate Finance I (PhD)



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