Optimal financial contracts and the dynamics of insider ownership
(joint with Charles Himmelberg)

This paper characterizes the optimal dynamic contract between risk-averse entrepreneurs and risk-neutral investors in an infinite horizon setting with information asymmetry. Under certain conditions, the optimal contract can be implemented with the entrepreneur's ownership of some of the firm's shares (insider ownership). This ownership evolves over time and tends to decrease as the entrepreneur's wealth increases. Another result of the paper is that the concentration of ownership declines with the degree of investor protection. These results are supported by the findings of several empirical studies.