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Three essays on investments and incentives : an application to pension plans Soumare, Issouf

Abstract

Despite significant diversification costs, a considerable number of defined contribution pension plans have large holdings of the shares of the company they work for. The first essay presents an incentive model in which the voluntary optimal company shareholdings of the worker is derived. The argument is that the worker voluntarily hold shares of his employer to benefit from his ability to adjust effort. In addition, the analysis provides a separate role for senior managers relative to other employees. The manager takes actions that influence the productivity of the entire work force. The worker on the other hand influences output by exerting effort. The optimal effort level will take into account the productivity decision of management while the productivity decision takes into account the worker's effort. In the second essay, I develop a model to study the equilibrium implications when some investors in the economy overweight a subset of stocks within their portfolio. I find that the excess returns for the overweighted stocks are lower, all else being equal. The riskfree rate increases and the market price of risk of the overweighted stock decreases, which create extra incentive for unconstrained agents to exit the stock market and hold bonds, hence clearing the market. The changes of stocks' volatilities are ambiguous. Finally, I provide an accurate quantification for agents' welfare. I also discuss the implications of my model in the context of defined contribution pension plans. In the third essay, a dynamic general equilibrium model for a two-country, two-good exchange economy in incomplete markets is developed. The model implies that when a domestic country caps foreign investment in some key industries in the domestic economy, the cost of capital of the protected industry increases, all else being equal, that of the non-protected industry decreases. On the other hand, when imposing restrictions on its residents' foreign investments, the domestic country improves its cost of capital, all else being equal. Furthermore, in both restricted economies, the cost of risk free borrowing and lending is lowered. However, when domestic residents are capped in their foreign investment, the uncovered interest rate parity relationship is violated. By artificially restricting agents' investment, countries can reduce financial contagion effects because stock markets are affected asymmetrically. This result contributes to the debate on why recent crises in international financial markets have had different effects on countries located in same geographical area or having similar economic characteristics. The effects of the restrictions on stock market volatilities are ambiguous. Finally, we show that when the restriction is protective, the welfare of the agents of the country imposing the restriction increases. This result helps us understand why some countries are so reluctant to change their protective financial policies.

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