Berkeley Thursday afternoon finance seminar:
Raghuram Rajan: "The Internal Governance of Firms" (with Viral Acharya, New York University; and Stewart Myers, Massachusetts Institute of Technology).
Why do modern publicly-traded firms with dispersed shareholding work as well as they do? Raghuram Rajan says that it is because of an efficiency-wage provided to managers--that firms do well to the extent that stockholders are just another class of bondholders, and the actual operation of the firm approximates the workings of the pre-IPO Goldman-Sachs partnership.
This is also a theory of the financial crisis. As long as the Wall Street investment banks were partnerships, the young guys who looked forward to becoming high-paid seniors disciplined the firm: they did not want it to blow up before they had their turn in the cushy chairs with the soft cushions. But once you go public, the juniors no longer care so much about the survival of the firm--and the seniors have nobody checking to make sure they are not selling lots of out-of-the-money puts and calling it alpha.