Essays on agency problems

This dissertation addresses many important economic questions surrounding agency problems and vertical incentives. The first chapter documents the institutional background and pricing of U.S. reverse convertible bonds. The primary reason why I look into the reverse convertible bonds market is that it has interesting variation, enabling me to answer research questions in the second chapter and the third chapter. The second chapter shows some suggestive evidence of agency problems and vertical incentives in the reverse convertible bonds market mainly using a reduced-form analysis. Finally, the third chapter estimates the degree of agency problems and the degree of vertical incentives using a structural model. I conclude by analyzing various counterfactual scenarios. The first chapter introduces a financial product called a reverse convertible bond. It documents the product, market structure, and distribution process of the bond. Using a data set on reverse convertible bonds, I calculate the fair value of each bond by which I derive an issuer markup, i.e. how much an issuer earns by issuing each bond. This variable plays a critical role in investigating agency problems and vertical incentive issues in the second and third chapters. I also introduce my second data set on broker firms in this chapter. The second chapter documents some suggestive evidence of agency problems and vertical incentives in the reverse convertible bonds market. Combining two data sets described in the first chapter, I show descriptive evidence of agency problems and vertical incentives which are against the relevant regulations in the market. Specifically, broker behavior indicates agency problems while the relevant regulations such as suitability standard or fiduciary duty prevent them from doing so. In addition, I show that brokers are sensitive to their vertically integrated upstream firm's profit while arms-length transaction laws prohibit them from doing so. The final chapter estimates the degree of agency problems as well as the degree of vertical incentives in the reverse convertible bonds market. Although I show suggestive evidence of agency problems and vertical incentives in the second chapter, it is not straight forward to estimate their severity using a reduced-form analysis. Thus, I introduce a structural model that allows us to estimate the degree of agency problems and the degree of vertical incentives. The estimation results suggest that there are severe levels of both agency problems and vertical incentives in the market. Lastly, the counterfactual analysis shows that there is a substantial consumer surplus loss arising from agency problems. I also document a consumer welfare loss coming from vertical incentives but the magnitude is smaller than the consumer welfare loss from agency problems.