Benjamin E. Hermalin

Thomas and Alison Schneider Distinguished Professor of Finance
  and Professor, Department of Economics

Updated January 22, 2017

Short Bio • Contact Information • Publications • Teaching Notes

Working Papers and Teaching Notes

Working Papers

In reverse chronological order.

Assessing Managerial Ability: Implications for Corporate Governance

with Michael S. Weisbach, January 2017
A manager's current and potential future employers are continually assessing her or his ability. Such assessment is a crucial component of corporate governance and this chapter provides an overview of the research on that aspect of governance. In particular, we review how assessment generates incentives (both good and bad), generates risks that must be faced by both managers and firms, and affects the contractual relationships between those parties in important ways. Assessment (or learning) proves a key perspective from which to study, evaluate, and possibly even regulate corporate governance. Moreover, because learning is a behavior notoriously subject to systematic biases, this perspective is a natural avenue through which to introduce behavioral and psychological insights into the study of corporate governance. Open PDF of paper

What's so Special About Two-sided Markets?

with Michael L. Katz, May 2016
An unusual feature of two-sided markets is that there is no consensus regarding what they are. Our approach to deriving a definition is to identify examples that have been found to represent an interesting phenomenon in common and then reverse engineer the outcomes to determine the drivers of what are perceived to be the distinguishing or interesting features of equilibrium. In our view, the central focus of the two-sided-markets literature has been on identifying and analyzing cross-platform externalities. We identify two critical features that give rise to such externalities at the margin: idiosyncratic matching and inefficient rationing. Open PDF of paper

At the Helm, Kirk or Spock? The Pros and Cons of Charismatic Leadership

March 2014 [major revision October 2014; previously revised July 2014]
Charisma is seen as a generally positive attribute for a leader to possess, yet many studies give it a "mixed report card": finding it can have little or no effect, or worse a negative effect. This paper develops a model to explain why. The key insight is that presenting the cold hard truth is often incompatible with simultaneously firing up followers—a tradeoff exists between information and inspiration. In particular, a temptation exists to hide bad news behind upbeat rhetoric. Rational followers understand such appeals conceal bad news. But as long as any followers are swayed by such appeals—respond to the leader's charisma—rational followers' pessimism is tempered, and more so the more charismatic the leader. Hence, a more charismatic leader can generate better responses from all followers with an emotional appeal than can a less charismatic leader. This is a benefit to charisma. But this power has a dark side: a highly charismatic leader is tempted to substitute charm for action—she is less likely to learn relevant information and, on certain margins, works less hard herself—all to her followers' detriment. Open PDF of paper
Response to Tyler Cowen's comments

Understanding Firm Value and Corporate Governance

August 2010
An impressive volume of careful empirical studies finds evidence that the strength of firms' corporate governance tends to be positively correlated with their financial performance; that is, firms that score higher on some measure of governance tend to outperform those which score worse. These findings are a puzzle insofar as we expect those who decide how a firm is organized, including its corporate governance, to do so in a manner that maximizes firm value subject to the relevant constraints. If the governance we observe is constrained optimal, then why, in equilibrium, should any correlation---positive or negative---exist between it and firm performance? This paper offers an answer. In doing so, the paper also makes predictions about the correlation between firm size and strength of governance, provides new explanations for the correlation between firm size and executive compensation, and provides insights into why empirical estimates of managerial incentives are often deemed too low. Open PDF of paper
Mathematica programs: Simulation in text; Simulation in appendix.

Network Interconnection with Two-Sided User Benefits

with Michael L. Katz, July 2001
Previous work on network interconnection has tended to overlook that both the sender and receiver of an electronic message take actions, bear costs,and derive benefits from the message exchange. In a simple model with two-sided benefits and fixed network architectures, we find that the socially optimal interconnection charge is independent of the “direction” of the message and is used to induce optimal end-user prices for sending and receiving messages that account for demand conditions. These optimal retail prices depend solely on the sum of the marginal costs of exchanging a message across the two networks, not the specific marginal costs of the individual networks. Optimal interconnection pricing with endogenous network investment is also explored. Open PDF of paper

Teaching Notes

  1. "Hidden-Information Agency" (An introduction to mechanism design written with Bernard Caillaud.)
  2. "Hidden Action and Incentives" (An introduction to agency written with Bernard Caillaud.)
  3. "Lecture Notes for Economics" (Notes on pricing, mechanism design, and agency at the Ph.D. level.) Revised 1/9/09
  4. "Second-degree Price Discrimination with a Continuum of Types"