Essays on contracting in banking and venture capital

This doctoral dissertation contains two essays that study financial contracting in banking and venture capital to explain the benefits of financial contracts used in practice.; The first chapter is entitled "Money and Modern Bank Runs." Bank runs in the economics literature are modeled as taking the form of withdrawals of demand deposits that deplete a fixed reserve of goods in the banking system. This paper examines modern bank runs, in which withdrawals typically take the form of wire transfers by large depositors. These transfers shift balances among banks, with no analog of a depletion of a scarce reserve from the banking system. I show that with demand deposits payable in money using modern payment systems, bank runs do not occur if there is efficient lending among banks. However, if interbank lending breaks down, bank runs occur if banks do not lend to a bank in need, and can lead to price deflation and contagion to other banks being run. Central bank intervention as lender of last resort prevents interbank-based banking crises. The model corresponds to evidence of the banking crisis that required unprecedented Federal Reserve intervention following September 11, 2001.; The second chapter is entitled "Vesting and Control in Venture Capital Contracts." Vesting of equity payments to an entrepreneur, which is time contingent compensation, is ubiquitous in venture capital contracts and has been shown empirically to be of economic importance. I show that vesting equity to an entrepreneur over a longer period of time, late vesting, acts as a screening device against low quality entrepreneurs. However, if vesting compensation cannot initially be contracted upon later outcomes, then late vesting gives lower incentives for effort by the entrepreneur than early (short time-period) vesting. I show how outcomes of screening, effort and assignment of control rights vary based on the ex-ante probability and the ex-interim signal of the entrepreneur's quality. Control rights are a substitute for early vesting and allow for the largest effort incentives. I also find a new explanation for the link between equity control rights and equity cash flow claims.