Faculty & Research

Milton Harris

Professor Emeritus of Finance and Economics

Phone :
(773) 702-2549
Address :
5807 South Woodlawn Avenue
Chicago, IL 60637

Milton Harris studies corporate finance and governance and the economics of contracts, especially corporate financial contracts. His current interests include the economics of credit ratings and bank regulation. Harris is a fellow of the Econometric Society and of the American Finance Association, and is a former president of the Western Finance Association and the Society for Financial Studies. He is also a senior fellow of the Finance Theory Group.

Harris has held permanent academic appointments at the J. L. Kellogg Graduate School of Management at Northwestern University and Carnegie Mellon University, and visiting appointments at Stanford University, the University of Haifa in Israel, and Tel Aviv University in Israel.

After graduating from Rice University in 1968 with a bachelor's degree in mathematics, Harris worked as a mathematician for the U.S. Naval Research Laboratory until 1971. In 1973, he earned a master's degree in economics from the University of Chicago and received his PhD in 1974 with a dissertation entitled "Optimal Planning Under Transaction Costs and General Equilibrium." He joined the Chicago Booth faculty in 1987.

When not working, Harris is an avid skier and pursues his interest in photography.

 

2013 - 2014 Course Schedule

Number Name Quarter
33911 The Economics of Information 2013 (Fall)

2014 - 2015 Course Schedule

Number Name Quarter
33911 The Economics of Information 2014 (Fall)

Other Interests

Skiing, photography.

 

Research Activities

Corporate finance and governance; economics of contracts, especially corporate financial contracts.

With Christian C. Opp and Marcus M. Opp, “Rating Agencies in the Face of Regulation,” Journal of Financial Economics (2013).

With George Constantinides and René Stulz, editors, Handbook of the Economics of Finance, Volumes 2A, 2B, Elsevier-North Holland (2013)

With Artur Raviv, “Control of Corporate Decisions: Shareholders vs. Management,” Review of Financial Studies (2010).

With Artur Raviv, "A Theory of Board Control and Size," Review of Financial Studies (2008).

With Artur Raviv, "The Capital Budgeting Process, Incentives and Information," Journal of Finance (1996).

With Artur Raviv, "Differences of Opinion Make a Horse Race," The Review of Financial Studies (1993).

With Artur Raviv, "Corporate Governance: Voting Rights and Majority Rules," Journal of Financial Economics (1988).

For a listing of research publications please visit ’s university library listing page.

New: Macroprudential Bank Capital Regulation in a Competitive Financial System
Date Posted: Jul  19, 2014
We propose a tractable general equilibrium framework to analyze the effectiveness of bank capital regulations when banks face competition from outside investors. Our analysis shows that increased competition can not only render previously optimal bank capital regulations ineffective but also imply that, over some ranges, increases in capital requirements cause more banks in the economy to engage in value-destroying risk-shifting. To avoid this perverse outcome, the regulator has to set capital requirements high enough, so that risk-shifting activities become less profitable from a banker's private perspective than socially valuable banking activities. Our model generates a set of novel implications that highlight the dependencies between optimal bank capital regulation and the comparative advantages of various institutions in the financial system.

REVISION: How to Get Banks to Take Less Risk and Disclose Bad News
Date Posted: May  30, 2014
There is wide agreement that before the recent financial crisis, financial institutions took excessive risk in their investment strategies. At the same time, regulators complained that banks did not reveal the extent of their difficulties in a timely fashion thus reducing the effectiveness of government intervention to prevent or mitigate the deleterious effects of the financial crisis. The purpose of this paper is to investigate how regulators can best use certain tools at their disposal to motivate banks to take less risk and to provide adverse information to regulators early. We argue that two tools, namely (i) allowing bank payouts to equity holders even when banks report they are in trouble and (ii) constraining banks’ future investment strategy when they are in trouble can achieve both goals. We show that, in some cases, it is optimal to use both of these tools in combination. That is, in such cases it is optimal to allow equity payouts when banks report they are in trouble, ...

REVISION: Higher Capital Requirements, Safer Banks? Macroprudential Regulation in a Competitive Financial System
Date Posted: Mar  26, 2014
We propose a tractable general equilibrium framework to analyze the effectiveness of bank capital regulations when banks face competition from other investors, such as institutions in the shadow-banking system. Our analysis shows that increased competition can not only render previously optimal bank capital regulations ineffective but also imply that, over some ranges, increases in capital requirements cause more banks in the economy to engage in value-destroying risk-shifting. To avoid this perverse outcome, the regulator has to set capital requirements high enough, so that risk-shifting activities become less profitable from a banker's perspective than socially valuable banking activities. Our model generates a set of novel implications that highlight the intricate dependencies between optimal bank capital regulation and the comparative advantages of various institutions in the financial system.

REVISION: Intellectual Property Contracts: Theory and Evidence from Screenplay Sales
Date Posted: Apr  11, 2013
This paper presents a model of intellectual property contracts. We explain why many intellectual property contracts are contingent on eventual production or success, even without moral hazard on the part of risk-averse sellers. The explanation is based on differences of opinion between buyers and sellers, and reputation building through multiple transactions. Our model predicts that more reputable sellers will be offered a very different mix of cash and contingency payments than inexperienced se

REVISION: Rating Agencies in the Face of Regulation
Date Posted: Apr  11, 2013
This paper develops a theoretical framework to shed light on variation in credit rating standards over time and across asset classes. Ratings issued by credit rating agencies serve a dual role: they provide information to investors and are used to regulate institutional investors. We show that introducing rating-contingent regulation that favors highly rated securities may increase or decrease rating informativeness, but unambiguously increases the volume of highly rated securities. If the regul

REVISION: Control of Corporate Decisions: Shareholders vs. Management
Date Posted: Sep  25, 2010
Activist shareholders have lately been attempting to assert themselves in a struggle with management and regulators over control of corporate decisions. These efforts have met with mixed success. Meanwhile, shareholders have been pressing for changes in the rules governing access to the corporate proxy process, especially in regard to nominating directors. The key issue which these events have brought to light is whether, in fact, shareholders will be better off with enhanced control over corpor

New: A Theory of Board Control and Size
Date Posted: Feb  20, 2009
This article presents a model of optimal control of corporate boards of directors. We determine when one would expect inside versus outside directors to control the board, when the controlling party will delegate decision-making to the other party, the extent of communication between the parties, and the number of outside directors. We show that shareholders can sometimes be better off with an insider-controlled board. We derive endogenous relationships among profits, board control, and the numb

REVISION: A Theory of Board Control and Size
Date Posted: Jan  15, 2008
We extend the traditional view of corporate boards as monitors to include a role for outside board members as suppliers of expertise or information. Indeed, both outsiders and insiders may have private information relevant to the decision. Because of the agency problem between managers and owners (who are assumed to be represented by the outside directors), neither party will communicate his or her information fully to the other. Outsiders in our model control agency problems by making some deci

Capital Budgeting and Delegation
Date Posted: Apr  17, 2005
As part of our ongoing research into capital budgeting processes as responses to decentralized information and incentive problems, we focus in this paper on when a level of a managerial hierarchy will delegate the allocation of capital across projects and time to the level below it. In our model, delegation is a way to save on costly investigation of proposed projects. Therefore, it is more extensive the larger are the costs of such investigations. This delegation takes advantage of the fact tha

Capital Budgeting and Delegation
Date Posted: Apr  17, 2005
As part of our ongoing research into capital budgeting processes as responses to decentralized information and incentive problems, we focus in this paper on when a level of a managerial hierarchy will delegate the allocation of capital across projects and time to the level below it. In our model, delegation is a way to save on costly investigation of proposed projects. Therefore, it is more extensive the larger are the costs of such investigations. This delegation takes advantage of the fact tha

Organization Design
Date Posted: Apr  15, 2005
This paper attempts to explain organization structure based on optimal coordination of interactions among activities. The main idea is that each manager is capable of detecting and coordinating interactions only within his limited area of expertise. Only the CEO can coordinate company-wide interactions. The optimal design of the organization trades off the costs and benefits of various configurations of managers. Our results consist of classifying the characteristics of activities and manage

Organization Design
Date Posted: Apr  14, 2005
This paper attempts to explain organization structure based on optimal coordination of interactions among activities. The main idea is that each manager is capable of detecting and coordinating interactions only within his limited area of expertise. Only the CEO can coordinate company-wide interactions. The optimal design of the organization trades off the costs and benefits of various configurations of managers. Our results consist of classifying the characteristics of activities and manage

Allocation of Decision-Making Authority
Date Posted: Mar  28, 2005
We present a simple model to analyze the allocation of decision-making authority and use the model to characterize the conditions under which a superior will delegate the decision to her subordinate. The model includes two managers, each of whom has private information regarding the outcome of a decision. Because the preferences of the two managers differ, neither can communicate her information fully to the other. We show that the probability of delegation increases with the importance of th

The Role of Games in Security Design
Date Posted: Aug  29, 1998
We contend that security design should be approached as a problem of game design. That is, contracts should specify the procedures that govern the behavior of contract participants in determining outcomes as well as the allocations resulting from those outcomes. We characterize optimal contracts in two nested classes: all contracts (including those that depend on the state) and state-independent contracts. We demonstrate that in situations in which the dependence of contracts on the state is lim

The Capital Budgeting Process, Incentives and Information
Date Posted: Feb  11, 1998
We study the capital allocation process within firms. Observed budgeting processes are explained as a response to decentralized information and incentive problems. It is shown that these imperfections can result in underinvestment when capital productivity is high and overinvestment when it is low. We also investigate how the budgeting process may be expected to vary with firm or division characteristics such as investment opportunities and the technology for information transfer.

The Capital Budgeting Process, Incentives and Information
Date Posted: Feb  11, 1998
We study the capital allocation process within firms. Observed budgeting processes are explained as a response to decentralized information and incentive problems. It is shown that these imperfections can result in underinvestment when capital productivity is high and overinvestment when it is low. We also investigate how the budgeting process may be expected to vary with firm or division characteristics such as investment opportunities and the technology for information transfer.