50th anniversary article option pricing valuation models and applications this paper surveys the literature on option pricing from its origins to the present an extensive review of valuation methods for european and american style claims is provided applications to complex securities and numerical methods are surveyed emphasis is placed on recent trends and developments in methodology and modeling

measurement error in job evaluation and the gender wage gap i introduction wage equations are widely used to estimate the size of the pay gap between male and female dominated jobs when jobs are the unit of observation job wage rates are regressed on job attributes such as skill effort responsibility and working conditions and on the percent of female incumbents in the job the coefficient on the percent female variable estimates the size of the gender pay gap which is often taken as a measure of pay discrimination against women 1 these estimates frequently become the metric for upward adjustment of female dominated job pay to redress the discrimination summarizing the research which uses jobs as the unit of observation ehrenberg 1989 concluded that female dominated jobs are underpaid by 15 34 relative to male dominated jobs similar findings have been reported in studies which use individuals instead of jobs as the unit of observation many criticisms have been raised of these two types of studies one common criticism is that not all relevant control variables for job attributes or individual productivity may be measured or even measurable so that specification error arises if these omitted variables are correlated with the gender variable then the estimated gender pay gap incorporates legitimate differences in productivity and or job attributes however few studies have analyzed the impact of omitted factors bias empirically another common criticism is that there is measurement error in the control variables which in turn leads to biases in estimating the size of the pay gap measured job attributes are highly subjective in nature making measurement error a major problem even human capital measures of education and training are subject to error although one may easily measure years of completed education and experience it is much more difficult to measure years of effective learning or achievement only a few studies have analyzed the size of these biases empirically this paper provides the first estimates of the size of this measurement error bias in the context of job level job attribute wage equations to our knowledge only two previous studies have estimated measurement error bias using individual level human capital wage equations and both are tangential to the major question that we address in particular we find that the estimated gender pay gap is overstated by 34 44 when measurement error bias is ignored in job level wage equation analysis wage adjustments to correct the gender gap in pay which adhere strictly to such biased estimates may lead to millions of dollars in over compensation in the future job evaluation should correct for this bias and we suggest appropriate procedures in addition we provide unique evidence that previous attempts to add measures of seemingly omitted job attributes need not have reduced the bias in the measured pay gap we find that the number of job attributes which enter the wage regression is artificially increased because measurement errors reduce the measured collinearity among job factors the next section explains factor point pay plans and summarizes the few related studies section iii reviews the statistical theory of regression analysis when there is measurement error in the explanatory variables we analyze the effect of independent and correlated measurement errors between job factors on the estimated magnitude of pay discrimination section iv discusses the data and reports the empirical results from implementing various measurement error corrections the final section summarizes our findings and suggests how this study could be used to improve future factor point pay analysis ii background and related research more than half of the workers in the united states are paid according to a pay system at least partly based on job evaluation these systems establish hierarchies of jobs and pay levels using information on a common set of job attributes such as skill effort responsibility and working conditions

herding with and without payoff externalities an internet experiment most real world situations that are susceptible to herding are also characterized by direct payoff externalities yet the bulk of the theoretical and experimental literature on herding has focused on pure informational externalities in this paper we experimentally investigate the effects of several different forms of payoff externalities e g network effects first mover advantage etc in a standard information based herding model our results are based on an internet experiment with more than 6000 subjects of which more than 2400 participated in the treatments reported here including a subsample of 267 consultants from an international consulting firm we also replicate and review earlier cascade experiments finally we study reputation effects i e the influence of success models in the context of herding

informational externalities strategic delay and optimal investment subsidies this paper examines optimal government policy when private investment generates information but investors cannot internalize the informational value their actions have to others equilibrium exhibits inefficient delay as investors adopt a wait and see approach the government can alter incentives via an investment subsidy but complications arise since future subsidies may induce investors to disregard current policy initiatives the paper shows that the government achieves its desired outcome only when the the investment subsidy is financed by a non distortionary lump sum tax when taxation is distortionary the government faces a time inconsistency problem that may prevent effective policy ce texte examine la politique optimale du gouvernement quand l investissement prive engendre de l information mais que les investisseurs ne peuvent pas internaliser la valeur informationnelle que leurs actions ont sur les autres l equilibre est marque par des delais inefficaces a proportion que les investisseurs adoptent une attitude attendre pour voir le gouvernement peut modifier les incitations en creant une subvention a l investissement mais des complications sont possibles puisque des subventions possibles dans l avenir peuvent amener les investisseurs a ne pas se prevaloir des initiatives mises de l avant par la politique courante le texte montre que le gouvernement atteint le resultat desire seulement quand la subvention a l investissement est finance par une taxe forfaitaire non distorsionnante quand la taxe cree des distorsions le gouvernement fait face a un probleme d inconsistance dans le temps qui empeche que la politique soit effective

social networks and technology adoption in northern mozambique despite their potentially strong impact on poverty agricultural innovations are often adopted slowly using a unique household dataset on sunflower adoption in mozambique we analyse whether and how individual adoption decisions depend upon the choices of others in the same social networks since farmers anticipate that they will share information with others we expect farmers to be more likely to adopt when they know many other adopters dynamic considerations however suggest that farmers who know many adopters might strategically delay adoption to free ride on the information gathered by others we present empirical evidence that shows that the relationship between the probability of adoption and the number of known adopters is shaped as an inverse u in line with information sharing the network effect is stronger for farmers who report discussing agriculture with others the data contains information which is needed to ameliorate the identification issues that commonly arise in this context in particular social networks are precisely identified and in addition we can control for village heterogeneity and endogenous group formation

option pricing and foreign investment under political risk abstract the paper analyses asset prices in a context of uncertainty over future government policy as current policy is maintained perceived risk abates thus leading to a gradual appreciation of asset prices and a gradual decrease in their conditional variance option values computed under this process have time series and the term structure of conditional volatility which in general are downward sloping in price series without a policy reversal implied volatility from option prices will exceed actual volatility with this wedge progressively disappearing this may be viewed as the volatility analogue of the peso premium for assets subject to large infrequent price drops

boom and gloom we study the performance of investments made at different points of an investment cycle we use a large data set covering hotels in the united states with rich details on their location characteristics and performance we find that hotels built during hotel construction booms underperform their peers for hotels built during local hotel construction booms this underperformance persists for several decades we examine possible explanations for this long lasting underperformance the evidence is consistent with information based herding explanations

delay and cycles when the profitability of investment depends on the general level of economic activity entrepreneurs have an incentive to delay investments during a recession endogenous delay thus prolongs the recovery from a recession and heightens the effect of the boom this paper describes a dynamic model that exhibits both delay and cycles and develops methods for analysing the role of delay in propogating business cycles a number of interesting characteristics of the cycle are revealed first the effect of delay is asymmetric it lengthens the recovery but not the downturn second delay can increase the amplitude and typically reduces the frequency of the cycle third it can reduce the average level of activity but it achieves this effect by prolonging the recession rather than by reducing the amplitude of the cycle the welfare effects of delay are ambiguous however

the effects of comparable worth in the public sector on public private occupational relative wages if as appears likely comparable worth programs are confined to the public sector the level of publiclprivate relative pay may change and the structure of publiclprivate relative wages within occupations will almost certainly change the nature of these changes will determine the degree to which public wages conform more or less closely to the prevailing wage standard which requires that wages for public jobs be equivalent to wages for similar private sector jobs thus there will be implications for economic efficiency this study analyzes alternative scenarios involving comparable worth in the state and local government slg sector the results suggest that when comparable worth is implemented through special wage increases public sector wages are moved further from compliance with the prevailing wage standard this is because public wages are on average already on a par with privatesector wages however comparable worth tends to provide larger wage increases to those occupations where publiclprivate wages are relatively low and when the payroll budget under comparable worth is fixed at the same size as the payroll budget before comparable worth public wages could be moved closer to compliance with the prevailing wage norm

comparable worth in a decentralized labour market the case of ontario we document the application of pro active pay equity legislation to the private sector of the canadian province of ontario in the early 1990s we report substantial lapses in compliance among smaller firms where the majority of men and women work we also find that the pay equity law had no effect on aggregate wages in female jobs or on the gender wage gap this experience provides unique perspectives on 1 the tensions between the workings of a decentralized labour market and the principles of comparable worth and 2 the obstacles to its extension to the private sector jel classification j7 j3 l equite salariale dans un marche du travail decentralise le cas de l ontario les auteurs documentent l application de la loi d equite salariale mise en vigueur dans le secteur prive en ontario au debut des annees 1990 on fait etat de defaillances substantielles dans la mise en uvre de cette politique aupres des pme ou la majorite des hommes et des femmes travaillent l analyse revele que au niveau agrege la loi d equite salariale n a pas eu d effets sur les salaires dans les emplois feminins ou sur l ecart salarial entre les hommes et les femmes l experience ontarienne fournit des perspectives eclairantes sur 1 les tensions entre le fonctionnement d un marche du travail decentralise et les principes de salaire egal pour un travail de valeur comparable et 2 sur les obstacles a l extension de ces principes au secteur prive

herd behavior the penguin effect and the suppression of informational diffusion an analysis of informational externalities and payoff interdependency this article analyzes a technology adoption process in which the effect of informational spillover interacts with network externalities the interplay of informational externalities and payoff interdependency induces risk averse and clustering behavior in the technology adoption process the analysis differs from the herd behavior literature in focusing on how the herd behavior of subsequent users influences the initial adoption decision moreover herd behavior in this article stems from each agent s desire to inhibit the revelation of new information that can be used in a way detrimental to her rather than from each agent s effort to free ride on information contained in the decisions made by predecessors

learning and capacity expansion under demand uncertainty a competitive dynamic model of entry into a new industry is set up and both its positive and normative aspects are studied the main assumptions are that entry is sequential that it occurs under imperfect information on the size of the market and that better information becomes available as time goes on the gradual improvement in information is due to the fact that later waves of entrants are able to observe the profitability of earlier entrants the major results reported here under suitable restrictions are that the equilibrium rate of entry is monotonically decreasing over time and that at any given point in time it is smaller than the socially optimal one when a new market opens as a result of a product being newly invented for instance or when an existing market starts to expand uncertainty with respect to its size is likely to prevail as a result of this uncertainty entry of firms into such markets typically will occur in waves some firms will enter initially while others will wait to see the consequences of that initial entry if the experience of early entrants is favourable entry will continue otherwise entry will cease hence with the introduction of a new product two phases are associated the growth phase typified by positive operating profits for existing firms and expansion of productive capacity due to entry of new firms and the mature phase typified by erosion of profits and fixed total productive capacity empiricists estimating the time pattern of investments during the growth phase have found an s shaped diffusion curve see mansfield 1986 and gort and klepper 1982 the purpose of the present paper is to theoretically characterize these time patterns and to investigate their welfare properties any attempt to model the type of entry described above must account for differences in both entry dates and resultant earnings in other words the theory must explain why the realized earnings of different cohorts of firms are not equal often such ex post differences are reconciled by assuming heterogeneity with respect to some latent underlying characteristic managerial ability for instance and attributing differences in earnings to differences in that characteristic in this paper instead earning differentials are attributable to luck only ex ante all firms are technologically identical and equally capable of forecasting market prospects and rationally acting upon those forecasts ex post some firms turn out to have entered at the right time and are for that reason more profitable the model developed in this paper analyzes a parametric example of a sequential entry problem in which the uncertainty over market size is gradually resolved over time in a bayesian setting in an environment of perfect competition and constant returns toscale a free entry equilibrium concept is introduced and the aggregate implications of the time path of investments are derived i then compare this actual time path to the optimum this comparison is interesting because the equilibrium is analysed under the

coordination and delay in global games abstract what is the effect of offering agents an option to delay their choices in a global coordination game we address this question by considering a canonical binary action global game and allowing players to delay their irreversible decisions those that delay have access to accurate private information at the second stage but receive lower payoffs we show that as noise vanishes as long as the benefit to taking the risky action early is greater than the benefit of taking the risky action late the introduction of the option to delay reduces the incidence of coordination failure in equilibrium relative to the standard case where all agents must choose their actions at the same time we outline the welfare implications of this finding and probe the robustness of our results from a variety of angles

making waves to innovate or be a fast second internal finance leads to a stalemate in innovation games each firm wants to free ride on the others costly experimentation when instead innovation is financed externally e g with venture capital or initial public offerings there is an endogenous cost to delay waiting to make risky irreversible investment conveys pessimistic information i characterize the relative sizes of waves of leaders and followers in innovation cycles and the endogenous intertemporal distribution of quality as each wave builds and crashes finally old waves leave an adverse selection hangover such that too much early innovation can cause the market for future innovation to break down

imperfect information and dynamic conjectural variations this article analyzes oligopoly interaction in an environment where firms are imperfectly informed about the evolution of the market demand curve the analysis develops a two period cournot framework under the assumptions that demand shifts are positively serially correlated that firms never directly observe the demand curve and that firms never observe the previous quantity decisions of rivals firms do draw inferences about the position of the demand curve from past observations on prices consequently the current output of a firm will influence the current market price which will then influence rivals inferences about future demand the future output decisions of rivals will respond accordingly the theory predicts negative dynamic conjectural variations essentially a firm perceives that an increase in its output will lower the current market clearing price which will cause rival firms to think that the demand curve has shifted down and hence induce them to lower their outputs in the future

early exercise decision in american options with dividends stochastic volatility and jumps using a fast numerical technique we investigate a large database of investors suboptimal nonexercise of short maturity american call options on dividend paying stocks listed on the dow jones the correct modeling of the discrete dividend is essential for a correct calculation of the early exercise boundary as confirmed by theoretical insights pricing with stochastic volatility and jumps instead of the black scholes merton benchmark cuts the amount lost by investors through suboptimal exercise by one quarter the remaining three quarters are largely unexplained by transaction fees and may be interpreted as an opportunity cost for the investors to monitor optimal exercise

path dependent options the case of lookback options lookback options are path dependent contingent claims whose payoffs depend on the extrema of a given security s price over a certain period of time using probabilistic tools we derive explicit formulas for various european lookback options and provide some results about their american counterparts

behavioral biases in endogenous timing herding games an experimental study abstract we experimentally study behavior in an endogenous timing herding game we find that subjects respond to their type and to observed investment activity in a sensible way but there are also substantial departures from nash equilibrium some departures can be viewed as mere noise in decision making while other departures represent systematic biases reflecting subjects failure to appreciate subtle aspects of the game

endogenous timing of actions under conflict between two types of second mover advantage in a model two players heterogeneous in their information quality compete with each other with perfect information about the other player s information quality if they can decide their timings of actions endogenously the less informed player has an incentive to delay her action for learning on the other hand the more informed player wants to delay her action to prevent her information from being revealed not to enable her to learn the consict of these two types of second mover advantages yields a war of attrition although both players can bene t from acting as the follower the gain from a delay for learning is greater than that for preventing the other s learning therefore a cost for the delay in action plays an important role in characterizing the equilibrium in contrast to the literature in which only informational externalities are considered this article shows that the introduction of payoff externalities contributes to different procedures and reasoning processes through which the heterogeneous players timings of actions are decided endogenously

externality effects of education dynamics of the adoption and diffusion of an innovation in rural ethiopia abstract this article investigates the role of schooling at the household and community levels in the adoption and diffusion of agricultural innovations in rural ethiopia we find that household level education is important to the timing of adoption but less crucial to the question of whether a household has ever adopted fertilizer since those without schooling may eventually copy the educated community level education substitutes for low levels of household education encouraging uneducated farmers to adopt sooner than would be predicted in the absence of educated neighbors moreover community level education is complementary to household education in determining which farmers will eventually adopt thus evidence is presented to suggest that there are two externality effects educated farmers are early innovators providing an example that may be copied by less educated farmers and educated farmers are better able to copy those who innovate first enhancing diffusion of the new technology more wide

an equilibrium analysis of information aggregation and fluctuations in markets with discrete decisions abstract this paper shows how the interaction between decentralized information gathering and discreteness of investment decisions at the individual level can generate random fluctuations in aggregate investment that involve occasionally large allocation errors this interaction is illustrated in a model in which private information is costly to acquire and prices reveal information the unique rational expectations equilibrium outcome of the model is shown to always be noisy and characterized by investment levels which may be high simply because uninformed investors are buying under the impression that the high price is a signal of good investment opportunities

pricing american style securities using simulation abstract we develop a simulation algorithm for estimating the prices of american style securities i e securities with opportunities for early exercise our algorithm provides both point estimates and error bounds for the true security price it generates two estimates one biased high and one biased low both asymptotically unbiased and converging to the true price combining the two estimators yields a confidence interval for the true price the proposed algorithm is especially attractive compared with lattice and finite difference methods when there are multiple state variables and a small number of exercise opportunities preliminary computational evidence is given

decentralization duplication and delay we argue that although decentralization has advantages in finding low cost solutions these advantages are accompanied by coordination problems which lead to delay or duplication of effort or both consequently decentralization is desirable when there is little urgency or a great deal of private information but it is strictly undesirable in urgent problems when private information is less important we also examine the effect of large numbers and find that coordination problems disappear in the limit if distributions are common knowledge

monte carlo valuation of american options through computation of the optimal exercise frontier this paper introduces a monte carlo simulation method for pricing multidimensional american options based on the computation of the optimal exercise frontier we consider bermudan options that can be exercised at a finite number of times and compute the optimal exercise frontier recursively we show that for every date of possible exercise any single point of the optimal exercise frontier is a fixed point of a simple algorithm once the frontier is computed we use plain vanilla monte carlo simulation to price the option and obtain a low biased estimator we illustrate the method with applications to several types of options

currency lookback options and observation frequency a binomial approach abstract in the last decade interest in exotic options has been growing especially in the over the counter currency market in this paper we consider lookback currency options which are path dependent we show that a one state variable binomial model for currency lookback options can be constructed with the same computational complexity or should we say simplicity as the standard binomial model furthermore the model allows us to investigate a second very important feature of real life lookback option contracts the observation frequency

the simple economics of research portfolios this article identifies biases in market portfolios of parallel research projects arising from the noncongruence of social goals and private aspirations occasioned by those circumstances where the market rewards only the winner and where the winner is awarded the entire social surplus it is shown that under risk neutrality this noncongruence implies that t he market encourages the development of too many discoveries too lar ge a spread in the distribution of the quality of discoveries and an excessive occurrence of multiple discoveries copyright 1987 by royal economic society

on industry life cycles delay entry and shakeout in beer brewing abstract this paper proposes a new explanation for industry shakeout an event evident in the life cycle of many industries in which the number of firms drops significantly in a short interval of time based on an in depth analysis of the shakeout in the united states beer brewing industry between 1880 and 1890 we propose that industry shakeouts naturally follow periods of mass entry by firms similar patterns are evident in two other industries we briefly examine the us automobile and tire industries while entry rates fluctuate broadly in all these industries we find that the timing of exit for a given cohort of entrants is remarkably similar over time the exit hazard rate is peaked in the first two years of every cohort s life and drops dramatically to low and stable levels for subsequent ages in this sense mass exit follows mass entry and does not require a deep explanation it is the mass entry evident in the data for these industries that requires an explanation we propose a theoretical model of information accumulation to explain entry into an industry entrepreneurs are uncertain about the profitability of the industry and this uncertainty is resolved through sufficient accumulation of information regarding the fortunes of incumbent firms delay in entry occurs solely due to the fact that it takes time to accumulate sufficient information to support more entry the resulting entry pattern from simulations of the model looks much like that observed in the industries we study

experimentation in markets we present a model of entry and exit with bayesian learning and price competition a new product of initially unknown quality is introduced in the market and purchases of the product yield information on its true quality we assume that the performance of the new product is publicly observable as agents learn from the experiments of others informational externalities arise we determine the markov perfect equilibrium prices and allocations in a single market the combination of the informational externalities among the buyers and the strategic pricing by the sellers results in excessive experimentation if the new product is launched in many distinct markets the path of sales converges to the efficient path in the limit as the number of markets grows in multi agent learning situations informational externalities may reduce the number of experiments undertaken below the socially efficient level as buyers choose among new experience goods or firms decide whether to adopt a new technology the availability of information from others decisions gives rise to a free rider problem rather than perform a costly experiment herself a buyer may opt to wait and see how the market evaluates the new product in this paper we develop a simple market model of experimentation and analyse the informational effects in a model with buyers and sellers in contrast to the one sided experimentation problems we find that equilibrium experimentation often exceeds the pareto optimal level in two sided models the first model we consider is a dynamic duopoly in continuous time with homogeneous buyers two firms with differentiated products engage in price competition over time one product has a known value while the other is new and its true value is initially uncertain to all the parties in the model the value of the product is determined by the quality of the match between consumer preferences and product characteristics additional information is acquired only through repeat purchases in each period buyers observe a noisy signal of the true value of the product we assume that all signals are publicly observable and that all uncertainty is about a common value component with this assumption all buyers and sellers condition their behaviour on the same information and we can abstract from individual differences in past observations this is justified in economic situations where public data on other buyers choices is available and informative for example when choosing among providers of communication or transportation services such as mail delivery firms or airlines it is reasonable to rely on consumer reports and other published data in addition to one s private experience we also show that our model has an alternative interpretation as one where a flow of buyers make a once and

the effects of the market structure on the adoption of evolving technologies abstract we study the speed at which technologies are adopted depending on how the market power is shared between the firms that sell technologies and the firms that buy them our results suggest that because of a double marginalization problem adoption is fastest when either sellers or buyers hold all the market power thus competition between sides of the market may delay the adoption of technologies

price dispersion and learning in a dynamic differentiated goods duopoly we study the evolution of prices set by duopolists who are uncertain about the perceived degree of product differentiation customers sometimes view the products as close substitutes sometimes as highly differentiated as the informativeness of the quantities sold increases with the price differential there is scope for active learning by firms when information has low value to the firms they charge the same price as would be set by myopic players and there is no price dispersion when firms value information more highly on the other hand they actively learn by creating price dispersion such price dispersion arises in a cyclical fashion and is most likely to be observed when the firms environment changes sufficiently often but not too frequently firms payoffs are higher when they use correlated pricing strategies contrary to what one might expect such coordination need not hurt consumers provided they are sufficiently impatient

pricing and exercising american options an asymptotic expansion approach abstract this paper proposes and implements a novel asymptotic expansion approach for pricing discretely monitored american options and approximating their optimal early exercise boundaries under a generic class of multivariate derivative pricing models incorporating both stochastic volatility and levy driven jumps in asset return the price and the critical value can be expanded up to any arbitrary order around those under a simple constant volatility jump diffusion model the expansion terms are then efficiently implemented by exactly solving some backward inductions via closed form fourier transforms where a substantial extension of the hilbert transform method of feng and linetsky 2008a 2009 plays an important role the efficiency of our method is illustrated through some representative examples as applications we analyze the impacts of various model parameters on the optimal early exercise boundary compare the optimal early exercise boundaries under different models and propose a derivative proxy based method for practically exercising american options under models with stochastic volatility and jumps

extending quadrature methods to value multi asset and complex path dependent options abstract the exposition of the quadrature quad method andricopoulos widdicks duck and newton 2003 universal option valuation using quadrature methods journal of financial economics 67 447 471 see also corrigendum journal of financial economics 73 603 2004 is significantly extended to cover notably more complex and difficult problems in option valuations involving one or more underlyings trials comparing several techniques in the literature adapted from standard lattice grid and monte carlo methods to tackle particular types of problem show that quad offers far greater flexibility superior convergence and hence increased accuracy and considerably reduced computational times the speed advantage of quad means that even under the curse of dimensionality it is not necessary to resort to monte carlo methods certainly for options involving up to five underlying assets given the universality and flexibility of the method it should be the method of choice for pricing options involving multiple underlying assets in the presence of many features such as early exercise or path dependency

the valuation of path dependent contracts on the average this article values option contracts based on the average price realized over a finite time horizon such contracts are of importance to traders who periodically transact in spot markets and who require protection from adverse moves in their total accrued costs realized over their trading horizons explicit valuation models for pricing a variety of path dependent contracts based on geometric and arithmetic averages are developed the early exercise features of american contracts are investigated and it is shown that this feature has significant value

universal option valuation using quadrature methods abstract this paper proposes and develops a novel simple widely applicable numerical approach for option pricing based on quadrature methods though in some ways similar to lattice or finite difference schemes it possesses exceptional accuracy and speed discretely monitored options are valued with only one timestep between observations and nodes can be perfectly placed in relation to discontinuities convergence is improved greatly in the extrapolated scheme a doubling of points can reduce error by a factor of 256 complex problems e g fixed strike lookback discrete barrier options can be evaluated accurately and orders of magnitude faster than by existing methods

learning from the behavior of others conformity fads and informational cascades learning by observing the past decisions of others can help explain some otherwise puzzling phenomena about human behavior for example why do people tend to converge on similar behavior why is mass behavior prone to error and fads the authors argue that the theory of observational learning and particularly of informational cascades has much to offer economics business strategy political science and the study of criminal behavior

on vertical relations and the timing of technology adoption we study the timing of new technology adoption in markets with input outsourcing and thus with vertical relations we find that technology adoption can take place earlier when firms engage in input outsourcing than when they produce the input in house hence the presence of vertical relations can accelerate the adoption of a new technology we also find that particular features of a vertically related market such as the distribution of bargaining power and the contract type through which trading is conducted can crucially affect the speed of technology adoption

should i stay or should i go bandwagons in the lab abstract we experimentally investigate the impact of strategic uncertainty and complementarity on leader and follower behavior using the model of farrell and saloner 1985 at the core of the model are endogenous timing irreversible actions and private valuations we find that strategic complementarity strongly determines follower behavior once a subject decides to abandon the status quo the probability that other players jump on the bandwagon increases sharply however there is a reluctance to lead when leading is a conditional best response we explain this deviation from the neo classical equilibrium by injecting some noise in the equilibrium concept we also find that cheap talk improves efficiency

male female supply to state government jobs and comparable worth the proportion of women in state government jobs and applicant pools is well explained by a model emphasizing supply side factors relative to men women s supply is least sensitive to wages in predominantly male jobs and most sensitive to wages in predominantly female jobs these results suggest that comparable worth policies that shift relative pay toward traditionally female jobs and away from traditionally male jobs will increase the proportion of females in male dominated female dominated and total state government jobs the implication is that supply side responses need not prevent comparable worth pay adjustments from raising total female compensation

technology adoption in the presence of network externalities we analyze technology adoption in industries where network externalities are significant the pattern of adoption depends on whether technologies are sponsored a sponsor is an entity that has property rights to the technology and hence is willing to make investments to promote it key findings include the following 1 compatibility tends to be undersupplied by the market but excessive standardization can occur 2 in the absence of sponsors the technology superior today has a strategic advantage and is likely to dominate the market 3 when one of two rival technologies is sponsored that technology has a strategic advantage and may be adopted even if it is inferior 4 when two competing technologies both are sponsored the technology that will be superior tomorrow has a strategic advantage

investment timing and learning externalities abstract we study a duopoly model of investment in which each player learns about the quality of a common value project by observing some public background information and possibly the experience of his rival investment costs are private information and the background signal takes the form of a poisson process conditional on the quality of the project being low the resulting attrition game has a unique symmetric equilibrium which depends on initial public beliefs we determine the impact of changes in the cost and signal distributions on investment timing and how equilibrium is affected when a first mover advantage is introduced

social contagion and income heterogeneity in new product diffusion a meta analytic test standard diffusion models capture social contagion only coarsely and do not allow one to operationalize different contagion mechanisms moreover there is increasing skepticism about the importance of contagion and as has long been known s shaped diffusion curves can also result from heterogeneity in the propensity to adopt we present hypotheses about conditions under which specific contagion mechanisms and income heterogeneity are more pronounced and test these hypotheses using a meta analysis of the q p ratio in applications of the bass diffusion model the ratio is positively associated with the gini index of income inequality in a country supporting the heterogeneity in thresholds interpretation the ratio also varies as predicted by the gamma shifted gompertz diffusion model but the evidence vanishes after controlling for national culture as to contagion the q p ratio varies with the four hofstede dimensions of national culture for three of them in a direction consistent with the social contagion interpretation furthermore products with competing standards have a higher q p ratio which is again consistent with the social contagion interpretation finally we find effects of national culture only for products without competing standards suggesting that technological effects and culturally moderated social contagion effects might not operate independently from each other

second mover advantage and entry timing we describe a model of entry timing assuming that a second mover can benefit from observing the experience of a first mover we focus on how market attractiveness characteristics such as size and cost affect the time until first entry the effects depend on whether the number of participants is exogenous or endogenous in the former case a more attractive market leads to earlier entry in the latter case it leads to later entry treating the number of firms as an integer free entry leads to non monotone but testable effects of market attractiveness on entry timing

ex post regret and the decentralized sharing of information abstract firms reveal private information about the value of investment through their investment decisions as a consequence they may have ex post regret once they see other firms investments we define a notion of rational expectations equilibrium for games which imposes a no regret property in this equilibrium all firms make the same investment decision but despite the absence of ex post regret the investment herd can be inefficient in addition equilibrium might not exist we introduce a notion of probabilistic existence and identify conditions under which if the number of firms is large enough information comes out so that investment herds are first best efficient with high probability and equilibrium exists with high probability journal of economic literatureclassification numbers c7 d8

taking the road less traveled by does conversation eradicate pernicious cascades abstract we offer a model in which sequences of individuals often converge upon poor decisions and are prone to fads despite communication of the payoff outcomes from past choices this reflects both direct and indirect action based information externalities in contrast with previous cascades literature cascades here are spontaneously dislodged and in general have a probability less than one of lasting forever furthermore the ability of individuals to communicate can reduce average decision accuracy and welfare

an experimental study of job evaluation and comparable worth the doctrine of comparable worth rests on an assumption that each job possesses an inherent worth independent of the market forces of supply and demand implementation of comparable worth further requires that inherentjob worth be measured with reasonable accuracy this paper reports the results of an experimental study of comparable worth three commercial job evaluation firms rated the same set of 27 jobs in an actual company statistical analysis of the experimental data indicates that the three evaluators differed in which job trait or constellation of traits they used to evaluate inherent job worth implying that at least one of them failed to measure inherent job worth accurately these results suggest that any attempt to implement comparable worth may be quite sensitive to the evaluator chosen to measure job worth

hindsight foresight and insight an experimental study of a small market investment game with common and private values we experimentally test an endogenous timing investment model in which sub jects privately observe their cost of investing and a signal correlated with the common investment return subjects overinvest relative to nash we separately consider whether subjects draw inferences in hindsight and use foresight to delay profitable investment and learn from market activity in contrast to nash cursed equilibrium and level k predictions behavior hardly changes across our experimental treatments maximum likelihood estimates are inconsistent with belief based theories we offer an explanation in terms ofboundedly ratio nal rules of thumb based on insights about the game which provides a better fit than quantal response equilibrium jel c72 d82 d83 gil

bayesian learning in social networks we study the perfect bayesian equilibrium of a sequential learning model over a general social network each individual receives a signal about the underlying state of the world observes the past actions of a stochastically generated neighbourhood of individuals and chooses one of two possible actions the stochastic process generating the neighbourhoods defines the network topology we characterize pure strategy equilibria for arbitrary stochastic and deterministic social networks and characterize the conditions under which there will be asymptotic learning convergence in probability to the right action as the social network becomes large we show that when private beliefs are unbounded meaning that the implied likelihood ratios are unbounded there will be asymptotic learning as long as there is some minimal amount of expansion in observations we also characterize conditions under which there will be asymptotic learning when private beliefs are bounded

the effect of endogenous timing on coordination under asymmetric information an experimental study abstract this paper investigates the role of endogenous timing of decisions on coordination under asymmetric information in the equilibrium of a global coordination game where players choose the timing of their decision a player who has sufficiently high beliefs about the state of the economy undertakes an investment without delay this decision potentially triggers an investment by the other player whose beliefs would have led to inaction otherwise endogenous timing has two distinct effects on coordination a learning effect early decisions reveal information and a complementarity effect early decisions eliminate strategic uncertainty for late movers the experiments that we conduct to test these theoretical results show that the learning effect of timing has more impact on the subjects behavior than the complementarity effect we also observe that subjects welfare improves significantly under endogenous timing

portfolio choice in research and development we analyze the effects of a winner take all patent mechanism on the riskiness of the research strategies chosen by competingfirms as well as on thefirms incentives to duplicate research projects nash equilibrium choices are compared with the social optimum in a oneshot simultaneous move game in which competitors choose the riskiness or correlation of their research performances we show that neither society nor firms have any preference for correlation per se while the divergence between social and privately optimal levels of risk depends on skewness characteristics of the probability distribution over discovery dates and on levels of risk aversion

investment as a process of search this paper analyzes optimal capital accumulation in the face of structural uncertainty in which the firm does not fully know its own profit function and can discover it only through further investment it is shown that under structural uncertainty capital accumulation is gradual even when adjustment costs are linear and not convex it is further shown that structural uncertainty creates an incentive to market research the paper also presents an example of structural uncertainty in which an additional price uncertainty has a negative effect on investment contrary to the standard models

primal dual simulation algorithm for pricing multidimensional american options this paper describes a practical algorithm based on monte carlo simulation for the pricing of multidimensional american i e continuously exercisable and bermudan i e discretely exercisable

investment under uncertainty irreversibility and the arrival of information over time in this paper we consider a risk neutral competitive firm which is uncertain about the true state of demand we build upon arrow by demonstrating that the irreversibility of investment in physical capital together with the anticipation of receiving information and of learning the state of demand lead to 1 cautious investment behaviour and hence to lower investment levels than otherwise since the firm cannot disinvest if market conditions turn out to be less favourable than currently anticipated 2 a time varying risk premium or marginal adjustment cost which is shown to arise endogenously and to be positively related to the investment level and to the anticipation of greater information in the sense of blackwell 1951 1953 3 a gradual adjustment of the capital stock to the desired level defined as the optimal capital stock corresponding to the true state of demand

social learning and delay in a dynamic model of price competition abstract this paper studies dynamic price competition between two firms selling differentiated durable goods to two buyers whose valuations of the two goods depend on their own private type as well as that of the other buyer we derive a key intertemporal property of the equilibrium prices and construct an equilibrium based on this property we show that social learning reduces the equilibrium prices in the sense that when the buyers are more interdependent and hence have a stronger incentive to wait and see the firms respond by lowering their period 1 prices interestingly we find that this response by the firms along with the intertemporal property of the equilibrium prices implies that buyers delay their decisions less often when they become more interdependent

experimentation imitation and stochastic stability abstract do boundedly rational agents repeatedly playing a symmetric game with a unique symmetric equilibrium learn over time to play it in this paper we model the dynamic interaction of two types of such agents experimenters and imitators whose behavior is characterized by simple rules of thumb we find that the stochastic process describing their play isstable in the large it converges globally and with probability one to a compact neighborhood of the equilibrium however its local behavior near the equilibrium depends in interesting ways on the details of the model journal of economic literatureclassification number d83

delay in contests abstract why is there delay in contests in this paper we follow and extend the line of reasoning of carl von clausewitz to explain delay for a given contest technology delay may occur if there is an asymmetry between defense and attack if the expected change in relative strengths is moderate and if the additional cost of investment in future strength is low

the adaptive mesh model a new approach to efficient option pricing abstract most derivative securities must be priced by numerical techniques these models contain distribution error and nonlinearity error the adaptive mesh model amm sharply reduces nonlinearity error by grafting one or more small sections of fine high resolution lattice onto a tree with coarser time and price steps three different amm structures are presented one for pricing ordinary options one for barrier options and one for computing delta and gamma efficiently the amm approach can be adapted to a wide variety of contingent claims for some common problems accuracy increases by several orders of magnitude with no increase in execution time

something to talk about social spillovers in movie consumption we exploit the randomness of weather and the relationship between weather and moviegoing to quantify social spillovers in movie consumption instrumenting for early viewership with plausibly exogenous weather shocks captured in lasso chosen instruments we find that shocks to opening weekend viewership are doubled over the following five weekends our estimated momentum arises almost exclusively at the local level and we find no evidence that it varies with either ex post movie quality or the precision of ex ante information about movie quality suggesting that the observed momentum is driven in part by a preference for shared experience and not only by social learning

information cascades and revolutionary regime transitions we combine acemoglu and robinson s model of the economic origins of democracy with lohmann s model of political mass protest this allows us to analyse the economic causes of political regime change based on the microfoundations of revolution we are able to derive conditions under which democracy arises peacefully when it occurs only after a revolution and when oligarchy persists we model these possibilities in a world of asymmetric information where information cascades are possible and where these cascades may involve errors in the sense that they make everyone worse off

can entrepreneurial firms benefit from product piracy abstract we examine the potential benefits of product piracy to entrepreneurial firms specifically we use a resource based perspective to show that a decrease in the inimitability of an entrepreneurial firm s intellectual property does not necessarily diminish performance when piracy increases the value of this resource and an information economics perspective to explain why and when imitation can increase the value of an intellectual property resource this explanation reconciles empirical studies that indicate mixed results it also expands the resource based view by suggesting that reducing the value of one resource can directly increase the value of another

the implementation process of comparable worth winners and losers this paper provides a unique opportunity to observe how a public policy affected the earnings of various interest groups at different stages of implementation specifically we examine how the earnings of women union members and supervisory and professional staff were affected by various proposed and implemented comparable worth pay plans in iowa we find that large relative gains to women in the original proposed plans were reduced as the process evolved as a result some of the original gains to women were redistributed to union members supervisors and professionals

evaluation of counterparty risk for derivatives with early exercise features abstract we introduce an efficient numerical approach to evaluate counterparty risk and we compute the credit valuation adjustment for derivatives having early exercise features the approach is flexible and can account for wrong way risk and various models for the underlying risk factor s dynamics numerical experiments are presented to illustrate the efficiency and versatility of the method

a signal jamming theory of predation we propose a new theory ofpredation based on signal jamming in our model the predator s characteristics are common knowledge while the entrant is uncertain of his own future profitability the entrant uses his current profit to decide whether to remain in the market and the predator preys to jam or interfere with this inference problem thus our model differs from those based on reputation effects in which the predator preys to signal information about himself

models of technology diffusion abstract the literature on new technology diffusion is vast and it spills over many conventional disciplinary boundaries this paper surveys the literature by focusing on alternative explanations of the dominant stylized fact that the usage of new technologies over time typically follows an s curve the most commonly found model which is used to account for this model is the so called epidemic model which builds on the premise that what limits the speed of usage is the lack of information available about the new technology how to use it and what it does the leading alternate model is often called the probit model which follows from the premise that different firms with different goals and abilities are likely to want to adopt the new technology at different times in this model diffusion occurs as firms of different types gradually adopt it there are actually many ways to generate an s curve and the third class of models which we examine are models of density dependence popularized by population ecologists in these models the twin forces of legitimation and competition help to establish new technologies and then ultimately limit their take up finally we look at models in which the initial choice between different variants of the new technology affect the subsequent diffusion speed of the chosen technology such models often rely on information cascades which drive herd like adoption behaviour when a particular variant is finally selected

consumer learning and hybrid vehicle adoption we study the effect of differences in product quality on new technology diffusion we propose a model in which heterogeneity in perceived product quality affects consumer adoption if consumers experientially infer the quality of a technology an increase in initial exposure to a low quality product may inhibit subsequent diffusion incentives intended to speed up adoption may in fact have the opposite effect if they propagate low quality signals we examine the predictions of the model using sales data for 11 hybrid vehicle models between 2000 and 2006 consistent with press reports that the first generation insight was perceived to be of lower quality than the first generation prius we find that conditional on overall hybrid vehicle adoption in the first 2 years locations with a relatively high prius market share experienced faster subsequent adoption than states with a relatively high insight market share we estimate the elasticity of new hybrid sales with respect to the prius penetration rate is 0 30 0 58 while the elasticity with respect to the insight penetration rate is 0 14 to 0 44

impact of bayesian learning and externalities on strategic investment we investigate the interplay between learning effects and externalities in the problem of competitive investments with uncertain returns we examine a game theoretic duopoly investment model in which i a firm can learn about the profitability of the investment by observing the performance of the first mover and ii externalities exist between the investments of two firms we find a region of a war of attrition between the two firms in which the interplay between externalities and learning gives rise to counterintuitive effects on investment strategies and payoffs in particular we find that contrary to the conventional war of attrition where an increase in benefits for the follower generally delays the first move an increase in the rate of learning which tends to benefit the follower can hasten the first investment this paper was accepted by james smith decision analysis

learning and information aggregation in an exit game we analyze information aggregation in a stopping game with uncertain common payos players learn from their own private experiences as well as by observing the actions of other players we give a full characterization of the symmetric mixed strategy equilibrium and show that information aggregates in randomly occurring exit waves observational learning induces the players to stay in the game longer the equilibria display aggregate randomness even for large numbers of players

dynamic competition in technological investments an empirical examination of the lcd panel industry abstract when are technological laggards more likely to try to catch up with leaders we offer empirical evidence on firm level data of plant investments in the tft lcd panel industry where technological competition has been intense and dynamic we find that the followers level of technology has a non monotonic effect on technology improving investments with intermediate followers the most apt to invest in catch ups this result is a puzzle given the existing theory on technology race we also find that followers catch up investments increase with the capacity of the leader that employs the state of the art technology these results are robust to variations in specification and alternative accounts of effects we discuss our findings and contributions in light of the technology race literature

information revelation and strategic delay in a model of investment we model investment as an n player game with a pure informational externality each player s payoff depends only on his own action and the state of nature however because a player s action reveals his private information players wait to see what other players will do equilibrium is inefficient because delay is costly and information is imperfectly revealed we characterize the unique symmetric perfect bayesian equilibrium and study the robustness of delay which turns out to be sensitive to the reaction speed and the number of players we establish the following results i when the period length is very short the game ends very quickly and there is a form of herding or informational cascade which results in a collapse of investment ii as the period length increases the possibility of herding disappears iii as the number of players increases the rate of investment and the information flow are eventually independent of the number of players adding more players simply increases the number who delay iv in the limit the time profile of investment is extreme a period of low investment followed either by an investment surge or a collapse

intrafirm diffusion of new technologies an empirical application research on the diffusion of new technologies has centred on the study of the interfirm rate of diffusion paying much less attention to intrafirm aspects this paper attempts to overcome this gap in the literature by analysing the factors that influence the speed with which a new technology the atm is fully adopted the data over which the hypotheses are tested belongs to the spanish savings banks market the results show that the rate of intrafirm diffusion is explained by innovation firm and market characteristics in testing our hypotheses we make use of both traditional methods and survival analysis techniques

persistence and reversal in herd behavior theory and application to the decision to go public we model rational herd behavior when the underlying value changes over time with payoffs that are either dependent or independent of the underlying value we show that herding does not last forever and is not monotone in signal quality high correlation among agents actions does not necessarily imply herding this suggests alternative empirical methods are needed to detect herding the model has many applications including the ipo decision in which payoffs are state dependent the model implies that the decision to go public is more likely associated with herding than the decision to delay an ipo copyright 2002 oxford university press

an experiment on behavior in social learning games with collective preferences abstract many environments with social learning involve payoff interdependencies until recently few studies have examined sequentially observational social learning environments with externalities this paper presents the results of an experiment that examines the theoretical predictions of a simple model of observational learning where individuals care about their own actions and the actions of others ali and kartik 2012 consistent with theory i find that behavior does not change with this class of payoff interdependencies however behavior deviates from equilibrium predictions in the same manner both with and without these interdependencies

the reaper and the scanner indivisibility led incremental innovations and the adoption of new technologies widespread adoption of a new capital embodied technology requires a continu ous flow of incremental innovations a few of them address the key problem of indivisibility by making renting the new machine a viable alternative to buying it or by dividing it up into modular elements such incremental innovations differ from the learning by doing effects usually considered by diffusion models and greatly affect the structure of the adopting industry the case for keeping them in due account is made by revisiting paul david s classic paper on the mccormick reaper by criticising the subsequent evolution of threshold models of adoption and by summarising my own findings on the diffusion of electronic pre press devices

delay and information aggregation in stopping games with private information abstract we consider equilibrium timing decisions in a model with a large number of players and informational externalities the players have private information about a common payoff parameter that determines the optimal time to invest they learn from each other in real time by observing past investment decisions we develop new methods of analysis for such large games and we give a full characterization of symmetric equilibria we show that the equilibrium statistical inferences are based on an exponential learning model although the beliefs converge to truth learning takes place too late ex ante welfare is strictly between that without observational learning and that with full information

is the market biased against risky r d this article analyzes the riskiness of the r d strategies chosen by firms engaged in a winner takes all patent race in contradiction to dasgupta and stiglitz 1980 we show that when the distribution of invention times is symmetric the market equilibrium cannot be safer and may be riskier than is socially optimal we identify the economic reason for the emergence but only if there are few competitors