bidding for contracts in a competitive procurement a buyer seeks to institute a bidding and contracting procedure which selects the most efficient firm to undertake the contract while offering terms that promote risk sharing between buyer and contractor this paper develops a model to analyze formally the trade off between the objectives of risk sharing and efficient contractor selection

choice shifts in groups a decision theoretic basis the phenomenon of choice shifts in group decision making has received much attention in the social psychology literature faced with a choice between a safe and risky decision group members appear to move to one extreme or the other relative to the choices each member might have made on her own both risky and cautious shifts have been identified in different situations this paper demonstrates that from an individual decision making perspective choice shifts may be viewed as a systematic violation of expected utility theory we propose a model in which a well known failure of expected utility captured by the allais paradox is equivalent to a particular configuration of choice shifts thus our results imply a connection between two well known behavioral regularities one in individual decision theory and another in the social psychology of groups

putting renewable energy auctions into action an agent based model of onshore wind power auctions in germany abstract the following analysis looks into auctions for renewable energy specifically onshore wind power in germany following an agent based modeling approach the two most commonly applied auction pricing rules are compared uniform and pay as bid and first conclusions on outcomes are drawn for future policy design the auctions are modeled to closely represent the auction design foreseen in the german renewable energy sources act eeg 2017 and replicate their parameters the analysis draws on auction theory for both pricing schemes individually rational agents with independent valuation are assumed as support for renewable electricity through auctions is to be established permanently and auction rounds will be held multi annually a further focus lies on agents learning over time by adapting their behavior to new information the model results show that pay as bid exhibits lower prices and thus support costs than uniform pricing whereas allocative efficiency suffers under pay as bid over time one can observe a decline in the strike price which is due to learning effects whereas agents profits increase in the course of the auctions furthermore smaller actors will experience difficulties and agent diversity is likely to suffer in the long term if this is not accounted for in other ways

endogenous market structure and competition in the 19th century american brewing industry abstract this study examines market structure and competition in the brewing industry in american frontier states around 1880 although comprehensive firm level data are unavailable available data provide information about the presence of firms in western frontier markets and characteristics of those markets the analysis uses these data in a discrete dependent variable econometric model to estimate the size of a market needed to support a certain number of breweries and the impact of market characteristics on market structure in addition the estimated market sizes needed to sustain different numbers of firms provide information about the competitive effects of entry in the early brewing industry the results indicate that the presence of second and third brewing firms significantly increased competition in a market implying that duopoly markets were not perfectly competitive moreover these findings suggest that brewing firms were not engaged in collusive behavior

on the consensus effect abstract individuals often tend to conform to the choices of others in group decisions compared to choices made in isolation we show that this behavior which we term the consensus effect is equivalent to a well known violation of expected utility namely strict quasi convexity of preferences which is shared by many popular non expected utility models in contrast to the equilibrium outcome when individuals are expected utility maximizers quasi convexity of preferences imply that group decisions may fail to properly aggregate preferences and strictly pareto dominated equilibria may arise

from cash in the market pricing to financial fragility we review some recent research that explores the relationship between asset price volatility and financial fragility when markets and contracts are incomplete jel e5 g2

moderation in groups evidence from betting on ice break ups in alaska we use a large sample of guessed ice break up dates for the tanana river in alaska to study differences between outcomes of decisions made by individuals versus groups we estimate the distribution of guesses conditional on whether they were made by individual bettors or betting pools we document two major distinctions between the two sets of guesses 1 the distribution of guesses made by groups of bettors appears to conform more to the distribution of historical break up dates than the distribution of guesses made by individual bettors and 2 the distribution for groups has less mass in its tails and displays lower variability than the distribution for individuals we argue that these two pieces of evidence are consistent with the hypothesis that group decisions are more moderate either because groups have to reach a compromise when their members disagree or because individuals with extreme opinions are less likely to be part of a group

on optimal competitive contracting we present an example of risk neutral bid taker and bidders in which the bid taker obtains a greater expected revenue from auctioning an inefficient contract than from auctioning an efficient contract this occurs because in going from the efficient contract to an inefficient but almost efficient contract the winning bidder s expected profit decreases faster than the value of the output produced under the contract net of production costs decreases therefore the bid taker s expected revenue the value of the output less the winning bidder s expected profit increases the competitive letting of a contract introduces a factor not present when somehow letting a contract noncompetitively in particular changing the contract not only affects the efficiency of the contract but also affects the amount of the contract s value that will be captured by the contract winner as profit therefore for competitively let contracts the optimal contract for the bid taker to offer turns out less efficient than can b

entry in monopoly market this paper develops new empirical models of market concentration from game theoretic models of entry we construct our models from inequality conditions that describe entrants equilibrium strategies in simultaneous move and sequential move games and use them to study the effects of entry in isolated monopoly markets for new automobiles from estimates of the market size necessary to support one and two dealers we conclude that monopoly dealers do not block the entry of a second dealer we also find that entry does not cause price cost margins to fall by much

free bank failures risky bonds versus undiversified portfolios almost 30 of the 872 banks established under the free banking system 1837 62 are considered failures unable to reimburse noteholders for the full value of their bank notes upon closure lacking sufficient data economists have focused on one of two general failure explanations poor regulation design or undiversified bank portfolios i test both explanations within hazard functions using warren weber s annual balance sheet data for almost every antebellum bank my results suggest that free banking s bond secured note issue was the underlying problem but individual banks could have avoided failure by diversifying their assets with loans and controlling their circulation

some remarks on quiggin s anticipated utility abstract this remark proves that quiggin s anticipated utility function may solve the allais paradox and the common ratio effect for some generalizations of these it is needed to assume that the decision weight function is concave

fact free learning aragones acknowledges financial support from the spanish ministry of science and technology grant sec2003 01961 and creabarcelona economics aragones gilboa and schmeidler gratefully acknowledge support from the polarization and conflict project cit 2 ct 2004 506084 funded by the european commission dg research sixth framework programme gilboa and schmeidler gratefully acknowledge support from the israel science foundation grant 790 00 and 975 03 postlewaite gratefully acknowledges support from national science foundation grant sbr 9810693

using nash bargaining to design project management contracts under cost uncertainty abstract in the design of procurement contracts cost sharing wherein the contractor receives a fixed fee plus a fraction of his cost is common when the cost for completing the project is uncertain we determine the best cost sharing contract between a risk neutral project manager and a risk averse contractor when negotiation proceeds in accord with nash bargaining we examine the characteristics of the contract when the contractor can invest to reduce the mean and or the uncertainty of the project cost we show that cost plus contracts dominate fixed price contracts as well as all other cost sharing contracts in order to extend our analysis to the case when the value of the project itself is uncertain we employ the recent method of embedded nash bargaining finally we generalize our main result by allowing an asymmetric nash bargaining solution

on optimal reservation prices in auctions the theory of auction design examines how various factors affect the outcome of an auction most of the existing literature focuses on how varying the amount of information available to each bidder affects the bid taker s expected revenue when all other factors remain constant this paper studies how the bid taker s expected revenue varies with changes in the auction format when such changes affect the number of bidders and in turn the bidders maximum value for the object being sold specifically we examine how varying the reservation price or screening level affects the bid taker s expected revenue though its effect on the number of bidders for two simple examples the losses associated with a reduced number of bidders outweighs any benefits that nontrivial reservation prices might have had in models with an exogonously set number of bidders

incentive contracts and competitive bidding an increasing segment of economic activity is taking place in nonmarket situations in which economic agents act outside the traditional markets or create markets to deal with specific resource allocation problems one such problem involves the selection by a buyer of a contractor using a competitive bidding process competitive bidding is used extensively by the government for the selection of suppliers of goods and services and for the sale of resources such as offshore oil leases firms may use competitive bidding for the selection of certain suppliers of factor inputs and may attempt to sell certain products in markets in which competitive price quoting is the established market mechanism this paper is concerned with a bidding process in which a firm has an opportunity to bid on a project under the terms of an incentive contract incentive contracts

household decision making in rural china using experiments to estimate the influences of spouses abstract many economic decisions are made jointly within households running an experiment on intertemporal choice we investigate the relative influence of spouses on joint household decisions we let each spouse first decide individually and then jointly with the other spouse we propose the use of a random parameter probit model to measure the relative influence of spouses on joint decisions we find that joint choices are in between husbands and wives choices with respect to impatience indicating that both spouses have an influence on joint decisions however we estimate that in 99 of households husbands have a stronger influence than wives

estimation of a model of entry in the airline industry this paper considers the effect of an airline s scale of operation at an airport on the profitability of routes flown out of that airport the empirical methodology uses the entry decisions of airlines as indicators of underlying profitability the results extend the empirical literature on airport presence by providing a new set of estimates of the determinants of city pair profitability these estimates imply that city pair profits increase in airport presence and decrease rapidly in the number of entering firms the literature on empirical models of oligopoly entry is also extended via a focus on the role of differences between firms

a theory of anticipated utility abstract a new theory of cardinal utility with an associated set of axioms is presented it is a generalization of the von neumann morgenstern expected utility theory which permits the analysis of phenomena associated with the distortion of subjective probability

bank runs in the free banking period free banks in the united states issued private banknotes without discretionary restriction of entry previous research suggests explanations for noteholders relatively large losses and the substantial number of banks that closed the authors examine these hypotheses and the hypothesis that contagious runs were important the evidence provides no support for the importance of wildcat banking due to par versus market valuation of bond reserves episodic but not general support for the importance of declining bond prices and support for contagion effects and contemporaries knowledge of them with little or no impact on the number of banks that closed copyright 1994 by ohio state university press

how individual preferences are aggregated in groups an experimental study abstract this paper experimentally investigates how individual preferences through unrestricted deliberation are aggregated into a group decision in two contexts reciprocating gifts and choosing between lotteries in both contexts we find that median group members have a significant impact on the group decision but the median is not the only influential group member non median members closer to the median tend to have more influence than other members by investigating the same individual s influence in different groups we find evidence for relative position in the group having a direct effect on influence these results are consistent with predictions from spatial models of dynamic bargaining for members with intermediate levels of patience we also find that group deliberation involves bargaining and compromise as well as persuasion preferences tend to shift towards the choice of the individual s previous group especially for those with extreme individual preferences

bank entry during the antebellum period a recent study by kenneth ng 1988 challenges the view the free banking laws lowered barriers to entry the authors study examines bank entry and capital formation in free and nonfree banking states during the free banking period a competitive model is developed and used to test if barriers were lowered in free banking states the evidence indicates that entry significantly increased after the enactment of the free banking laws and that entry policy in nonfree banking states appeared to have been liberalized when the free banking laws were enacted in other states copyright 1995 by ohio state university press

back to the future backtesting systemic risk measures during historical bank runs and the great depression abstract we evaluate the performance of two popular systemic risk measures covar and srisk during eight financial panics in the era before fdic insurance bank stock price and balance sheet data were not readily available for this period we rectify this shortcoming by constructing a novel dataset for the new york banking system before 1933 our evaluation exercise focuses on two challenges ranking systemically important financial institutions sifis and financial crisis prediction we find that covar and srisk meet the sifi ranking challenge that is they help identify systemic institutions in periods of distress beyond what is explained by standard risk measures up to six months before panics in contrast aggregate covar and srisk are only somewhat effective at predicting financial crises

developments in non expected utility theory the hunt for a descriptive theory of choice under risk this article reviews recent developments in the economic theory of individual decision making under risk since the 1950s it has been known that individual choices violate the standard model of expected utility in predictable ways considerable research effort has now been devoted to the project of developing a superior descriptive model following an overview of non expected utility theories which distinguishes between conventional and non conventional approaches the paper seeks to assess these alternative models in terms of empirical success using laboratory and field data and theoretical usefulness the closing sections reflect on some new directions emerging in this literature

why do so few hold stocks the authors investigate why 75 percent of u s households do not hold stocks despite the equity premium and predictions of expected utility models the question is relevant for privatization asset pricing and tax progressivity issues they show that risk aversion per se heterogeneity of beliefs habit persistence time nonseparability and quantity constraints on borrowing do not account for the phenomenon a wedge between borrowing and lending rates and minimum investment requirements are plausible but empirically weak factors more promising explanations are inertia and departures from expected utility maximization there is also qualified support for nondiversifiable income risk as a contributing factor copyright 1995 by royal economic society

ausi expected utility an anticipated utility theory of relative disappointment aversion abstract in this paper we provide an axiomatization for a representation of preferences over lotteries that is only one parameter richer than expected utility our model is a special case of rank dependent expected utility moreover we show that the same restriction on this parameter is required for risk aversion intuitive comparative static results for a reasonably general class of economically interesting choice problems and accommodating some of the most well known violations of expected utility theory

simple probability models for project contracting there are two aspects to the process of price setting using sealed bids the project owner is interested in deploying the contract mechanism that will secure reliable service at the cheapest cost on the other hand each contractor bidding for the project is interested in winning the contract but at a price that assures him a reasonable profit margin we use a parsimonious stochastic model to compare and contrast some commonly used contracts from the point of view of the project owner we show that if the bidders are risk neutral a fixed price contract results in the smallest expected procurement cost for the project owner we introduce and analyze menu contracts and show that the expected price of a menu contract lies in between the prices of the fixed price and cost plus contracts for the same project we analyze how risk aversion and collusion which we model using concepts of stochastic dependence impacts the average winning bid price

the relation between variance and information rent in auctions abstract this paper examines the conventional wisdom expressed in mcafee and mcmillan s 1987 widely cited survey paper on auctions that links increased variance of bidder values to increased information rent we find that although the conventional wisdom does indeed hold in their 1986 model of a linear contract auction this relationship is an artifact of that particular model and cannot be generalized using samuelson s 1987 model which is similar but allows for unobservable costs we show that increased variance does not always imply increased information rent finally we give the appropriate measure of dispersion different from variance that provides the link between the bidder value distribution and information rent

margin based asset pricing and deviations from the law of one price in a model with heterogeneous risk aversion agents facing margin constraints we show how securities required returns increase in both their betas and their margin requirements negative shocks to fundamentals make margin constraints bind lowering risk free rates and raising sharpe ratios of risky securities especially for high margin securities such a funding liquidity crisis gives rise to bases that is price gaps between securities with identical cash flows but different margins in the time series bases depend on the shadow cost of capital which can be captured through the interest rate spread between collateralized and uncollateralized loans and in the cross section they depend on relative margins we test the model empirically using the credit default swap bond bases and other deviations from the law of one price and use it to evaluate central banks lending facilities jel g01 g12 g13 e44 e50 the paramount role of funding constraints becomes particularly salient during liquidity crises with the one that started in 2007 being an excellent case in point banks unable to fund their operations closed down and the funding problems spread to other investors such as hedge funds that relied on bank funding therefore traditional liquidity providers became forced sellers interest rate spreads increased dramatically treasury rates dropped sharply and central banks stretched their balance sheets to facilitate funding these funding problems had significant asset pricing effects the most extreme example being the failure of the law of one price loop securities with nearly

market structure and multiple equilibria in airline markets we provide a practical method to estimate the payoff functions of players in complete information static discrete games with respect to the empirical literature on entry games originated by bresnahan and reiss 1990 and berry 1992 the main novelty of our framework is to allow for general forms of heterogeneity across players without making equilibrium selection assumptions we allow the effects that the entry of each individual airline has on the profits of its competitors its competitive effects to differ across airlines the identified features of the model are sets of parameters partial identification such that the choice probabilities predicted by the econometric model are consistent with the empirical choice probabilities estimated from the data we apply this methodology to investigate the empirical importance of firm heterogeneity as a determinant of market structure in the u s airline industry we find evidence of heterogeneity across airlines in their profit functions the competitive effects of large airlines american delta united are different from those of low cost carriers and southwest also the competitive effect of an airline is increasing in its airport presence which is an important measure of observable heterogeneity in the airline industry then we develop a policy experiment to estimate the effect of repealing the wright amendment on competition in markets out of the dallas airports we find that repealing thewright amendment would increase the number of markets served out of dallas love

competition in the economic crisis analysis of procurement auctions we study the effects of the recent economic crisis on firms bidding behavior and markups in sealed bid auctions using data from austrian construction procurements we estimate bidders construction costs within a private value auction model we find that markups of all bids submitted decrease by 1 5 percentage points in the recent economic crisis markups of winning bids decrease by 3 3 percentage points we also find that without the government stimulus package this decrease would have been larger these two pieces of evidence point to pro cyclical markups

bank panics government guarantees and the long run size of the financial sector evidence from free banking america governments attempt to increase the confidence of financial market participants by making implicit or explicit guarantees of uncertain credibility confidence in these guarantees presumably alters the size of the financial sector but observing the long run consequences of failed guarantees is difficult we look to america s free banking era and compare the consequences of a broken guarantee during the indiana centered panic of 1854 to the panic of 1857 in which guarantees were honored our estimates of a model of endogenous market structure indicate substantial negative long run consequences to financial depth when panics cast doubt upon a government s ability to honor its guarantees

saving risk sharing and preferences for risk saving decisions are made jointly by household members who generally earn risky incomes consequently to interpret saving patterns it is crucial to analyze the relationship between intrahousehold risk sharing and intertemporal choices to that end in this paper the household is characterized as a group of agents with possibly heterogeneous preferences making efficient decisions two results are obtained first it is shown that risk sharing can increase the amount saved by the household second i find that an increase in risk aversion and prudence of an individual member can reduce household risk aversion and prudence these results are consistent with the empirical evidence collected using the hrs

bidding for contests the procurement of product development and production services brings special strategic considerations to the buyer seller relationship in industrial and institutional markets multiple sourcing in particular dual sourcing is a likely way of dealing with the increased risks faced by buyers however there is lack of dual sourcing models that analyze the selection and control process in an integrated fashion this omission had led to apparently contradictory findings in agency and auction theory the paper models the strategic issues for a cost containment contest between two suppliers the suppliers are drawn from several vendors who participate in a bidding competition the supplier with the lower final cost in the contest wins a larger share of the pooled profit fee propositions are derived for the optimal cost plus contest and comparisons are made with the common incentive contract for the integrated selection and control model the larger the winner s share the greater the effort the buyer can make a credible commitment to the optimal winner s share as the winner s share rises however the bid prices increase due to increased contract risk this incentive risk tradeoff determines a the optimal winner s share that minimizes expected procurement price b the corresponding profit fee bid by suppliers c the ensuing cost control effort and d the final price for the procurement comparisons with the common incentive contract tell us when the cost plus contest induces more effort and when bidding for a contest results in a lower final procurement price

the causes of free bank failures a detailed examination abstract in this paper we propose and test a new explanation of bank behavior during the free banking era 1837 1863 arguing against the conventional view that free bank failures were due to wildcat banking we claim they were caused by falling asset prices confronting both explanations with our new and detailed data set developed from state auditor reports we find that the falling asset price explanation of free bank failures explains far more failures than does the wildcatting hypothesis