tick size and the compass rose further insights abstract this paper investigates two differing perspectives on the compass rose those of crack and ledoit 1996 the journal of finance 51 2 751 762 and szpiro 1998 journal of banking and finance 22 1559 1569 neither perspective has explicitly considered the effect of time and we consider the implications of this with illustrations using market micro data

resource based fdi and expropriation in developing economies abstract globally foreign direct investment fdi assets are expropriated more in resource extraction industries compared to other sectors despite the higher apparent risk of expropriation in resources countries more likely to expropriate also have a larger share of fdi in the resource sector an incomplete markets model of fdi is developed to account for this puzzle the type of government regime is stochastic with low penalty regimes facing a relatively low exogenous cost of expropriating fdi and country risk is measured by the variation in these costs across different regimes the key innovation of the model is that the government before the regime type is known is able to charge different prices to domestic and foreign investors for mineral rights granting cheap access increases fdi and reduces the country s share of resource rents increasing the temptation to expropriate in a relatively low penalty regime in very high risk countries subsidizing resource fdi increases the total value of output by raising investment and the net gains from expropriating in a low penalty regime outweigh the rents foregone under a high penalty one however a stochastic resource output price results in relatively low risk countries restricting fdi inflows to the resource sector instead windfall profits in this sector raise incentives to expropriate when prices are high yet minimization of the ex ante risk of expropriation is preferred owing to the relatively high penalty for expropriating these results imply a higher average share of resource based fdi in countries most likely to expropriate while resources account for a high share of expropriated assets compared to the sector s global share of fdi we show that the model is able to reconcile observed patterns of foreign investment and expropriation for a sample of 38 developing and emerging economies

uncovering nonlinear structure in real time stock market indexes the s p 500 the dax the nikkei 225 and the ftse 100 this article tests for nonlinear dependence and chaos in real time returns on the world s four most important stock market indexes both the brock dechert scheinkman and the lee white and granger neural network based tests indicate persistent nonlinear structure in the series estimates of the lyapunov exponents using the nychka ellner gallant and mccaffrey neural net method and the zeng pielke and eyckholt nearest neighbor algorithm confirm the presence of nonlinear dependence in the returns on all indexes but provide no evidence of low dimensional chaotic processes given the sensitivity of the results to the estimation parameters we conclude that the data are dominated by a stochastic component

expropriation and direct investment abstract the paper considers a model in which private foreign investors make direct long lived capital investments in a small developing country that is subject to stochastic shocks to production depending upon the preferences of the host country we find that expropriation can occur because of either desperation or opportunism we show that under reasonable assumptions increased investment makes expropriation less likely to occur and that the level of investment chosen by atomistic foreign investors may be non optimal

large investors regulatory taking and investor state dispute settlement abstract this paper offers an economic analysis of an international investor state dispute settlement regime isds in markets with large investors it identifies a reason for strategic overinvestment by the domestic industry leading to permissive regulation in the absence of isds an ideal investor state dispute settlement arrangement efficiency oriented transaction cost free with untouchable fully reliable and unbiased judges has positive and negative effects in this framework it generates an equal level playing field for domestic and foreign investors but it magnifies an existing overinvestment problem and may reduce world welfare the results explain anecdotal evidence according to which isds that protects foreign investors is liked by the domestic industry and disliked by other interest groups in the host country

an economic analysis of scrappage this article examines the impact of policies aimed at encouraging the retirement of older high polluting vehicles such as the cash for clunkers policy endorsed by president george bush in 1992 the analysis assesses the likely benefits and costs of vehicle scrappage programs i also address the interaction of a scrappage program with other ongoing policies such as improved inspection and maintenance finally the simulation for los angeles suggests plausible design values for a scrappage program

interest rates and currency prices in a two country world abstract this paper is a theoretical study of the determination of prices interest rates and currency exchange rates set in an infinitely lived two country world which is subject both to stochastic endowment shocks and to monetary instability formulas are obtained for pricing all equity claims nominally denominated bonds and currencies and these formulas are related to earlier closely related results in the theories of money finance international trade

aggregate consequences of limited contract enforceability we study a general equilibrium model in which entrepreneurs finance investment with optimal financial contracts because of enforceability problems contracts are constrained efficient we show that limited enforceability amplifies the impact of technological innovations on aggregate output this implies that economies with lower enforceability of contracts are characterized by greater macroeconomic volatility a key assumption for the amplification result is that defaulting entrepreneurs are not excluded from the market

stock price clustering and discreteness stock prices cluster on round fractions clustering increases with price level and volatility and decreases with capitalization and transaction frequency clustering is pervasive price clustering will occur if traders use discrete price sets to simplify their negotiations exchange regulations require that most stocks be traded on eighths clustering on larger fractions will occur if traders choose to use discrete price sets based on quarters halves or whole numbers an econometric model of clustering is derived and estimated projections from the results suggest that traders would frequently use odd sixteenths when trading low price stocks if exchange regulations permitted trading on sixteenths article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

tick size the compass rose and market nanostructure abstract economists have begun using methods borrowed from the physical sciences to search for non linearities in economic and financial data the so called phase portrait from chaos theory in which the values of a time series are plotted against their delayed values is one of the techniques employed for this purpose it has recently been shown however that when returns on traded assets are plotted in this manner in two or three dimensional space surprising patterns arise which seriously distort the conclusions that can be drawn about the underlying data these patterns which resemble a compass rose reflect the microstructure of the market or more specifically the finite size of the ticks by which prices can change in a market the present paper clarifies the reason for this phenomenon it is shown that within the microstructure there exists nanostructure that becomes visible only when the computations are performed without approximation high frequency data from a foreign exchange market are used to illustrate this phenomenon

commodity trade and international risk sharing how much do financial markets matter abstract this paper evaluates the social gains from international risk sharing in some simple general equilibrium models with output uncertainty a simulation model calibrated to selected moments of u s and japanese data estimates the incremental loss from a ban on international portfolio diversification to be on the order of 0 20 percent of output per year even the theoretical gains from asset trade may disappear under alternative sets of assumptions on preferences and technology the paper argues that the small magnitude of potential trade gains may help explain the apparently inconsistent findings of empirical studies on the degree of international capital mobility

a note on the wang and wang measure of the quality of the compass rose abstract h wang and c wang visibility of the compass rose in financial asset returns a quantitative study j bank financ 26 2002 1099 1111 derive a measure of the visibility of the radial patterns that appear in a plot of current and past returns which are more commonly known as the compass rose in theory this measure should be positively related to the tick volatility ratio in practice however we find that this relationship does not hold for higher tick volatility ratios that are common to stock market data thus the use of this measure is limited in real world applications we propose a correction factor that improves the behaviour of the quality measure over higher tick volatility ratios however further research is required to fully identify and correct the problem

impact of pension privatization on foreign direct investment summary we explore the causal effect of market oriented pension reform on net foreign direct investment fdi inflows in latin america and among the transitional economies of eastern europe and central asia both of which have experienced waves of pension privatization and fdi over the last two decades with our balanced panel of 42 countries over the 1991 2006 period we implement fixed effects models controlling for the decision to enact full or partial privatization of the public pension system and several other covariates whose choice is informed by the rich empirical literature on fdi our econometric results indicate that pension privatization triggers a significant increase in net fdi inflows and that the effect does not wane over time we estimate that full privatization increases fdi as a percentage of gdp by about 57 ceteris paribus

north south lending and endogenous domestic capital market inefficiencies abstract we develop an open economy model of intertemporal trade under asymmetric information capital market imperfections are endogenous and depend on a country s stage of economic development relative to the perfect information benchmark north south capital flows are dampened and possibly reversed and world interest rates are lower whereas riskless rates are equalized across borders the domestic loan rate is higher in poorer countries the model can be applied to a number of policy issues including the debt overhang problem the indexation of foreign public debts and the effect of income distribution on growth

do sales tax credits stimulate the automobile market in this paper we quantitatively investigate the effectiveness of a sales tax reduction in stimulating sales and profits of durable goods manufacturers our question is motivated by policy makers recent interest in helping ailing automobile manufacturers and in replacing a fleet of highly polluting vehicles president obama s economic stimulus plan for instance has directly targeted the primary market by including a sales tax credit on purchases of new cars and trucks in this paper we show that the benefit of reducing the sales tax measured by its effect on firms profits and sales greatly decreases with the product s durability the magnitude of our findings indicates that one must carefully account for durability and firms behavior when evaluating such policies our findings are robust when we vary key parameters of the market

private capital flows capital controls and default risk abstract what has been the effect of the shift in emerging market capital flows toward private sector borrowers are emerging market capital flows more efficient if not can controls on capital flows improve welfare this paper shows that the answers depend on the form of default risk when private loans are enforceable but there is the risk that the government will default on behalf of all residents private lending is inefficient and capital controls are potentially pareto improving however when private agents may individually default capital flow subsidies are potentially pareto improving

an explanation for the compass rose pattern abstract the compass rose pattern cannot be observed in daily returns in the spot foreign exchange forex market but is observable when intraday forex returns are used monte carlo simulations show that the pattern is visible only when the tick volatility ratio is above some threshold level a condition that is readily met with intraday returns

a theory of expropriation and deviations from perfect capital mobility there are many reasons why commodity trade fails to equate the rewards to factors of production in different countries consequently there is an incentive for factor movements between countries while movements of factors especially capital are important in the world economy they have not been sufficient to equate factor returns among countries the failure of capital flows to equate returns to capital is frequently attributed to political risks and left outside the sphere of economic analysis specifically investments abroad especially in ldc s are said to be more subject to the risk of expropriation or at least to unpredictable changes in the tax and exchange control regime adopted by the host country fears of foreign investors have often been realised williams i975 estimates that about 20 of the value of foreign investments carried into or made during i956 72 in ldc s was expropriated without compensation in this period in the past researchers in disciplines other than economics have been responsible for most of the analysis of expropriations we argue that an important set of economic considerations affect the nature of these impediments to capital mobility and this paper provides a theory of expropriation based on maximising behaviour by host countries and investors we use this theory to identify industry and national characteristics increasing the threat of expropriation and implying large deviations from equal returns on capital and to examine host country and home country policies minimising distortions from the threat of expropriation three broad conclusions follow from the analysis first the threat of expropriation can significantly distort the international allocation of capital even if the act of expropriation is relatively rare in the extreme acts of expropriation would never occur in a world of perfect foresight and rational decision making yet actions by investors to ensure that countries do not expropriate would be distorting second the ability of a country s government to expropriate foreign investments may actually reduce its welfare furthermore a host may be better off if home governments can retaliate against an expropriating country indeed an increase in the penalty imposed on an expropriating country may increase its welfare a government s power to expropriate after investments are made may alasdair smith and an associate editor made numerous valuable suggestions we would also like to thank g m grossman r w jones l a sjaastad n h stern and j e stiglitz for comments much of eaton s work on this paper was completed while he was a visitor at the graduate institute for international studies geneva an earlier version of this paper appeared under the same title as rpds

chaos and the compass rose abstract we show that the recently discovered compass pattern in stock returns that results from discrete jumps of stocks seriously distorts the null distribution of the brock dechert scheinkmann bds chaos test under the null hypothesis of i i d returns the true rejection probability exceeds the nominal size by wide margins which suggests that much of the evidence for chaos that has so far been found in stock returns might well be due to the fact that prices change only in discrete ticks

nonlinear dynamics and stock returns simple deterministic systems are capable of generating chaotic output that mimics the output of stochastic systems for this reason algorithms have been developed to distinguish between these two alternatives these algorithms and related statistical tests are also useful in detecting the presence of nonlinear dependence in time series in this article the authors apply these procedures to stock returns and find evidence that indicates the presence of nonlinear dependence on weekly returns from the center for research in security prices value weighted index copyright 1989 by the university of chicago

two sided expropriation and international equity contracts abstract the paper considers a model in which investors in two symmetrical countries can trade equity claims on their endowments the governments of the two countries expropriate the foreign owned securities if doing so raises domestic welfare in spite of the possibility of expropriation agents may still choose to hold completely pooled portfolios depending on preferences in the two countries increases in the level of domestic output can increase or decrease the probability of expropriation in the equilibria we consider agents hold too much foreign equity a reduction in foreign investment raises welfare by reducing the probability of expropriation

central banks at war war is expensive troops must be equipped and weapons must be procured when the enormous borrowing requirements of war make the sovereigns credibility problem more difficult central banks enhance a government s ability to borrow by being the sole direct purchaser of government debt the central bank increases the effective punishment that can be imposed on the government for defaulting on the marginal lender this increases lenders confidence that the government will be punished in case of default making lenders willing to purchase the debt at a lower rate of interest the sovereign dependent on the low borrowing costs offered by the central bank has an incentive to retain the bank data covering the nineteenth and early twentieth centuries reveal that possessing a central bank lowers the sovereign s borrowing costs particularly during times of war

north south customs unions and international capital mobility the primary distinction in a north south trade accord is likely to be that the southern nation experiences more capital scarcity than its northern trade partner so the trade accord s impact on the southern trading partner s ability to attract capital may have welfare implications for both nations the authors extend the traditional analysis of customs unions to allow for international capital movements their results indicate that trade accords may affect the ability of southern nations to attract capital and may divert capital between southern nations moreover the welfare implications of north south trade accords may differ from those that predict the north american free trade agreement s nafta minor third country effects holding factor endowments constant the key implications of north south trade accords such as nafta are generally perceived to involve their impact on investment flows the authors try to understand the channels through which trade accords can affect north south investment flows a potential link between trade accords and investment flows may be how the accords affect the ability of the southern partner government to make commitments about the treatment of foreign investment they show that these accords can affect both the magnitude and pattern of inward foreign investment and production implying the possibility that both trade and financial diversion can stem from a bilateral regional trade accord novel effects that emerge under sovereign risk must be addressed when assessing the welfare implications of trade accords the greatest gains from integration are still achieved when integration takes place between the countries with the greatest potential gains from trade but the authors make a distinction these gains now include both current trade and inter temporal trade through foreign investment

determinants of participation in accelerated vehicle retirement programs one potential way to reduce hydrocarbon emission is through accelerated vehicle retirement programs however it is difficult to forecast participation rates in these programs because the number and characteristics of participants are likely to vary with the price offered to attract old cars this paper presents a theoretical model of the owner s car tenure and scrappage decision an econometric model of participation is then developed and estimated using data from a recent old vehicle scrap program in delaware participation rates at different possible offer prices are then predicted

relational incentive contracts standard incentive theory models provide a rich framework for studying informational problems but assume that contracts can be perfectly enforced this paper studies the design of self enforced relational contracts i show that optimal contracts often can take a simple stationary form but that self enforcement restricts promised compensation and affects incentive provision with hidden information it may be optimal for an agent to supply the same inefficient effort regardless of cost conditions with moral hazard optimal contracts involve just two levels of compensation this is true even if performance measures are subjective in which case optimal contracts terminate following poor performance jel c73 d82 l14

durable goods oligopoly with secondary markets the case of automobiles we study the effects of durability and secondary markets on equilibrium firm behavior in the car market we construct a dynamic oligopoly model of a differentiated product market to incorporate the equilibrium production dynamics that arise from the durability of the goods and their active trade in secondary markets we derive an econometric model and estimate its parameters using data from the automobile industry over a 20 year period our estimates are used to provide a measure of the competitive importance of the secondary market

short term contracts and long term agency relationships abstract long term contracts are valuable only if optimal contracting requires commitment to a plan today that would not otherwise be adopted tomorrow we show that commitments are unnecessary and hence short term contracts are sufficient if 1 all public information can be used in contracting 2 the agent can acess a bank on equal terms with the principal 3 recontracting takes place with common knowledge about technology and preferences and 4 the frontier of expected utility payoffs generated by the set of incentive compatible contracts is downward sloping at all times

visibility of the compass rose in financial asset returns a quantitative study abstract the compass rose phenomenon is studied based on the random walk model of stock prices it is found that the structure is inherently present in any financial data having a finite precision but becomes visible only under some conditions a quantitative description of the pattern visibility condition is given providing a method for the interpretation of pattern appearance and a more comprehensive understanding of the compass rose phenomenon this is achieved by defining a measure of pattern quality the arguments and the proposed method are supported by numerical examples one such example is the presentation of patterns in portfolios with some specific weights

dynamic games with hidden actions and hidden states abstract we consider a class of dynamic games in which each player s actions are unobservable to the other players and each player s actions can influence a state variable that is unobservable to the other players we develop an algorithm that solves for the subset of sequential equilibria in which equilibrium strategies depend on private information only through the privately observed state journal of economic literature classification numbers c63 c73

optimal cartel equilibria with imperfect monitoring abstract there exist optimal symmetric equilibria in the green porter model 4 8 having an elementary intertemporal structure such an equilibrium is described entirely by two subsets of price space and two quantities the only production levels used by firms in any contingency the central technique employed in the analysis is the reduction of the repeated game to a family of static games

the effects of capital controls on international capital flows in the presence of asymmetric information abstract this paper examines the effects of capital controls on the volume and composition of international capital flows in the presence of asymmetric information in the two period small open economy model stochastic second period output depends on the level of first period investment which cannot be verified by international investors domestic agents obtain external funding by borrowing on international capital markets and by selling equity to international investors the paper investigates the effects of various capital controls on the debt equity choice domestic investment and welfare controls on capital inflows are shown to shift the composition of flows from fixed income instruments towards equity and to reduce the overall volume of inflows

currency and credit are equivalent mechanisms i study a pure exchange economy with many agents whose marginal utility of consumption is stochastically heterogeneous and independent of wealth with realized marginal utility of wealth private information i show that currency and credit are equivalent to a contract that is efficient when the privacy of information is viewed as a constraint and that the cash in advance constraint is an expression of an incentive constraint

garch estimation and discrete stock prices an application to low priced australian stocks the garch model is misspecified if applied to returns calculated from discrete prices we propose a modification of the above model for handling such cases we find large differences between the standard and the extended model estimates although the results sometimes are obscured by large standard errors

state owned mncs and host country expropriation risk the role of home state soft power and economic gunboat diplomacy expropriation risk has a binding effect on foreign direct investment fdi however state owned multinational corporations may counter the monopoly power of the host state by leveraging the political influence of their home government the magnitude of this counter force we argue may vary depending on the strength of political relations between the home and host state and the level of economic dependence of the host country on the home market we find supporting evidence of our hypotheses using chinese firm level fdi information between 2003 and 2010

implications of the discreteness of observed stock prices stock prices on the organized exchanges are restricted to be divisible by 1 8 therefore the true price usually differs from the observed price this paper examines the biases resulting from the discreteness of observed stock prices it is shown that the natural estimators of the variance and all of the higher order moments of the rate of returns are biased an approximate set of correction factors is derived and a procedure is outlined to show how the correction can be made the natural estimators of the beta and of the variance of the market portfolio on the other hand are nearly unbiased the behavior of stock prices has been an issue of interest to the financial economist for many years this interest resulted in a growing number of empirical studies which attempt to estimate this behavior e g blattberg and gonedes 2 fama 6 fama and roll 7 8 barnea and downes 1 to date stock price behavior is estimated under the assumption that the observed trading price is the true equilibrium price however observed stock prices and stock price changes on the organized exchanges are restricted to multiples of 1 8 of a dollar 1 therefore if the true distribution of stock prices is continuous an observed trading price can be different from the true price this paper examines the biases in estimating the moments of stock price changes caused by the discreteness of observed stock prices the major focus of the paper is in noting this problem providing a model which explains the source of these biases and quantifying their size section i demonstrates that due to the discrete nature of observed stock prices the natural estimators for the variance and for the higher order moments of the rate of returns are biased upward this bias is larger for stocks with lower prices and smaller standard deviation for instance assuming that the standard deviation a is 0 001 the stock price is one dollar the true probability distribution of stock prices is lognormal and the observed prices are as close as possible to the true prices then the natural estimator of r has expectation 0 01400 hence it is biased upward by 1300 significant biases have important implications in option pricing we derive an approximate set of correction factors which can be applied to the

institutions and the external capital structure of countries abstract a widespread view holds that countries that finance themselves through foreign direct investment and portfolio equity rather than bonds and loans are less prone to crises but what determines countries external capital structures in a cross section of advanced economies emerging markets and developing countries we find that equity like liabilities as a share of countries total external liabilities are positively and significantly associated with indicators of educational attainment openness natural resource abundance and especially institutional quality these relationships are robust to attempts to control for possible endogeneity suggesting that better institutional quality may help improve countries external capital structures

balladurette and juppette a discrete analysis of scrapping subsidies this paper studies the effects of subsidies on durable goods markets in particular we focus on a recent policy in france in which the governments of balladur and juppe subsidized the replacement of old cars with new ones to study this policy we construct a dynamic stochastic discrete choice model of car ownership at the household level the resulting decision rules and equilibrium conditions are used to estimate the underlying parameters of the model using aggregate data these policy functions are used to evaluate the short and long run effects of the french policies we find that these policies do stimulate the automobile sector in the short run but through the induced changes in the cross sectional distribution of car ages create the basis for subsequent low activity further while these policies increase government revenues in the short run revenues in the long run are lower relative to a baseline without intervention

taxation and the transfer of technology by multinational firms this paper analyzes a multinational s transfer of technology to a foreign subsidiary for the case where there is a risk of expropriation an expropriation is assumed to give rise to competition between the parts of the previous multinational enterprise to reduce the benefit of expropriation the multinational generally transfers an inferior technology even if the transfer of technology is costless with a reduced benefit of expropriation the multinational has to pay lower taxes to prevent expropriation the multinational optimally transfers additional technology over time if it has a finite horizon in the country for this case tax payments also are shown to increase over time in a tax holiday like fashion

when do secondary markets harm firms to investigate whether secondary markets aid or harm durable goods manufacturers we build a dynamic model of durable goods oligopoly with transaction costs in the secondary market calibrating model parameters using data from the us automobile industry we find the net effect of opening the secondary market is to decrease new car manufacturers profits by 35 percent counterfactual scenarios in which the size of the used good stock decreases such as when products become less durable when the number of firms decreases or when firms can commit to future production levels increase the profitability of opening the secondary market

optimal lending contracts and firm dynamics we develop a general model of lending in the presence of endogenous borrowing constraints borrowing constraints arise because borrowers face limited liability and debt repayment cannot be perfectly enforced in the model the dynamics of debt are closely linked with the dynamics of borrowing constraints in fact borrowing constraints must satisfy a dynamic consistency requirement the value of outstanding debt restricts current access to short term capital but is itself determined by future access to credit this dynamic consistency is not guaranteed in models of exogenous borrowing constraints where the ability to raise short term capital is limited by some prespecified function of debt we characterize the optimal default free contract which minimizes borrowing constraints at all histories and derive implications for firm growth survival leverage and debt maturity the model is qualitatively consistent with stylized facts on the growth and survival of firms comparative statics with respect to technology and default constraints are derived borrowing constraints are an important determinant of firm growth and survival 1 such constraints may arise in connection to the financing of investment opportunities faced by firms or temporary liquidity needs such as those required to survive a recession this paper develops a theory of endogenous borrowing constraints and studies its implications for firm dynamics in our model debt is constrained by the firm s limited liability and option to default a lending contract specifies an initial loan size future financing and a repayment schedule the choice of these variables in turn determines future growth the firm s future borrowing capacity and its ability and willingness to repay hence borrowing constraints and firm dynamics are jointly determined we study this dynamic design problem our model builds on thomas and worral s 1994 model of foreign direct investment at time zero a risk neutral borrower firm or entrepreneur has a project which requires a fixed initial set up cost every period the project yields revenues that increase with the amount of 1 there is considerable evidence suggesting that financing constraints are important determinants of firm dynamics gertler and gilchrist 1994 argue that liquidity constraints may explain why small manufacturing firms respond more to a tightening of monetary policy than do larger manufacturing firms perez quiros and timmermann 2000 show that in recessions smaller firms are more sensitive to the worsening of credit market conditions as measured by higher interest rates and default premia evans and jovanovic 1989 show that the liquidity constraints are essential in the decision to become an entrepreneur fazzari hubbard and petersen 1988 among others view financial constraints as an explanation for the dynamic behaviour of aggregate investment and cabral and mata 1996 are able to fit reasonably well the size distribution of portuguese manufacturing firms by estimating a simple model of financing constraints for surveys see hubbard 1998 and stein 2003

optimal long term financial contracting we develop an agency model of financial contracting we derive long term debt a line of credit and equity as optimal securities capturing the debt coupon and maturity the interest rate and limits on the credit line inside versus outside equity dividend policy and capital structure dynamics the optimal debt equity ratio is history dependent but debt and credit line terms are independent of the amount financed and in some cases the severity of the agency problem in our model the agent can divert cash flows we also consider settings in which the agent undertakes hidden effort or can control cash flow risk

infinitely repeated games with public monitoring and monetary transfers this paper studies infinitely repeated games with imperfect public monitoring and the possibility of monetary transfers it is shown that all public perfect equilibrium payoffs can be implemented with a simple class of stationary equilibria that use stick and carrot punishments a fast algorithm is developed that exactly computes the set of pure strategies equilibrium payoffs for all discount factors

mortal managers and long term goals an impossibility result this article examines decision myopia under effort and risk neutrality an infinite non overlapping sequence of mortal managers is selected and their performance evaluated contracts admit premature termination plant condition depends on maintenance which induces an interstage linkage in production when ability and action are imprecisely known by employers no contract achieves the first best outcome furthermore if the manager discounts less than the owners inefficiency is partially due to moral hazard which resembles myopia optimal contracts infer ability and motivate behavior via manipulation of wage schedules and tenure guidelines

estimation bias induced by discrete security prices commonly equilibrium security prices are modeled by continuous state stochastic processes while observed prices are rounded into discrete units this paper models the rounding mechanism and examines the probabilistic structure of the resultant rounded process we provide accurate and simple estimates of the inflation in estimated variance and kurtosis induced by ignoring rounding in particular the maximum likelihood estimate of security price volatility using rounded prices is developed and a simulation analysis is performed to examine the small sample properties of this estimator for many practical applications a simple correction for rounding becomes available

sequential equilibria in a ramsey tax model this paper presents a full characterization of the equilibrium value set of a ramsey tax model more generally it develops a dynamic programming method for a class of policy games between the government and a continuum of households by selectively incorporating euler conditions into a strategic dynamic programming framework we wed two technologies that are usually considered competing alternatives resulting in a substantial simplification of the problem

sovereign debt as intertemporal barter author s kletzer kenneth m wright brian d abstract borrowing and lending between sovereign parties is modeled as intertemporal barter that smoothes the consumption of a risk averse party subject to endowment shocks the surplus anticipated in the relationship offers sufficient incentive for cooperation by all parties including any other competitive agents who are potential lenders to the sovereign the sole punishments consist of renegotiation proof changes in the path of future payments we show that intertemporal trade can be sustained in the absence of any exogenous enforcement of lending relationships whatsoever that is borrowing and lending are possible under anarchy and are supported by punishments that consist of cheating any cheater long term implicit relationships may be fulfilled as the continual renegotiation of simple incomplete short term loans the analysis suggests that the crucial role of the explicit loan contract is the identification of the relationship and the parties involved

robust structure without predictability the compass rose pattern of the stock market plotting daily stock returns against themselves with one day s lag reveals a striking pattern evenly spaced lines radiate from the origin the thickest lines point in the major directions of the compass this compass rose pattern appears in every stock it is caused by discreteness however counter examples demonstrate that the existence of exchange imposed tick sizes e g eighths is neither necessary nor sufficient for the compass rose the compass rose cannot be used to make abnormal profits it is structure without predictability among other consequences the compass rose may bias estimation of arch models and tests for chaos technical analysts attempt to identify recurring patterns in stock prices e g edwards and magee 1992 similarly chaos researchers embed time series of stock returns into multi dimensional spaces and attempt to identify lowdimensional attractors e g barnett and chen 1988 figure 1 the hope is that with structure comes predictability and abnormal profits in fact neither of these literatures has yet discovered indisputable structure we follow a procedure similar to a chaos researcher s we look at a simple scatter diagram of daily stock returns plotted against themselves with one day s lag we document a structural relationship the compass rose that is strikingly geometrical in contrast to the products of technical analysis and chaos theory the structure we find is indisputably present in every stock unfortunately the compass rose cannot be used for predictive purposes by market participants it is an artifact of market microstructure it follows that even a successful search for significant structure in stock market data need not enhance predictability nor lead to abnormal profits an equally important lesson is that microstructure effects can be spectacular in daily and even weekly data several areas for future research are given these include potential biases caused by the compass rose in the estimation of autoregressive conditional heteroskedasticity arch models and in a standard test for chaos

competitive risk sharing contracts with one sided commitment this paper analyzes dynamic equilibrium risk sharing contracts between profit maximizing intermediaries and a large pool of ex ante identical agents that face idiosyncratic income uncertainty that makes them heterogeneous ex post in any given period after having observed her income the agent can walk away from the contract while the intermediary cannot i e there is one sided commitment we consider the extreme scenario that the agents face no costs to walking away and can sign up with any competing intermediary without any reputational losses we demonstrate that not only autarky but also partial and full insurance can obtain depending on the relative patience of agents and financial intermediaries insurance can be provided because in an equilibrium contract an up front payment effectively locks in the agent with an intermediary we then show that our contract economy is equivalent to a consumption savings economy with one period arrow securities and a short sale constraint similar to bulow and rogoff 1989 from this equivalence and our characterization of dynamic contracts it immediately follows that without cost of switching financial intermediaries debt contracts are not sustainable even though a risk allocation superior to autarky can be achieved

on repeated moral hazard with discounting in this paper we analyze optimal contracts in an infinitely repeated agency model in which both the principal and agent discount the future we show that there is a stationary representation of the optimal contract when the agent s conditional discounted expected utility is used as a state variable this representation reduces the multi period problem to a static variational problem which can be analyzed using standard variational techniques this reduction is used to obtain several properties of the contract

an analysis of the principal agent problem most analyses of the principal agent problem assume that the principal chooses an incentive scheme to maximize expected utility subject to the agent s utility being at a stationary point an important paper of mirrlees has shown that this approach is generally invalid we present an alternative procedure if the agent s preferences over income lotteries are independent of action we show that the optimal way of implementing an action by the agent can be found by solving a convex programming problem we use this to characterize the optimal incentive scheme and to analyze the determinants of the seriousness of an incentive problem

international lending with moral hazard and risk of repudiation in this paper i examine the constrained optimal pattern of capital flows between a lender and a borrower in an environment in which there are two impediments to forming contracts the first impediment to contracting arises from the assumption that lenders cannot observe whether borrowers invest or consume borrowed funds this assumption leads to a moral hazard problem in investment the second impediment arises from the assumption that the borrower as a sovereign nation may choose to repudiate his debts the optimal contract is shown to specify that the borrowing country experience a capital outflow when the worst realizations of national output occur this seemingly perverse capital outflow forms a necessary part of the optimal solution to the moral hazard problem in investment

distributional effects of alternative vehicle pollution control policies abstract previous work shows that policies that subsidize new vehicles and tax size miles or gasoline efficiently reduce pollution less is known about their distributional effects this paper examines distributional effects by estimating the joint demand for vehicles and miles using the consumer expenditure survey greater price responsiveness among low income households enhances progressivity of gas or miles taxes across lower incomes and mitigates regressivity across upper incomes taxes on engine size or subsidies to new vehicles are significantly more regressive than gas or miles taxes