risk sharing and contagion in networks we investigate the socially optimal design of financial networks that allows to tackle the trade off between risk sharing and contagion we identify conditions on the shock distribution under which full integration or maximal segmentation is optimal we also show that under different conditions the optimal network displays different levels of strength of linkages to other firms or intermediate degrees of segmentation in the latter case the individual and social incentives to establish linkages are not necessarily aligned when firms face heterogeneous distributions of risks they should optimally form linkages only with firms facing risks of the same kind

optimal dynamic pricing of inventories with stochastic demand over finite horizons in many industries managers face the problem of selling a given stock of items by a deadline we investigate the problem of dynamically pricing such inventories when demand is price sensitive and stochastic and the firm s objective is to maximize expected revenues examples that fit this framework include retailers selling fashion and seasonal goods and the travel and leisure industry which markets space such as seats on airline flights cabins on vacation cruises and rooms in hotels that become worthless if not sold by a specific time we formulate this problem using intensity control and obtain structural monotonicity results for the optimal intensity resp price as a function of the stock level and the length of the horizon for a particular exponential family of demand functions we find the optimal pricing policy in closed form for general demand functions we find an upper bound on the expected revenue based on analyzing the deterministic version of the problem and use this bound to prove that simple fixed price policies are asymptotically optimal as the volume of expected sales tends to infinity finally we extend our results to the case where demand is compound poisson only a finite number of prices is allowed the demand rate is time varying holding costs are incurred and cash flows are discounted the initial stock is a decision variable and reordering overbooking and random cancellations are allowed

the formation of networks with transfers among players we examine the formation of networks among a set of players whose payoffs depend on the structure of the network when players may bargain by promising or demanding transfer payments when forming links we vary three aspects of the game i whether players can only make transfers to and receive transfers from players to whom they are directly linked or whether they can also subsidize links that they are not directly involved in ii whether or not transfers relating to a given link can be made contingent on the full resulting network or only on the link itself and iii whether or not players can pay other players to refrain from forming links we characterize the networks that are supported under these variations and show how each of the above aspects either accounts for a specific type of externality or deals with the combinatorial nature of network payoffs

time preference and international lending and borrowing in an overlapping generations model two economies represented by diamond type overlapping generations models and differing only in their pure rates of time preference are joined together capital formation balance of payments behavior and welfare are compared under autarky and openness with a positive natural rate of growth the low time preference country runs a current account surplus in the steady state but not necessarily outside it if preexisting capital is not shiftable between countries integration in the world economy makes the high time preference country worse off in the short run the ranking of stationary utility levels under autarky and openness is ambiguous

joint stochastic dynamic pricing and advertising with time dependent demand abstract this paper examines the sale of a finite number of items in a class of stochastic dynamic pricing and advertising models with time dependent demand elasticities we prove structural properties of the optimal expected profits with respect to time inventory level price impact advertising impact and different model parameters such as discount rate marginal unit costs and holding costs we find that the value of an additional item opportunity costs is decreasing in the unit costs the discount rate the holding cost rate and the number of items left to sell we also derive structural properties of optimal joint pricing and advertising strategies this way we obtain general qualitative insights in the complex interplay and the mutual dependence of optimal pricing and advertising decisions among other properties we show that a higher advertising impact leads to higher optimal prices and lower advertising rates which in turn implies a lower speed of sale the results obtained help practitioners to respond to changes in market conditions by adjusting price and advertising accordingly our results allow speeding up numerical computations of decisions as the set of possible actions can be reduced significantly our analysis implies general results for pure pricing as well as pure advertising models with time dependent demand elasticities

the interbank market during a crisis abstract the autumn of 1998 provides a setting in which to test the performance of the interbank market during a potential financial crisis this period witnessed russia s effective default on its sovereign bonds and the near collapse of the hedge fund long term capital management despite these negative shocks to bank capital and increased uncertainty in financial markets the federal funds market still effectively channeled liquidity to those institutions in need at rates consistent with federal reserve intentions further risk premiums on overnight lending were largely unaffected and lending volumes increased suggesting that the federal funds market performed well during this period

optimal pricing and advertising in a durable good duopoly abstract this paper analyzes dynamic advertising and pricing policies in a durable good duopoly the proposed infinite horizon model while general enough to capture dynamic price and advertising interactions in a competitive setting also permits closed form solutions we use differential game theory to analyze two different demand specifications linear demand and isoelastic demand for symmetric and asymmetric competitors we find that the optimal price is constant and does not vary with cumulative sales while the optimal advertising is decreasing with cumulative sales comparative statics for the results are presented

discipline and liquidity in the interbank market using 20 years of panel data i demonstrate that high risk banks have consistently paid more than safe banks for interbank loans and have been less likely to use these loans as a source of liquidity the economic importance of this effect was relatively small until the mid 1990s when regulatory and institutional changes began to impose more of the costs of bank failure on uninsured creditors subsequently interbank market price discipline roughly doubled and risk based rationing effects increased by a factor of six in imposing this discipline lenders seem to care most about credit risk at borrowing institutions

capital accumulation and foreign investment taxation this paper presents a dynamic choice theoretic general equilibrium model of capital accumulation in an open economy equilibria with and without capital mobility are described and compared it is shown that neither is necessarily pareto optimal and that an equilibrium with free trade in capital does not pareto dominate an equilibrium with autarky the effects of restricting capital flows by taxing foreign investment eamings are discussed it is seen that there will be no agreement within a country as to what constitutes an optimal tax of restricting capital mobility by foreign investment taxation is discussed the model employed is a two country overlapping generations model olg with production it is an international version of diamond s 1965 closed economy model which combines a one sector solow growth model with samuelson s olg model each period a given number of agents are born the agents live two periods and then die in their first period of life agents born in period t may trade only with agents born in t 1 or t in their second period of life they may trade only with agents born in t 1 or t the model begins at period one at this time the young of generation one and the old of generation zero are alive it will be seen that in the first period of life agents save and in the second period of life agents consume the return on their savings thus the abstraction of a two period life captures the essential feature of a life cycle model the agents begin life by saving but at some point start to dissave the major results are that if two countries differ only in initial capital abundance then in autarky the initially more capital abundant country will always be more capital abundant and will always have higher wages and lower interest rates than the initially less capital abundant country however the steady state is identical in each country with or without trade neither an autarky nor a laissez faire equilibrium is necessarily pareto optimal autarky and laissez faire are shown to be pareto non comparable in the relatively capital abundant country laissez faire is preferred by generation zero and autarky is preferred by later generations the reverse is true in the relatively labour abundant country there will be no unanimity as to the optimal level of foreign investment taxation in either country generation zero in the relatively capital labour abundant country will prefer a smaller larger tax than that which would maximize current national

stochastic dynamic pricing and advertising in isoelastic oligopoly models abstract in this paper we analyze stochastic dynamic pricing and advertising differential games in special oligopoly markets with constant price and advertising elasticity we consider the sale of perishable as well as durable goods and include adoption effects in the demand based on a unique stochastic feedback nash equilibrium we derive closed form solution formulas of the value functions and the optimal feedback policies of all competing firms efficient simulation techniques are used to evaluate optimally controlled sales processes over time this way the evolution of optimal controls as well as the firms profit distributions are analyzed moreover we are able to compare feedback solutions of the stochastic model with its deterministic counterpart we show that the market power of the competing firms is exactly the same as in the deterministic version of the model further we discover two fundamental effects that determine the relation between both models first the volatility in demand results in a decline of expected profits compared to the deterministic model second we find that saturation effects in demand have an opposite character we show that the second effect can be strong enough to either exactly balance or even overcompensate the first one as a result we are able to identify cases in which feedback solutions of the deterministic model provide useful approximations of solutions of the stochastic model

sustainable balance of trade deficits abstract this paper analyzes a model of overlapping generations in which there are two currencies there are two agents born in each period and these agents have completely heterogeneous preferences and endowments the paper shows that there are monetary equilibria in which one country can sustain a trade deficit whose present value is arbitrarily close to that of its trading partner s entire stream of resources hence there may be no limit to the present value of a country s trade deficit even if the equilibrium for the world economy satisfies an intertemporal efficiency criterion

on the indeterminacy of equilibrium exchange rates in this paper we consider a particular international economic policy regime the laissez faire regime the distinguishing features of which are unrestricted portfolio choice and floating exchange rates and as we show this regime although favored by many economists is not economically feasible it does not have a determinate equilibrium that is an implication of an overlapping generations model more basically it is an implication of the notion that money is wanted only in order to accomplish trades

financial integration and liquidity crises this paper analyzes the effects of financial integration on the stability of the banking system financial integration allows banks in different regions to smooth local liquidity shocks by borrowing and lending on a world interbank market we show under which conditions financial integration induces banks to reduce their liquidity holdings and to shift their portfolios toward more profitable but less liquid investments integration helps reallocate liquidity when different banks are hit by uncorrelated shocks however when a correlated systemic shock hits the total liquid resources in the banking system are lower than in autarky therefore financial integration leads to more stable interbank interest rates in normal times but to larger interest rate spikes in crises these results hold in a setup in which financial integration is welfare improving from an ex ante point of view we also look at the model s implications for financial regulation and show that in a second best world financial integrati

dynamic pricing and advertising of perishable products with inventory holding costs abstract we examine a special class of dynamic pricing and advertising models for the sale of perishable goods including marginal unit costs and inventory holding costs the time horizon is assumed to be finite and we allow several model parameters to be dependent on time for the stochastic version of the model we derive closed form expressions of the value function as well as of the optimal pricing and advertising policy in feedback form moreover we show that for small unit shares the model converges to a deterministic version of the problem whose explicit solution is characterized by an overage and an underage case we quantify the close relationship between the open loop solution of the deterministic model and the expected evolution of optimally controlled stochastic sales processes for both models we derive sensitivity results we find that in the case of positive holding costs on average optimal prices increase in time and advertising rates decrease furthermore we analytically verify the excellent quality of optimal feedback policies of deterministic models applied in stochastic models

asset commonality debt maturity and systemic risk we develop a model in which asset commonality and short term debt of banks interact to generate excessive systemic risk banks swap assets to diversify their individual risk two asset structures arise in a clustered structure groups of banks hold common asset portfolios and default together in an unclustered structure defaults are more dispersed portfolio quality of individual banks is opaque but can be inferred by creditors from aggregate signals about bank solvency when bank debt is short term creditors do not roll over in response to adverse signals and all banks are ine ciently liquidated this information contagion is more likely under clustered asset structures in contrast when bank debt is long term welfare is the same under both asset structures

liquidity coinsurance moral hazard and financial contagion we study the propagation of financial crises between regions characterized by moral hazard problems the source of the problem is that banks are protected by limited liability and may engage in excessive risk taking the regions are affected by negatively correlated liquidity shocks so that liquidity coinsurance is pareto improving the moral hazard problem can be solved if banks are sufficiently capitalized under autarky a limited investment is needed to achieve optimality so that a limited amount of capital is sufficient to prevent risk taking with interbank deposits the optimal investment increases and capital becomes insufficient to prevent excessive risk taking thus bankruptcy occurs with positive probability and the crises spread to other regions via the financial linkages opening the financial markets is nevertheless pareto improving consumers benefit from liquidity coinsurance although they pay the cost of excessive risk taking finally we show that in this framework a completely connected deposit structure is more conducive to financial crises than an incompletely connected structure

dynamic advertising and pricing with constant demand elasticities in this paper we analyze a stochastic dynamic advertising and pricing model with isoelastic demand the state space is discrete time is continuous and the planing horizon is allowed to be finite or infinite a dynamic version of the dorfman steiner identity will be derived explicit expressions of the optimal advertising and pricing policies of the value function and of the optimal advertising expenditures will be given the general results will be used to analyze the case of impatient customers furthermore particular time inhomogeneous models and homogeneous ones with and without discounting will be examined we will study the social efficiency of a monopolist s optimal policies and the consequences of specific subsidies from a buyer s perspective our analysis reveals that waiting when looking at immediate expected prices is never profitable should two or more units be available but we will also prove that the sequence of average sales prices is monotone decreasing moreover the techniques applied to solve the discrete stochastic advertising and pricing problem will be used to solve a related deterministic control problem with continuous state space

banks as monitors of other banks evidence from the overnight federal funds market this study provides evidence that banks are effective monitors of their peers by showing that the interest rate paid on federal funds transactions reflects differences in credit risk across borrowers in addition the size and relative importance in the funds market of the trading institutions are shown to affect the rates charged for overnight borrowing thereby providing insight into the nature of competition in the federal funds market transaction volume and size of transaction effects are uncovered as is evidence of relationship banking between banks these results are made possible by unique data identifying individual federal funds transactions copyright 2001 by university of chicago press

in efficient interbank networks we study the efficiency properties of the formation of an interbank network banks face a trade off by establishing connections in the interbank market on the one hand banks improve the diversification of their liquidity risk and therefore can obtain a higher expected payoff on the other hand banks not sufficiently capitalized have risk shifting incentives that expose them to the risk of bankruptcy connecting to such risky banks negatively affects expected payoff we show that both the optimal and the decentralized networks are characterized by a core periphery structure the core is made of the safe banks whereas the periphery is populated by the risky banks nevertheless the two network structures coincide only if counterparty risk is sufficiently low otherwise the decentralized network is underconnected as compared to the optimal one finally we analyze mechanisms that can avoid the formation of inefficient interbank networks

a strategic model of social and economic networks we study the stability and efficiency of social and economic networks when self interested individuals can form or sever links first for two stylized models we characterize the stable and efficient networks there does not always exist a stable network that is efficient next we show that this tension persists generally to assure that there exists a stable network that is efficient one is forced to allocate resources to nodes that are not responsible for any of the production we characterize one such allocation rule the equal split rule and another rule that arises naturally from bargaining of the players

crises and capital requirements in banking we analyze a general equilibrium model in which there is both adverse selection of and moral hazard by banks the regulator can screen banks prior to giving them a licence audit them ex post to learn the success probability of their projects and impose capital adequacy requirements capital requirements combat moral hazard when the regulator has a strong screening reputation and they otherwise substitute for screening ability crises of confidence can occur only in the latter case and contrary to conventional wisdom the appropriate policy response may be to tighten capital requirements to improve the quality of surviving banks

financial networks and contagion we study cascades of failures in a network of interdependent financial organizations how discontinuous changes in asset values e g defaults and shutdowns trigger further failures and how this depends on network structure integration greater dependence on counterparties and diversification more counterparties per organization have different nonmonotonic effects on the extent of cascades diversification connects the network initially permitting cascades to travel but as it increases further organizations are better insured against one another s failures integration also faces trade offs increased dependence on other organizations versus less sensitivity to own investments finally we illustrate the model with data on european debt cross holdings jel d85 f15 f34 f36 f65 g15 g32 g33 g38 globalization brings with it increased financial interdependencies among many kinds of organizations governments central banks investment banks firms etc that hold each other s shares debts and other obligations such interdependencies can lead to cascading defaults and failures which are often avoided through massive bailouts of institutions deemed too big to fail recent examples include the us government s interventions in aig fannie mae freddie mac and general motors and the european commission s interventions in greece and spain although such bailouts circumvent the widespread failures that were more prevalent in the nineteenth and early twentieth centuries they emphasize the need to study the risks created by a network of interdependencies understanding these risks is crucial to designing incentives and regulatory responses which defuse cascades before they are imminent in this paper we develop a general model that produces new insights regarding financial contagions and cascades of failures among organizations linked through a network of financial interdependencies organizations values depend on each other e g through cross holdings of shares debt or other liabilities if an

financial networks contagion commitment and private sector bailouts i develop a model of financial networks in which linkages not only spread contagion but also induce private sector bailouts where liquid banks bail out illiquid banks because of the threat of contagion introducing this bailout possibility i show that linkages may be optimal ex ante because they allow banks to obtain some mutual insurance even though formal commitments are impossible however in some cases e g when liquidity is concentrated among a small group of banks the whole network may collapse i also characterize the optimal network size and apply the results to joint liability arrangements and payment systems linkages among agents in financial markets are a concern because of the risk of financial contagion that is the risk that a small shock to one agent will spread to other agents in a domino effect whether we should worry about these linkages is an open question the main goal of this paper is to show that a network in which agents are closely interlinked may be optimal both because of and despite the potential for contagion another goal is to characterize optimal networks that is whether and how agents should be linked to one another the basic intuition is as follows linkages present the threat of contagion to prevent collapse of the whole network agents who are lucky ex post may be willing to bail out those who are not in this way agents obtain the benefits of mutual insurance even though they cannot precommit to making payments

dynamic pricing in the presence of inventory considerations research overview current practices and future directions the benefits of dynamic pricing methods have long been known in industries such as airlines hotels and electric utilities where the capacity is fixed in the short term and perishable in recent years there has been an increasing adoption of dynamic pricing policies in retail and other industries where the sellers have the ability to store inventory three factors contributed to this phenomenon 1 the increased availability of demand data 2 the ease of changing prices due to new technologies and 3 the availability of decision support tools for analyzing demand data and for dynamic pricing this paper constitutes a review of the literature and current practices in dynamic pricing given its applicability in most markets and its increasing adoption in practice our focus is on dynamic intertemporal pricing in the presence of inventory considerations

the formation of a core periphery structure in heterogeneous financial networks recent empirical evidence suggests that nancial networks exhibit a core periphery network structure this paper aims at giving an economic explanation for the emergence of such a structure using network formation theory focusing on intermediation benets we nd that a core periphery network cannot be unilaterally stable when agents are homogeneous the best response dynamics converge to a unique unilaterally stable outcome ranging from an empty to denser networks as the costs of linking decrease a core periphery network structure can form endogenously however if we allow for heterogeneity among agents in size we show that our model can reproduce the observed core periphery structure in the dutch interbank market for reasonable parameter values

the formation of financial networks modern banking systems are highly interconnected despite various benefits linkages between banks carry the risk of contagion in this article i investigate whether banks can commit ex ante to mutually insure each other when there is contagion risk in the financial system i model banks decisions to share this risk through bilateral agreements a financial network that allows losses to be shared among various counterparties arises endogenously i characterize the probability of systemic risk defined as the event that contagion occurs conditional on one bank failing in equilibrium interbank networks i show that there exist equilibria in which contagion does not occur