some aspects of the taxation of capital gains abstract the analysis of the effects of capital gains taxation requires a careful modelling both of the details of the tax code and the imperfections in the capital market under the standard assumptions concerning perfect capital markets and under the standard idealizations of the tax code there are several strategies by which rational investors can avoid note only all taxes on their capital income but also all taxes on their wage income these strategies leave individuals consumption and bequests in each state of nature and at each date unchanged from what they would have been in the absence of taxes although certain detailed provisions of the tax code may limit the extent to which rational investors can avail themselves of these tax avoidance activities there are ways in a perfect capital market by which the effects of these restrictions can be ameliorated accordingly any analysis of the effects of capital taxation must focus on imperfect capital markets if individuals face limitations on the amounts which they can borrow and or if there are limitations on short sales then under some circumstances there is a locked in effect individuals do not sell securities which they would have sold in the absence of taxation but under other circumstances individuals are induced to sell securities that they otherwise would have held in order to take advantage of the asymmetric treatment of short term losses and long term gains a policy of realizing gains as soon as they become eligible for long term treatment dominates the policy of postponing the realization of capital gains provided the gains are not too large a simple general equilibrium model is constructed within which it is shown that the taxation of capital gains may increase the volatility of asset prices and lead individuals not to trade when they otherwise would while the analysis casts doubt on the significance of the welfare losses resulting from these exchange inefficiencies there are circumstances in which the tax leads to production inefficiencies e g terminating projects at other than the socially optimal date finally we argue that the focus of some recent policy debates on the short run revenue impact of a decrease in the tax rate on capital gains is misplaced even when the short run revenue impact is positive consumption may increase thus exacerbating inflationary pressures and private savings may decrease thus leading to a lower level of investment in the private sector moreover there is some presumption that the long run revenue impact is negative our analysis has some important implications for empirical research in particular it suggests that the impact of the tax is not adequately summarized by a single number such as the effective tax rate representing the average ratio of tax payments to capital gains moreover the impact of the tax cannot be assessed by looking only at reported capital gains and losses

delays and equilibria with large and small information in social learning abstract the general model of social learning with irreversible investment and endogenous timing is analyzed for any distribution of private informations strategic complementarities and multiple equilibria appear which are generated solely by information externalities different equilibria generate strikingly different amounts of information the impacts of various assumptions bounded beliefs large number of agents discrete time and short periods are examined carefully the properties are robust to the introduction of observation noise with a continuum of agents

the incidence and allocation effects of a tax on corporate distributions abstract to study the effects of double taxation first at the corporation level then at the shareholder level this paper analyzes a model with a tax on all corporate distributions to equity owners and no other taxes contrary to the common view the tax is shown to have no subtitution effect and in particular no effect on the corporate choice between debt and equity via retained earnings finance the analysis opens to question certain arguments commonly used to support integration of corporation and individual income taxes via dividend relief

vertical integration market foreclosure and consumer welfare in the cable television industry i examine the effects of vertical integration between programming and distribution in the cable television industry i assess the effects of ownership structure on program offerings prices and subscriptions and i compare consumer welfare across integrated and unintegrated markets the results of this analysis suggest two general conclusions first integrated operators tend to exclude rival program services suggesting that certain program services cannot gain access to the distribution networks of vertically integrated cable system operators second vertical integration does not harm and may actually benefit consumers because of the associated efficiency gains

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

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

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

investment dynamics with common and private values abstract we study a dynamic investment game with two dimensional signals where each firm observes its continuously distributed idiosyncratic cost of investment and a discrete signal correlated with common investment returns we demonstrate that the one step property holds and provide an equilibrium existence characterization result reversals are possible where a large number of firms investing in a given round becomes bad news about investment returns welfare is compared to static and rigid timing benchmarks and computed for large economies

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

strategic delay in market entry two firms are contemplating entry into a market that is viable for only one firm in a good state we show that even if each firm receives a signal that perfectly reveals a good state both might strategically delay entry owing to the fear that the other firm might enter in the same period as well we also find the conditions where the informed firm will let the rival firm know about the market s profitability and the two will merge to enter the market we discuss the applications of this model to the oil industry and the generic drug industry jel classification l71 d8

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

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

the effect of the investment tax credit on the value of the firm abstract a change in the tax law that increases investment incentives for new assets may result in excess returns on new investment causing firm value to increase alternatively because the investment incentives apply only to new investments the value of existing assets that compete with these investments may decline in general investment incentives have a theoretically ambiguous effect on firm value cross sectional tests examine the changes in firm value to repeated changes of the investment tax credit changes in firm value are found to be positively related to the expected receipt of investment tax credits no evidence is found to support a relationship between expected changes in the value of a firm s existing assets and changes in firm value

vertical integration and firm boundaries the evidence since ronald h coase s 1937 seminal paper a rich set of theories has been developed that deal with firm boundaries in vertical or input output structures in the last twenty five years empirical evidence that can shed light on those theories also has been accumulating we review the findings of empirical studies that have addressed two main interrelated questions first what types of transactions are best brought within the firm and second what are the consequences of vertical integration decisions for economic outcomes such as prices quantities investment and profits throughout we highlight areas of potential cross fertilization and promising areas for future work

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

effective tax rates and tobin s q abstract this paper clarifies the relation between the average and marginal effective tax rates using the notion of the change in tobin s average q the equation connecting the effective rates shows that corporate taxation can be represented by a mixture of two extreme tax rules one being a distorting pure corporate tax and the other a nondistorting cash flow tax the paper proposes new measures representing this feature

the competitive impact of vertical integration by multiproduct firms we study the impact of vertical integration on pricing incentives in multiproduct industries to do so we exploit recent variation in vertical structure in the us carbonated beverage industry while the elimination of double marginalization with vertical integration is normally characterized as procompetitive economic theory predicts that it may cause anticompetitive price increases in multiproduct industries we indeed find that vertical integration causes price decreases in products with eliminated double margins but price increases in the other products sold by the integrated firm these results provide new evidence of anticompetitive effects of vertical mergers

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

first versus second mover advantage with information asymmetry about the profitability of new markets is it better to move first or second to innovate or to imitate we show that if one player s information about the profitability of new markets is only modestly superior the possibility of foreclosing the market can lead to a first mover advantage on the other hand more extreme information superiority can reverse this leading to a second mover advantage knowing more surely what is the best choice the better informed player wants to delay to keep his information private and the less informed player wants to delay to learn because of this more accurate information can actually lead to inefficiency by increasing the incentive to delay and exogenous costs of delay can aid efficiency by neutralizing that strategic incentive in fact in some circumstances a player may purposely coarsen his information to deter imitation

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

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

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

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

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

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

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

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

social learning and peer effects in consumption evidence from movie sales using box office data for all movies released between 1982 and 2000 i quantify how much the consumption decisions of individuals depend on information they receive from their peers when quality is ex ante uncertain in the presence of social learning we should see different box office sales dynamics depending on whether opening weekend demand is higher or lower than expected i use a unique feature of the movie industry to identify ex ante demand expectations the number of screens dedicated to a movie in its opening weekend reflects the sales expectations held by profit maximizing theatre owners several pieces of evidence are consistent with social learning first sales of movies with positive surprise and negative surprise in opening weekend demand diverge over time if a movie has better than expected appeal and therefore experiences larger than expected sales in week 1 consumers in week 2 update upward their expectations of quality further increasing week 2 sales second this divergence is small for movies for which consumers have strong priors and large for movies for which consumers have weak priors third the effect of a surprise is stronger for audiences with large social networks finally consumers do not respond to surprises in first week sales that are orthogonal to movie quality like weather shocks overall social learning appears to be an important determinant of sales in the movie industry accounting for 32 of sales for the typical movie with positive surprise this implies the existence of a large social multiplier such that the elasticity of aggregate demand to movie quality is larger than the elasticity of individual demand

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

vertical mergers in multi product industries and edgeworth s paradox of taxation when a two product monopolist merges with one of its suppliers thus eliminating the double marginalization for one of its goods three qualitative effects on downstream prices can result the monopolist might 1 lower both prices 2 lower the price of the good for which the double marginalization is eliminated and raise the price of the other good or 3 raise both prices since some and even all prices can increase mergers of successive monopolists in multiproduct industries do not necessarily improve welfare this result differs from the single product case in which such mergers necessarily increase welfare copyright 1991 by blackwell publishing ltd

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

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

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

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

do economic instruments matter wind turbine investments in the eu 15 abstract this paper analyses how governments in the eu 15 countries have succeeded in stimulating investments in wind turbines between 1985 and 2005 i use four different evaluation criteria tobin s q euler equation estimation investment accelerator model and the effective marginal tax rate to describe the observed investment patterns after a period of rapid growth in capital stock 1985 2000 a period of modest growth 2001 2005 can be observed even though the economic attractiveness of investing increases modestly this pattern cannot be explained by the evaluation criteria unless we accept economic attractiveness is a necessary condition and not a necessary and sufficient condition when analysing which policy has worked best the policies of germany denmark and spain stand out their early and consistent support has been based on feed in tariffs combined with subsidies

equilibrium vertical foreclosure the authors formulate a complete but analytically simple equilibrium model of vertical mergers to evaluate the logic of standard vertical foreclosure claims and the criticisms made of those claims the model includes incentives of the integrated firm and unintegrated input suppliers to exclude rivals and the potential holdout problem in this fully specified model vertical foreclosure can emerge in equilibrium copyright 1990 by american economic association

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

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

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

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

vertical mergers and market foreclosure ythe model in this paper illustrates three effects of vertical mergers when both stages are oligopolistic and vertically integrated and unintegrated producers coexist first the merging firm increases its final good output second the resulting backward shift in the residual demand curve facing unintegrated final good producers ylowers their demand for the intermediate good third the merged firm withdraws from the intermediate good market the increased concentration pushes the intermediate good price upward which effect dominates depends on market structure under some conditions a vertical merger causes the price of the final good to increase

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

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

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

market foreclosure and vertical merger a case study of the vertical merger between turner broadcasting and time warner abstract we employ an event study methodology the event being the vertical merger between time warner and turner broadcasting distribution and programming respectively in the cable television industry we assess the effects of the merger on final prices subscriptions and carriage and marketing decisions of time warner the analysis finds several interesting facts first foreclosure in time warner markets following the merger is observed for the rival channels that are not integrated with any cable distributors second the turner broadcasting channels that increased market shares because of this merger appeared to be foreclosed by time warner prior to the merger the preference for own channels by time warner persisted despite a lower quality of channel bundles in its markets efficiency gains from the merger were not passed on to consumers

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

vertical relationships between manufacturers and retailers inference with limited data in this paper different models of vertical relationships between manufacturers and retailers in the supermarket industry are compared demand estimates are used to compute price cost margins for retailers and manufacturers under different supply models when wholesale prices are not observed the purpose is to identify the set of margins compatible with the margins obtained from estimates of cost and to select the model most consistent with the data among non nested competing models the models considered are 1 a simple linear pricing model 2 a vertically integrated model and 3 a variety of alternative strategic supply scenarios that allow for collusion non linear pricing and strategic behaviour with respect to private label products using data on yogurt sold in several stores in a large urban area of the u s the results imply that wholesale prices are close to marginal cost and that retailers have pricing power in the vertical chain this is consistent with non linear pricing by the manufacturers or high bargaining power of the retailers

information revelation through bunching abstract in this paper we analyze a dynamic game of pure information externality each player receives a private signal and chooses whether and when to invest bunching occurs when a subgroup of the players make decisions contingent on their signals while the rest of the players wait regardless of their signals we focus on asymmetric pure strategy equilibria where players private information is revealed gradually through bunching when players become patient enough the most efficient equilibrium contains no herding of investing while the least efficient equilibrium resembles the outcomes in an exogenous timing model when players discount factors differ less patient players will bunch earlier than more patient players

market power vertical integration and the wholesale price of gasoline this paper examines empirically the relationship between vertical integration and wholesale gasoline prices we use discrete and differential changes in the extent of vertical integration generated by mergers in west coast gasoline refining and retailing markets to test for incentives to raise rivals costs the research design allows us to test for a relationship between vertical integration and wholesale prices controlling for horizontal market structure cost shocks and trends we find evidence consistent with the strategic incentive to raise competitors input costs this suggests that vertical integration can have a significant impact on wholesale prices

strategic delay and the onset of investment cascades i study the phenomenon of herd behavior in a framework where agents can endogenously choose both the actions and the timing of their actions i assume that agents may have privately known quality and content of information a unique symmetric equilibrium in pure strategies is proved to exist and characterized in its closed form an investment cascade always occurs in the equilibrium and a strategic delay is shown to exist before the sudden onset of the investment cascade i also examine the loss of welfare from delay and information cascade

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

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

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

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

anticompetitive vertical integration by a dominant firm backward vertical integration by a dominant firm into an upstream competitive industry causes both input and output prices to rise the dominant firm s advantage may or may not offset the negative effect of higher prices on social welfare whether it does depends on a simple indicator derived from input and output market shares and the degree of prior vertical integration a vertical merger is similar to a hypothetical horizontal merger suggesting that vertical merger policy for this industry should be similar to horizontal merger policy the dominant firm model yields an observable sufficient indicator of welfare improving vertical mergers copyright 1998 by american economic association