information acquisition and under diversification if an investor wants to form a portfolio of risky assets and can exert effort to collect information on the future value of these assets before he invests which assets should he learn about the best assets to acquire information about are ones the investor expects to hold but the assets the investor holds depend on the information he observes we build a framework to solve jointly for investment and information choices with general preferences and information cost functions although the optimal research strategies depend on preferences and costs the main result is that the investor who can first collect information systematically deviates from holding a diversified portfolio information acquisition can rationalize investing in a diversified fund and a concentrated set of assets an allocation often observed but usually deemed anomalous copyright wiley blackwell

simple market equilibria with rationally inattentive consumers we study a market with rationally inattentive consumers who are unsure of the terms of the offers made by firms but can acquire information about the terms at a cost in a symmetric equilibrium the price set by firms is continuously increasing in the cost of information for consumers and decreasing in the number of firms operating in addition favorable a priori information about a firm leads it to set a higher price and a new entrant can increase demand for incumbents when consumers have heterogeneous costs of information firms selling low quality products may choose to set the highest prices

general equilibrium theory with imperfect competition abstract this survey is organized as follows i introduction ii the main issues iii negishi s model iv objective demand in the cournot nash framework v objective demand in the bertrand nash framework vi the assumption of quasi concavity of the profit functions vii compromises between the conjectural and the objective approach viii insights into the notion of perfect competition ix conclusion

man bites dog business cycles the newsworthiness of an event is partly determined by how unusual it is and this paper investigates the business cycle implications of this fact signals that are more likely to be observed after unusual events may increase both uncertainty and disagreement among agents in a simple business cycle model such signals can explain why we observe i occasional large changes in macro economic aggregate variables without a correspondingly large change in underlying fundamentals ii persistent periods of high macroeconomic volatility and iii a positive correlation between absolute changes in macro variables and the cross sectional dispersion of survey expectations

rational inattention in uncertain business cycles the paper proposes endogenous information choice as a channel through which uncertainty affects price dynamics i consider a rational inattention model with volatility uncertainty and endogenous information processing capability according to the model firms learning and optimal attention exhibits inertia and asymmetry in response to volatility changes firms choose to process more information when uncertainty rises especially about aggregate conditions and their pricing behavior changes accordingly using a markov switching factor augmented vector autoregression ms favar the paper also documents a significant positive correlation between volatility and firms responsiveness to macro and microlevel shocks consistent with model predictions

portfolio choice attention allocation and price comovement abstract this paper models the attention allocation of portfolio investors investors choose the composition of their information subject to an information flow constraint given their expected investment strategy in the next period which is to hold a diversified portfolio in equilibrium investors choose to observe one linear combination of asset payoffs as a private signal when investors use this private signal to update information about two assets changes in one asset affect both asset prices and may lead to asset price comovement the model also has implications for the transmission of volatility shocks between two assets

a quantized approach to rational inattention abstract in this paper i propose a model of rational inattention where the choice variable is a deterministic function of the exogenous variables and still only a finite amount of information is being used this holds provided the choice variable is discrete rather than continuous that is the mapping from the realization of the exogenous variables to the endogenous ones is piece wise constant thus limited information is now a source of lumpiness in behavior rather than a source of noise the approach is applied to a simple static model of price setting where individual price setters face aggregate monetary shocks and idiosyncratic productivity shocks the effect of aggregate money shocks on output and prices is studied it is shown that as the variance of idiosyncratic shocks become large the aggregate log price level converges to a linear function of the aggregate money shock with a coefficient which is strictly between 0 and 1 consequently unanticipated aggregate money shocks have real effects on output in contrast to the sticky price model of caplin and spulber 1987 but these effects are smaller than in standard rational inattention models or in the lucas 1972 misperception model

measuring the effects of natural gas pipeline constraints on regional pricing and market integration abstract natural gas pipeline capacity sets physical limits on the quantity of gas that can be moved between regions with attendant price effects we find support for the hypothesis of integrated regional markets using data on daily pipeline flows and capacities in florida and southern california we estimate reduced form price effects of capacity constraints we find that pipeline congestion increased realized citygate prices by at least 11 over the mean in florida and by 6 over the mean in southern california we attribute the difference in price effects to more binding capacity constraints in the florida pipeline network our estimates provide guidance for interstate pipeline investments

price points and price dynamics abstract a standard model of price setting is extended to include an important role for price points as well as sticky information it makes empirically reasonable predictions about the frequency of price adjustments the sizes of price increases and decreases the shape of the hazard function the fraction of price changes that are price increases and the relationship between price changes and inflation when the model of price setting is integrated into a small scale dsge model it implies plausible aggregate effects of monetary policy in contrast to a model with a prominent role for price points but no information rigidities

permit banking in emission trading competition arbitrage and linkage abstract several existing or proposed climate policies have considered bankable permits in a cap and trade c t program that covers beyond a single sector e g electric power or allows the program to link to external c t programs in other regions this paper develops a model of permit banking under imperfect competition and imperfect inter temporal arbitrage in which the firms in one dominant sector can exert market power in both product and permit markets while those in other sectors or linked programs are perfectly competitive a simple analytical model is developed to generate contestable hypothesis we further extend the model to account for the physical power system institutional rules and market conditions and then apply it to the pennsylvania jersey maryland pjm market we show that if the dominant firm has market power then the permit price rises at a higher rate than the discount rate contrary to perfectly competitive permit market where the permit price rises at the discount rate following the classic hotelling s rule furthermore under a declining emissions cap system with the permits front loaded in early time periods the dominant firm has an incentive to suppress the permit prices monopsony when buying the permits in early periods and then inflate the permit prices monopoly when selling them in later periods numerical results of the pjm case are consistent with the analytical conclusion

exclusionary manipulation of markets for pollution rights abstract strategic price manipulation can affect the distribution of transferable pollution rights across polluters and the efficiency of pollution control efforts prior research has concentrated on market manipulation by firms seeking only to minimize the sum of pollution rights costs and pollution abatement costs in this paper we explore the potential for the exclusionary manipulation of pollution permit markets intended to drive up the costs of one s rivals and we distinguish between the resource allocation effects of exclusionary manipulation and cost minimizing manipulation we find that exclusionary manipulation can sometimes worsen and sometimes ameliorate the abatement inefficiency which occurs under cost minimizing manipulation and that an overbuying rule can obviate or at least limit damages from this form of strategic behavior

multi sector model of tradable emission permits this paper presents a multi sector model of tradable emission permits which includes oligopolistic and perfectly competitive industries the firms in oligopolistic industries are assumed to exercise market power in the tradable permit market as well as in the product market specifically we examine the effects of the initial permit allocation on the equilibrium outcomes focusing on the interaction among these product and permit markets it is shown that raising the number of initial permits allocated to one firm in an oligopolistic industry increases the output produced by that firm under certain conditions raising a clean less polluting firm s share of the initial permits can lead to reductions in both the product and permit prices we discuss criteria for the socially optimal allocation of initial permits considering the trade off between production inefficiency and consumer benefit

what do emissions markets deliver and to whom evidence from southern california s nox trading program a perceived advantage of cap and trade programs over more prescriptive environmental regulation is that enhanced compliance flexibility and cost effectiveness can make more stringent emissions reductions politically feasible however increased compliance flexibility can also result in an inequitable distribution of pollution we investigate these issues in the context of southern california s reclaim program we match facilities in reclaim with similar california facilities also located in non attainment areas our results indicate that emissions fell approximately 24 percent on average at reclaim facilities relative to our counterfactual furthermore we find that observed changes in emissions do not vary significantly with neighborhood demographic characteristics

tradable emission rights and strategic interaction the use of tradable emission rights as environmental policy instruments may affect the conditions for strategic interaction between regulated firms and thus have implications for competition policy this paper presents an analysis of how and under what conditions emission rights can be used strategically by oligopolistic firms for predatory and exclusionary purposes

an oligopolistic power market model with tradable no sub x permits models formulated as complementarity problems have been applied previously to assess the potential for market power in transmission constrained electricity markets here we use the complementarity approach to simulate the interaction of pollution permit markets with electricity markets considering forward contracts and the operating reserve market because some power producers are relatively large consumers of permits there could be interaction between market power in the permits and energy markets market power in the energy market is modeled using a cournot game while a conjectured price response model is used in the permits market an illustrative application is made to pennsylvania new jersey maryland interconnection pjm which we represent by a 14 node dc load flow model and the usepa ozone transport commission no sub x budget program the results show that forward contracts effectively mitigate market power in pjm energy market and both simulated solutions of perfect and cournot oligopoly competition are a good approximation to actual prices in 2000 except that the cournot model yielded higher peak prices the no sub x market influences the cournot energy market in several ways one is that cournot competition lowers the price of no sub x permits which in turn affects on low and high emission producers differently in general because pollution permits are an important cost high concentration in the market for such permits can exacerbate the effects of market power in energy markets

market power and transferable property rights the appeal of using markets as a means of allocating scarce resources stems in large part from the assumption that a market will approximate the competitive ideal when competition is not a foregone conclusion the question naturally arises as to how a firm might manipulate the market to its own advantage this paper analyzes the issue of market power in the context of markets for transferable property rights first a model is developed that explains how a single firm with market power might exercise its influence this is followed by an examination of the model in the context of a particular policy problem the control of particulate sulfates in the los angeles region

investigating nonneutrality in a state dependent pricing model with firm level productivity shocks in a model with fixed cost of price adjustment and idiosyncratic shocks two parameterizations match a large set of microeconomic facts yet display different degrees of nonneutrality although there is substantial nonneutrality in both cases the model does not behave like a time dependent model as changes in the distribution of firms account for roughly a third of the short run response of the price level to a monetary shock we use the model to examine how aggregating firm behavior can generate flat hazards we also find that a recently developed steady state statistic is an imperfect guide to characterizing nonneutrality

rigid pricing and rationally inattentive consumer abstract this paper proposes a mechanism leading to rigid pricing as an optimal strategy it applies a framework of rational inattention to study the pricing strategies of a monopolistic seller facing a consumer with limited information capacity the consumer needs to process information about the realized price while the seller is perfectly attentive the seller chooses to price rigidly i e prices respond to changes in the unit input cost less than if the consumer was perfectly attentive the rigidity is sometimes manifested by discreteness of prices the seller charges a finite set of different prices even for a continuous range of unit input costs the seller does so to provide the consumer with easily observable prices which stimulates her to consume more and increases the seller s profit

heuristic thinking and limited attention in the car market can heuristic information processing affect important product markets analyzing over 22 million wholesale used car transactions we find evidence of left digit bias in the processing of odometer values whereby individuals focus on the number s leftmost digits the bias leads to discontinuous drops in sale prices at 10 000 mile odometer thresholds along with smaller drops at 1 000 mile thresholds these findings reveal that information processing heuristics matter even in markets with large stakes and easily observed information we model left digit bias in an inattention framework and structurally estimate the inattention parameter empirical patterns suggest the results are driven by final customers rather than professional agents jel d12 d44 d83 l81

optimal sticky prices under rational inattention this paper presents a model in which price setting firms decide what to pay attention to subject to a constraint on information flow when idiosyncratic conditions are more variable or more important than aggregate conditions firms pay more attention to idiosyncratic conditions than to aggregate conditions when we calibrate the model to match the large average absolute size of price changes observed in micro data prices react fast and by large amounts to idiosyncratic shocks but only slowly and by small amounts to nominal shocks nominal shocks have strong and persistent real effects we use the model to investigate how the optimal allocation of attention and the dynamics of prices depend on the firms environment jel e 3 e5 d8

implications of rational inattention abstract a constraint that actions can depend on observations only through a communication channel with finite shannon capacity is shown to be able to play a role very similar to that of a signal extraction problem or an adjustment cost in standard control problems the resulting theory looks enough like familiar dynamic rational expectations theories to suggest that it might be useful and practical while the implications for policy are different enough to be interesting