strategic capacity rationing to induce early purchases dynamic pricing offers the potential to increase revenues at the same time it creates an incentive for customers to strategize over the timing of their purchases a firm should ideally account for this behavior when making its pricing and stocking decisions in particular we investigate whether it is optimal for a firm to create rationing risk by deliberately understocking products then the resulting threat of shortages creates an incentive for customers to purchase early at higher prices but when does such a strategy make sense if it is profitable to create shortages what is the optimal amount of rationing risk to create we develop a stylized model to study this problem in our model customers have heterogeneous valuations for the firm s product and face declining prices over two periods customers are assumed to have identical risk preferences and know the price path and fill rate in each period via its capacity choice the firm is able to control the fill rate and hence the rationing risk faced by customers customers behave strategically and weigh the payoff of immediate purchases against the expected payoff of delaying their purchases we analyze the capacity choice that maximizes the firm s profits first we consider a monopoly market and characterize conditions under which rationing is optimal we examine how the optimal amount of rationing is affected by the magnitude of price changes over time and the degree of risk aversion among customers we then analyze an oligopoly version of the model and show that competition reduces the firms ability to profit from rationing indeed there exists a critical number of firms beyond which a rationing equilibrium cannot be supported

minimum effort coordination games stochastic potential and logit equilibrium abstract this paper revisits the minimum effort coordination game with a continuum of pareto ranked nash equilibria noise is introduced via a logit probabilistic choice function the resulting logit equilibrium distribution of decisions is unique and maximizes a stochastic potential function in the limit as the noise vanishes the distribution converges to an outcome that is analogous to the risk dominant outcome for 2 2 games in accordance with experimental evidence logit equilibrium efforts decrease with increases in effort costs and the number of players even though these parameters do not affect the nash equilibria journal of economic literature classification numbers c72 c92

the value of fast fashion quick response enhanced design and strategic consumer behavior a fast fashion system combines quick response production capabilities with enhanced product design capabilities to both design hot products that capture the latest consumer trends and exploit minimal production lead times to match supply with uncertain demand we develop a model of such a system and compare its performance to three alternative systems quick response only systems enhanced design only systems and traditional systems which lack both enhanced design and quick response capabilities in particular we focus on the impact of each of the four systems on strategic or forward looking consumer purchasing behavior i e the intentional delay in purchasing an item at the full price to obtain it during an end of season clearance we find that enhanced design helps to mitigate strategic behavior by offering consumers a product they value more making them less willing to risk waiting for a clearance sale and possibly experiencing a stockout quick response mitigates strategic behavior through a different mechanism by better matching supply to demand it reduces the chance of a clearance sale most importantly we find that although it is possible for quick response and enhanced design to be either complements or substitutes the complementarity effect tends to dominate hence when both quick response and enhanced design are combined in a fast fashion system the firm typically enjoys a greater incremental increase in profit than the sum of the increases resulting from employing either system in isolation furthermore complementarity is strongest when customers are very strategic we conclude that fast fashion systems can be of significant value particularly when consumers exhibit strategic behavior this paper was accepted by yossi aviv operations management

ten little treasures of game theory and ten intuitive contradictions this paper reports laboratory data for games that are played only once these games span the standard categories static and dynamic games with complete and incomplete information for each game the treasure is a treatment in which behavior conforms nicely to predictions of the nash equilibrium or relevant refinement in each case however a change in the payoff structure produces a large inconsistency between theoretical predictions and observed behavior these contradictions are generally consistent with simple intuition based on the interaction of payoff asymmetries and noisy introspection about others decisions

the stabilizing role of government size abstract this paper presents an analysis of how alternative models of the business cycle can replicate the stylized fact that large governments are associated with less volatile economies our analysis shows that adding nominal rigidities and costs of capital adjustment to an otherwise standard rbc model can generate a negative correlation between government size and the volatility of output however in the model we find that the stabilizing effect is only due to a composition effect and it is not present when we look at the volatility of private output given that empirically we also observe a negative correlation between government size and the volatility of consumption we modify the model by introducing rule of thumb consumers in this modified version of our initial model we observe that consumption volatility is also reduced when government size increases in similar way to the observed pattern in oecd economies over the last 45 years

boundedly rational nash equilibrium a probabilistic choice approach we propose an equilibrium for n person finite games based on bounded rationality using the legit model of discrete choice theory at equilibrium each player uses appropriate choice probabilities given those used by the others rationality is parameterized on a continuum from complete rationality to uniform random choice results on the existence of equilibrium and on convergence to nash as rationality becomes perfect are similar to results due to mckelvey and palfrey we identify conditions such that for a given rationality parameter range the path of choices over time when the players use fictitious play converges to equilibrium c 1997 academic press

rent seeking with bounded rationality an analysis of the all pay auction the winner take all nature of all pay auctions makes the outcome sensitive to decision errors which we introduce with a logit formulation the equilibrium bid distribution is a fixed point the belief distributions that determine expected payoffs equal the choice distributions determined by expected payoffs we prove existence uniqueness and symmetry properties in contrast to the nash equilibrium the comparative statics of the logit equilibrium are intuitive rent dissipation increases with the number of players and the bid cost overdissipation of rents is impossible under full rationality but is observed in laboratory experiments our model predicts this property

interactions between monetary and fiscal policy rules the fiscal stability pact for emu implies that constraints on fiscal policy facilitate inflation control in this paper we identify two stable policy regimes when monetary policy seeks to raise real interest rates in response to excess inflation a self stabilising fiscal policy is required to ensure model stability a fiscal policy which does not by itself ensure fiscal solvency constrains monetary policy to be relatively passive however in simulations we conclude that the central bank does not need to seek on this account the degree of debt stabilisation that appears to be implied by the fiscal stability pact

climate change policy what do the models tell us very little a plethora of integrated assessment models iams have been constructed and used to estimate the social cost of carbon scc and evaluate alternative abatement policies these models have crucial flaws that make them close to useless as tools for policy analysis certain inputs e g the discount rate are arbitrary but have huge effects on the scc estimates the models produce the models descriptions of the impact of climate change are completely ad hoc with no theoretical or empirical foundation and the models can tell us nothing about the most important driver of the scc the possibility of a catastrophic climate outcome iam based analyses of climate policy create a perception of knowledge and precision but that perception is illusory and misleading jel c51 q54 q58

the principle of minimum differentiation holds under sufficient heterogeneity the so called principle of minimum differentiation stated by hotelling has been challenged by many authors this paper restores the principle by showing that n firms locate at the center of the market and charge prices higher than the marginal cost of production when heterogeneity in consumers tastes is large enough

government size and macroeconomic stability abstract we analyze the effects of government size on output variability in the context of a rbc model in which government size is parameterized by the income tax rate and the share of government purchases in output the model implies that i income taxes are destabilizing and ii for most specifications considered government purchases are stabilizing we compare those predictions with the results of simple cross country regressions using data for 22 oecd countries the estimated relationship between empirical indicators of government size and measures of gdp variability appears far stronger than the model predicts and often has the opposite sign

government spending and the taylor principle this paper explores how government size affects the scope for equilibrium indeterminacy in a new keynesian economy where part of the population live hand to mouth the main result is that a higher level of public consumption is likely to generate indeterminacy and render the taylor principle insufficient as criterion for equilibrium uniqueness this holds even though fiscal policy serves to reduce swings in current income only if government consumption is a substitute for private consumption will it narrow the scope for indeterminacy hence monetary policy should be conducted with an eye to the amount and composition of government consumption

designing price contracts for boundedly rational customers does the number of blocks matter when designing price contracts one of the major questions confronting managers is how many blocks there should be in the contract we investigate this question in the setting of a manufacturer retailer dyad facing a linear deterministic consumer demand theoretical marketing models predict that the manufacturer s profits rise dramatically when the number of blocks in the contract is increased from one to two because both channel efficiency and its share of channel profits increase however increasing the number of blocks to three yields no incremental profits we test these predictions experimentally and find that increasing the number of blocks from one to two raises channel efficiency but not the manufacturer s share of profits surprisingly having three blocks in the contract increases channel efficiency even further and also gives the manufacturer a slightly higher share of profits we show that these results can be explained by a quantal response equilibrium model in which the manufacturer accounts for noisy best response due to nonpecuniary payoff components in the retailer s utility we also show that the retailer is sensitive to the counterfactual profits it could have earned if it were charged a lower marginal price for earlier blocks in the multiple block contract

cyclic pricing by a durable goods monopolist in the model of this paper a monopoly seller of a durable good holds periodic sales as a means of price discrimination a new cohort of consumers enters the market in each period interested in purchasing the good either immediately or after a delay within each cohort consumers vary in their tastes for the good under broad conditions the seller will vary the price over time in most periods he will charge a price just low enough to sell immediately to consumers with a high willingness to pay periodically however he will drop the price far enough to sell to an accumulated group of consumers with a low willingness to pay

reducing the cost of demand uncertainty through accurate response to early sales traditionally fashion products have incurred high losses due to stockouts and inventory obsolence because long lead times coupled with a concentrated selling season force all or at least most production to be committed before demand information is available under a quick response system lead times are shortened sufficiently to allow a greater portion of production to be scheduled in response to initial demand we model and analyze the decisions required under quick response and give a method for estimating the demand probability distributions needed in our model we applied these procedures with a major fashion skiwear firm and found that cost relative to the current informal response system was reduced by enough to increase profits by 60 relative to the cost that would have been incurred if no response were used optimized response reduces cost by enough to roughly quadruple profits

english auctions with resale an experimental study i design and test a simple english auction and two english auctions with resale but with different informational backgrounds all three treatments theoretically have the same equilibrium i find however that the possibility of resale alters behavior significantly in the two treatments with resale subjects deviated from both the nash prediction and the common results about bidding behavior in english auctions subjects tend to overbid when they are certain they can reap the whole surplus in the resale market i employ different models like qre and levels of reasoning and conclude that overbidding can be explained as a rational response to the noisy environment in markets with human participants that is as rational decision making when anticipating others to make errors when the outcome of the resale market is not certain there is significant signaling behavior and auction prices tend to be lower than the nash prediction

current real business cycle theories and aggregate labor market fluctuations hours worked and the return to working are weakly correlated traditionally the ability to account for this fact has been a litmus test for macroeconomic models existing real business cycle models fail this test dramatically we modify prototypical real business cycle models by allowing government consumption shocks to influence labor market dynamics this modification can in principle bring the models into closer conformity with the data our empirical results indicate that it does

the logit equilibrium a perspective on intuitive behavioural anomalies costs associated with deviations from the nash equilibrium these payoff asymmetry effects are incorporated in an approach that introduces noisy behavior via a logit probabilistic choice function in the resulting logit equilibrium behavior is characterized by a probability distribution that satisfies a rational expectations consistency condition the beliefs that determine players expected payoffs match the decision distributions that arise from applying the logit rule to those expected payoffs we prove existence of a unique symmetric logit equilibrium and derive comparative statics results the paper provides a unified perspective on many recent laboratory studies of games in which nash equilibrium predictions are inconsistent with both intuition and experimental evidence

infrastructure investment a review essay economists try not to be faddists but they often cannot help themselves while work on a topic should mirror the prospective importance of the topic that situation seems to occur with disappointing frequency instead the usual pattern is that some reasonably important topic will be totally ignored for the longest time then recognized and then the subject of a flurry of work all out of proportion to its likely long run importance nowhere has this speculative bubble of economic research been more clearly illustrated than with infrastructure investment macroeconomists havelong felt that the stock of public capital is an important factor input in the production of total output macroeconomists have known that u s productivity growth slowed dramatically in about 1973 and macroeconomists should have known that united states investment in public capital has been down since the late 1960s yet analysis of the u s productivity slowdown completely ignored infrastructure investment for the first fifteen years of this slowdown concentrating instead on energy prices social regulation the composition of the work force research and development different rates of obsolescence of the private capital stock and any number of other matters the public capital stock was hardly ever even mentioned as a potential factor in the productivity slowdown aschauer changed all that he wrote a series of papers 1989a 1989b 1989c that put these two movements together econometrically infrastructure investment turned down and aggregate productivity turned down slightly later both in the united states and in some other developed countries his work hit the magic button those who had worried about the productivity puzzle for fifteen years welcomed a new suspect those who were worried about low rates of u s national saving welcomed a new way to make their argument even more forcefully than with official figures on saving and investment which do not count infrastructure investment as investment political liberals and liberal politicians saw a way to rescue government spending and projects from the assaults of reaganism and even a way to avoid oth

balanced budget rules and macroeconomic in stability abstract it has been shown that under perfect competition and constant returns to scale a one sector real business cycle model may exhibit indeterminacy and sunspots when income tax rates are determined by a balanced budget rule with a pre set level of government expenditures this paper shows that indeterminacy disappears if the government finances endogenous public spending and transfers with fixed income tax rates under this type of balanced budget formulation the economy exhibits saddle path stability and equilibrium uniqueness regardless of the source of government revenue and or the existence of lump sum transfers

dynamic pricing in the presence of strategic consumers and oligopolistic competition we present a dynamic pricing model for oligopolistic firms selling differentiated perishable goods to multiple finite segments of strategic consumers who are aware that pricing is dynamic and may time their purchases accordingly this model encompasses strategic behavior by both firms and consumers in a unified stochastic dynamic game in which each firm s objective is to maximize its total expected revenues and each consumer responds according to a shopping intensity allocation consumer choice model we prove the existence of a unique subgame perfect equilibrium provide equilibrium optimality conditions and prove monotonicity results for special cases the model provides insights about equilibrium price dynamics under different levels of competition asymmetry between firms and multiple market segments with varying properties we demonstrate that strategic behavior by consumers can have serious impacts on revenues if firms ignore that behavior in their dynamic pricing policies moreover ideal equilibrium responses to consumer strategic behavior can recover only a portion of the lost revenues a key conclusion is that firms may benefit more from limiting the information available to consumers than from allowing full information and responding to the resulting strategic behavior in an optimal fashion

balanced budget rules distortionary taxes and aggregate instability a traditional argument against a balanced budget fiscal policy rule is that it amplifies business cycles by stimulating aggregate demand during booms via tax cuts and higher public expenditures and by reducing demand during recessions through a corresponding fiscal contraction this paper suggests an additional source of instability that may arise from this type of fiscal policy rule it shows that within the standard neoclassical growth model a balanced budget rule can make expectations of higher tax rates self fulfilling if the fiscal authority relies heavily on changes in labor income taxes to eliminate short run fiscal imbalances calibrated versions of the model show that indeterminacy occurs for income tax rates that are empirically plausible for the u s economy and other group of seven countries

the effectiveness of energy service demand reduction a scenario analysis of global climate change mitigation abstract a reduction of energy service demand is a climate mitigation option but its effectiveness has never been quantified we quantify the effectiveness of energy service demand reduction in the building transport and industry sectors using the asia pacific integrated assessment computable general equilibrium aim cge model for the period 2015 2050 under various scenarios there were two major findings first a 25 energy service demand reduction in the building transport and basic material industry sectors would reduce the gdp loss induced by climate mitigation from 4 0 to 3 0 and from 1 2 to 0 7 in 2050 under the 450 ppm and 550 ppm co 2 equivalent concentration stabilization scenarios respectively second the effectiveness of a reduction in the building sector s energy service demand would be higher than those of the other sectors at the same rate of the energy service demand reduction furthermore we also conducted a sensitivity analysis of different socioeconomic conditions and the climate mitigation target was found to be a key determinant of the effectiveness of energy service demand reduction measures therefore more certain climate mitigation targets would be useful for the decision makers who design energy service demand reduction measures

on the uniqueness and stability of equilibrium in quality speed competition with boundedly rational customers the case with general reward function and multiple servers abstract in this paper we extend the service speed competition game with boundedly rational customers considered in li et al 2016 to the case with general reward function and multiple servers the n servers make strategic decisions on their service rates sequentially and repeatedly since the competing servers payoff functions can only be expressed by an implicit function set we propose a matrix method to derive the uniqueness of the equilibrium service rates and we establish the stability of the equilibrium through a tatonnement scheme by conducting a sensitivity analysis regarding the number of competing servers and the demand density we find that the server competition benefits the customers by improving their utilities as well as getting more customers to be served furthermore for a fixed demand density the equilibrium service rate increases in the market size and converges to a certain level when the market size is large enough

effective tax rates in macroeconomics cross country estimates of tax rates on factor incomes and consumption abstract this paper proposes a method for computing tax rates using national accounts and revenue statistics using this method we construct time series of tax rates for large industrial countries the method identifies the revenue raised by different taxes at the general government level and defines aggregate measures of the corresponding tax bases this method yields estimates of effective tax rates on factor incomes and consumption consistent with the tax distortions faced by a representative agent in a general equilibrium framework these tax rates compare favorably with existing estimates of marginal tax rates and highlight important international differences in tax policy

dynamic pricing when consumers are strategic analysis of posted and contingent pricing schemes abstract we study dynamic pricing policies for a monopolist selling perishable products over a finite time horizon to strategic buyers buyers are strategic in the sense that they anticipate the firm s price policies it is expensive and administratively difficult for most brick and mortar retailers to change prices placing limits on the number of price changes and the types of pricing policies they can adopt the simplest policy is to commit to a set of price changes a more complex alternative is to let the price depend on sales history we investigate two pricing schemes that we call posted and contingent pricing using the posted pricing scheme the firm announces a set of prices at the beginning of the horizon in the contingent pricing scheme price evolution depends upon demand realization our focus is on the posted pricing scheme because of its ease of implementation counter to intuition we find that neither a posted pricing scheme nor a contingent pricing scheme is dominant and the difference in expected revenues of these two schemes is small limiting the number of price changes will result in a decrease in expected revenues we show that a multi unit auction with a reservation price provides an upper bound for expected revenues for both pricing schemes numerical examples suggest that a posted pricing scheme with two or three price changes is enough to achieve revenues that are close to the upper bound dynamic pricing is only useful when strategic buyers perceive scarcity we study the impact of scarcity and derive the optimal stocking levels for large markets finally we investigate whether or not it is optimal for the seller to conceal inventory or sales information from buyers a firm benefits if it does not reveal the number of units it has available for sale at the beginning of the season or subsequently withholds information about the number of units sold

information distortion in a supply chain the bullwhip effect this article originally appeared in management science april 1997 volume 43 number 4 pp 546 558 published by the institute of management sciences consider a series of companies in a supply chain each of whom orders from its immediate upstream member in this setting inbound orders from a downstream member serve as a valuable informational input to upstream production and inventory decisions this paper claims that the information transferred in the form of orders tends to be distorted and can misguide upstream members in their inventory and production decisions in particular the variance of orders may be larger than that of sales and distortion tends to increase as one moves upstream a phenomenon termed bullwhip effect this paper analyzes four sources of the bullwhip effect demand signal processing rationing game order batching and price variations actions that can be taken to mitigate the detrimental impact of this distortion are also discussed

heterogeneous quantal response equilibrium and cognitive hierarchies we explore an equilibrium model of games where behavior is given by logit response functions but payoff responsiveness and beliefs about others responsiveness are heterogeneous we study two substantively different ways of extending quantal response equilibrium qre to this setting 1 heterogeneus qre where players share identical correct beliefs about the distribution of payoff responsiveness and 2 truncated qre where players have downward looking beliefs systematically underestimating others responsiveness we show that the cognitive hierarchy model is a special case of truncated qre we conduct experiments designed to differentiate these approaches we find significant evidence of payoff responsive stochastic choice and of heterogeneity and downward looking beliefs in some games

the structure of economic modeling of the potential impacts of climate change grafting gross underestimation of risk onto already narrow science models scientists describe the scale of the risks from unmanaged climate change as potentially immense however the scientific models because they omit key factors that are hard to capture precisely appear to substantially underestimate these risks many economic models add further gross underassessment of risk because the assumptions built into the economic modeling on growth damages and risks come close to assuming directly that the impacts and costs will be modest and close to excluding the possibility of catastrophic outcomes a new generation of models is needed in all three of climate science impact and economics with a still stronger focus on lives and livelihoods including the risks of large scale migration and conflicts

stochastic technical progress smooth trends and nearly distinct business cycles this paper studies a model of random technical progress where technology diffuses at realistically slow rates it fits smooth trends to the sum of gdp series generated by this model and series representing transitory or cyclical fluctuations detrended gdp is then largely unrelated to technical progress the detrending method proposed by rotemberg 1999 reconstructs cyclical variations somewhat more accurately than the hp filter with sufficiently slow diffusion it is also more accurate than a method based on vars fitted to hours and gdp growth consistent with the model s predictions permanent shocks initially depress both hours and output in these vars

high price or low price an experimental study on a markdown pricing policy abstract this study examines whether strategic customers behavioral patterns remain consistent in different pricing scenarios under a markdown pricing policy these customers decision patterns have been widely discussed because they significantly influence the expected monetary output contrary to rational assumptions the behavioral research literature indicates that customers behavioral biases manifest in their reference dependency risk and loss attitudes and fill rate misperceptions however the relationship between behavioral biases and various pricing scenarios has not been carefully examined accordingly we conducted laboratory experiments to observe customers behavioral performance in a series of pricing scenarios to provide pricing suggestions for sellers our experimental results demonstrate that behavioral factors reflecting risk and loss attitudes as well as reference dependency can clearly describe customers behavioral biases meanwhile our estimation shows that the degrees of risk and loss attitude are not constant but depend on price settings the lower the full price in the initial period the higher the degrees of aversion to both risk and loss given such behavioral patterns we suggest that sellers should set their full prices lower than the normative value when the fill rate in period two is low and set them higher than the normative value when the fill rate in period two is high

discrete choice and variable returns to scale in previous studies of the probabilistic theory of qualitative choice e g marschak 1960 and mcfadden 1974 it has been assumed that an individual chooses among various alternatives with their utility levels independent of the number of individuals who choose each alternative there are however many examples in which the utility of a choice depends on the number of individuals who make the same choice for instance the utility of a given spatial choice may depend upon the number of others who choose neighboring locations neighborhood utility may decrease crowding or it may increase agglomerative economies with population size a second example is the automobile traveler s choice of routes the benefit of one route choice over another due to congestion depends on the number of drivers who choose the same route both of the examples suggested above deal with spatial choices of a particular kind but there are even examples from the more traditional macroeconomic theory one such example is of a product produced under variable returns to scale by a number of different sellers the price that each seller charges will depend upon the number of his customers if a buyer must choose to purchase from only one seller the price paid and thus utility will depend upon the total number of buyers choosing the same seller in all of the examples cited a reasonable model of choice is one that postulates uncertainty about the actual utility of each alternative the point of view is that a chooser s notional utility about each choice is a random variable in this case it is not certain which alternative will be chosen but the chosen alternative is the one with the greatest perceived utility it follows therefore that the probability that a given alternative is chosen is the probability that the utility perceived to be associated with it is larger than the utility perceived to be associated with any other alternative

countercyclical taxes in a monopolistically competitive environment in the context of a neoclassical growth model with monopolistic competition this paper studies the stabilizing effects of countercyclical tax policy when the income tax rate has an additional role of financing government budget deficits consistent with the conventional wisdom countercyclical taxes generally reduce aggregate volatility unless the fiscal response to debt accumulation is weak the presence of monopoly power enhances these effects even when automatic stabilizers successfully stabilize business cycle fluctuations countercyclical taxes are welfare inferior due to reduced precautionary saving motives while if the fiscal response to debt is weak and countercyclical tax policy destabilizing the increased precautionary saving motive is not welfare enhancing as the asset accumulated is government debt rather than capital these results are generally robust nominal inertia may however dominate the precautionary saving mechanism

automatic stabilizers fiscal rules and macroeconomic stability abstract this paper analyzes the effect of the fiscal structure upon the trade off between inflation and output stabilization induced by technological shocks in a dge model with nominal and real rigidities that also integrates a rich menu of fiscal variables as well as a target on the debt to output ratio the channels through which fiscal policy affects macroeconomic stability include supply side effects of distortionary taxes the procyclical behavior of public spending induced by fiscal rules and the conventional effect of automatic stabilizers operating through disposable permanent income the paper investigates these channels and concludes that contrary to what has been found in rbc models distortionary taxes tend to reduce output volatility relative to lump sum taxes when significant rigidities are present we also study the stabilization effect of alternative distortionary tax structures and find that these are only relevant if substantial rigidities are present

revenue management under a general discrete choice model of consumer behavior customer choice behavior such as buy up and buy down is an important phenomenon in a wide range of revenue management contexts yet most revenue management methodologies ignore this phenomenon or at best approximate it in a heuristic way in this paper we provide an exact and quite general analysis of this problem specifically we analyze a single leg reserve management problem in which the buyers choice behavior is modeled explicitly the choice model is very general simply specifying the probability of purchase for each fare product as a function of the set of fare products offered the control problem is to decide which subset of fare products to offer at each point in time we show that the optimal policy for this problem has a quite simple form namely it consists of identifying an ordered family of efficient subsets s 1 s m and at each point in time opening one of these sets s k where the optimal index k is increasing in the remaining capacity x and decreasing in the remaining time that is the more capacity or less time available the further the optimal set is along this sequence we also show that the optimal policy is a nested allocation policy if and only if the sequence of efficient sets is nested that is s 1 s 2 s m moreover we give a characterization of when nesting by fare order is optimal we also develop an estimation procedure for this setting based on the expectation maximization em method that jointly estimates arrival rates and choice model parameters when no purchase outcomes are unobservable numerical results are given to illustrate both the model and estimation procedure

designing pricing contracts for boundedly rational customers does the framing of the fixed fee matter the format of pricing contracts varies substantially across business contexts a major variable being whether a contract imposes a fixed fee payment this paper examines how the use of the fixed fee in pricing contracts affects market outcomes of a manufacturer retailer channel standard economic theories predict that channel efficiency increases with the introduction of the fixed fee and is invariant to its framing we conduct a laboratory experiment to test these predictions surprisingly the introduction of the fixed fee fails to increase channel efficiency moreover the framing of the fixed fee does make a difference an opaque frame as quantity discounts achieves higher channel efficiency than a salient frame as a two part tariff although these two contractual formats are theoretically equivalent to account for these anomalies we generalize the standard economic model by allowing the retailer s utilities to be reference dependent so that the up front fixed fee payment is perceived as a loss and the subsequent retail profits as a gain we embed this reference dependent utility function in a quantal response equilibrium framework where the retailer is allowed to make decision mistakes due to computational complexity the key prediction of this behavioral model is that channel efficiency decreases with loss aversion for sufficiently nash rational retailers consistent with this prediction the estimated loss aversion coefficient is 1 37 in the two part tariff condition significantly higher than 1 27 in the quantity discount condition at the same time loss aversion dominates contract complexity in explaining the data lastly we conduct a follow up experiment to confirm the central role of loss aversion as a behavioral driver in one condition the retailer becomes less loss averse when we temporally compress the fixed fee payment and the realization of retail profits which supports the loss aversion theory in the other condition the retailer s contract acceptance rate does not decline when we reward the manufacturer a higher cash payment for each experimental point earned which rules out the competing hypothesis that the retailer rejects contract offers due to fairness concerns

selling to strategic consumers when product value is uncertain the value of matching supply and demand we address the value of quick response production practices when selling to a forward looking consumer population with uncertain heterogeneous valuations for a product consumers have the option of purchasing the product early before its value has been learned or delaying the purchase decision until a time at which valuation uncertainty has been resolved whereas individual consumer valuations are uncertain ex ante the market size is uncertain to the firm the firm may either commit to a single production run at a low unit cost prior to learning demand or commit to a quick response strategy that allows additional production after learning additional demand information we find that the value of quick response is generally lower with strategic forward looking customers than with nonstrategic myopic customers in this setting indeed it is possible for a quick response strategy to decrease the profit of the firm though whether this occurs depends on various characteristics of the market specifically we identify conditions under which quick response increases profit when prices are increasing when dissatisfied consumers can return the product at a cost to the firm and conditions under which quick response may decrease profit when prices are constant or when consumer returns are not allowed this paper was accepted by martin lariviere operations and supply chain management

anomalous behavior in a traveler s dilemma the notion of a nash equilibrium has joined supply and demand as one of the two or three techniques that economists instinctively try to use first in the analysis of economic interactions moreover the nash equilibrium and closely related game theoretic concepts are being widely applied in other social sciences and even in biology where evolutionary stability often selects a subset of the nash equilibria many people are uneasy about the stark predictions of the nash equilibrium in some contexts where the extreme rationality assumptions seem implausible kaushik basu s 1994 traveler s dilemma is a particularly convincing example of a case where the unrelenting logic of game theory is at odds with intuitive notions about human behavior the story associated with the dilemma is that two travelers purchase identical antiques while on a tropical vacation their luggage is lost on the return trip and the airline asks them to make independent claims for compensation in anticipation of excessive claims the airline representative announces

user delay costs and internal pricing for a service facility this paper studies optimal pricing and capacity decisions for a service facility in an environment where users delay cost is important the model assumes a general nonlinear delay cost structure and incorporates the tradeoff between the delay cost and capacity cost we find necessary and sufficient conditions for the optimality of a pricing rule that charges out service resources at their marginal capacity cost we examine the issue of budgetary balance and find that net value maximization entails a budget deficit for the service facility that is the service facility should be evaluated as a deficit center the results provide guidelines under which the optimal magnitude of the deficit can be determined

coordinating supply chains with competition capacity allocation in semiconductor manufacturing abstract this paper motivated by the experiences of a major us based semiconductor manufacturer presents an integrated model of incentive problems arising in forecasting and capacity allocation our model involves multiple product managers and multiple manufacturing managers who forecast the means of their respective demand and capacity distributions a central coordinator is responsible for allocating capacities to product lines when these distributions are unknown to the central coordinator and capacity is scarce the managers misrepresent their forecasts a product manager inflates his forecast to gain a greater allocation of the capacity a manufacturing manager deflates his forecast to cover for the uncertainties in production we propose a game theoretic model and design a mechanism a bonus scheme for all managers and an allocation rule to allocate realized capacity to the product managers that elicits truthful reporting by all managers the results herein show that the structure of the truth eliciting bonus schemes is rather simple with easily calculable parameters we also show that large classes of allocation rules including the current allocation practice of the firm are manipulable a bonus is often required for elicitation of truthful information we synthesize the implications of our results for the practitioners

production growth and business cycles ii new directions abstract this paper outlines new directions for investigations of real business cycle models consideration of stochastic growth of exogenous and endogenous forms analysis of suboptimal outcomes arising due to externalities of distorting taxes and implications of labor market heterogeneity

sticky price and limited participation models of money a comparison abstract we provide new evidence that models of the monetary transmission mechanism should be consistent with at least the following facts after a contractionary monetary policy shock the aggregate price level responds very little aggregate output falls interest rates initially rise real wages decline by a modest amount and profits fall we compare the ability of sticky price and limited participation models with frictionless labor markets to account for these facts the key failing of the sticky price model lies in its counterfactual implications for profits the limited participation model can account for all the above facts but only if one is willing to assume a high labor supply elasticity 2 percent and a high markup 40 percent the shortcomings of both models reflect the absence of labor market frictions such as wage contracts or factor hoarding which dampen movements in the marginal cost of production after a monetary policy shock 1997 elsevier science b v

existence incentive compatibility and efficiency of the rational expectations equilibrium abstract the rational expectations equilibrium ree as introduced in radner 1979 in a general equilibrium setting a la arrow debreu mckenzie often fails to have desirable properties such as universal existence incentive compatibility and efficiency we resolve those problems by providing a new model which makes the ree a desirable solution concept in particular we consider an asymmetric information economy with a continuum of agents whose private signals are independent conditioned on the macro states of nature for such an economy agents are allowed to augment their private information by the available public signals we prove the existence incentive compatibility and efficiency for this new ree concept

capacity allocation using past sales when to turn and earn consider a supplier selling to multiple retailers demand varies across periods but the supplier s capacity and wholesale price are fixed if demand is high the retailers needs exceed capacity and the supplier must implement an allocation mechanism to dole out production we examine how the choice of mechanism impacts retailer actions and supply chain performance in particular we analyze turn and earn allocation a method commonly used in the automobile industry this scheme bases current allocations on past sales and thus enables retailers to influence their future allocations they compete for scarce capacity even if they do not compete for customers we show that turn and earn induces the retailers to increase their sales when demand is low and the supplier s capacity is otherwise underutilized supplier profits thus increase the impact on the supply chain depends on how restrictive capacity is with mildly tight capacity the retailers higher sales rate does not significantly lower their profits but does reduce the cost of idle capacity supply chain performance improves with extremely tight capacity the retailers intense competition dissipates more profits than the supplier gains and supply chain performance suffers consequently turn and earn does not generally coordinate the system it is best characterized as a means for the supplier to increase her profits at the expense of the retailers and potentially even the supply chain furthermore these results hold even if the retailers can hold inventory in anticipation of scarce capacity

optimal fiscal policy public capital and the productivity slowdown abstract this paper develops a quantitative theoretical model for the optimal provision of public capital we show that the ratio of public to private capital in the us economy since 1925 evolves in a manner that is broadly consistent with an optimal transition path derived from a simple growth model the model is used to quantify the conditions under which an increase in the stock of public capital is desirable and to investigate the degree to which nonoptimal fiscal policies can account for the us productivity slowdown

modeling bounded rationality in capacity allocation games with the quantal response equilibrium we consider a supply chain with a single supplier and two retailers the retailers choose their orders strategically and if their orders exceed the supplier s capacity quantities are allocated proportionally to the orders we experimentally study the capacity allocation game using subjects motivated by financial incentives we find that the nash equilibrium which assumes that players are perfectly rational substantially exaggerates retailers tendency to strategically order more than they need we propose a model of bounded rationality based on the quantal response equilibrium in which players are not perfect optimizers and they face uncertainty in their opponents actions we structurally estimate model parameters using the maximum likelihood method our results confirm that retailers exhibit bounded rationality become more rational through repeated game play but may not converge to perfect rationality as assumed by the nash equilibrium finally we consider several alternative behavioral theories and show that they do not explain our experimental data as well as our bounded rationality model this paper was accepted by loana popescu guest editor operations management

towards a quantitative theory of automatic stabilizers the role of demographics employment volatility is larger for young and old workers than for the prime aged at the same time in countries with high tax rates the share of total hours supplied by young old workers is lower these two observations imply a negative correlation between government size and business cycle volatility this paper assesses in a heterogeneous agent olg model the quantitative importance of these two facts to account for the empirical relation between government size and macroeconomic stability

an experimental study of jury decision rules we present experimental results on groups facing a decision problem analogous to that faced by a jury we consider three treatment variables group size three or six number of votes needed for conviction majority or unanimity and pre vote deliberation we find evidence of strategic voting under the unanimity rule a large fraction of our subjects vote for a decision analogous to conviction even when their private information indicates a state analogous to innocence this is roughly consistent with the game theoretic predictions of feddersen and pesendorfer although individual behavior is explained well by the game theoretic model there are discrepancies at the level of the group decision contrary to feddersen and pesendorfer in our experiments there are fewer outcomes analogous to incorrect convictions under unanimity rule than under majority rule in the case of no deliberation we simultaneously account for the individual and group data using quantal response equilibrium

european inflation dynamics abstract we provide evidence on the fit of the new phillips curve npc for the euro area over the period 1970 1998 and use it as a tool to compare the characteristics of european inflation dynamics with those observed in the u s we also analyze the factors underlying inflation inertia by examining the cyclical behavior of marginal costs as well as that of its two main components namely labor productivity and real wages some of the findings can be summarized as follows a the npc fits euro area data very well possibly better than u s data b the degree of price stickiness implied by the estimates is substantial but in line with survey evidence and u s estimates c inflation dynamics in the euro area appear to have a stronger forward looking component i e less inertia than in the u s d labor market frictions as manifested in the behavior of the wage markup appear to have played a key role in shaping the behavior of marginal costs and consequently inflation in europe

personal income tax progressivity and output volatility evidence from oecd countries this paper investigates empirically the effect of personal income tax progressivity on output volatility using macro data from a sample of oecd countries over the period 1982 2009 our measure of progressivity is based on the difference between the marginal and the average personal income tax rate for the average production worker we find supportive empirical evidence for the hypothesis that higher personal income tax progressivity leads to lower output volatility this effect comes in addition to the stabilizing impact of government size and it is equally important in economic terms all other factors constant countries with more progressive personal income tax systems seem to benefit from stronger automatic stabilizers

fiscal policy in general equilibrium this paper studies four classic fiscal policy experiments within a quantitatively restricted neoclassical model the authors main findings are as follows 1 permanent changes in government purchases can lead to short run and long run output multipliers that exceed one 2 permanent changes in government purchases induce larger effects than temporary changes 3 the financing decision is quantitatively more important than the resource cost of changes in government purchases and 4 public investment has dramatic effects on private output and investment these findings stem from important dynamic interactions of capital and labor absent in earlier equilibrium analyses of fiscal policy copyright 1993 by american economic association

on the empirical content of quantal response equilibrium the quantal response equilibrium qre notion of mckelvey and palfrey 1995 has recently attracted considerable attention due largely to its widely documented ability to rationalize observed behavior in games played by experimental subjects we show that this ability to t the data as typically measured in this literature is uninformative without ap riori distributional assumptions a qre can match any distribution of behavior by each player in any normal form game we discuss approaches that might be taken to provide valid empirical evaluation of the qre and discuss its potential value as an approximating empirical structure

cognitive hierarchy in capacity allocation games we examine a supply chain with a single supplier and multiple retailers to predict retailers actual ordering behaviors if retailer orders exceed supplier capacity a proportional rationing rule applies to capacity allocation among retailers we propose a behavior model based on cognitive hierarchy theory in which retailers with different levels of strategic reasoning capabilities form heterogeneous beliefs about other players capabilities when choosing their orders this behavioral model yields three interesting predictions first retailers orders increase as the number of retailers decreases or the supplier s production capacity shrinks second the orders tend to increase as the retailer population becomes more sophisticated third retailers profits first increase in relation to their strategic reasoning capabilities and then decrease indicating an inverted u shaped relationship between profits and strategic reasoning capabilities we experimentally examine the capacity allocation game with p

reference dependence in multilocation newsvendor models a structural analysis we propose a behavioral theory to predict actual ordering behavior in multilocation inventory systems the theory rests on a well known stylized fact of human behavior people s preferences are reference dependent we incorporate reference dependence into the newsvendor framework by assuming that there are psychological costs of leftovers and stockouts we also hypothesize that the psychological aversion to leftovers is greater than the disutility for stockouts we then experimentally test the proposed theory in both the centralized and decentralized inventory structures using subjects motivated by substantial financial incentives consistent with the proposed theory actual orders exhibit the so called pull to center bias and the degree of bias is greater in the high profit margin than in the low profit margin condition these systematic biases are shown to eliminate the risk pooling benefit when the demands across store locations are strongly correlated because the proposed model nests the standard inventory and ex post inventory error minimization theories as special cases one can systematically evaluate the predictive power of each alternative using the generalized likelihood principle we structurally estimate all three theories using the experimental data and the estimation results strongly suggest that the proposed behavioral theory captures actual orders and profits better we also conduct two experiments to validate the behavioral model by manipulating the relative salience of the psychological costs of leftovers versus that of stockouts to alleviate the pull to center bias

strategic customer behavior facing possible stockout an experimental study abstract this paper studies strategic customer behavior in a monopolistic seller system given the stock quantity and the selling prices a customer chooses either to buy at the full price to certainly obtain a product or to wait for a discount with the risk of stockout we model the behavior of strategic customers as a customer game it is shown that the customer game may have multiple nash equilibria specifically in the condition of weak incentive compatibility the trembling hand perfect equilibrium is all wait which is inconsistent with the all buy assumption in the literature we conduct laboratory experiments to investigate behavior of strategic customers the results show that customers behaviors exhibit a deviation from nash equilibria using a framework of quantal response equilibrium we develop behavioral models to effectively characterize the behavior of strategic customers

on the role of technology shocks as a source of business cycles some new evidence i provide some new evidence that reinforces the conclusion in gal o 1999 that exogenous variations in technology play a very limited role if any as sources of the business cycle first i provide evidence that supports the identie cation of technology shocks proposed in that paper second i show that similar e ndings obtain when the same approach is implemented for the euro area using a newly available data set jel e32 e24

monopoly production and pricing of finitely durable goods with strategic consumers fluctuating willingness to pay abstract demand volatility and production lead time oblige manufacturers of made to stock goods to use economic forecasts in deciding on production quantities manufacturers of finitely durable goods face an additional complication in making production decisions they must consider not only the uncertainty in demand for new goods but also how the future sales will be affected by the older goods that will become available via a secondhand market using a model of an infinite horizon sequential game between a monopolistic producer of durable goods and strategic consumers we investigate how demand volatility affects producers production and pricing decisions we formulate the problem of a monopolist durable goods producer as a discrete time markov decision process and prove certain structural properties of the sales and production policy these structural properties facilitate an efficient computational algorithm which we use in running numerical experiments to explicate the producer s strategy and to conduct equilibrium comparative statics analysis we show that a simple myopic policy is optimal when each period s demand is independent and identically distributed i i d when demand is correlated across periods the producer s optimal production and sales policy is not myopic and in some states when the economy is poor the producer withholds some of the new goods inventory our numerical results suggest that in equilibrium the producer who is dealing with myopic rather than with forward looking consumers is more likely to sell some of these held back goods later as vintage goods

decision bias in the newsvendor problem with a known demand distribution experimental evidence in the newsvendor problem a decision maker orders inventory before a one period selling season with stochastic demand if too much is ordered stock is left over at the end of the period whereas if too little is ordered sales are lost the expected profit maximizing order quantity is well known but little is known about how managers actually make these decisions we describe two experiments that investigate newsvendor decisions across different profit conditions results from these studies demonstrate that choices systematically deviate from those that maximize expected profit subjects order too few of high profit products and too many of low profit products these results are not consistent with risk aversion risk seeking preferences prospect theory preferences waste aversion stockout aversion or the consequences of underestimating opportunity costs two explanations are consistent with the data one subjects behave as if their utility function incorporates a preference to reduce ex post inventory error the absolute difference between the chosen quantity and realized demand two subjects suffer from the anchoring and insufficient adjustment bias feedback and training did not mitigate inventory order errors we suggest techniques to improve decision making

the energy policy relevance of the 2014 ipcc working group iii report on the macro economics of mitigating climate change abstract research which attempted to determine the macroeconomic importance of mitigating climate change through 2100 was presented primarily in chapter 6 of the 2014 ipcc working group iii report some of the findings of this chapter were then summarized in the summary for policy makers spms of both the synthesis report and the wgiii report unfortunately these spms omitted key aspects of what the overall macroeconomic results for the costs and benefits of mitigating climate change actually did and did not include how they were produced and a careful assessment of their uncertainty and scientific validity yet many of the major omissions were acknowledged deep in the text of chapter 6 but were not revealed to the public we conclude therefore that neither of these spms was useful for energy policy makers and energy managers and they were misleading due to their many key omissions finally we recommend several improvements that can be made to integrated assessment modeling methodologies so that the macroeconomic analysis of mitigating climate change resulting from the use of such models can be more relevant and useful to energy policy makers in the future and can be communicated to them better

durable goods coasian dynamics and uncertainty theory and experiments this paper presents a model in which a durable goods monopolist sells a product to two buyers each buyer is privately informed about his own valuation thus all players are imperfectly informed about market demand we study the monopolist s pricing behavior as players uncertainty regarding demand vanishes in the limit in the limit players are perfectly informed about the downward sloping demand we show that in all games belonging to a fixed and open neighborhood of the limit game there exists a generically unique equilibrium outcome that exhibits coasian dynamics and in which play lasts for at most two periods a laboratory experiment shows that consistent with our theory outcomes in the certain and uncertain demand treatments are the same median opening prices in both treatments are roughly at the level predicted and considerably below the monopoly price consistent with coasian dynamics these prices are lower for higher discount factors demand withholding however leads to more trading period

the role of automatic stabilizers in the u s business cycle most countries have automatic rules in their tax and transfer systems that are partly intended to stabilize economic uctuations this paper measures how eective they are at lowering the volatility of u s economic activity we identify seven potential stabilizers in the data and include four theoretical channels through which they may operate in a business cycle model calibrated to the u s data the model is used to compare the volatility of output in the data with counterfactuals where some or all of the stabilizers are shut down our rst nding is that proportional taxes like sales property and corporate income taxes contribute little to stabilization our second

on modeling and interpreting the economics of catastrophic climate change with climate change as prototype example this paper analyzes the implications of structural uncertainty for the economics of low probability high impact catastrophes even when updated by bayesian learning uncertain structural parameters induce a critical tail fattening of posterior predictive distributions such fattened tails have strong im plications for situations like climate change where a catastrophe is theoretically possible because prior knowledge cannot place sufficiently narrow bounds on overall damages this paper shows that the economic consequences of fat tailed structural uncertainty along with unsureness about high temperature damages can readily outweigh the effects of discounting in climate change policy analysis

to react or not technology shocks fiscal policy and welfare in the eu 3 this paper develops a dynamic stochastic general equilibrium dsge model to examine the quantitative macroeconomic implications of counter cyclical fiscal policy for france germany and the uk the model incorporates real wage rigidity and consumption habits as the particular market failures justifying policy intervention we subject the model to productivity shocks and allow policy instruments to react to the output gap and the debt to output ratio a welfare analysis reveals that the most effective instrument target combination is to use public consumption to stabilize the output gap moreover welfare gains from counter cyclical fiscal policy are much stronger in the presence of wage rigidities compared with consumption habits finally since active policy and automatic stabilizers are substitutes it is possible that relatively undistorted economies may be in need of countercyclical fiscal action due to inadequate automatic stabilizers

monetary policy and automatic stabilizers the role of progressive taxation we study the effects of progressive labor income taxation in an otherwise standard new keynesian nk model we show that progressive taxation i introduces a trade off between output and inflation stabilization and affects the slope of the phillips curve ii acts as automatic stabilizer changing the responses to technology shocks and demand shocks and iii alters the prescription for the optimal monetary policy the welfare gains from commitment decrease as labor income taxes become more progressive quantitatively the model reproduces the observed negative correlation between the volatility of output hours and inflation and the degree of progressivity of labor income taxation

purchasing pricing and quick response in the presence of strategic consumers we consider a retailer that sells a product with uncertain demand over a finite selling season the retailer sets an initial stocking quantity and at some predetermined point in the season optimally marks down remaining inventory we modify this classic setting by introducing three types of consumers myopic consumers who always purchase at the initial full price bargain hunting consumers who purchase only if the discounted price is sufficiently low and strategic consumers who strategically choose when to make their purchase a strategic consumer chooses between a purchase at the initial full price and a later purchase at an uncertain markdown price in equilibrium strategic consumers and the retailer make optimal decisions given their rational expectations regarding future prices availability of inventory and the behavior of other consumers we find that the retailer stocks less takes smaller price discounts and earns lower profit if strategic consumers are present than if there are no strategic consumers we find that a retailer should generally avoid committing to a price path over the season assuming such commitment is feasible committing to a markdown price or to not mark down at all is often too costly inventory may remain unsold even in the presence of strategic consumers the better approach is to be cautious with the initial quantity and then mark down optimally furthermore we discuss the value of quick response the ability to procure additional inventory after obtaining updated demand information albeit at a higher unit cost than the initial order we find that the value of quick response to a retailer is generally much greater in the presence of strategic consumers than without them on average 67 more valuable and as much as 558 more valuable in our sample in other words although it is well established in the literature that quick response provides value by allowing better matching of supply with demand it provides more value often substantially more value by allowing a retailer to control the negative consequences of strategic consumer behavior