a method for solving general equilibrium models with incomplete markets and many financial assets abstract this paper presents a numerical method for solving stochastic general equilibrium models with dynamic portfolio choice the method can be applied to models with heterogeneous agents time varying investment opportunity sets and incomplete asset markets we illustrate the method using a two country model with production we check the accuracy of our method by comparing the numerical solution to a complete markets version of the model against its known analytic properties we then apply the method to an incomplete markets version where no analytic solution is available in all versions the standard accuracy tests confirm the effectiveness of our method

comparing revenue from auctions and posted prices i analyze the market for compact discs using an original data set of items listed for sale online over 5000 listings of both new and used compact discs were collected from ebay which provides sellers a choice between two mechanisms auction or posted price and its subsidiary half com which features only posted prices despite the often cited revenue dominance property of auctions many sellers choose to post a fixed price to explain this anomaly i examine empirically the determinants of the revenue earned by sellers in this market i find that posted price goods sell for higher prices while auctioned goods sell with a higher probability further results suggest that the size of a seller s inventory is the key factor in the choice between selling in an auction and posting a fixed price in particular sellers with large inventories are more likely to use the posted price mechanism

an institutional critique of intergovernmentalism most intergovernmentalist analyses of european integration focus on treaty bargaining among european union member governments recent articles also have examined everyday decision making through power index analysis an approach that asserts that a government s ability to influence policy is a function of all possible coalitions in the council of ministers to which it is pivotal this approach suffers from two major weaknesses first it fails to take into account the policy preferences of governments it overestimates the influence of governments holding extreme preferences and underestimates that of more centrist governments second power index analysis fails to consider the important roles of the commission of the european communities and the european parliament in legislative processes today s procedures affect the mix of agenda setting and veto power and this has systematic effects on policy outcomes if intergovernmentalism is to explain choices made during treaty rounds it must take into account these legislative dynamics

voting power in the ec decision making and the consequences of two different enlargements abstract in this paper we study the voting power in the council of ministers of the ec the purpose of this paper is twofold first to evaluate the voting power for the member states of today s community and second to analyse the balance of power after two different enlargements of the community the analysis is based on the shapley shubik and the banzhaf power indices of simple cooperative games the modified version of the shapley shubik index is used to analyse how the sub systems of the ec can change the distribution of power in the decision making process

learning from prices public communication and welfare we study the effect of releasing public information about productivity or monetary shocks using a micro founded macroeconomic model in which agents learn from the distribution of nominal prices while a public release has the direct beneficial effect of providing new information it also has the indirect adverse effect of reducing the informational efficiency of the price system we show that the negative indirect effect can dominate thus the public information release may increase uncertainty about the monetary shock and reduce welfare we find that the optimal communication policy is always to release either all or none of the information

can information heterogeneity explain the exchange rate determination puzzle empirical evidence shows that most exchange rate volatility at short to medium horizons is related to order flow and not to macroeconomic variables we introduce symmetric information dispersion about future macroeconomic fundamentals in a dynamic rational expectations model in order to explain these stylized facts consistent with the evidence the model implies that a observed fundamentals account for little of exchange rate volatility in the short to medium run b over long horizons the exchange rate is closely related to observed fundamentals c exchange rate changes are a weak predictor of future fundamentals and d the exchange rate is closely related to order flow

country portfolio dynamics this paper presents a general approximation method for characterizing timevarying equilibrium portfolios in a two country dynamic general equilibrium model the method can be easily adapted to most dynamic general equilibrium models it applies to environments in which markets are complete or incomplete and it can be used for models of any dimension moreover the approximation provides simple easily interpretable closed form solutions for the dynamics of equilibrium portfolios

comparing solution methods for dynamic equilibrium economies this paper compares solution methods for dynamic equilibrium economies the authors compute and simulate the stochastic neoclassical growth model with leisure choice using undetermined coefficients in levels and in logs finite elements chebyshev polynomials second and fifth order perturbations and value function iteration for several calibrations the authors document the performance of the methods in terms of computing time implementation complexity and accuracy and they present some conclusions about their preferred approaches based on the reported evidence

auctions versus posted price selling two popular selling methods posted price selling and auctions are compared here in an independent private values model without auctioning costs auctioning is always optimal when auctioning is costly auctions are still preferable if the marginal revenue curve is sufficiently steep the global steepness of the marginal revenue curve is found to coincide with the dispersion around the mean for a number of standard distributions finally the prices of the monopoly seller and of the social optimum are compared copyright 1993 by american economic association

international portfolios capital accumulation and foreign assets dynamics despite the liberalization of capital ows among oecd countries equity home bias remains sizable we depart from the two familiar explanations of equity home bias transaction costs that impede international diversi cation and terms of trade responses to supply shocks that provide risk sharing so that there is little incentive to hold diversi ed portfolios we show that the interaction of the following ingredients generates a realistic equity home bias capital accumulation shocks to the e ciency of physical investment as well as international trade in stocks and bonds in our model domestic stocks are used to hedge uctuations in local wage income terms of trade risk is hedged using bonds denominated in local goods and in foreign goods in contrast to related models the low level of international diversi cation does not depend on strongly countercyclical terms of trade the model also reproduces the cyclical dynamics of foreign asset positions and of international capital ows

solving dsge portfolio choice models with dispersed private information abstract noisy rational expectations models in which agents have dispersed private information and extract information from an endogenous asset price are widely used in finance however these linear partial equilibrium models do not fit well in modern macroeconomics that is based on non linear dynamic general equilibrium models we develop a method for solving a dsge model with portfolio choice and dispersed private information we combine and extend existing local approximation methods applied to public information dsge settings with methods for solving noisy rational expectations models in finance with dispersed private information

learning from others a welfare analysis abstract this paper considers a smooth and noisy version of the statistical prediction model studied in the herding informational cascades literature and compares market and optimal learning the latter is characterized by defining a decentralized welfare benchmark as the solution to an infinite horizon team problem market behavior involves herding in the sense that agents put too little weight on their private information for any given precision of public information and yields underinvestment in the production of public information however both market and optimal learning involve slow learning examples of the model include learning by doing reaching consensus and consumer learning about quality journal of economic literature classification numbers d82 d83

international capital flows under dispersed private information abstract it is well established that private information is critical to our understanding of asset prices in this paper we argue that it also affects international capital flows and use a simple two country dsge model to illustrate its impact we show that private information i increases the volatility of both net and gross capital flows ii leads to a high correlation between capital inflows and outflows iii leads to a disconnect of capital flows from observed macro fundamentals and iv implies that capital flows contain information about the future macro fundamentals we also show that dispersed information affects capital flows both through asset prices and directly so that the impact on flows is not just the mirror image of the impact on prices

international equity flows and returns a quantitative equilibrium approach this paper models trading by foreign and domestic investors in developed country equity markets the key assumptions are that i both the foreign and domestic investor populations contain investors of different sophistication and ii investor sophistication matters for performance in both public equity and private off market investments a quantitative model with these assumptions delivers a unified explanation for three stylized facts about us investors international equity trades that have been documented in the literature i trading by us investors occurs in bursts of simultaneous buying and selling ii americans build and unwind foreign equity positions gradually and iii us investors increase their market share in a country when stock prices there have recently been rising

information immobility and the home bias puzzle many argue that home bias arises because home investors can predict home asset payoffs more accurately than foreigners can but why does global information access not eliminate this asymmetry we model investors endowed with a small home information advantage who choose what information to learn before they invest surprisingly even when home investors can learn what foreigners know they choose not to investors profit more from knowing information others do not know learning amplifies information asymmetry the model matches patterns of local and industry bias foreign investments portfolio outperformance and asset prices finally we propose new avenues for empirical research

buy price english auction abstract consider an english auction for a single object in which there is an option for a bidder to guarantee a purchase at a seller specified buy price b at any time we show that there exist v and v v such that a bidder purchases at the buy price immediately if his valuation v is no less than v or v v v and at least one other bidder is participating in the auction if b v v he purchases at the buy price once the current bid reaches a strategically chosen threshold price a properly set buy price increases expected social welfare and the expected utility of each agent when either buyers or seller are risk averse

international capital flows abstract the surge in international asset trade since the early 1990s has lead to renewed interest in models with international portfolio choice we develop the implications of portfolio choice for both gross and net international capital flows in the context of a simple two country dynamic stochastic general equilibrium dsge model we focus on the time variation in portfolio allocation following shocks and resulting capital flows endogenous time variation in expected returns and risk which are the key determinants of portfolio choice affect capital flows in often subtle ways the model is consistent with a broad range of empirical evidence an additional contribution of the paper is to overcome the technical difficulty of solving dsge models with portfolio choice by developing a broadly applicable solution method

gravity in international finance abstract the past decade has witnessed an explosion of papers estimating gravity equations for cross border financial holdings without much of a theoretical foundation in this paper we develop a theory for bilateral asset holdings that takes a gravity form we discuss how to estimate international financial frictions and conduct comparative statics analysis within the context of the theory we also find though that reasonable extensions of the model no longer generate a gravity form while this does not significantly complicate estimation and comparative statics analysis it raises questions about the empirical validity of gravity specifications for cross border financial holdings that need to be addressed in future work

the optimal listing strategies in online auctions this article proposes a unified framework to completely characterize the seller s optimal listing strategy in the online auction as a function of her rate of time impatience specifically the fixed price listing the regular auction and the buy it now bin auction are each a solution of the seller s single optimization problem under different values of the rate of intertemporal discount the perfectly patient seller adopts the regular auction the sellers with a medium range of time impatience adopt the bin auction and the most impatient of sellers adopt the fixed price listing moreover under mild conditions the reverse price is inversely related to the value of the seller s discount factor either within or across formats this in turn implies that the posted price in the fixed price sale is greater than the reserve price of the bin auction followed by that of the regular auction these predictions offer clear empirical implications

a theory of demand shocks this paper presents a model of business cycles driven by shocks to consumer expectations regarding aggregate productivity agents are hit by heterogeneous productivity shocks they observe their own productivity and a noisy public signal regarding aggregate productivity the public signal gives rise to noise shocks which have the features of aggregate demand shocks they increase output employment and inflation in the short run and have no effects in the long run numerical examples suggest that the model can generate sizable equilibrium dsge models of the business cycle include a large number of shocks to technol ogy monetary policy preferences etc but typically do not include expectational shocks as independent drivers of short run fluctuations 1 this paper explores the idea of expectation driven cycles looking at a model where technology determines equilibrium output in the long run and consumers receive noisy signals about technology in the short run the presence of noisy signals produces expectational errors this paper studies the role of these expectational errors in gener ating volatility at business cycle frequencies the model is based on two ingredients first consumers take time to recognize permanent changes in aggregate fundamentals although they may have good information on the current state of the individual firm or sector where they operate they have only limited information regarding the long run determinants of aggregate activity second consumers have access to public information that is relevant to estimate long run productivity this includes news about technological innovations publicly released macroeconomic and sectoral statistics financial market prices and public statements by policy makers however these signals provide only a noisy forecast of the long run effects of technological innovations this opens the door to noise shocks which induce consumers to temporarily overestimate or underestimate the productive capacity of the economy

probabilistic voting power in the eu council the cases of trade policy and social regulation the distribution of voting power in the european union council of ministers is studied in regard to trade policy and social regulation member states are divided into three groups according to their attitudes toward the policy issues under consideration the objectives are to evaluate member countries voting power as compared to situations where predetermined coalitions do not exist analyze the kinds of decisions the council can and probably will make concerning these policy issues and examine whether an expansion of the european union by the efta countries will change the direction of policymaking copyright 1995 by the editors of the scandinavian journal of economics

buy prices in online auctions irrationality on the internet abstract buy prices are puzzling it makes sense for a seller at auction to set a minimum bidding level i e a reserve price surely but a maximum we explore the use of maximum bidding levels buy prices in online auctions and provide a rational explanation for this seemingly irrational auction mechanism we show that augmenting an english auction with a buy price can improve the seller s profits by partially insuring and therefore increasing the expected payment from some risk averse bidders perhaps more surprising is that the english auction augmented with a buy price can also be superior even to the first price sealed bid and dutch auctions when bidders are risk averse

mechanism choice and the buy it now auction a structural model of competing buyers and sellers a striking feature of many online sales platforms is the coexistence of multiple sales mechanisms items on ebay for instance are frequently offered through auctions posted prices and buy it now auctions in this article i study how this mechanism multiplicity influences the welfare of buyers and sellers i specify and estimate a structural model of mechanism choice in online markets in which i consider both sides of the market on the demand side buyers choices among available listings are equilibrium outcomes of an entry game on the supply side sellers make equilibrium decisions when choosing sales mechanisms and prices i estimate this model using data from sales of baseball tickets on ebay and calculate consumer and seller rents in three markets the actual market with all three sales mechanisms and two counterfactual markets with auctions and fixed prices or only fixed price listings respectively i find that the addition of auctions to fixed price markets hurts sellers and risk averse buyers but benefits risk neutral buyers additionally the consumer surplus increases when buy it now auctions are offered but the seller surplus is reduced further i discuss the intuition for the cause of this result

the winner s curse reserve prices and endogenous entry empirical insights from ebay auctions internet auctions have recently gained widespread popularity and are one of the most successful forms of electronic commerce we examine a unique data set of ebay coin auctions to explore the determinants of bidder and seller behavior we begin by documenting a number of empirical regularities in our data set of ebay auctions next we specify and estimate a structural econometric model of bidding on ebay using our parameter estimates from this model we measure the extent of the winner s curse and simulate seller revenue under different reserve prices