independent central banks low inflation at no costs a widely held view suggests that politically independent central banks bring about relatively low and stable inflation rates a more debated question is whether one has to pay for this good outcome with more real instability in his seminal contribution kenneth rogoff 1985 suggests that an independent and inflation averse central bank reduces average inflation but as a result increases output variability the conservative central banker reduces the inflation bias due to the time inconsistency problem but stabilizes less however alesina and summers 1993 do not find that at least within the oecd countries more independent central banks are associated with more variability of growth or unemployment thus they conclude that independent central banks bring about low inflation at no apparent real costs the point of this paper is to provide theoretical underpinnings to this finding which is in contrast to rogoff 1985 2 the basic idea is that one can isolate two sources of output variability one is the economic variability induced by standard exogenous shocks that monetary policy is supposed to stabilize for instance money demand shocks or supply shocks the second source of variability is political or more generally policy induced this is the variability introduced in the system by the uncertainty about the future course of policy for instance alesina 1987 studies the effect of uncertain electoral outcomes in a model where the two contending parties have different preferences over inflation and unemployment an inflation averse independent central banker does not stabilize as much the economic variability in order to keep inflation low and stable this is rogoff s point however by insulating monetary policy from political pressures an independent central bank can reduce the political variability the overall effect of independence on output variability is thus ambiguous this result is consistent at least prima facie with the evidence in alesina and summers 1993 on the lack of correlation between centralbank independence and output variability in fact it is possible that when the politically induced output variability is predominant a more independent central bank reduces average inflation and the variance of output

risk return and the three moment capital asset pricing model another look abstract most studies on three moment capital asset pricing models have found a strong and consistent relationship between an asset s returns and its higher statistical moments other studies report results which are opposite to what the theory would suggest this paper re examines the empirical evidence of the three moment capital asset pricing model on 43 randomly selected mutual funds from 1970 1986 the results indicate that trade offs of risks for returns on the selected mutual funds are less than predicted and inconsistent

investment under uncertainty with price ceilings in oligopolies abstract we study the impact of price cap regulation on the level and timing of investment in an oligopolistic cournot industry facing stochastic demand we find that a price ceiling affects investment decisions in two mutually competing ways it makes the option to defer investment more valuable but at the same time it reduces the incentive for firms to strategically underinvest in order to raise prices we show that while sensible price cap regulation speeds up investment a low price cap can be a disincentive for investment there exists an optimal price cap independent of market concentration the competitive investment price trigger that maximizes investment incentives and in the long term increases industry installed capacity this optimal price cap becomes less effective and less robust as the market becomes more competitive and as demand volatility increases errors in estimation of the optimal price cap have asymmetric effects underestimation has more dire consequences than overestimation

hospital price regulation and expenditure cap policy abstract in several european countries governments have chosen to put a global budget cap on health care expenditure this paper analyzes the strategies of the providers facing this policy and evaluates its effects on provider and patient surplus we consider this policy when it is applied to local monopoly hospitals and when it is applied to hospitals playing as cournot competitors using a two stage model to characterize the optimal expenditure cap policy taking the hospitals optimal responses as given we prove that this policy induces a level of welfare lower than the first best outcome however we show that a second best outcome may be achieved under this policy when the number of hospitals becomes large

cournot oligopoly characterization and applications preface part 1 introduction 1 introduction purpose and overview andrew f daughety part ii background 2 of the competition of producers augustin cournot translation by nathanial t bacon 3 review of walras s theorie mathematique de la richesse sociale and cournot s reserches sur les principles mathematiques de la theorie des richesses joseph bertrand translation by james w friedman 4 non cooperative games john nash part iii examining cournot s model 5 on the existence of cournot equilibrium william novshek 6 collusive behavior in non cooperative epsilon equilibria of oligopolies with long but finite lives roy radner 7 a non cooperative equilibrium for supergames james w friedman 8 reconsidering cournot the cournot equilibrium is consistent andrew f daughety 9 an experimental test of the consistent conjectures hypothesis charles a holt 10 quantity precommitment and bertrand competition yield cournot outcomes david m kreps and jose a scheinkman 11 on the efficiency of bertrand and cournot equilibria with product differentiation xavier vives 12 price competition vs quantity competition the role of uncertainty paul klemperer and margaret meyer part iv applications 13 cournot and walras equilibrium william novshek and hugo sonnenschein 14 duopoly information equilibrium cournot and bertrand xavier vives 15 information transmission cournot and bertrand equilibria esther gal or 16 uncertainty resolution private information aggregation and the cournot competitive limit thomas r palfrey 17 losses from horizontal merger the effects of an exogenous change in industry structure on cournot nash equilibrium stephen w salant sheldon switzer and robert j reynolds 18 delegation and the theory of the firm john vickers 19 a study of cartel stability the joint executive committee 1880 1886 robert h porter 20 oligopoly and financial structure the limited liability effect james a brander and tracy r lewis

complementarities momentum and the evolution of modern manufacturing in the nineteenth century the railroad and telegraph were at the center of a set of technological advances physical investments and managerial innovations that transformed american industry alfred chandler 1977 later the automobile and telephone played a similar role in another transformation today the high tech industries include computers telecommunications and electronics working on our remarkably powerful computers even as they rapidly become obsolete co authoring papers by electronic mail and fax and conversing on our portable cellular telephones we are struck by what appears to be a self supporting and reinforcing dynamic to the technological improvements across the electronics industries an advance almost anywhere in the sector seems to call forth more advances across the sector these advances are occurring contemporaneously with a broad pattern of other changes not only in the electronics industries but in manufacturing more generally and not just in hardware but in methods and organization as well a new paradigm has begun to emerge in contrast to traditional manufacturing firms modern firms frequently 1 make greater use of flexible programmable equipment and of computeraided design and manufacturing technologies 2 have fewer job classifications 3 offer more varieties of their major products and or update their product lines more frequently 4 put more emphasis on speed in order processing production and delivery 5 hold much lower inventories of intermediate and finished goods 6 rely on subcontractors to supply a greater proportion of the total value added and 7 overlap design product and process engineering to speed the introduction of new products these features of modern manufacturing firms encompass technology choices marketing strategies personnel policies supplier relations lines of internal communications and other operational policies in a far reaching and coherent pattern whose existence in the words of michael piore 1986 poses a challenge to economic theory in a recent paper milgrom and roberts 1990 proposed a theory to explain the emergence of this new paradigm arguing that the various characteristics and activities described are mutually complementary and so tend to be adopted together with each making the others more attractive in that theory the falling costs of high speed data communication data processing and flexible multitask equipment lead to increases in the directly affected activities which through a web of complementarities then lead to increases in a set of related activities as well although the costs of flexible machinery and data communication and processing surely have fallen substantially in recent decades an analysis that takes these changes as exogenous does not constitute a full explanation of the pattern of change that we observe one must ask why are these particular costs falling relative to others here we enrich the milgrom roberts analysis by adding a dynamic to it innovations in the manufacture of basic inputs both arise in response to a growing market for those inputs and simultaneously encourage that growth this reflects a fundamental complementarity between the level of any activity and investments that reduce its marginal department of economics milgrom and qian and graduate school of business roberts stanford university stanford ca 94305 we thank avner greif for his helpful comments on an earlier draft financial support from the national science foundation milgrom and roberts and the robert and anne bass faculty fellowship roberts is gratefully acknowledged

correlations in price changes and volatility across international stock markets the short run interdependence of prices and price volatility across three major international stock markets is studied daily opening and closing prices of major stock indexes for the tokyo london and new york stock markets are examined the analysis utilizes the autoregressive conditionally heteroskedastic arch family of statistical models to explore these pricing relationships evidence of price volatility spillovers from new york to tokyo london to tokyo and new york to london is observed but no price volatility spillover effects in other directions are found for the pre october 1987 period article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the effectiveness of monetary policy anchors firm level evidence analyses of monetary policy posit that exchange rate pegs inflation targets and central bank independence can help anchor private sector inflation expec tations yet there are few direct tests of this argument we offer cross national micro level evidence on the effectiveness of monetary anchors in controlling private sector inflation concerns using firm level data from eighty one countries approximately 10 000 firms we find evidence that international anchors exchange rate commit ments correlate significantly with a substantial reduction in private sector concerns about inflation while domestic anchors inflation targeting and central bank inde pendence do not our conjecture is that private sector inflation expectations are more responsive to exchange rate anchors because they are more transparent more con straining and more costly than domestic anchoring arrangements the literature on monetary policy highlights the role of monetary institutions in stabilizing private sector inflation expectations central bank independence cbi inflation targeting it and fixed exchange rates pegs are widely viewed as insti tutions that have the capacity to mitigate private sector concerns that policymak ers will exploit them after they have locked in their price wage and investment decisions while other empirical research explores the institutional correlates of inflation and its variability yielding mixed results we use firm level data in our study to directly assess the impact of monetary anchors on private sector inflation concerns we find evidence that pegs mitigate firm owners concerns with infla tion but that domestic anchors such as it and cbi are uncorrelated with our micro indicators of inflation expectations considerable research has investigated the use of it cbi and pegs as institu tions that establish monetary policy credibility whereas these anchors are expected

central bank independence and output variability abstract the benefit of greater central bank independence is the reduction in inflation that should result from the mitigation of a country s time consistency problem the cost of greater independence is the loss of discretionary monetary policymaking and consequent increase in output variability empirically however there is no correlation between output variability and central bank independence a possible explanation for this lack of correlation is that countries which are more likely to have lower output variability are also more likely to choose to have an independent central bank this hypothesis is tested using data for 44 countries while the evidence is weakly consistent with this hypothesis this does not seem sufficient to explain the zero correlation between output variability and central bank independence

surplus maximization and optimality i identify assumptions under which policies that maximize expected surplus are pareto optimal even when expected consumer surplus does not even locally represent preferences over price income lotteries besides the oft made partial equilibrium assumptions that only one price varies and that income changes do not aect demand the two other assumptions are that every consumer s indirect utility function is supermodular in price and income and policies order prices by a single crossing property supermodularity holds precisely if relative risk aversion exceeds the income elasticity of demand a mild condition the single crossing property appears strong but holds in many applications that use expected surplus

asset pricing higher moments and the market risk premium a note following the work of rubinstein 4 kraus and litzenberger kl 2 derived and tested a linear three moment pricing model finding the additional variable co skewness to explain the empirical anomalies of the two moment capital asset pricing model capm the three moment model was reexamined by friend and westerfield fw 1 with mixed results the purpose of this note is to examine why the market risk premium rm rf may influence tests of asset pricing models with higher moments when skewness is added to a pricing model developed within the usual two fund separation assumptions the market risk premium enters the pricing equation in a nonlinear fashion and is implicit in the estimation of each moment s coefficient unless this nonlinearity is recognized incorrect conclusions regarding the tests of such models may result section i examines the implications of the risk premium nonlinearity while section ii contains a brief summary

demand uncertainty inventories and resale price maintenance we show that a manufacturer facing uncertain demand and selling through a competitive retail market may wish to support adequate retail inventories by preventing the emergence of discount retailers in our model discounters offer low prices made possible by low probability of being saddled with unsold inventories in the event of slack demand full price retailers are compensated for a higher probability of unsold inventories by a higher retail price when they sell we show that preventing discounting increases the manufacturer s wholesale demand and profits and we delineate demand conditions under which equilibrium inventory holding and consumer welfare increase

seigniorage and political instability the importance of seigniorage relative to other sources of government revenue differs markedly across countries this paper tries to explain this regularity by studying a political model of tax reform the model implies that countries with a more unstable and polarized political system will have more inefficient tax structures and thus will rely more heavily on seigniorage this prediction of the model is tested on cross sectional data for seventy countries the authors find that after controlling for other variables political instability is positively associated with seigniorage copyright 1992 by american economic association

predicting volatility in the foreign exchange market measures of volatility implied in option prices are widely believed to be the best available volatility forecasts in this article we examine the information content and predictive power of implied standard deviations isds derived from chicago mercantile exchange options on foreign currency futures the article finds that statistical time series models even when given the advantage of ex post parameter estimates are outperformed by isds isds however also appear to be biased volatility forecasts using simulations to investigate the robustness of these results the article finds that measurement errors and statistical problems can substantially distort inferences even accounting for these however isds appear to be too variable relative to future volatility it is widely believed that the volatility implied in option prices is the market s best estimate of future volatility after all if it were not one could devise a trading strategy that could generate profits by identifying mispriced options the purpose of this article is to investigate the information content and predictive power of volatility implied in options on foreign currencies the paper focuses on options on currency futures traded on the chicago mercantile exchange cme because of the depth and liquidity of cme futures and options traded side by side in the same market implied standard deviations isds allow for clean tests of the predictive power of implied volatilities early studies of the information content of isds have generally found that these contain substantial information for future volatility latane and rendleman 1976 chiras and manaster 1978 and beckers 1981 for example regress future volatility on the weighted implied volatility across a broad sample of chicago board options exchange cboe stocks and find that options contain volatility forecasts that are more accurate than historical measures 1 these studies performed shortly after the 1973 beginning of the cboe option market could only use a relatively short time span and therefore focused on cross sections rather than time series predictions

quadratic arch models we introduce a new model for time varying conditional variances as the most general quadratic version possible within the arch class hence it encompasses all the existing restricted quadratic variance functions its properties are very similar to those of garch models but avoids some of their criticisms in univariate applications to daily u s and monthly u k stock market returns qarch adequately represents volatility and risk premia qarch is easy to incorporate in multivariate models to capture dynamic asymmetries that garch rules out such asymmetries are found in an empirical application of a conditional factor model to 26 u k sectorial stock returns

central bank independence and macroeconomic performance some comparative evidence this note uses information on a sample of sixteen oecd countries to assess the relationship between central bank independence and macroeconomic performance as previous work suggests politically controlled central banks are more likely to pursue policies that lead to high and variable inflation however the authors find little evidence that political control of central bank policy has any impact on measures of the level or variability of growth unemployment or the ex ante real interest rate copyright 1993 by ohio state university press

demand uncertainty and price maintenance markdowns as destructive competition this paper offers a new theory of destructive competition the authors compare minimum resale price maintenance to retail market clearing in a model with a monopolistic manufacturer selling to competitive retailers in both the resale price maintenance and flexible price games retailers must order inventories before the realization of demand uncertainty the authors find that manufacturer profits and equilibrium inventories are higher under resale price maintenance than under market clearing surprisingly consumer surplus can also be higher in which case unfettered retail competition can legitimately be called destructive copyright 1997 by american economic association

arch models properties estimation and testing abstract the aim of this survey paper is to provide an account of some of the important developments in the autoregressive conditional heteroskedasticity arch model since its inception in a seminal paper by engle 1982 this model takes account of many observed properties of asset prices and therefore various interpretations can be attributed to it we start with the basic arch models and discuss their different interpretations arch models have been generalized in different directions to accommodate more and more features of the real world we provide a comprehensive treatment of many of the extensions of the original arch model next we discuss estimation and testing for arch models and note that these models lead to some interesting and unique problems there have been numerous applications and we mention some of these as we present different models the paper includes a glossary of the acronyms for the models we describe

hourly volatility spillovers between international equity markets abstract this paper examines the timing of mean and volatility spillovers between new york and london equity markets using an arch model it is found that the evidence of volatility spillovers between these markets is minimal and have a duration which lasts only an hour or so the most significant effects surround the movement of share prices around the new york opening but these results are not strong several new arch models are estimated including an asymmetric or leverage model and a non linear model which allows big shocks to have a different impact from small shocks

arbitrage equilibrium with skewed asset returns the quadratic form of the covariance co skewness model by kraus and litzenberger and arbitrage pricing theory are used for an empirical investigation of market equilibrium with skewed seecurity returns empirical tests similar to the ones in black jensen scholes and gibbons are discussed the empirical estimates give some support to the kraus litzenberger hypothesis on skewness preference however there is some evidence that the tested arbitrage equilibrium is not a complete description of security pricing

conditional volatility skewness and kurtosis existence persistence and comovements abstract recent portfolio choice asset pricing value at risk and option valuation models highlight the importance of modeling the asymmetry and tail fatness of returns these characteristics are captured by the skewness and the kurtosis we characterize the maximal range of skewness and kurtosis for which a density exists and show that the generalized student t distribution spans a large domain in the maximal set we use this distribution to model innovations of a garch type model where parameters are conditional after demonstrating that an autoregressive specification of the parameters may yield spurious results we estimate and test restrictions of the model for a set of daily stock index and foreign exchange returns the estimation is implemented as a constrained optimization via a sequential quadratic programming algorithm adequacy tests demonstrate the importance of a time varying distribution for the innovations in almost all series we find time dependency of the asymmetry parameter whereas the degree of freedom parameter is generally found to be constant over time we also provide evidence that skewness is strongly persistent but kurtosis is much less so a simulation validates our estimations and we conjecture that normality holds for the estimates in a cross section setting we also document covariability of moments beyond volatility suggesting that extreme realizations tend to occur simultaneously on different markets

a critique of the stochastic discount factor methodology in this paper we point out that the widely used stochastic discount factor sdf methodology ignores a fully specified model for asset returns as a result it suffers from two potential problems when asset returns follow a linear factor model the first problem is that the risk premium estimate from the sdf methodology is unreliable the second problem is that the specification test under the sdf methodology has very low power in detecting misspecified models traditional methodologies typically incorporate a fully specified model for asset returns and they can perform substantially better than the sdf methodology asset pricing theories such as those of sharpe 1964 lintner 1965 black 1972 merton 1973 ross 1976 and breeden 1979 show that the expected return on a financial asset is a linear function of its covariances or betas with some systematic risk factors this implication has been tested extensively in the finance literature by the so called traditional methodologies in the traditional methodologies a data generating process is first proposed for the returns and then the restrictions imposed by an asset pricing model are tested as parametric constraints on the return generating process the approach taken by the traditional methodologies has a potential problem which is that when the proposed return generating process is misspecified the test results could be misleading therefore in applying the traditional methodologies researchers typically have to justify that the proposed data generating process provides a good description of the returns for example when the proposed return generating process is a factor model one would like the model to have high r 2 in explaining the returns on the test assets especially when the test assets are well diversified portfolios as many of the earlier theories are special cases of the stochastic discount factor sdf model recent empirical asset pricing studies have been focused on testing the pricing restrictions in terms of the sdf model rather

market design and investment incentives the purpose of this study was to understand how market design affects market performance through its impact on investment incentives for this purpose we model capacity choices by two ex ante identical firms which compete in the product market we analyse a number of different market design elements including i two commonly used auction formats the uniform price and discriminatory auctions ii price caps and iii bid duration we find that although the discriminatory auction tends to lower prices this does not imply that investment incentives at the margin are poorer indeed aggregate capacity is the same under both auction formats

on price caps under uncertainty this paper shows how standard arguments supporting the impo sition of price caps break down in the presence of demand uncertainty in particular though in the deterministic case the introduction or lowering of a price cap above marginal cost results in increased production increased total welfare decreased prices and increased consumer welfare we show that all of the above comparative statics predictions fail for generic uncertain demand functions for example for price caps su ciently close to marginal cost a decrease in the price cap always leads to a decrease in production and total welfare under certain mild conditions under stronger regularity assumptions all of the monotone comparative statics predictions from the deterministic case also do not hold for a generic uncertain demand if we restrict attention to price caps in an arbitrary flxed interval as long as the price caps are binding for some values in that interval

modeling asymmetric comovements of asset returns existing time varying covariance models usually impose strong restrictions on how past shocks affect the forecasted covariance matrix in this article we compare the restrictions imposed by the four most popular multivariate garch models and introduce a set of robust conditional moment tests to detect misspecification we demonstrate that the choice of a multivariate volatility model can lead to substantially different conclusions in any application that involves forecasting dynamic covariance matrices like estimating the optimal hedge ratio or deriving the risk minimizing portfolio we therefore introduce a general model which nests these four models and their natural asymmetric extensions the new model is applied to study the dynamic relation between large and small firm returns article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies