bid caps in large contests abstract we study the effect of rigid and flexible bid caps on contestants aggregate costs and aggregate bids in all pay contests with a large number of heterogeneous contestants and prizes we show that rigid caps always decrease aggregate costs whereas flexible caps have essentially no effect on aggregate costs rigid caps decrease aggregate bids when costs are linear or concave but increase aggregate bids under some conditions when costs are convex flexible caps always decrease aggregate bids

survival of overconfidence in currency markets this paper tests the influential hypothesis that irrational traders will be driven out of financial markets by trading losses the paper s main finding is that overconfident currency dealers are not driven out of the market dealers with extensive experience are neither more nor less overconfident than their junior colleagues we set the stage for this investigation by providing evidence that currency dealers display two forms of overconfidence they underestimate uncertainty and they overestimate their professional success this is notable because one might have expected the opposite currency dealers face strong incentives for accuracy they have access to comprehensive information and they have extensive experience

contests with multiple rounds this paper studies contests where players have the flexibility to add to their previous efforts after observing their rivals most recent effort in an intermediate stage it is found that 1 contrary to previous findings the stackelberg outcome where the underdog leads and the favorite follows cannot be an equilibrium 2 there are multiple subgame perfect equilibria all occurring on the underdog s usual one shot reaction function in between and including the one shot cournot nash and stackelberg outcome with the favorite leading 3 the total equilibrium effort is typically greater than or equal to what a one shot cournot nash play would predict and 4 in settings where players can choose whether or not to disclose their early actions to the rival both the favorite and the underdog disclose in equilibrium applications in sports lobbying and r d races are discussed

caps on political lobbying comment following the 1999 israeli elections the winning candidate s ehud barak s party was fined 3 2 million dollars for violating israel s campaign financing laws by exceeding the spending cap imposed and raising 1 2 million dollars illegally see time europe 2000 while adhering to the strict ncaa recruiting regulations the university of oregon spent 3 million dollars to make their football locker room the best anywhere including the nfl lexington herald leader 2003 when asked about the previous salary cap in the uk football league players said that it the cap was so artificial that clubs paid money in brown paper envelopes bbc2 newsnight 2002 in all these cases there officially existed a rigid spending cap however they show that even though a cap exists the cap might not be easily enforced when enforced the penalty may just be financial rather than a change in outcome the cap may be enforced and adhered to but there may also be alternate perhaps less effective hence more costly means of spending we also see that the flexible nature of the cap is often built into the rules by examining the salary caps of the four major us sports leagues where the caps are routinely exceeded in baseball and basketball surpassing the cap invokes a pure financial penalty called a luxury tax which is proportional to the excess in football while the cap is stated in terms of salaries many teams use signing bonuses as a way to circumvent it in ice hockey there is a dual cap system where the luxury tax is invoked on salaries falling between the two caps and signing bonuses are an allowed method to exceed the

one two three infinity newspaper and lab beauty contest experiments beauty contest is a game in which participants have to choose typically a number in 0 100 the winner being the person whose number is closest to a proportion of the average of all chosen numbers we describe and analyze beauty contest experiments run in newspapers in uk spain and germany and find stable patterns of behavior across them despite the uncontrollability of these experiments these results are then compared with lab experiments involving undergraduates and game theorists as subjects in what must be one of the largest empirical corroborations of interactive behavior ever tried we claim that all observed behavior across a wide variety of treatments and subject pools can be interpretedas iterative reasoning level 1 reasoning level 2 reasoning and level 3 reasoning are commonly observed in all the samples while the equilibrium choice level maximum reasoning is only prominently chosen by newspaper readers and theorists the results show the empirical power of experiments run with large subject pools and open the door for more experimental work performed on the rich platform offered by newspapers and magazines

caps on political lobbying the cost of political campaigns in the u s has risen substantially in recent years for example real spending on congressional election campaigns doubled between 1976 and 1992 steven d levitt 1995 there are many reasons why increased campaign spending might be socially harmful first increased spending means increased fund raising which may keep politicians from their legislative duties 1 second a lobbyist who makes a large campaign contribution may have undue influence on electoral outcomes on the shaping of legislation or on the outcome of regulatory proceedings 2 that is the socially preferred candidate or legislation may not prevail likewise a lobbyist involved in a regulatory matter or a competition for a government contract may benefit unduly from a legislator s intervention 3 third a perception that campaign contributions purchase influence may lead to increased tolerance of corruption in the private sector a desire to control campaign spending has spawned many initiatives to limit both campaign contributions and spending beginning with the passage of the federal election campaign act feca political action committees pacs can contribute at most 5 000 per election to a candidate while individuals can contribute at most 1 000 restrictions have also been put on in kind contributions making it more difficult to circumvent these limits 4 while direct restrictions on campaign spending have proven difficult to implement recent initiatives aim to impose voluntary spending limits and stricter limits on contributions 5 despite the existing legislation and the proposals to limit contributions little is known about the impact of contribution limits on aggregate expenditures while it is intuitively appealing that aggregate expenditures would drop we challenge that intuition here we study a lobbying game and show that a cap on individual lobbyists expenditures may have the perverse effect of increasing aggregate expenditures and loweri this abstract was borrowed from another version of this item

heterogeneous risk loss aversion in complete information all pay auctions we extend previous theoretical work on n player complete information all pay auctions to incorporate heterogeneous risk and loss averse utility functions we provide sufficient and necessary conditions for the existence of equilibria with a given set of active players with any strictly increasing utility functions and characterize the players equilibrium mixed strategies assuming that players can be ordered by their risk aversion player a is more risk averse than player b if whenever player b prefers a certain payment over a given lottery so does player a we find that in equilibrium the more risk averse players either bid higher than the less risk averse players and win with higher ex ante probability or they drop out furthermore while each player s expected bid decreases with the other players risk aversion her expected bid increases with her own risk aversion thus increasing a player s risk aversion creates two opposing effects on total expected bid a sufficient condition for the total expected bid to decrease with a player s risk aversion is that this player is relatively more risk averse compared to the rest of the players our findings have important implications for the literature on gender differences in competitiveness and for gender diversity in firms that use personnel contests for promotions

a restriction on lobbyist donations abstract this paper studies the consequences of a fine for violating a ceiling on permissible donations in a competition for a political prize increasing the fine can increase or decrease the amount of expected donations in equilibrium

portfolio optimization with mental accounts we integrate appealing features of markowitz s mean variance portfolio theory mvt 4 and shefrin and statman s behavioral portfolio theory bpt into a new mental accounting 5 ma framework features of the ma framework include an ma structure of portfolios 6 a definition of risk as the probability of failing to reach the threshold level in each mental 7 account and attitudes toward risk that vary by account we demonstrate a mathematical 8 equivalence between mvt ma and risk management using value at risk var the ag9

bid costs and endogenous bid caps we study contests where several privately informed agents bid for a price all bidders bear a cost of bidding that is an increasing function of their bids and moreover bids may be capped we show that regardless of the number of bidders if agents have linear or concave cost functions then setting a bid cap is not profitable for a designer who wishes to maximize the average bid on the other hand if agents have convex cost functions i e an increasing marginal cost then affectively capping the bids is profitable for a designer facing a sufficiently large number of bidders

traders expectations in asset markets experimental evidence we elicit traders predictions of future price trajectories in repeated experimental markets for a 15 period lived asset we find that individuals beliefs about prices are adaptive and primarily based on past trends in the current and previous markets in which they have participated most traders do not anticipate market downturns the first time they participate in a market and when experienced they typically overestimate the time remaining before market peaks and downturns occur when prices deviate from fundamental values belief data are informative to an observer in predicting the direction of future price movements and the timing of market peaks

the level and quality of value at risk disclosure by commercial banks in this paper we study both the level of value at risk var disclosure and the accuracy of the disclosed var figures for a sample of us and international commercial banks to measure the level of var disclosures we develop a var disclosure index that captures many different facets of market risk disclosure using panel data over the period 1996 2005 we find an overall upward trend in the quantity of information released to the public we also find that historical simulation is by far the most popular var method we assess the accuracy of var figures by studying the number of var exceedances and whether actual daily vars contain information about the volatility of subsequent trading revenues unlike the level of var disclosure the quality of var disclosure shows no sign of improvement over time we find that var computed using historical simulation contains very little information about future volatility

endogenous timing in contests with delegation i introduction contests with delegation where each player hires a delegate to expend effort or resources on the player s behalf to win a prize are common 1 an example is litigation between a plaintiff and a defendant in which each litigant hires an attorney who expends his effort to win the lawsuit on behalf of his client another example is a rent seeking contest in which each firm hires a lobbyist who expends his effort to acquire a monopoly or a procurement contract from the government on behalf of his client yet another example is a patent contest in which each firm hires a group of independent researchers or university professors who conduct research to obtain a patent on behalf of their employer delegation is attractive to players because they each can use superior ability by hiring a delegate with more ability than herself and achieve strategic commitments through delegation in such contests with delegation we believe delegates decide endogenously when to expend their effort after signing delegation contracts indeed pursuing their self interest the delegates may well endogenize the order of their moves and communicate it with each other before they expend their effort we believe also that players take it into account when designing their contracts for the delegates that the delegates will endogenize the order of their moves it is these ideas that motivate this paper accordingly the purpose of this paper is to systematically study contests with delegation in which delegates decide endogenously when to expend their effort after signing delegation contracts and before they expend their effort we study two player contests with delegation focusing on not only the equilibrium delegation contracts between players and their delegates but also the equilibrium orders of the delegates moves specifically we set up and analyze the following three stage game in the first stage two players each hire a delegate and they simultaneously announce their contracts written with their delegates each player s contract specifies how much her delegate will be paid if he wins the contest and how much if he loses it in the second stage each delegate decides when to expend his effort and the delegates announce their decisions simultaneously in the third stage the delegates expend their effort according to their decisions in the second stage to win the prize on behalf of their employers we show that in equilibrium the delegate hired by the higher valuation player chooses his effort level after observing his counterpart s and his expected payoff is greater than that of his counterpart this advantage of the delegate of the higher valuation player can be explained by the fact that his employer the higher valuation player offers better contingent compensation as it will be defined in section ii to him than the lower valuation player does to her delegate we compare the outcomes of the endogenous timing framework the three stage game presented above with those of the simultaneous move framework the game which is the same as the three stage game with the exception that the delegates choose their effort levels simultaneously and this order of their moves is given exogenously an interesting result is that each player offers her delegate a better contract in the endogenous timing framework than in the simultaneous move framework another interesting result is that unless the valuation for the prize of the higher valuation player is significantly greater than that of the lower valuation player then each delegate s expected payoff is greater in the endogenous timing framework than in the simultaneous move framework whereas each player s expected payoff is less in the endogenous timing framework than in the simultaneous move framework in summary pursuing their self interest the delegates decide endogenously when to expend their effort given contracts between the players and the delegates

a comparison of var and cvar constraints on portfolio selection with the mean variance model in this paper we analyze the portfolio selection implications arising from imposing a value at risk var constraint on the mean variance model and compare them with those arising from the imposition of a conditional value at risk cvar constraint we show that for a given confidence level a cvar constraint is tighter than a var constraint if the cvar and var bounds coincide consequently a cvar constraint is more effective than a var constraint as a tool to control slightly risk averse agents but in the absence of a risk free security has a perverse effect in that it is more likely to force highly risk averse agents to select portfolios with larger standard deviations however when the cvar bound is appropriately larger than the var bound or when a risk free security is present a cvar constraint dominates a var constraint as a risk management tool

two player asymmetric contests with ratio form contest success functions i examine players equilibrium effort levels in two player asymmetric contests with ratio form contest success functions i first characterize the nash equilibrium of the simultaneous move game i show that the equilibrium effort ratio is equal to the valuation ratio and that the prize dissipation ratios for the players are the same i also show that the prize dissipation ratio for each player is less than or equal to the minimum of the players probabilities of winning at the nash equilibrium and thus never exceeds a half then i examine how the equilibrium effort ratio the prize dissipation ratios and the players equilibrium effort levels respond when the players valuations for the prize or their abilities change jel d72 c72 i introduction a contest is a situation in which players compete with one another by expending irreversible effort to win a prize typical examples are various types of rent seeking contests competition among firms to win a monopoly rent secured under government protection or by a government procurement contract competition between domestic and foreign firms to obtain governmental trade policies favorable to them competition among firms to acquire a rent generated by rights of ownership to an import quota and competition among firms to capture rents created by governmental decisions to establish tariffs or other trade barriers other examples of contests include auctions patent races research and development r d competition among firms litigation competition for jobs among job candidates competition among candidates to win promotion to higher ranks election campaigns between political candidates and competition between local governments to invite business firms government institutions or government owned corporations into their districts naturally due to their prevalence and importance in economies such contests have been studied by many economists loury 1979 lee and wilde 1980 tullock 1980 rogerson 1982 rosen 1986 appelbaum and katz 1987 dixit 1987 hillman and riley 1989 hirshleifer 1989 ellingsen 1991 nitzan 1991 1994 krishna and morgan 1997 che and gale 1998 hurley and shogren 1998 and konrad 2000 to name a few in this vast literature on the theory of contests one of the main issues is how much effort do the players exert in pursuit of the prize indeed it is of great interest because the players effort levels determine the profitability of the players engaging in the contest and in some cases they are revenues collected by the contest organizer or bribes given to government officials furthermore they account for other important outcomes of the contest for example in a rent seeking contest efforts expended by the players are viewed as social costs due to rent seeking activities so that total effort level is a measure of economic efficiency in an r d contest effort levels expended by the players these are r d expenditures of the firms determine the expected date of invention this article also addresses the issue how much effort do the players exert in pursuit of the prize but it differs from previous research by dealing with contests with ratio form contest success functions 1 specifically the novelty of this article is to consider two player asymmetric contests in which each player s probability of winning is a function of the ratio of the two players effort levels two player contests with ratio form contest success functions or two player contests that can be best modeled with ratio form contest success functions are easily observed in the real world examples include various types of two player rent seeking contests litigation between a plaintiff and a defendant election campaigns between two parties or candidates and r d competition between two firms consider for example a rent seeking contest in which two firms potential monopolists compete with each other to win a government monopoly franchise contract

credit auctions and bid caps abstract in this paper we offer two contributions to the field of credit auctions first we compare first and second price credit auctions and provide solvency dependent conditions such that one mechanism dominates the other in terms of expected payoffs of all the parties involved in addition we present a new possibility of using bid caps in credit auctions we study the equilibria in the capped mechanisms and show that bid caps can increase the seller s expected payoff and in some cases the expected payoffs of all sides a win win situation

sequential location games we study location games where market entry is costly and occurs sequentially and where consumers are nonuniformly distributed over the unit interval we show that for certain classes of densities including monotone and under some additional restrictions hump shaped and u shaped ones equilibrium locations can be determined independently of when they are occupied our analysis reveals a number of peculiarities of the uniform distribution extensions of the model allow for price competition and advertisement in media markets winner take all competition trade offs between profits in the short and the long run and firms operating multiple outlets

do investors put their money where their mouth is stock market expectations and investing behavior there is a large gap between what finance models predict for individual investor behavior and what can be observed in their actual behavior portfolio theory assumes that investors form expectations about return and risk of securities and select portfolios according to their expectations and risk preferences as a consequence they should hold broadly diversified portfolios and trade very little but instead private investors have been shown to hold underdiversified portfolios to trade frequently to take high idiosyncratic risk and to gamble in the stock market to understand this striking differences the investment process itself needs greater scrutiny how do real investors use their beliefs and preferences in investing decisions we examine this question using a panel survey of self directed online investors at a uk bank the survey asks for return expectations risk expectations and risk tolerance of these investors in three month intervals between 2008 and 2010 we combine the survey data with investors actual trading data and portfolio holdings we find that investor beliefs have little predictive power for immediate trading behavior however portfolio risk levels and changes are systematically related to return and risk expectations in line with financial theory risk taking increases with return expectations and decreases with risk expectations

distributional conflict in organizations abstract hierarchy can function as an instrument to channel influence activities or power struggles in organizations contrary to what has frequently been argued we show that multi divisional organizations may involve lower influence costs than single tier organizations even though they offer more scope for organizational conflict and have more executives that can be influenced these benefits derive from two effects first part of the conflict in multi divisional organizations takes place on the division level where a small number of agents fight over only a fraction of the overall prize second by grouping agents into common divisions multi divisional organizations create free rider problems in rent seeking our model sheds new light on the desirability of divestitures and the transition from the u to the m form by us corporations in the 1920s

bank regulation and international financial stability a case against the 2006 basel framework for controlling tail risk in trading books abstract in attempting to promote international financial stability the basel committee on banking supervision 2006 provided a framework that sought to control the amount of tail risk that large banks around the world would take in their trading books relative to their corresponding minimum capital requirements however many of these banks suffered significant trading losses during the recent financial crisis our paper examines whether the basel framework allowed banks to take substantive tail risk in their trading books without a capital requirement penalty we find that it allowed banks to do so and that its minimum capital requirements can be notably procyclical hence focusing on the way the basel framework sought to control the amount of tail risk in trading books relative to their corresponding minimum capital requirements our paper supports the view that it was not properly designed to promote financial stability we also discuss alternative regulatory frameworks that would potentially be more effective than the basel framework in preventing banks from taking substantive tail risk in their trading books without a capital requirement penalty

optimal portfolio selection in a value at risk framework abstract in this paper we develop a portfolio selection model which allocates financial assets by maximising expected return subject to the constraint that the expected maximum loss should meet the value at risk limits set by the risk manager similar to the mean variance approach a performance index like the sharpe index is constructed furthermore when expected returns are assumed to be normally distributed we show that the model provides almost identical results to the mean variance approach we provide an empirical analysis using two risky assets us stocks and bonds the results highlight the influence of both non normal characteristics of the expected return distribution and the length of investment time horizon on the optimal portfolio selection

shortfall as a risk measure properties optimization and applications motivated from second order stochastic dominance we introduce a risk measure that we call shortfall we examine shortfall s properties and discuss its relation to such commonly used risk measures as standard deviation var lower partial moments and coherent risk measures we show that the mean shortfall optimization problem unlike mean var can be solved e7ciently as a convex optimization problem while the sample mean shortfall portfolio optimization problem can be solved very e7ciently as a linear optimization problem we provide empirical evidence a in asset allocation and b in a problem of tracking an index using only a limited number of assets that the mean shortfall approach might have advantages over mean variance 2003 elsevier b v all rights reserved

influencing rent seeking contests this paper shows that a policy that uniformly increases contestants effort costs can lead to an increase in total effort in asymmetric settings this levels the playing field and therefore encourages weaker players who otherwise would have stayed out to enter paradoxically a contest designer whose only objective is to maximize total effort may thus wish to make rent seeking more difficult these results suggest that the often lamented bureaucratic red tape might in fact be a rational response to the problem of attracting lobbyists to participate in a contest

political culture and discrimination in contests abstract many economic and political decisions are the outcome of strategic contests for a given prize the nature of such contests can be determined by a designer who is driven by political considerations with a specific political culture the main objective of this study is to analyze the effect of political culture and of valuation asymmetry on discrimination between the contestants the weights assigned to the public well being and the contestants efforts represent the political culture while discrimination is an endogenous variable that characterizes the mechanism allocating the prize we consider situations under which the optimal bias of the designer is in favor of the contestant with the larger or smaller prize valuation and examine the effect of changes in the political culture and in valuation asymmetry on the designer s preferred discrimination between the contestants focusing on the two most widely studied types of contest success functions deterministic all pay auctions and logit csfs we show that an all pay auction is always the preferred csf from the point of view of the contest designer this result provides a new political economic micro foundation to some of the most commonly used models in the contest literature

policy watch congressional campaign finance reform while campaign finance reform attracts a lot of attention it seems unlikely that such reform at least in it current guise will have a large impact on the functioning of the american political system recent studies have called into question the conventional wisdom that challenger campaign spending is especially effective suggesting that attempts to close the gap between incumbent and challenger spending will have a smaller than expected impact on election outcomes while it is safe to conclude that pacs wield some influence it is not clear that limiting cash contributions will have a substantial effect

procyclical leverage and value at risk the availability of credit varies over the business cycle through shifts in the leverage of financial intermediaries empirically we find that intermediary leverage is negatively aligned with the banks value at risk var motivated by the evidence we explore a contracting model that captures the observed features under general conditions on the outcome distribution given by extreme value theory evt intermediaries maintain a constant probability of default to shifts in the outcome distribution implying substantial deleveraging during downturns for some parameter values we can solve the model explicitly thereby endogenizing the var threshold probability from the contracting problem

incumbency advantage and political campaign spending limits abstract this paper presents a model which captures the three main arguments for and against campaign spending limits campaign spending limits are purported to restrict the incumbent s ability to exploit his fundraising advantage in contrast to conventional wisdom a ceiling increases the incumbent s probability of victory regardless of the candidates relative fundraising abilities as long as the challenger is not more effective in campaign spending if the challenger is more effective in campaign spending ceilings have a non monotonic effect when the incumbent enjoys a mild initial voter disposition advantage a moderate ceiling decreases the incumbent s probability of victory but further restricting the limit favors the incumbent irrespective of incumbency status the marginal benefit to quality decreases with a more restrictive cap in an open seat contest a more restrictive limit improves the electoral prospects of the superior quality candidate stricter ceilings may lead to the unintended consequence of increased expected spending

regulation and pension fund risk taking abstract we investigate the extent to which regulations governing investment valuation and funding affect the riskiness of defined benefit pension funds asset allocation we compare the regulatory frameworks of public corporate and industry pension funds in the united states canada and the netherlands over 1992 2011 derived from panel data analysis of a unique set of asset allocation details for close to 600 funds our results highlight that regulatory factors are more economically significant than pension funds characteristics in shaping asset allocation in particular risk based capital requirements and mark to market valuation are both associated with a 7 lower risky asset exposure especially equities regardless of market conditions by contrast the exposure of a pension fund subject to a 100 funding requirement does not differ significantly from that of an unconstrained pension fund during normal times but the constrained pension fund invests 4 less in risky assets during a financial crisis in line with theoretical predictions we find that risk based capital requirements and minimum funding limits have different consequences for pension funds risk taking

hindsight bias risk perception and investment performance once they have observed information hindsight biased agents fail to remember how ignorant they were initially they knew it all along we formulate a theoretical model of this bias providing a foundation for empirical measures and implying that hindsight biased agents learning about volatility will underestimate it in an experiment involving 66 students from mannheim university we find that hindsight bias reduces volatility estimates in another experiment involving 85 investment bankers in london and frankfurt we find that more biased agents have lower performance these findings are robust to differences in location information overconfidence and experience

optimal portfolios under a value at risk constraint abstract this paper looks at the optimal portfolio problem when a value at risk constraint is imposed this provides a way to control risks in the optimal portfolio and to fulfil the requirement of regulators on market risks the value at risk constraint is derived for n risky assets plus a risk free asset and is imposed continuously over time the problem is formulated as a constrained utility maximization problem over a period of time the dynamic programming technique is applied to derive the hamilton jacobi bellman equation and the method of lagrange multiplier is used to tackle the constraint a numerical method is proposed to solve the hjb equation and hence the optimal constrained portfolio allocation under this formulation we find that investments in risky assets are optimally reduced by the imposed value at risk constraint

political contribution caps and lobby formation theory and evidence abstract the perceived importance of special interest group money in election campaigns motivates widespread use of caps on allowable contributions we present a bargaining model in which the effect of a cap that is not too stringent on the amount a lobby can contribute improves its bargaining position relative to the politician it thus increases the payoff from lobbying which will therefore increase the equilibrium number of lobbies when lobby formation is endogenous caps may then also increase aggregate contributions from lobbies and increase politically motivated government spending we present empirical evidence from u s states that support various predictions of the model we find a positive effect on the number of pacs formed from enacting laws constraining pac contributions moreover the estimated effect is non linear as predicted by the theoretical model very stringent caps reduce the number of pacs but as the cap increases above a threshold level the effect becomes positive contribution caps in the majority of u s states are above this threshold

optimal portfolios with minimum capital requirements abstract we propose a novel approach to active risk management based on the recent basel ii regulations to obtain optimal portfolios with minimum capital requirements in order to avoid regulatory penalties due to an excessive number of value at risk var violations capital requirements are minimized subject to a given number of violations over the previous trading year capital requirements are based on the recent basel ii amendments to account for the stressed var that is the downside risk of the portfolio under extreme adverse market conditions an empirical application for two portfolios involving different types of assets and alternative stress scenarios demonstrates that the proposed approach delivers an improved balance between capital requirement levels and the number of var exceedances furthermore the risk adjusted performance of the proposed approach is superior to that of minimum var and minimum stressed var portfolios

social interaction and stock market participation we propose that stock market participation is influenced by social interaction in our model any given social investor finds the market more attractive when more of his peers participate we test this theory using data from the health and retirement study and find that social households those who interact with their neighbors or attend church are substantially more likely to invest in the market than non social households controlling for wealth race education and risk tolerance moreover consistent with a peer effects story the impact of sociability is stronger in states where stock market participation rates are higher

symmetric two stage contests with budget constraints the impact of a budget constraint on individual expenditures is examined in two models of two stage contests with homogenous and risk neutral players competing to win a single indivisible commonly valued rent the set of players is partitioned into equally sized groups in the first model one contestant from each group survives to compete on the second stage against the other survivors in the second model one group survives the first stage and its members compete against each other on the second stage we derive and discuss the symmetric subgame perfect equilibrium solution for each model

the power of money wealth effects in contests abstract the relationship between wealth and power has long been debated nevertheless this relationship has been rarely studied in a strategic game in this paper we study wealth effects in a strategic contest game two opposing effects arise wealth reduces the marginal cost of effort but it also reduces the marginal benefit of winning the contest we consider three types of contests which vary depending on whether rents and efforts are commensurable with wealth our theoretical analysis shows that the effects of wealth are strongly contest dependent it thus does not support general claims that the rich lobby more or that low economic growth and wealth inequality spur conflicts

participation in deterministic contests abstract this paper considers participation in deterministic contests for m 1 identical prizes which employ an auction like rule to determine the winners in most papers that investigate such models participation by precisely m 1 players is associated with players having complete information about their opponents characteristics and participation by more than m 1 players is associated with players having incomplete information about their opponents characteristics i show that incomplete information is in fact neither sufficient nor necessary for participation by more than m 1 players

risk in banking and capital regulation this paper investigates the role of bank capital regulation in risk control it is known that banks choose portfolios of higher risk because of inefficiently priced deposit insurance bank capital regulation is a way to redress this bias toward risk utilizing the mean variance model the following results are shown a the use of simple capital ratios in regulation is an ineffective means to bound the insolvency risk of banks b as a solution to problems of the capital ratio regulation the theoretically correct risk weights under the risk based capital plan are explicitly derived and c the theoretically correct risk weights are restrictions on asset composition which alters the optimal portfolio choice of banking firms the recent increase in bank failures especially after the 1980 and 1982 deregulatory acts has again ignited a controversy over the risk portfolio of the banking industry given the importance of this sector there has been increased scrutiny of the industry s motives for risk taking and possible regulatory changes to improve its stability these investigations have centered around two rather complementary areas the first of these is the role of deposit insurance and how its current pricing procedure encourages risk taking and justifies current bank regulations the works of buser chen and kane 4 kane 9 and benston et al 2 have made substantive contributions the authors demonstrates the way in which our current fixed rate insurance system rewards risk taking by the firm and insulates it through deposit insurance from the market discipline that needs to exist to ensure proper risk evaluation this realization has led these authors to propose a series of regulatory changes to encourage proper portfolio choice within the industry these include a shift to market value accounting risk based deposit insurance premiums and additional capital regulation the last of these serves as a method of coinsurance whereby higher capital levels require the bank to absorb greater losses in the event of failure and encourage additional prudence in management in essense it is one method of risk reduction that may offset the risk preference imposed on the industry due to the inappropriate insurance pricing because the amount of capital influences the probability of bank insolvency and thus the soundness of the entire banking system the regulators ceteris paribus prefer more capital to

rent seeking with regretful agents theory and experiment abstract we investigate both theoretically and experimentally the role that information disclosure has on behavior in all pay environments in which all agents must exert costly effort but only the winner is rewarded through the lens of all pay auctions we show that bidders who have regret concerns when they lose an auction may alter their bids whether or not information about the winning bid is disclosed all losing bidders regret not bidding 0 however when feedback on the winning bid is provided those bidders who lost at an affordable price may regret not bidding more we show that the former effect causes bidders to lower their bids while the latter effect causes bidders to raise their bids our experimental results indicate overbidding whether or not the winning bid is disclosed to losing bidders however disclosing the winning bid leads to even more aggressive bidding increases revenues decreases the frequency of dropouts and also leads to more efficient allocations thus our results show that information disclosure is a powerful tool that mechanism designers may wish to exploit to extract more rents in all pay environments

the all pay auction when a committee awards the prize there is very little work on the equilibrium of the all payauction when the prize is awarded by two or more people iconsider an all pay auction under committee administrationwith caps on the bids of the contestants i show that for anynumber of committee members and contestants there exists apure strategy equilibrium in which the contestants bid anamount equal to a suitably chosen cap i argue that the cap isnot an artificial restriction on the game given that thereare caps on political lobbying in the real world i find thatcommittee administration could result in higher aggregateexpenditures even if there is some probability that thecommittee will not award the prize the intuition for thisresult is that the inclusion of additional administratorsrelaxes the effect of caps on lobbying that is caps onlobbying tend to be more effective the smaller is the size ofthe committee caps may also be a solution to the problem ofmajoritarian cycles in all pay auctions under committeeadministration

campaign contributions and access an important and pervasive view of campaign contributions is that they are given to promote access to successful candidates under circumstances when such access would not ordinarily be given in this story access is valuable as it offers groups the opportunity to influence legislative decisions through the provision of policy relevant information under complete information regarding donors policy preferences i argue that this model predicts a negative relationship between contributions and the extent to which the groups and the recipient legislators preferences are similar however one of the more robust empirical findings in the literature is that this relationship is positive relaxing the informational assumption on donors preferences i reexamine the access story with a model in which campaign contributions can act as signals of policy preference and the informational value of access to any agent is endogenous

weak cartels and collusion proof auctions abstract we study private value auctions in which bidders may collude without using side payments in our model bidders coordinate their actions to achieve an outcome that interim pareto dominates the noncooperative outcome we characterize auctions that are collusion proof in the sense that no such coordination opportunities exist and show that the efficient and revenue maximizing auctions are not collusion proof unless all bidders exhibit a concave distribution of valuations we then solve for revenue maximizing collusion proof auctions if distributions of valuations are symmetric and single peaked the optimal selling mechanism is a standard auction with a minimum bid followed by sequential negotiation in case no bidder bids above the minimum bid

behavioral portfolio theory we develop a positive behavioral portfolio theory bpt and explore its implications for portfolio construction and security design the optimal portfolios of bpt investors resemble combinations of bonds and lottery tickets consistent with friedman and savage s 1948 observation we compare the bpt efficient frontier with the mean variance efficient frontier and show that in general the two frontiers do not coincide optimal bpt portfolios are also different from optimal capm portfolios in particular the capm twofund separation does not hold in bpt we present bpt in a single mental account version bpt sa and a multiple mental account version bpt ma bpt sa investors integrate their portfolios into a single mental account while bpt ma investors segregate their port folios into several mental accounts bpt ma portfolios resemble layered pyramids where layers are associated with aspirations we explore a two layer portfolio where the low aspiration layer is designed to avoid poverty while the high aspiration layer is designed for a shot at riches

limited liability and mechanism design in procurement in the presence of cost uncertainty limited liability introduces the possibility of default in procurement with its associated bankruptcy costs when nancial soundness is not perfectly observable we show that incentive compatibility implies that nancially less sound contractors are selected with higher probability in any feasible mechanism informational rents are associated with unsound nancial situations by selecting the nancially weakest contractor stronger price competition auctions may not only increase the probability of default but also expected rents thus weak conditions are su cient for auctions to be suboptimal in particular we show that pooling rms with higher assets may reduce the cost of procurement even when default is costless for the sponsor

an evaluation of the basle guidelines for backtesting banks internal risk management models the 1996 amendment to the baste capital accord to incorporate market risks constitutes a breakthrough in the determination of capital requirements rather than dictating these requirements through a uniform supervisory approach banks are allowed to use their own internal models for computing the capital required in order to mitigate moral hazard problems and stimulate banks to use adequate internal models the models must be subjected to a backtesting procedure if a model produces too many incorrect predictions increased capital requirements result this paper provides an evaluation of the current internal models approach in conjunction with the proposed backtesting procedure in particular using a stylized representation of the present supervisory framework we investigate whether banks are provided with the right incentives to come up with the correct internal model we find that under the current regulatory framework banks are prone to under reporting their true market risk a much stricter penalty scheme is required in order to align banks incentives with those of the supervisor we check the sensitivity of our results to changes in the length of the planning horizon portfolio risk time preferences risk attitudes and the distribution of financial returns

altruistic voting and campaign contributions abstract an altruistic citizen votes yes in a referendum if the perceived benifit of the project exceeds its perceived cost the altruist gets information about benifits and costs from contributions to the pro and con campaigns in the nash equilibrium of a campaign contribution game with two beneficiaries altruists vote on the side with the largest contribution and altruistic voting guarantees efficient choices if there are many agents however altruistic voters do not always make efficient choices a disclosure law that provides information about the number of beneficiaries increases the efficiency of the referendum process

competitive burnout theory and experimental evidence abstract we examine equilibrium selection in a two stage sequential elimination contest in which contestants compete for a single prize this game has a continuum of equilibria only one of which satisfies the coalition proof nash equilibrium cpne refinement that equilibrium involves burning out by using all of one s resources in the first stage it is pareto dominated by many other equilibria we find that cpne predicts well when four people compete but not when eight people compete for two second stage spots using a cognitive hierarchy ch framework we show that when the number of players and the mean number of thinking steps are large the ch prediction involves burning out this provides a partial explanation of our results we also develop a formal argument as to why cpne logic is more compelling with more players we conclude that more competition leads to higher bids and that burning out is indeed a competitive phenomenon

forecasting the forecasts of others implications for asset pricing we develop a dynamic asset pricing model with heterogeneously informed agents unlike previous research we focus on the general case where differential information leads to the problem of forecasting the forecasts of others and to non trivial dynamics of higher order expectations in particular we prove that the model does not admit a finite number of state variables using numerical analysis we compare equilibria characterized by identical fundamentals but different information structure we demonstrate that the distribution of information has substantial impact on equilibrium prices and returns in particular we show that asymmetric information can generate momentum in returns and high trading volume

options and structured products in behavioral portfolios abstract options and structured products have no roles in mean variance portfolios but they have roles in behavioral portfolios behavioral portfolios are composed of mental account sub portfolios each associated with a goal such as retirement income or bequest investors optimize each mental account by finding the assets and asset allocation that maximizes the expected return of each mental account sub portfolio subject to the condition that the probability of failing to reach a preset threshold aspiration level not exceed a preset probability put options are useful in downside protection mental accounts whose goal is avoiding poverty whereas call options are useful in upside potential mental accounts whose goal is a shot at riches we also explore the roles in behavioral portfolios of option collars capital guaranteed notes and barrier range notes

second order beliefs and the individual investor in a panel survey of individual investors we show that investors second order beliefs their beliefs about the return expectations of other investors influence investment decisions investors who believe others hold more optimistic stock market expectations allocate more of their own portfolio to stocks even after controlling for their own risk and return expectations however second order beliefs are inaccurate and exhibit several well known psychological biases we observe both the tendency of investors to believe that their own opinion is relatively more common among the population false consensus and that others who hold divergent beliefs are considered to be biased bias blind spot

the incentive effects of affirmative action in a real effort tournament abstract affirmative action policies bias tournament rules in order to provide equal opportunities to a group of competitors who have a disadvantage they cannot be held responsible for its implementation affects the underlying incentive structure which might induce lower performance by participants and additionally result in a selected pool of tournament winners that is less efficient in this paper we study the empirical validity of such concerns in a case where the disadvantage affects capacities to compete we conducted real effort tournaments between pairs of children from two similar schools who systematically differed in how much training they received ex ante on the task at hand contrary to the expressed concerns our results show that the implementation of affirmative action did not result in a significant performance loss for either advantaged or disadvantaged subjects instead it rather enhanced the performance for a large group of participants moreover affirmative action resulted in a more equitable tournament winner pool where half of the selected tournament winners came from the originally disadvantaged group hence the negative selection effects due to the biased tournament rules were at least partially offset by performance enhancing incentive effects

all pay auctions with a buy price option all pay auctions this paper studies all pay auctions in which there is a buy price option for bidders to guarantee purchases at a seller specified price we analyze symmetric increasing bidding equilibria in the first and second price all pay auctions with the buy price option while the optimal buy price in the second price is higher than are those in the first price all pay auction both formats maintain the same expected profit with an endogenous entry process all pay auctions with the buy price can attract more consumers and ultimately reach a higher expected profit than does the uniform posted price selling mechanism jel d44 l11 l81

a model of auction contracts with liquidated damages abstract this paper develops an auction model in which the winning bidder has an opportunity to cancel the transaction and pay damages to the seller in the event of a default on the auction contract the winning bidder pays liquidated damages or loses a posted deposit when renegotiation is possible increasing the deposit has no effect on the seller s payoff unless the seller has some bargaining power and exogenously receives some information about the winning bidder under these conditions the seller s payoff is decreasing in the level of the deposit journal of economic literature classification number d44

individual investor perceptions and behavior during the financial crisis combining monthly survey data with matching trading records we examine how individual investor perceptions change and drive trading and risk taking behavior during the 2008 2009 financial crisis we find that investor perceptions fluctuate significantly during the crisis with risk tolerance and risk perceptions being less volatile than return expectations during the worst months of the crisis investors return expectations and risk tolerance decrease while their risk perceptions increase towards the end of the crisis investor perceptions recover we document substantial swings in trading and risk taking behavior that are driven by changes in investor perceptions overall individual investors continue to trade actively and do not de risk their investment portfolios during the crisis

capital requirements and the behaviour of commercial banks abstract i study the consequences of capital regulations on the portfolio choices of commercial banks elaborating on previous work by kareken and wallace 1978 koehn and santomero 1980 and kim and santomero 1988 i obtain the following results if the objective of commercial banks is maximization of the market value of their future profits value maximizing banks capital regulations cannot prevent banks from choosing very specialized and very risky portfolios risk based insurance premia are in fact the relevant instrument for that purpose on the other hand if banks behave as portfolio managers utility maximizing banks capital regulations can be effective but only if the weights used in the computation of the ratio are proportional to the systematic risks of the assets their betas because of limited liability of commercial banks a minimum capital regulation or a closing rule may become necessary as well to prevent failing banks from betting for resurrection

equilibrium contingent compensation in contests with delegation we consider two player contests in which each player hires a delegate who expends his effort to win a prize on the player s behalf endogenizing delegation contracts we focus on the equilibrium contracts between the players and their delegates we first show that each player s equilibrium contract is a no win no pay contract then we examine the delegates equilibrium compensation spreads effort levels probabilities of winning expected payoffs and the players equilibrium expected payoffs we show that economic rents for the delegates may exist

multi stage sequential all pay auctions abstract we study multi stage sequential all pay contests auctions where heterogeneous contestants are privately informed about a parameter ability that affects their cost of effort we characterize the perfect bayesian equilibrium of these contests and analyze the effect of the number of contestants and their types on the contestants expected highest effort

bubbles and persuasion with uncertainty over market sentiment abstract recent empirical studies suggest that during times of unexpected innovation agents heterogeneously update their beliefs about an asset fundamental value and are uncertain of other agents beliefs about it in this paper i show that when there is uncertainty over the market sentiment defined as other investors beliefs about an asset fundamental value market manipulation can act through a previously unconsidered channel by misleading agents learning on the market sentiment this novel type of market manipulation could strengthen existing financial bubbles or even give rise to new ones

speculative equilibrium with differences in higher order beliefs modest differences in higher order beliefs may have large price effects we generalize a standard rational expectations equilibrium model with different information by allowing differences in higher order beliefs investors have possibly different dogmatic beliefs about the mean different dogmatic beliefs about other investors beliefs and so on for higher and higher orders of beliefs even when every investor s first order expectations are unbiased overvaluation results when investors have inconsistent higher order beliefs that their own expectations are more optimistic than average this lack of common knowledge destabilizes prices in an unbounded manner as market liquidity disappears this paper was accepted by gustavo manso finance

an investigation of the average bid mechanism for procurement auctions in a procurement context it can be quite costly for a buyer when the winning seller underestimates the cost of a project and then defaults on the project midway through completion the average bid auction is one mechanism intended to help address this problem this format involves awarding the contract to the bidder who has bid closest to the average of the bids submitted we compare the performance of this mechanism with the standard low price mechanism to determine how successful the average bid format is in preventing bidder losses as well as its impact on the price paid by the buyer we find the average bid mechanism to be more successful than expected because surprisingly bidding behavior remains similar between the average bid and low price auctions we provide an explanation for the bidding behavior in the average bid auction that is based on subjects having problems processing signals near the extremes of the distribution this paper was accepted by teck hua ho behavioral economics

caps in sequential contests i introduction in many competitions we can often observe situations where severe constraints are imposed on contestants for example in the u s electoral campaign there is a specific maximum campaign contribution that a single agent can make to a candidate 1 in sports where equipment plays a major role e g sailing motor races etc explicit or implicit technological constraints are imposed on the allowed equipment also several sports leagues e g the national basketball association nba implement a salary cap which places a limit on the total amount of money a team can spend on players salaries salary caps are clearly binding and teams are sometimes forced to trade expensive players in order to make place for other needed team members the usual reason for applying salary caps is that they facilitate even competition between small and large city teams otherwise large city teams could pay more buy the best talent and ultimately destroy any semblance of competition in the league the goal of caps imposed by designers of competitions is to create what we call a competitive balance so that many players have a chance to win and not necessarily the strongest ones in addition if the contest is more competitively balanced the uncertainty of the outcome is higher and therefore the contest is more attractive furthermore competitive balance may lead to an improvement of the expected total performance of all the players rather than just the performance of the top player several other ways have been suggested to enhance the competitive balance in contests for example baye kovenock and de vries 1993 showed that in all pay auctions contests by excluding the strongest player the player with the highest value of winning the contest becomes more competitively balanced and then the players expected total bid may increase moldovanu and sela 2001 found that in all pay auctions under incomplete information when cost functions are convex several positive prizes may be optimal for a designer who wishes to maximize the expected total bid in other words by increasing the number of the prizes the chances of the players with relatively low values of winning to win one of the prizes increase and therefore these players will increase their efforts accordingly cohen kaplan and sela 2008 studied all pay auctions with effort dependent rewards under incomplete information and demonstrated that when the designer maximizes the total bid effort and when there is a sufficiently large number of contestants the optimal reward decreases in the contestants bid this means that a designer will offer higher prizes to the players with relatively low values of winning those who exert lower efforts than to the players with relatively high values of winning those who exert higher efforts such a distribution of prizes balances the bids submitted by the players with high and low values of winning we focus here on the role of bid caps to enhance the competitive balance in contests relatively weak players players with low abilities or low values of winning usually exert low efforts which are lower than the level of the bid cap imposed by a designer in a contest with a bid cap if these players exert an effort that is equal to the bid cap they will have a higher chance to win since no one can exert a higher effort than the bid cap thus the weak players exert more effort than they would in a contest without a bid cap however relatively strong players players with high abilities or high values of winning usually exert higher efforts than the level of the bid cap thus the strong players exert less effort than they would in a contest without a bid cap hence the effect of the bid cap on the players total effort depends on the trade off between the increase of the weaker players efforts and the decrease of the stronger players efforts to be fully effective the bid cap system must guarantee that as many players as possible raise their efforts to the level of the bid cap and as less as possible reduce their efforts to this level

beauty contests and iterated expectations in asset markets in a financial market where traders are risk averse and short lived and prices are noisy asset prices today depend on the average expectation today of tomorrow s price thus iterating this relationship the date 1 price equals the date 1 average expectation of the date 2 average expectation of the date 3 price this will not in general equal the date 1 average expectation of the date 3 price we show how this failure of the law of iterated expectations for average belief can help understand the role of higher order beliefs in a fully rational asset pricing model and explain over reaction to noisy public information

contest efforts in light of behavioural considerations this study shows that distortion of probabilities is a possible reason for rent under dissipation incontests with relatively small number of participants such distortion may also result however inover dissipation of the contested rent focusing on contests with homogeneous contestants and thecommonly studied contest success function our main results clarify under what circumstances i rents are more under dissipated relative to the standard situation where probabilities are notdistorted ii rents are under dissipated yet less intensely relative to the standard situation whereprobabilities are not distorted iii rents are over dissipated and iv the contest does not possess asymmetric interior equilibrium in pure strategies

investment in the absence of property rights the role of incumbency advantages in many situations the individuals who can generate some output must enter a contest for appropriating this output this paper analyses the investment incentives of such agents and the role of incumbency advantages in the contest depending on the advantages an increase in the productivity of the investment can decrease or increase the amount of investment the results are applied to autocrats investment behavior and job specific investment in organizations

survey evidence on diffusion of interest and information among investors abstract questionnaire surveys of institutional and individual investors were undertaken to learn about patterns of communications it was found that direct interpersonal communications are very important in investor decisions questions elicited what fraction of investors were unsystematic and allowed themselves to be influenced by word of mouth communications or other salient stimuli randomly sampled investors were studied as well as investors in stocks whose price had recently increased dramatically contagion or epidemic models of financial markets are proposed in which interest in individual stocks is spread by word of mouth the survey evidence is interpreted as supporting such models

lottery versus all pay auction models of lobbying i first provide a complete characterization of the unique equilibrium of the lottery game by n lobbyists with asymmetric valuations and then compare the lottery and the all pay auction models of lobbying i show that the exclusion principle discovered by baye kovenock and de vries 1993 for all pay auction does not apply to lottery i also show that the perverse effect that an exogenous cap may increase the total lobbying expenditure in a two bidder all pay auction discovered by che and gale 1998 does not apply to lottery

when more is less using multiple constraints to reduce tail risk abstract financial institutions suffered large trading losses during the 2007 2009 global financial crisis these losses cast doubt on the effectiveness of regulations and risk management systems based on a single value at risk var constraint while some researchers have recommended using conditional value at risk cvar to control tail risk var remains popular among practitioners and regulators accordingly our paper examines the effectiveness of multiple var constraints in controlling cvar under certain conditions we theoretically show that they are more effective than a single var constraint furthermore we numerically find that the maximum cvar permitted by the constraints is notably smaller than with a single constraint these results suggest that regulations and risk management systems based on multiple var constraints are more effective in reducing tail risk than those based on a single var constraint

bidding in hierarchies this paper reconsiders the comparison between hierarchical contests and single stage contests a condition is given that characterizes whether and when the aggregate equilibrium payoff of contestants is higher in the single stage contest and when the single stage contest is more likely to award the prize to the contestant who values it most highly the outcome depends on inter and intra group heterogeneity and is not driven by free rider incentives

high bids and broke winners abstract this paper analyzes auctions where budget constrained bidders have options to declare bankruptcy it predicts a bidding equilibrium that changes discontinuously in a borrowing rate available to bidders when the borrowing rate is above a threshold high budget bidders win and the likelihood of bankruptcy is low when the borrowing rate is below the threshold the winner is the most budget constrained bidder and is most likely to declare bankruptcy this result explains the high bids and broke winners anomaly in the c block fcc spectrum auction based on its equilibrium analysis the paper proves that a seller can profit from offering to finance the highest bidder at a below market interest rate even with default risk journal of economic literature classification numbers d44 d45 d82 g33 l96

should we tax or cap political contributions a lobbying model with policy favors and access abstract this paper develops a model of political contributions in which a politician can either sell policy favors or sell access access allows interest groups to share hard information with the politician in support of their preferred policy here selling access maximizes policy utility while selling policy favors maximizes total contributions imposing a binding contribution limit makes it more likely that the politician sells access which can improve expected constituent welfare however a contribution limit distorts the signals associated with the contributions which tends to result in worse policy alternatively a tax on political contributions can ensure that the politician sells access without distorting his information therefore from the viewpoint of a representative constituent a tax on contributions is strictly preferred to a contribution limit or no reform the politician however may prefer regulation in the form of a contribution limit even when a tax is better for the constituent

precautionary bidding in auctions we analyze bidding behavior in auctions when risk averse buyers bid for a good whose value is risky we show that when the risk in the valuations increases dara bidders will reduce their bids by more than the appropriate increase in the risk premium ceteris paribus buyers will be better off bidding for a more risky object in first price second price and english auctions with affiliated common interdependent values this precautionary bidding effect arises because the expected marginal utility of income increases with risk so buyers are reluctant to bid so highly we also show that precautionary bidding behavior can make dara bidders prefer bidding in a common values setting to bidding in a private values one when risk neutral or cara bidders would be indifferent thus the potential for a winner s curse can be a blessing for rational dara bidders

all pay auctions with certain and uncertain prizes abstract we study all pay auctions with multiple prizes the players have the same value for all the certain prizes except for one uncertain prize for which each player has a private value we characterize the equilibrium strategy and show that independent of the ranking of the uncertain prize if the uncertain prize is not the lowest one a player s effort as well as his expected payoff increase in his value for the uncertain prize otherwise if this prize is the lowest one we obtain that a player s effort may decrease in his value for the uncertain prize but his expected utility increases

soft money and campaign finance reform we analyze special interest influence on policy when political contributions are capped but the regulation contains soft money loopholes the politician chooses between two policy options we define special interest influence as the probability the politician chooses the policy he would not have chosen in the absence of contributions any binding cap reduces special interest influence but the effect may be nonmonotonic a ban on contributions can result in greater special interest influence than a binding but nonzero cap the results may also have implications for the policy response to the 2010 supreme court ruling on citizens united v fec

ambiguous political power and contest efforts when there is incomplete information on the source of power in a contest the contestants may divide their lobbying efforts between the potential centers of power only one of which determines the contests winning probabilities our analysis focuses on the effect of ambiguity regarding the source of power on the contestants aggregate effort in a symmetric simple lottery contest with two potential centers of power specifically we examine the effects of varying the informativeness of the contestants private signals i e the probability that a signal is correct and the degree of correlation between them our benchmark case is the standard tullock s model in which the source of power is known i e the contestants signals are perfectly informative we show that the level of aggregate effort in this case is reached also when the signals are perfectly uninformative however in any intermediate case the contestants aggregate effort is lower provided that the signals are not perfectly correlated in other words there is a u shape relationship between the informativeness of the signals and the aggregate effort in the contest the lowest level of effort is spent when the signals are independent and the probability that a signal is true is about 0 85 in this case efforts are reduced by about one fifth in comparison with the benchmark case from a rent dissipation of 50 to slightly over 40