buyer initiated vs seller initiated information revelation sales presentations are the core of the selling process where salespeople provide information to prospects one challenge is that the amount of information available to be potentially communicated may exceed salespeople s ability to communicate or customers ability to process there is limited bandwidth between the firm and customers one important decision then is which information should customers see what the firm chooses to tell customers may be informative in itself when constrained to a seller initiated information revelation format where the firm chooses which feature to show the firm never finds it optimal to offer more features than it is able to inform customers about consequently customers never find credible a claim that the product has all features the important implication is that price alone cannot serve as a signal of quality in this setting in contrast a buyer initiated information revelation format where customers decide which information to receive increases the probability of a sale and also results in the production of higher quality products in a competitive setting by adopting buyer initiated information revelation firms are able to attain positive profits this is due to the fact that customers infer the product s quality from the price along with the information revelation format customers know that at some prices firms find it profitable to produce high quality products and at other lower prices this is not the case thus customer empowerment leads to higher profits

return policies market outcomes and consumer welfare the effect of return policies on market outcomes is studied in a model where consumers differ in their valuations of time product reliability is identified with defect rates producers first choose reliability levels and then compete in prices for given defect rates allowing returns makes products closer substitutes enhancing competition and reducing prices being closer substitutes makes higher reliability less worthwhile which reduces reliability while the decrease in reliability reduces consumer welfare the decrease in prices raises it the latter dominates so that aggregate consumer welfare increases with return policy l effet des politiques de remboursement sur les resultats du marche est examine dans le cadre d un modele ou les consommateurs ont des evaluations differentes de la valeur de leur temps la fiabilite des produits est mesuree par leur taux de defectuosite les producteurs choisissent d abord des niveaux de fiabilite et ensuite se concurrencent par les prix pour des niveaux de defectuosite donnes permettre de retourner le produit rend les produits davantage des substituts accroit la concurrence et reduit les prix une plus grande substituabilite rend la fiabilite moins importante et donc reduit la fiabilite alors que la chute de la fiabilite reduit le bien etre du consommateur la chute des prix l accroit ce second effet domine ce qui fait que le bien etre agrege du consommateur s accroit quand il y a politique de remboursement

money back warranties vs replacement warranties a simple comparaison product warranties are one of the most common time honored and visible contractual relationships entered into by consumers moreover under the uniform commercial code consumers are covered by an implied warranty of merchantability even without a written warranty in this paper we compare the outcomes of two contrasting types of consumer product warranties money back warranties and replacement warranties both these types of warranties are ubiquitous in fact a best and a r andreasen 1977 find that returning an item is the most common action taken by dissatisfied consumers c l kendall and f a russ 1975 in a study of the consumer packaged goods industry find that money back and new merchandise are the two most common responses made by firms to consumer complaints yet as our analysis shows there are significant differences in the incentives they provide firms and in their welfare properties in particular we find that the comparison depends crucially on the observability of quality and on the cost of servicing warranties although there are certainly more complicated explanations for warranties we rely on a simple model of imperfect consumer information in which to embed our comparison of the relative performance of these two forms of warranty consumers are confronted by seller moral hazard that is either they are unable to discern the quality of a product before purchase or alternatively this information is extremely costly for consumers to obtain or for firms to publicly demonstrate we abstract from issues such as differing degrees of risk aversion consumer moral hazard and screening each of which is frequently the rationale behind warranty provision our model is perhaps closest to the model presented in michael spence s 1977 article in which he analyzes the provision of warranties in an environment with biased consumer information

information flow and pricing errors a unified approach to estimation and testing this study examines whether rates of information flow differ between trading and nontrading periods and whether the variances of pricing errors differ at the open and close of trading the approach improves on existing methods by allowing for correlation between pricing errors and information flow and by conducting inferences at the individual security level the daytime rate of information flow is about seven times the overnight rate and the variances of pricing errors at the open are not different from those at the close of trading this evidence differs from existing results based on return variance ratios much of the empirical market microstructure literature predicates its analysis on a model in which price changes have a permanent information related component and a transitory market friction or dealer cost component two questions that have received a great deal of attention relate to the behavior of these components the first is whether and to what extent the rate of information flow into prices differs during trading and nontrading periods this is equivalent to asking whether the variance of the permanent component per unit time is different during periods when trading occurs than when trading does not occur the second question is whether pricing errors of differing magnitudes are associated with different trading mechanisms or trading preceded by an overnight period of nontrading this corresponds to asking whether the variance of the transitory component is different depending on which trading mechanism is used or whether trading has been halted for a time more generally these questions relate to whether the permanent and transitory components of price changes are heteroskedastic although both questions share the context of this model existing studies typically focus

signaling quality with a money back guarantee the role of transaction costs direct marketing is witnessing explosive growth as consumers increasingly purchase products from their homes their ability to judge the quality of products they buy is significantly reduced in this paper we study how money back guarantees can signal product quality in such environments we interpret product quality broadly to mean both the level of attributes promised as well as the firm s consistency in delivering on those promises key aspects of our formulation are the explicit consideration of transaction costs and alternative signals of product quality transaction costs are the costs the seller or buyer faces when redeeming a money back guarantee we show that money back guarantees signal quality by exploiting the higher probability of returns for a lower quality product and the attendant higher transaction costs however if the seller s transaction costs are very large then there are less costly ways to signal namely charging a high price we compare the signaling performance of 1 price 2 price with uninformative advertising and 3 price with a money back guarantee whereas uninformative advertising does not work at all in our model under certain conditions a money back guarantee is necessary to signal and under other conditions a money back guarantee is a useful supplement to price

limit order book as a market for liquidity we develop a dynamic model of an order driven market populated by discretionary liquidity traders these traders must trade yet can choose the type of order and are fully strategic in their decision traders differ by their impatience less patient traders demand liquidity more patient traders provide it three equilibrium patterns are obtained the pattern is determined by three parameters the degree of impatience of the patient traders which we model as the cost of execution delay in providing liquidity their proportion in the population which determines the degree of competition among the liquidity providers and the tick size which is the cost of the minimal price improvement despite its simplicity the model generates a rich set of empirical predictions on the relation between market parameters time to execution and spreads we argue that the economic intuition of this model is so basic its main results must be robust in much more general models

export industry policy and reputational comparative advantage abstract country of origin reputations are endogenized in this paper and it is shown that otherwise identical countries can be correctly perceived as differing in their percentage of high quality producers these self fulfilling reputations determine not only the average quality of a country s exports but also the type of products in which a country specializes hence the pattern of international trade can be determined by this reputational comparative advantage an inferior country of origin reputation leads to lower national welfare therefore several trade and industrial policies that can improve country of origin reputation are examined

transaction costs order placement strategy and existence of the bid ask spread by considering investor order placement strategy this paper demonstrates that transaction costs cause bid ask spreads to be an equilibrium property of asset markets with transaction costs the probability of a limit order executing does not go to unity as the order is placed infinitesimally close to a counterpart market quote thus with certainty of execution at the counterpart market quote a gravitational pull is generated that keeps counterpart quotes from being placed infinitesimally close to each other an equilibrium spread is defined and its size linked to market thinness implications are noted for the design of a trading system

price formation and liquidity in the u s treasury market the response to public information the arrival of public information in the u s treasury market sets off a two stage adjustment process for prices trading volume and bid ask spreads in a brief first stage the release of a major macroeconomic announcement induces a sharp and nearly instantaneous price change with a reduction in trading volume demonstrating that price reactions to public information do not require trading the spread widens dramatically at announcement evidently driven by inventory control concerns in a prolonged second stage trading volume surges price volatility persists and spreads remain moderately wide as investors trade to reconcile residual differences in their private views how do financial markets form prices and provide liquidity when information arrives efforts to address this issue have led to an extensive microstructure literature on equity markets and to a lesser extent on the foreign exchange fx market relatively little work has focused on the u s treasury market however in spite of its importance in its own right and the advantages it offers as an alternative testing ground for microstructure hypotheses

trading mechanisms and stock returns an empirical investigation this paper examines the effects of the mechanism by which securities are traded on their price behavior we compare the behavior of open to open and close to close returns on nyse stocks given the differences in execution methods applied in the opening and closing transactions opening returns are found to exhibit greater dispersion greater deviations from normality and a more negative and significant autocorrelation pattern than closing returns we study the effects of the bid ask spread and the price adjustment process on the estimated return variances and covariances and discuss the associated biases we conclude that the trading mechanism has a significant effect on stock price behavior

a productivity model of city crowdedness abstract population density varies widely across us cities a simple static general equilibrium model suggests that moderate sized differences in cities total factor productivity can account for such variation nevertheless the productivity required to sustain above average population densities considerably exceeds estimates of the increase in productivity caused by such high density in contrast increasing returns to scale may be able to sustain multiple equilibria at below average population densities

quality of life firm productivity and the value of amenities across canadian cities we estimate quality of life and productivity differences across canada s metropolitan areas in a hedonic general equilibrium framework these are based on the estimated willingness to pay of heterogeneous households and firms to locate in various cities which differ in their wage levels housing costs and land values using 2006 canadian census data our metropolitan quality of life estimates are somewhat consistent with popular rankings yet find canadians care more about climate and culture quality of life is highest in victoria for anglophones montreal for francophones and vancouver for allophones and lowest in more remote cities toronto is canada s most productive city vancouver is the overall most valuable city qualite de vie productivite des entreprises et la valeur des avantages dans les diverses villes canadiennes on evalue les differences entre la qualite de vie et la productivite des entreprises entre les zones metropolitaines au canada a l aide d un cadre d analyse d equilibre general hedonique ces metriques sont basees sur l estimation de la volonte de payer de menages et d entreprises heterogenes pour se localiser dans diverses villes qui different tant pour ce qui est des niveaux de salaires des couts de l habitation et des prix des terrains a l aide des donnees du recensement canadien de 2006 on construit des evaluations de la qualite de vie des diverses zones metropolitaines qui s arriment convenablement aux ordonnancements en vogue mais on decouvre que les canadiens portent une attention particuliere au climat et a la culture la qualite de vie est la plus elevee a victoria pour les anglophones a montreal pour les francophones et a vancouver pour les allophones et la plus faible pour les villes eloignees des grands centres toronto est la ville la plus productive vancouver est generalement la plus appreciee

the making of a hot product a signaling explanation of marketers scarcity strategy every marketer s dream is to create a hot product that customers would absolutely want to have thus generating considerable profit to the marketer according to one school of thought marketers should make products hard to get in order to create really hot products in this paper using a game theoretic model we investigate if such scarcity strategies can indeed be optimal while a scarcity strategy may appear to be a viable approach for making a firm s product successful further analysis raises some puzzling issues in particular it is not clear why a firm would not increase its price to get demand and supply in sync and increase its profit in the process we therefore offer a signaling explanation for the optimality of such strategies and show that a high quality seller may optimally choose to make the product scarce in order to credibly signal the quality of its product to uninformed customers our analysis indicates that a high quality seller optimally employs scarcity as a signaling device in product markets that are characterized ceteris paribus by a small difference in marginal cost between high and low quality products a low reservation price for a low quality product a greater heterogeneity in reservation prices for a high quality product and a moderate number of informed consumers our results provide a rationale for the fact that scarcity strategies are usually observed for discretionary or specialty products but not for commodity products staple products or new to the world products

monopoly provision of product quality and warranties an exploration in the theory of multi dimensional screening we address the monopoly problem of designing and pricing a product line of goods distinguished by different quality and warranty levels consumers vary in their evaluations of these attributes so that the problem is one of screening it is sufficiently complex that the local approach commonly used does not work instead we use new techniques for dealing with incentive constraints between nonadjacent consumer types these techniques allow us to characterize optimal allocations that may not be monotonic in particular although the more eager types of buyer do pay higher prices and yield the monopoly higher profit they may receive lower quality or lower warranty coverage we find preference restrictions that restore monotonicity concave risk tolerance implies that warranty coverage increases in type and constant absolute risk aversion implies that quality increases in type

product quality and return policy in a supply chain under risk aversion of a supplier abstract this study aims to identify the relationship between return policy and product quality decisions in a decentralized system we consider a supply chain situation as in a retail or oem supply chain system where a buyer decides a return policy for consumers and delegates the product quality decision to a supplier we consider the supplier s different risk attitudes whether risk averse or risk neutral a penalty contract is introduced to control the supplier s hidden action conveying external failures due to returns to the supplier we show the conditions for supply chain coordination and demonstrate that product quality enhancement needs to precede a generous return policy setting in view of the prevalent business environment and current supply chain management practices moreover we indicate the optimal conditions for a generous return policy setting without quality enhancement

trading volume and cross autocorrelations in stock returns this paper finds that trading volume is a significant determinant of the lead lag patterns observed in stock returns daily and weekly returns on high volume portfolios lead returns on low volume portfolios controlling for firm size nonsynchronous trading or low volume portfolio autocorrelations cannot explain these findings these patterns arise because returns on low volume portfolios respond more slowly to information in market returns the speed of adjustment of individual stocks confirms these findings overall the results indicate that differential speed of adjustment to information is a significant source of the cross autocorrelation patterns in short horizon stock returns both academics and practitioners have long been interested in the role played by trading volume in predicting future stock returns 1 in this paper we examine the interaction between trading volume and the predictability of short horizon stock returns specifically that due to lead lag cross autocorrelations in stock returns our investigation indicates that trading volume is a significant determinant of the cross autocorrelation patterns in stock returns 2 we find that daily or weekly returns of stocks with high trading volume lead daily or weekly returns of stocks with low trading volume additional tests indicate that this effect is related to the tendency of high volume stocks to respond rapidly and low volume stocks to respond slowly to marketwide information

walrasian tâtonnement auctions on the tokyo grain exchange the tokyo grain exchange tge s itayose mechanism provides the opportunity to analyze functioning walrasian t tonnement auctions wta in 15 677 auctions conducted over 1997 1998 for corn and redbean futures contracts price formation is unexpectedly similar to that observed in continuous double auctions provisional prices and pledges are informative in contrast to behavior observed in experiments few pledges are deceptive because the traders participate repeatedly and because the auctioneer has flexibility when changing the provisional price and ending the auction both the risk of the auction ending and the more equitable dispersion of information increase depth and the speed at which information is embodied in price

the role of site and job characteristics in hedonic wage models recent economic analyses of wage rate differentials have generally used some form of hedonic framework in explaining the observed wage structure while these studies have adopted this common theoretical justification the models have been used to serve two distinct objectives the first of these is an empirical test of the theory of equalizing differences originally introduced by adam smith in such applications see brown 7 lucas 26 olson 28 thaler and rosen 36 and viscusi 40 as examples specific job characteristics measured with technical information or with worker perceptions have been used to explain differences in wage rates across individuals and jobs while there are a number of these studies there has not been a consistent pattern of support for the theory indeed with the exception of job risks many characteristics that a priori would be expected to lead to equalizing differences have often exhibited incorrect and or statistically insignificant measured effects on wages the second use for wage models has been as the basis for an index of the quality of life in urban areas in this framework households are assumed to select residential locations so as to maximize their individual welfare migration between cities provides the mechanism for an equilibrium household assignment under ideal conditions the pattern of equilibrium wage rates reflects the attributes of the cities involved see hoch 20 izraeli 23 cropper lo cropper and arriaga salinas 111 and rosen 31 as examples the purpose of this paper is to develop a model for wage rate differentials that includes both job and site characteristics and to estimate the model with a large micro data set our wage models provide estimates of a market clearing envelope which includes each of two types of past analyses as a

friction in the trading process and the estimation of systematic risk abstract this paper considers how estimates of the market model beta parameter can be biased by friction in the trading process information decision and transaction costs that a leads to a distinction between observed and true returns b causes observed returns to be generated asynchronously for a set of interdependent securities and c thereby introduces serial cross correlation into security returns several propositions are derived from which consistent estimators of beta are obtained and the effect of differencing interval length on beta estimates is specified the formulation is contrasted with the related analyses of scholes williams 1977 and dimson 1979

order consolidation price efficiency and extreme liquidity shocks we show that the consolidation of orders is important for producing efficient prices especially during times of high liquidity demand the nyse s centralized opening call market performs better than nasdaq s decentralized opening process on typical trading days the nyse is much better than nasdaq on witching days when index arbitrage activity subjects s p 500 stocks to large predictable and mostly informationless order flow around quarterly futures contract expirations nasdaq opening price efficiency improves to nyse levels once nasdaq initiates a consolidated opening call in november 2004 but prices on the decentralized nasdaq remain less efficient at other times of day

the switch from continuous to call auction trading in response to a large intraday price movement some european exchanges e g euronext frankfurt and madrid make use of a mechanism to moderate price volatility that was proposed by madhavan 1992 as preferable to a trading halt in times of market stress it consists of a temporary switch from continuous to call auction trading in an individual security whenever its price moves beyond predetermined limits this article studies whether this mechanism sharpens the information content of prices dampens volatility and normalizes trading volume and intensity taking intraday data for the madrid order driven continuous market i find post switch improvements in the information content of prices and reductions in volatility especially for thinly traded stocks trading volume and intensity peaked around auctions but soon returned to preevent levels

information disclosure and price manipulation during the pre closing session evidence from an order driven market on 20 february 2012 the taiwan stock exchange corporation launched an order matching simulation mechanism for five minutes during the start of the pre closing session in order to increase information disclosure during this period 13 25 13 30 pre closing information disclosure significantly reduces both trading costs and closing price volatility as well as price manipulation the decrease in price manipulation found in this work is due to pre closing information disclosure not the behaviour of investors shifting to an earlier time further if a stock price rises or falls by more than 3 5 in the simulation in the last minute during the closing session trading of the stock will be suspended for two minutes from 13 31 to reduce volatility however this trading mechanism suspended closing does not seem to have achieved the intended goals of the authorities as it has not been able to significantly reduce closing price volatility and price manipulation

incentive schemes as a signaling device abstract this paper considers a model of moral hazard where the principal has private information for instance in an organizational setting the firm may be better informed about the profitability of a sales area for which it seeks to employ a new sales representative we show how this information asymmetry may lead to a game of signaling which can mute incentives

union membership in the united states 1973 1981 this paper reports estimates of union membership gathered from may current population surveys from 1973 to 1981 the authors present data by occupation industry selected states and smsas race gender and educational attainment the paper both extends and differs from that by freeman and medoff which presents unionism estimates for the private sector for 1968 75 to facilitate longitudinal analysis this paper reports three year moving averages of occupational and industry data and annual estimates of demographic classifications the data include public sector as well as private sector workers and they exclude workers not covered by the national labor relations act also the authors provide only union membership estimates not estimates on workers covered by union contracts this paper suggests that the percentage of all workers that are unionized in the united states remained fairly constant over the 1973 81 period

an integrated product returns model with logistics and marketing coordination we develop an integrated approach for analyzing logistics and marketing decisions within the context of designing an optimal returns system for a retailer servicing two distinct market segments at the operational level we show that the optimal refund price is not unique moreover it is such that if both market segments return a purchased product then neither segment will receive a full money back refund and it is such that if one or both segments do not return a purchased product then a refund premium over the purchase price is possible but the refund premium will not be enough to offset a customer s total net cost of purchase and return we also show that any improvement to the returns system that results in increased logistical efficiency or marketing effectiveness will be accompanied by an increase in the selling price of the product at the strategic level we show that if the retailer does not coordinate its logistics and marketing efforts to improve the overall returns system then it will tend to over invest in one of the functions and under invest in the other finally we illustrate how our model can be generalized to the case in which a customer s ex post valuation of the product falls along a continuum

voluntary quality disclosure and market interaction marketers disclose quality information directly to potential consumers using a variety of communication channels this study investigates how competition may influence duopoly firms incentive to voluntarily reveal quality information we show that firms in competitive markets reveal less information than a monopoly firm in addition sequential disclosure leads to asymmetric equilibrium disclosure behavior the disclosure leader reveals unambiguously less information than in the simultaneous disclosure case whereas the follower ex ante reveals less more private information than that released by the leader or by the firms in the simultaneous case when the disclosure cost is sufficiently low high we also examine the equilibrium firm profits and social welfare we demonstrate that there may be a u shaped relationship between equilibrium monopoly profits or social welfare under both monopoly and duopoly and the disclosure cost moreover in comparison to the simultaneous disclosure case sequential disclosure can lead to increasingly softened competition improving both firm profitability and social welfare

the impact of site characteristics on housing cost estimates abstract hedonic housing regressions using micro data for owners and renters from the 1972 1973 consumer expenditure survey are presented by including tract characteristics and public goods in these regressions evidence is presented which indicates sensitivity of the physical housing variable coefficients to the choice of included site related characteristics furthermore omission of public good variables can result in misleading and possibly perverse coefficients on access intermetropolitan housing cost estimates however are shown to be relatively insensitive to the choice of site related characteristics

estimating and adjusting for the intervalling effect bias in beta the concept of beta as the measure of systematic risk has been widely accepted in the academic and financial community increasingly betas are being used to estimate the cost of capital for corporations despite this however biases are generally present in ordinary least squares ols estimates of beta in particular empirical estimates of beta are affected by friction in the trading process which delays the adjustment of a security s price to informational change and hence leads to an intervalling effect bias in this paper we present and empirically test two procedures for correcting this bias the first is to estimate the asymptotic value that ols beta approaches as the differencing interval is lengthened without bound the second procedure is to infer the value of beta by adjusting ols beta for cross sectional differences in the intervalling effect as a function of the depth of the market for a security as measured by its value of shares outstanding our results suggest that a substantial correction is needed to get true beta estimates from short differencing interval data

optimal land development with endogenous environmental amenities a spatially explicit model of the optimal timing and location of land development is presented that incorporates dynamic interactions between land development and water quality ignoring two way interactions leads to a lower level of water quality more development and lower social welfare the optimal pace and pattern of development can be achieved through the assessment of an impact fee that internalizes pollution damages and irreversibility costs our results demonstrate the importance of accounting for the spatial dimension of land use the interdependence between land use and environmental quality and development irreversibility in models of urbanization and amenity driven growth copyright 2008 oxford university press

new estimates of climate demand evidence from location choice abstract we develop and apply to census data a new method for estimating climate demand the method is useful for ranking quality of life based upon a willingness to pay criterion our two major findings are that the willingness to pay quality of life index is correlated with the hedonic approach s ranking but that the migration approach generates much larger estimates of willingness to pay for a more moderate climate this finding is relevant for evaluating the economic impact of global warming

opening and closing the market evidence from the london stock exchange we investigate the performance of call markets at the open and close using a unique natural experiment provided by the london stock exchange where traders can choose between a call and an off exchange dealership system although the call market dominates dealers in terms of price discovery it suffers from a high failure rate to open and close trading especially when trading conditions are difficult the call s trading costs increase with asymmetric information slow trading order flow imbalances and uncertainty traders resort to use of call auctions is negatively correlated with firm size implying that the call may not be the optimal method for opening and closing trading of medium and small sized stocks

new estimates of quality of life in urban areas implicit markets capture compensation for intraurban and interregional differe nces in amenities and yield differences in housing prices and wages these pecuniary differences become preference based weights in a qual ity of life index hedonic equations are estimated using microdata fr om the 1980 census and assembled county based amenity data on climati c environmental and urban conditions ranking of 253 urban counties reveals substantial variation within as well as among the 185 urba n areas the quality of life differences across counties within one s msa is almost one half of the difference between the top and bottom ranked counties in the nation copyright 1988 by american economic association

wages rents and the quality of life this study focuses on the role of wages and rents in allocating workers to locations with various quantities of amenities the theory demonstrates that if the amenity is also productive then the sign of the wage gradient is unclear while the rent gradient is positive the theory is extended to include the housing market and nontraded goods these extensions require little modification of the conclusion the empirical work on wages shows that the regional wage differences can be explained largely by these local attributes with the use of site price data implicit prices are estimated and quality of life rankings for the cities are computed

regulatory and legal pressures and the costs of nasdaq trading the nasdaq market came under intense pressure from regulators and class action lawsuits following allegations of tacit collusion by christie and schultz 1994 this article examines the changes in transaction costs on the nasdaq from january 1993 through june 1996 using 16 million trades in 30 stocks effective spreads cannot be matched however the autocovariance spread estimator of roll 1984 works well with intraday data over this period this spread estimator reveals that trading costs declined significantly for 29 of the 30 stocks over 1993 96 article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

price discovery in auction markets a look inside the black box opening mechanisms play a crucial role in information aggregation following the overnight nontrading period this article examines the process of price discovery at the new yorkstockexchange single price opening auction we develop a theoretical model to explain the determinants of the opening price and test the model using order level data we show that the presence of designated dealers facilitates price discovery relative to a fully automated call auction market this is consistent with specialists extracting information from observing the evolution of the limit order book in addition the specialist s opening trade reflects noninformational factors such as price stabilization requirements

market microstructure and securities values evidence from the tel aviv stock exchange abstract this paper examines the value effects of improvements in the trading mechanism selected stocks on the tel aviv stock exchange were transferred gradually from a daily call auction to a mechanism where the call auction was followed by iterated continuous trading sessions this event was associated with a positive and permanent price appreciation the cumulative average market adjusted return over a period that started five days prior to the announcement and ended 30 days after the stocks started trading by the new method was approximately 5 5 in addition we find positive liquidity externalities spillovers across related stocks and improvements in the value discovery process due to the improved trading method finally there was a positive association between liquidity gains and price appreciation

advertising and quality in the u s market for automobiles using data consisting of domestic and foreign automobiles over the period 1985 1990 the hypothesis that advertising serves as a signal of higher quality is empirically tested this is accomplished by examining how advertising levels vary with a quality measure that is not observable at the time of purchase but becomes available subsequent to a model s release above average quality results in expenditures that are 15 higher than average quality outlays lending further support to the signalling hypothesis the positive advertising quality relationship holds strongest when a model significantly improves in quality relative to the previous year s model

promotions and product pricing parsimony versus veblenesque demand the veracity of the parsimonious law of demand has long been challenged by analyses of the veblen effect and prestige pricing backward bending demand curves often attend discussions of conspicuous consumption probing the sociological and psychological intricacies of potential consumer interdependencies scholars in economics and marketing have overlooked mundane product promotions for a monopolistic firm we formalize the relationship between the optimal price quantity combination and the thoroughness of product promotions iterating toward the profit maximizing thoroughness of product promotion gives rise to a backward bending price quantity locus challenges to the law of demand that ignore product promotions are thereby undercut

how does the call market method affect price efficiency evidence from the singapore stock market abstract on august 21 2000 the singapore exchange sgx adopted the call market method to open and close the market while the remainder of the day s trading continued to rely on the continuous auction method the call method significantly improved the price discovery process and market quality a positive spillover effect is observed from the opening and closing calls day end price manipulation also declined after the introduction of the call market method however the beneficial impact from the call market method is asymmetric benefiting liquid stocks more than illiquid stocks

market quality changes in the london stock market this paper examines the impact that the introduction of a closing call auction had on market quality at the london stock exchange using estimates from the partial adjustment with noise model of amihud and mendelson amihud y mendelson h 1987 trading mechanisms and stock returns an empirical investigation journal of finance 42 533 553 we show that opening and closing market quality improved for participating stocks when we stratify our sample securities into five groups based on trading activity we find that the least active securities experience the greatest improvements to market quality a control sample of stocks are not characterized by discernable changes to market quality

product risk sharing by warranties in a monopoly market with risk averse consumers abstract this paper analyzes the implications of three different warranty rules in a monopoly setting with risk averse consumers the necessary condition for the existence of the market is independent of the risk sharing arrangement although the quantity consumed is the highest if the consumer receives no warranty even if the monopolist is constrained to marginal cost pricing the replacement warranty is most efficient from a risk allocation point of view however the situation with no warranty is pareto superior to a money back warranty additionally the producer and the consumers agree on the ranking of the warranty rules

effects of market reform on the trading costs and depths of nasdaq stocks the relative merits of dealer versus auction markets have been a subject of significant and sometimes contentious debate on january 20 1997 the securities and exchange commission began implementing reforms that would permit the public to compete directly with nasdaq dealers by submitting binding limit orders additionally superior quotes placed by nasdaq dealers in private trading venues began to be displayed in the nasdaq market we measure the impact of these new rules on various measures of performance including trading costs and depths our results indicate that quoted and effective spreads fell dramatically without adversely affecting market quality

wages rents and amenities differences among workers and regions what explains persistent regional earnings differences this paper argues that regional differences in amenities can account for the wage differences in contrast cost of living variations do not account for wage differences but actually exacerbate them this conclusion results from a model in which variations in rents and wages are equalizing differences for amenity differences empirical results are consistent with the model

price and advertising signals of product quality we present a signaling model based on ideas of phillip nelson in which both the introductory price and the level of directly uninformative advertising or other dissipative marketing expenditures are choice variables and may be used as signals for the initially unobservable quality of a newly introduced experience good repeat purchases play a crucial role in our model a second focus of the paper is on illustrating an approach to refining the set of equilibria in signalling games with multiple potential signals

signaling new product reliability with after sales service contracts prior studies on performance based contracting pbc for after sales services have highlighted its advantages over traditional resource based contracting rbc when products are established and their reliability is known to all parties we develop a game theoretic model to investigate how these insights are affected when the vendor is privately informed about the reliability of a newly developed product a novel feature of our model is the interaction between reliability signaling private information and the vendor s discretionary investment in spares inventory private action which arises naturally in the setting we consider we find that this interaction leads to contrasting equilibrium outcomes under the two contracts rbc induces the vendor to focus on inventory savings leading to underinvestment in spares whereas pbc induces the vendor to focus on reliability signaling achieved through overinvestment in inventory as a result neither contract is efficient we investigate two means to mitigate this inefficiency but either approach has caveats a making inventory verifiable removes the trade off between reliability signaling and inventory investment but results in diverging contract preferences between the vendor and the buyer b pooling inventories across multiple buyers saves inventory costs but it also hinders reliability signaling potentially exacerbating inefficiency this paper was accepted by yossi aviv operations management

continuous trading or call auctions revealed preferences of investors at the tel aviv stock exchange we use the move of israeli stocks from call auction trading to continuous trading to show that investors have a preference for stocks that trade continuously when large stocks move from call auction to continuous trading the small stocks that still trade by call auction experience a significant loss in volume relative to the overall market volume as small stocks move to continuous trading they experience an increase in volume and positive abnormal returns because of the associated increase in liquidity overall though a move to continuous trading increases the volume of large stocks relative to small stocks

warranties durability and maintenance two sided moral hazard in a continuous time model double moral hazard in continuous time generates the familiar warranty pattern with full coverage for an initial block of time the more complete the warranty the better the producer s durability incentives and the worse the consumer s maintenance incentives using continuous time highlights the need for some warranty bound to avoid reaching the first best as an unreasonable limit early in the paper an exogenous bound is used while later the bound arises endogenously from the possibility of abuse and repair a quadratic example shows that the warranty s duration depends on the relative severity of the two moral hazard problems

ex ante investment ex post remedy and product liability low quality products may cause consumer harm a firm can reduce the probability of low quality through ex ante investment before sales and can take remedy actions such as product recalls if it learns after sales that product quality is low an increase in the firm s product liability increases its incentive for ex post remedy more ex post remedy however may reduce the firm s ex ante quality investment on the other hand higher product liability increases consumer demand for the product resulting in high output and hence greater return to ex ante investment the trade off between these two effects the substitution effect and the output effect can lead to an inverted u shaped relationship between ex ante investment and product liability we find that the firm always prefers full liability whereas consumers might be better off with less than full liability full product liability tends to be socially optimal when the potential consumer loss from low quality is sufficiently high otherwise partial liability can be socially optimal

product warranties and double moral hazard this article explores a model of warranties in which moral hazard problems play a key role the goal is to understand the important characteristics of warranties including their provision of incomplete insurance and the relationship between product quality and coverage we analyze a model in which buyers and sellers take actions that affect a product s performance since these actions are not cooperatively determined an incentives problem arises we characterize the optimal warranty contract and undertake comparative statics to determine the predicted correlation of warranty coverage and product quality

competition and confidentiality signaling quality in a duopoly when there is universal private information abstract we model non cooperative signaling by two firms that compete over a continuum of consumers assuming each consumer has private information about the intensity of her preferences for the firms respective products and each firm has private information about its own product s quality we characterize a symmetric separating equilibrium in which each firm s price reveals its respective product quality we show that the equilibrium prices the difference between those prices the associated outputs and profits are all increasing functions of the ex ante probability of high safety if horizontal product differentiation is sufficiently great then equilibrium prices and profits are higher under incomplete information about quality than if quality were commonly known thus while signaling imposes a distortionary loss on a monopolist using price to signal quality duopolists may benefit from the distortion as it can reduce competition finally average quality is lower since signaling quality redistributes demand towards low quality firms

adverse selection and convertible bonds informational asymmetries between a firm and investors may lead to adverse selection in capital markets this paper demonstrates that when the market obtains noisy information about a firm over time this adverse selection problem can be costlessly solved by issuing callable convertible bonds with restrictive call provisions such securities can be designed to make the payoff to new claimholders independent of the private information of the manager this eliminates the possibility of any dilution of equity or underinvestment and implements the symmetric information outcome in either a pooling or a separating equilibrium the same first best efficient outcome can also be implemented by issuing floating price and mandatory convertibles

warranties as signals under consumer moral hazard this article examines the use of prices and warranties as signals of product quality to consumers who choose how to maintain their purchases the seller s incentives are strongly affected by the interaction of quality and maintenance in determining product reliability two different assumptions about this interaction are made a separating equilibrium in which high quality is signalled with a low warranty and low price is shown to be possible in both cases

do traders strategically time their pledges during real world walrasian auctions abstract experimental research suggests the walrasian t tonnement auction encourages traders to under reveal preferences even encouraging initial pledges contrary to true desires because pledges are not binding we analyze the timing and characteristics of individual pledges and trades during 9604 auctions for redbeans conducted by the tokyo grain exchange we find no evidence of contrarian pledging and little evidence of under revelation as many traders over reveal as under reveal most traders pledge seriously from the beginning despite the considerable heterogeneity in pledging behavior across individual traders these differences appear to have no relationship with traders profits nor do they appear to affect the achievement of equilibrium

voluntary product safety certification this paper describes the incentives for firms to seek voluntary product safety certifications we consider a firm that makes the decision of whether or not to seek certification prior to selling the product we show that even when the firm and the consumers have the same beliefs about the product s safety there are incentives for the firm to seek safety certification the main analysis investigates the role of consumer moral hazard and shows that it can lead to greater incentives for voluntary certification when inherent product safety and effort are substitutes but smaller incentives when they are complements the analysis of consumer moral hazard provides a nuanced perspective on the so called risk compensation or the peltzman effect phenomenon which postulates higher levels of accidents for safer products in our paper products that are successfully certified can end up with a higher incidence of accidents we also uncover an interesting nonmonotonic relationship between effectiveness of consumer

a closing call s impact on market quality at euronext paris abstract the paris bourse currently euronext paris refined its trading system to include electronic call auctions at market closings in 1996 for its less liquid continuous b stocks and in 1998 for its more actively traded continuous a stocks this paper analyzes the effects of the innovation on market quality our empirical analysis of price behavior for two samples of firms 50 b stocks and 50 a stocks for two different calendar dates 1996 and 1998 indicates that introduction of the closing calls has lowered execution costs for individual participants and sharpened price discovery for the broad market we further observe that market quality is improved at market openings albeit to a lesser extent we suggest that a positive spillover effect explains the closing call s more pervasive impact

optimal sales contracts with withdrawal rights we introduce ex post participation constraints in the standard sequential screening model this captures the presence of consumer withdrawal rights as for instance mandated by european union regulation of distance sales contracts with such additional constraints the optimal contract is static and unlike with only ex ante participation constraints does not elicit the agent s information sequentially this holds whenever differences in ex ante and ex post outside options are below a positive upper bound welfare effects of mandatory withdrawal rights are ambiguous since it is insufficient in our setting to consider only local incentive constraints we develop a novel technique to identify the relevant global constraints

search bargaining and signalling in the market for legal services over the last eight centuries lawyers in common law countries have generally been precluded from buying their clients cases recently a number of economists and lawyers have argued that sale should be allowed so as to eliminate moral hazard particularly when contingent fees are used this argument is based on full information reasoning however if the lawyer has private information about the case value then compensation demands potentially signal this value when the client can search over lawyers we provide a formal model and a family of computational examples that show that allowing possibly partial purchase can reduce expected social efficiency

monotone equilibria in signaling games abstract we examine the monotonicity of the sender s equilibrium strategy with respect to her type in signaling games we show that when the sender s return from the receiver s action depends on her type the spence mirrlees condition cannot rule out equilibria in which a higher type sender chooses a strictly lower action than a lower type we provide sufficient conditions under which all equilibria are monotone which require that the sender s payoff is decreasing in her action is increasing in the receiver s action and has strictly increasing differences between her type and the action profile we apply our sufficient conditions to education signaling advertising and warranty provision