portfolio selection with capital gains tax recursive utility and regime switching capital gains taxation has important implications for investors portfolio choice decisions to explore these implications we develop a continuous time investment and consumption model with capital gains tax epstein zin recursive utility and regime switching we find that various factors such as tax rate risk aversion interest rate stock return and volatility jointly affect optimal portfolio allocation whereas intertemporal substitution does not in a regime switching market investors may trade or stop trading purely because of a change in regime and there is a distinct cross regime effect on optimal portfolio allocation in particular investors tend to raise stock investment in a bear regime so as to reduce potential tax payments upon regime switching given reasonable parameter values regime switching has a greater impact on optimal portfolio allocation in a bear regime than in a bull regime this paper was accepted by neng wang finance

durable goods monopoly learning by doing and the coase conjecture abstract the coase conjecture states that if a durable goods monopolist can make offers to sell arbitrarily frequently then in equilibrium she will charge the competitive price and the market will be saturated quickly this conjecture is shown to be refuted when production of the durable good is subject to learning by doing for the linear case it is shown that there exist a stationary strategy perfect equilibrium in which the monopolist charges competitive prices but the market is saturated slowly an interesting analogy between bargaining and durable goods monopoly with learning by doing is also pointed out

the use of replacement workers in union contract negotiations the u s experience 1980 1989 it is argued in many circles that a structural change occurred in u s collective bargaining in the 1980s strike incidence declined dispute incidence increased and the composition of disputes shifted away from strikes and toward holdouts we investigate the extent to which the hiring of replacement workers can account for these changes for a sample of over 300 major strikes since 1980 we estimate the likelihood of replacements being hired we find that the risk of replacement is lower for bargaining units with more experienced workers and declines during tight labor markets the composition of disputes shifts away from strikes as the predicted risk of replacement increases in addition the overall level of disputes increases as a result of the shift in the composition of disputes based on our estimates reducing the predicted replacement risk faced by bargaining units to the pre 1982 levels would have lead to a reduction in the dispute incidence by around 5 percentage points an increase in the fraction of disputes involving a strike by around 4 percentage points and an increase in the strike incidence by around 0 8 percentage points

bargaining and waiting until recently the final word on bargaining with full information had been rubinstein s 1982 seminal work which concluded that an agreement will be reached immediately and the first mover will have the advantageous share rubinstein s model was one of alternating offers made at fixed time intervals many variations of the model have emerged and until recently they mainly focus on asymmetric information with some having the uninformed agent making all the offers the conclusion from examining these variations is that the equilibrium is highly sensitive to the exact specification of the institutional structure in more recent work perry and reny 1990 perry and reny 1993 sakavics 1993 and nickerson sadanand and sadanand 1994 endogenize the structure of the bargaining by allowing the order and timing of play to be determined endogenously the first three papers endogenous structure models deal with the full information setting and the last is an asymmetric information model 2 in addition to the exogenously given minimum reaction time for responding to offers made by the other player the endogenous structure models introduce the important innovation of an exogenous waiting time a time between a player s offer and his next offer they also allow players to make simultaneous offers which sakovics later disallows the findings in this recent literature are rather startling i the waiting time has a profound impact the longer the time the greater the share the player can command 3 ii the consequence of simultaneous offers is multiple equilibria when the reaction time is zero a continuum of shares lying between the two unique rubinstein shares can result and additional continua of shares arise with delayed agreement when the reaction times are positive iii equilibrium paths are almost exclusively characterized by simultaneous offers in this paper we examine the question of simultaneous offers and reconcile the conflict between the infrequency of simultaneous offers in real life bargaining and their prevalence in the endogenous structure models we

dynamic adverse selection and the supply size in this paper we examine the problem of dynamic adverse selection in a stylized market where the quality of goods is a seller s private information while the realized distribution of qualities is public information we obtain that full trade occurs in every dynamic competitive equilibrium moreover we show that if prices can be conditioned on the supply size then a dynamic competitive equilibrium always exists while it fails to exist if prices cannot be conditioned on the supply size and the frequency of exchanges is high enough we conclude that the possibility to condition prices on the supply size allows us to reach efficiency in the limit for exchanges becoming more and more frequent while otherwise the welfare loss due to delays of exchanges remains bounded away from zero

foundations of dynamic monopoly and the coase conjecture subgame perfect equilibria are characterized for a market in which the seller quotes a price each period assume zero costs positive interest rate continuum of buyers and some technical conditions if buyers valuations are positive then equilibrium is unique buyers strategies are stationary and the price sequence is determinant along the equilibrium path but possibly randomized elsewhere otherwise a continuum of stationary equilibria can exist but at most one with analytic strategies coase s conjecture is verified for stationary strategies reducing the period length drives all prices to zero or the least valuation connections to bargaining models are described journal qf economic literature classification

credit risk and asymmetric information a simplified approach abstract we present a simple model for risky corporate debt debtholders and equityholders have incomplete information about the financial state of the debt issuing company information is incomplete because it is delayed for all agents and it is asymmetrically distributed between debtholders and equityholders we solve for the equityholders optimal default policy and for the credit spreads required by debtholders delayed information accelerates the equityholders optimal decision to default interestingly this effect is small implying only a small impact on credit spreads asymmetric information however has a major impact on credit spreads our model predicts high credit spreads for short term debt as observed empirically in credit markets

expected shortfall and beyond financial institutions have to allocate so called economic capital in order to guarantee solvency to their clients and counterparties mathematically speaking any methodology of allocating capital is a risk measure i e a function mapping random variables to the real numbers nowadays value at risk var which is defined as a fixed level quantile of the random variable under consideration is the most popular risk measure unfortunately it fails to reward diversification as it is not subadditive in the search for a suitable alternative to var expected shortfall es or conditional var or tail var has been characterized as the smallest coherent and law invariant risk measure to dominate var we discuss these and some other properties of es as well as its generalization to a class of coherent risk measures which can incorporate higher moment effects moreover we suggest a general method on how to attribute es risk contributions to portfolio components

the principle of convergence in wartime negotiations if war results from disagreement about relative strength then it ends when opponents learn enough about each other learning occurs when information is revealed by strategically manipulable negotiation behavior and nonmanipulable battlefield outcomes i present a model of simultaneous bargaining and fighting where both players can make offers and asymmetric information exists about the distribution of power in the markov perfect sequential equilibrium making and rejecting offers has informational value that outweighs the one provided by the battlefield however states use both sources of information to learn and settle before military victory the principle of convergence posits that warfare ceases to be useful when it loses its informational content and that belief in defeat victory is not necessary to terminate initiate hostilities thus the standard puzzle in international relations that seeks to account for prewar optimism on both sides may not be that relevant

public vs private offers in the market for lemons we study the role of observability in bargaining with correlated values short run buyers sequentially submit offers to one seller when previous offers are observable bargaining is likely to end up in an impasse in contrast when offers are hidden agreement is always reached although with delay

uncertainty about uncertainty and delay in bargaining we study a one sided offers bargaining game in which the buyer has private information about the value of the object and the seller has private information about his beliefs about the buyer s valuation we show that this uncertainty about uncertainties dramatically changes the set of outcomes in particular second order beliefs can lead to a delay in reaching agreement even when the seller makes frequent offers we show that not all types of second order beliefs lead to a delay when the buyer assigns positive probability to the seller knowing the buyer s value then delay not only can occur but it must occur for a class of equilibria however in all other cases delay will never occur

financial expertise as an arms race we show that firms intermediating trade have incentives to overinvest in financial expertise in our model expertise improves firms ability to estimate value when trading a security expertise creates asymmetric information which under normal circumstances works to the advantage of the expert as it deters opportunistic bargaining by counterparties this advantage is neutralized in equilibrium however by offsetting investments by competitors moreover when volatility rises the adverse selection created by expertise triggers breakdowns in liquidity destroying gains to trade and thus the benefits that firms hope to gain through high levels of expertise

the timing of out of court settlements parties to a lawsuit will frequently delay litigation even in circumstances where a voluntary agreement is eventually reached this article is concerned with what causes legal disputes to be prolonged over time we discuss dynamic models of litigation to illustrate how changes in the bargaining environment might generate empirical hazard functions comparative statics results are then corroborated with empirical estimates of a hazard function adjusted to account for both the heterogeneity of lawsuits and the nonproportional time dependence suggested by theory

dealer price discrimination in new car purchases evidence from the consumer expenditure survey this paper documents the variation in dealer discounts for new cars using transactions price data from the consumer expenditure survey consumer specific characteristics fail to explain dealer discounts whereas model market specific and purchase transaction variables e g first time purchase trade in and financing through dealer do explain them the results contradict earlier findings of race and gender discrimination based on a controlled experiment this contradiction is reconciled by examining the higher moments of the empirical discount distribution while mean and median markups do not vary by race and gender minority purchases are characterized by higher dispersion this may rationalize the disparate treatment of minorities by dealers documented in the controlled experiment

selling procedures with private information and common values the seller posted price procedure is probably the most common method for making transactions in modern economies we analyze the performance of posted pricing for transactions having significant common value elements in a model of two sided private information we characterize the fully revealing perfect equilibrium offer strategy of the seller we also characterize equilibrium behavior under two other pricing procedures a sealed bid procedure and a direct revelation mechanism finally we examine the efficiency of these procedures and show that as the degree of common values increases fewer mutually beneficial agreements are attained

optimal consumption and investment with capital gains taxes this article characterizes optimal dynamic consumption and portfolio decisions in the presence of capital gains taxes and short sale restrictions the optimal decisions are a function of the investor s age initial portfolio holdings and tax basis our results capture the trade off between the diversification benefits and tax costs of trading over an investor s lifetime the incentive to rediversify the portfolio is inversely related to the size of the embedded gain and investor s age contrary to standard financial advice the optimal equity holding increases well into an investor s lifetime in our model due to the forgiveness of capital gains taxes at death taxes play an important role in the decision making process of individuals concerning their consumption and investment plans the taxation of returns on financial assets alters the benefits of saving for future consumption and thus affects the trade off between current consumption and investment moreover the ability of investors to defer the taxation of capital gains alters the relative valuation of stocks and bonds and thus affects the optimal portfolio composition of investors the deferral feature of capital gains taxes also affects the trade off investors face regarding taxes and diversification investors would like to maintain an optimally diversified portfolio over time

common failings how corporate defaults are correlated we test the doubly stochastic assumption under which firms default times are correlated only as implied by the correlation of factors determining their default intensities using data on u s corporations from 1979 to 2004 this assumption is violated in the presence of contagion or frailty unobservable explanatory variables that are correlated across firms our tests do not depend on the time series properties of default intensities the data do not support the joint hypothesis of well specified default intensities and the doubly stochastic assumption we find some evidence of default clustering exceeding that implied by the doubly stochastic model with the given intensities why do corporate defaults cluster in time several explanations have been explored first firms may be exposed to common or correlated risk factors whose co movements cause correlated changes in conditional default probabilities second the event of default by one firm may be contagious in that one such event may directly induce other corporate failures as with the collapse of penn central railway in 1970 third learning from default may generate default correlation for example to the extent that the defaults of enron and worldcom revealed accounting irregularities that could be present in other firms they may have had a direct impact on the conditional default probabilities of other firms our primary objective is to examine whether cross firm default correlation that is associated with observable factors determining conditional default probabilities the first channel on its own is sufficient to account for the degree of time clustering in defaults that we find in the data

harmonization and side payments in political cooperation for two districts or countries that try to internalize externalities i analyze a bargaining game under private information i derive conditions for when it is efficient with uniform policies across regions with and without side payments and when it is efficient to prohibit side payments in the negotiations while policy differentiation and side payments allow the policy to better reflect local conditions they create conflicts between the regions and thus delay the results also describe when political centralization outperforms decentralized cooperation and they provide a theoretical foundation for the controversial uniformity assumption traditionally used by the fiscal federalism literature

bargaining and the right to remain silent this paper analyzes a class of alternating offer bargaining games with one sided incomplete information for the case of no gap if sequential equilibria are required to satisfy the additional restrictions of stationarity monotonicity pure strategies and no free screening we establish the silence theorem when the time interval between successive periods is made sufficiently short the informed party never makes any serious offers in the play of alternating offer bargaining games a class of parametric examples suggests that the time interval required to assure silence is not especially brief as a byproduct of the analysis we also prove under the same set of assumptions a uniform version of the coase conjecture when the time interval between successive periods is made sufficiently short the initial serious offer by either party in an alternating offer bargaining game must be less than e times the highest possible buyer valuation for an entire family of distribution functions

strikes and holdouts in wage bargaining theory and data we develop a private information model of union contract negotiations in which disputes signal a firm s willingness to pay previous models have assumed that all labor disputes take the form of a strike yet a prominent feature of u s collective bargaining is the holdout negotiations often continue without a strike after the contract has expired production continues with workers paid according to the expired contract we analyze the union s decision to strike or hold out and highlight its importance to strike activity strikes are more likely to occur after a drop in the real wage or a decline in unemployment

endogenous market segmentation for lemons information asymmetry between sellers and buyers often prevents socially desirable trade this article presents a new mechanism that mitigates the inefficiencies caused by information asymmetry i consider decentralized markets under adverse selection and show that such markets can be endogenously segmented in a way that improves social welfare endogenous segmentation is driven by low quality sellers incentive to attract more buyers by separating from high quality sellers the mechanism helps us understand the roles of several real world institutions such as multiple marketplaces costless advertisements and nonbinding list prices

risk factor contributions in portfolio credit risk models abstract determining contributions to overall portfolio risk is an important topic in risk management for positions instruments and sub portfolios this problem has been well studied and a significant theory built around the calculation of marginal contributions we consider the problem of determining the contributions to portfolio risk of risk factors this cannot be addressed through an immediate extension of techniques for position contributions since the portfolio loss is a nonlinear function of the risk factors we employ the hoeffding decomposition of the portfolio loss into a sum of terms depending on the factors this decomposition restores linearity but includes terms arising from joint effects of groups of factors these cross factor terms provide information to risk managers since they can be viewed as best hedges of the portfolio loss involving instruments of increasing complexity we illustrate the technique on multi factor portfolio credit risk models where systematic factors represent industries geographical sectors etc

qualitative uncertainty in a market with bilateral trading bargaining between a single seller and a succession of potential buyers of an indivisible object is studied in this paper the seller bargains with one buyer at a time and switching buyers is costly the seller does not know the buyers reservation prices and buyers cannot observe the quality of the object if the costs of switching buyers are high there exists a signalling equilibrium in which the seller s price offer reveals the quality of the object if the costs of switching are low adverse selection occurs and the high quality seller drops out of the market

portfolio tax trading with carryover losses we study portfolio choice with multiple stocks and capital gains taxation assuming that capital losses can only offset current or future realized capital gains we show through backtesting using empirical distributions that optimal equity holdings over an extended period are significantly lower on average than benchmark holdings suggested in the literature using value and growth or small and large portfolios the backtests show that allocations remain persistently underdiversified carryover losses have large economic significance since they can dramatically shrink the no trade region finally the backtested economic cost of incorrectly modeling capital losses is at least 8 of lifetime wealth the internet appendix is available at https doi org 10 1287 mnsc 2017 2733 this paper was accepted by neng wang finance

better later than never an experiment on bargaining under adverse selection a central result in the literature on bargaining with asymmetric information is that the uninformed party buyer can screen the informed party seller over time screening eliminates trade failures that are otherwise common in the presence of adverse selection but the downside of the bargaining institution is the cost associated with repeated offers and time frictions this article reports an experimental test of these predictions we find that rates of trade are substantially higher in the bargaining institution than in control treatments in which we remove the possibility to make repeated offers take it or leave it offer or the time frictions however we also observe a persistent overdelay before agreements are reached that is bargaining takes longer than theoretically predicted this lowers efficiency below its predicted level and below the level observed in the take it or leave it offer institution we identify possible channels for overdelay in the form of fairness preferences and loss aversion concluding that there are important behavioral deviations from the standard model that are detrimental to the efficiency of bargaining under incomplete information

the dynamics of pretrial negotiation it is shown that many cases proceed to court despite ample opportunity for interaction and much of the settlement takes place on the courthouse steps the deadline effect when fixed costs of bargaining are introduced a u shaped pattern of settlement appears with a greater chance of settlement at the beginning and at the end of negotiations than in the middle these characteristics persist even as the time between offers approaches zero the theoretical predictions are consistent with the stylized facts a large proportion of the lawsuits that are settled out of court are settled very close to the trial date or in the first several days of the trial 3 although the deadline effect appears in many other settings as well it has little theoretical support 4

imperfect competition and efficiency in lemons markets this article studies the impact of competition on the degree of inefficiency in lemons markets more precisely we characterise the second best mechanism i e the optimal mechanism with private information in a stylised lemons market with finite numbers of buyers and sellers we then study the relationship between the degree of efficiency of the second best mechanism and market competitiveness a general message of our results is that increasing competition may not help lemons markets in some circumstances moreover increasing competition beyond a certain degree increases the distance between the first best and second best levels of efficiency

costly search with adverse selection solicitation curse versus acceleration blessing we analyze a dynamic trading model of adverse selection where a seller can increase the frequency of strategic price quotes a low quality seller benefits more from trade and therefore searches more intensively than a high quality seller this makes a seller s contact carry negative information but a seller s availability become a stronger indicator of high quality in the stationary environment the two effects exactly offset each other and reducing search costs is weakly beneficial to the seller in the nonstationary environment the relative strengths of the two effects vary over time and reducing search costs can be detrimental to the seller

waiting to persuade i analyze a sequential bargaining model in which players are optimistic about their bargaining power measured as the probability of making offers but learn as they play the game i show that there exists a uniquely predetermined settlement date such that in equilibrium the players always reach an agreement at that date but never reach one before it given any discount rate if the learning is sufficiently slow the players agree immediately i show that for any speed of learning the agreement is delayed arbitrarily long provided that the players are sufficiently patient therefore although excessive optimism alone cannot cause delay it can cause long delays if the players are expected to learn

the game of negotiations ordering issues and implementing agreements abstract we use a two issue bargaining model with asymmetric information to study agent choice of how to structure bargaining we uncover the settings in which different agenda structures are chosen in equilibrium how the order in which issues are bargained over matters and what impact the rules for implementing agreements have if agreements are implemented as they are reached easy issues are negotiated first and hard issues later if agreements are implemented only after all issues are settled then it is size that matters with large issues settled first all parties prefer the former rules of implementation to the latter

bargaining with durable offers and endogenous timing abstract the timing structure of a bargaining game is crucial in the static bargaining model of j nash 1953 econometrica 21 128 140 any division of the surplus is a possible equilibrium in the alternating offer model of a rubinstein 1982 econometrica 50 97 109 there is a unique subgame perfect nash equilibrium spne this paper takes a step toward endogenizing the timing of offers by expanding the strategy space to include the duration of the offer and permitting but not imposing simultaneous moves we find that virtually any division is a possible spne whenever simultaneous accept reject decisions are permitted

bargaining structure and strike activity in this paper the authors examine the nature of the relationship between bargaining structure and strike activity in particular they focus on the implications of the fact that the amount of information revealed by a union s actions depends on the bargaining environment in which it operates the authors demonstrate that a union representing workers of more than one firm will face a greater incentive to reject offers than an independent union this implies that a merger of two unions or the formation of bargaining coalitions will lead to a greater level of strike activity

sequential bargaining with correlated values the paper analyzes an infinite horizon sequential bargaining game with one sided offers between a buyer and a seller when the buyer s valuation depends on the seller s the seller knows the value of the object and the buyer does not the influence of relative discount factors on the solution is studied it is shown for example that an impasse may result if the buyer offeror is too impatient relative to the seller the buyer makes a single take it or leave it offer

deadline effects and inefficient delay in bargaining with endogenous commitment abstract bilateral sequential negotiators delay agreements until a deadline if a player that rejects an offer is subsequently committed not to accept any poorer proposal and if the common discount factor is close enough to one journal of economic literature classification numbers c7 c78 j52

analytical methods for hedging systematic credit risk with linear factor portfolios abstract multi factor credit portfolio models are used widely today for managing economic capital and pricing collateralized debt obligations cdos and asset backed securities commonly practitioners allocate capital to the portfolio components sub portfolios counterparties or transactions the hedging of credit risk is generally also focused on the deltas of underlying names we present analytical results for hedging portfolio credit risk with linear combinations of systematic factors based on the minimization of systematic variance of portfolio losses we solve these problems within a multi factor merton type credit portfolio model and apply them to hedge systematic credit default losses of loan portfolios and cdos

bargaining with endogenous information two ex ante identically informed agents play a double auction over the division of a trading surplus with endogenous information and common values this paper shows that if information acquisition is not observable three types of inefficiencies can arise if the information cost is in an intermediate range no pure strategy equilibrium with trade exists although the agents maintain symmetric information if the information cost is low any trading equilibrium exhibits costly information acquisition if the agents face asymmetric information cost the akerlof s lemons problem arises as a self fulfilling equilibrium and only partial trade occurs

strategic delay in bargaining this paper analyses a bargaining model with incomplete information in which the time between offers is an endogenous strategic variable we find equilibria involving a delay to agreement that is due to the use of strategic time delay by bargainers to signal their relative strength under some specifications of the parameters delay is present in the unique sequential equilibrium whose beliefs satisfy one intuitive restriction this delay does not vanish as the minimal time between offers becomes small

a signaling theory of consumer boycotts abstract we present a theory that explains the prevalence of consumer boycotts in our model a firm does not know how concerned consumers are about the firm s misconduct because it is only optimal for the firm to alter its behavior if consumers are very concerned consumers have an incentive to overstate their concern by boycotting the firm we show that free riding problems do not preclude such boycotting in fact in each equilibrium boycotting occurs with positive probability and the firm always caters to the demands of those who boycott should boycotting ensue

bargaining orders in a multi person bargaining game abstract this paper studies a complete information bargaining game with one buyer and multiple sellers of different sizes or bargaining strengths the bargaining order is determined endogenously with a finite horizon there is a unique subgame perfect equilibrium outcome in which the buyer purchases in order of increasing size from the smallest to the largest with an infinite horizon if the sellers have sufficiently different sizes there is a unique equilibrium outcome which has the same bargaining order if the sellers have similar sizes with an infinite horizon there may be multiple equilibrium outcomes with different bargaining orders

signalling in a dynamic labour market this paper analyzes a multiperiod version of the spence job market signalling model in which workers cannot commit to an education choice and firms make wage offers at any point in time the dynamic competition combined with the incomplete information yield a multiplicity of sequential equilibria including ones that sustain implicit collusion even though the length of the game is finite emphasis is placed on equilibria that satisfy the independence of never weak best response criterion of kohlberg and mertens 1986 it is shown that in the limit as the time between offers tends to zero any such equilibrium results in expectation in the unique stable outcome of the static spence model

bargaining with arrival of new traders we study dynamic bargaining with asymmetric information and arrival of exogenous events which represent arrival of traders or information we char acterize the unique limit of stationary equilibria with frequent offers the possi bility of arrivals changes equilibrium dynamics there is delay in equilibrium and the seller slowly screens out buyers with higher valuations the seller pay off equals what he can achieve by simply awaiting an arrival in applications when buyer valuations fall average prices drop and delay increases surplus division depends on relative arrival rates of buyers sellers and expected time to trade is a nonmonotonic function of the arrival rate

bargaining and sharing innovative knowledge we consider the problem of bargaining over the disclosure of interimresearch knowledge between two participants in an r d race for an ultimate patentable invention licence fee schedules that are functions of the amount of knowledge disclosed by the leading to the laggingagent are examined for their abilities to attain efficient outcomes andvarying shares of the surplus arising from disclosure in hersequential offers bargaining games the uninformed buyer is able to elicitfull disclosures without sharing the incremental surplus with any type ofthe licensor and thus do as well as a perfectly informed and discriminatingknowledge licensee

optimal capital structure and bankruptcy choice dynamic bargaining versus liquidation abstract we model a firm s optimal capital structure decision in a framework in which it may later choose to enter either chapter 11 reorganization or chapter 7 liquidation creditors anticipate equityholders ex post reorganization incentives and price them into the ex ante credit spreads using a realistic dynamic bargaining model of reorganization we show that the off equilibrium threat of costly renegotiation can lead to lower leverage even with liquidation in equilibrium if reorganization is less efficient than liquidation the added option of reorganization can actually make equityholders worse off ex ante even when they liquidate on the equilibrium path

strategic delay in bargaining with two sided uncertainty the role of strategic delay is analyzed in an infinite horizon alternating offer model of bargaining a buyer and seller are engaged in the trade of a single object both bargainers have private information about their own preferences and are impatient in that delaying agreement is costly an equilibrium is constructed in which the bargainers signal the strength of their bargaining positions by delaying prior to making an offer a bargainer expecting large gains from trade is more impatient than one expecting small gains and hence makes concessions earlier on trade occurs whever gains from trade exist but due to the private information only after costly delay panmunjom korea upi the american general and the north korean general glared at each other across the table and the only sound was the wind howling across the barren hills outside their hut maj gen james b knapp negotiator for the united nations command unc was waiting for maj gen ri choonsun of the democratic people s republic of north korea to propose a recess they sat there arms folded for 42 hours not a word finally gen ri got up walked out and drove away evening bulletin philadelphia 11 april 1969

dynamic bargaining with transaction costs a buyer and seller alternate making offers until an offer is accepted or someone terminates negotiations the seller s valuation is common knowledge but the buyer s valuation is known only by the buyer impatience to reach an agreement comes from two sources the traders discount future payoffs and there are transaction costs of bargaining equilibrium behavior involves either immediate trade delayed trade or immediate termination depending on the size of the gains from trade and the relative bargaining costs this contrasts with the pure discounting model where termination never occurs and the pure transaction cost model where delayed trade never occurs

bargaining with incomplete information an infinite horizon model with two sided uncertainty the resolution of any bargaining conflict depends crucially on the relative urgency of the agents to reach agreement and the information each agent has about the others preferences this paper explores within the context of an infinite horizon bargaining model with two sided uncertainty how timing and information affect the rational behaviour of agents when commitment is not possible since the bargainers are uncertain about whether trade is desirable they must communicate some of their private information before an agreement can be reached this need for learning due to incomplete information about preferences results in bargaining inefficiencies trade often occurs after costly delay thus the model provides an explanation for the inefficient bargaining behaviour that appears to occur often in practice

calibration of the default probability model abstract in this paper we study the calibration problem for the merton vasicek default probability model robert merton on the pricing of corporate debt the risk structure of interest rate journal of finance 29 1974 449 470 we derive conditions that guarantee existence and uniqueness of the solution using analytical properties of the model we propose a fast calibration procedure for the conditional default probability model in the integrated market and credit risk framework our solution allows one to avoid numerical integration problems as well as problems related to the numerical solution of the nonlinear equations

portfolio investment with the exact tax basis via nonlinear programming computing the optimal portfolio policy of an investor facing capital gains tax is a challenging problem because the tax to be paid depends on the price at which the security was purchased the tax basis the optimal policy is path dependent and the size of the problem grows exponentially with the number of time periods dammon et al 2001 2002 2004 garlappi et al 2001 and gallmeyer et al 2001 address this problem byapproximating the exact tax basis by the weighted average purchase price our contribution is threefold first we show that the structure of the problem has several attractive features that can be exploited to determine the optimal portfolio policy using theexact tax basis via nonlinear programming second we characterize the optimal portfolio policy in the presence of capital gains tax when using theexact tax basis third we show that the certainty equivalent loss from using the average tax basis instead of the exact basis is very small it is typically less than 1 for problems with up to 10 periods and this result is robust to the choice of parameter values and to the presence of transaction costs dividends intermediate consumption labor income tax reset provision at death and wash sale constraints

selling a lemon under demand uncertainty we consider a seller who has private information about the quality of her good but is uncertain about buyer arrivals assuming that the high quality seller insists on a price we show that the low quality seller s surplus and pricing strategy crucially depend on buyers knowledge about the demand state if they are also uncertain about demand then demand uncertainty increases the low quality seller s expected payoff and her optimal strategy is to lower the price after some time if buyers know the demand state then demand uncertainty does not affect the low quality seller s payoff but she must employ a sophisticated pricing strategy

search with adverse selection this paper analyzes a sequential search model with adverse selection we study information aggregation by the price how close the equilibrium prices are to the full information prices when search frictions are small we identify circumstances under which prices fail to aggregate information well even when search frictions are small we trace this to a strong form of the winner s curse that is present in the sequential search model the failure of information aggregation may result in inefficient allocations

waiting for news in the market for lemons econometrica vol 80 no 4 july 2012 1433 1504 waiting for news in the market for lemons b y b rendan d aley and b rett g reen 1 we study a dynamic setting in which stochastic information news about the value of a privately informed seller s asset is gradually revealed to a market of buyers we con struct an equilibrium that involves periods of no trade or market failure the no trade period ends in one of two ways either enough good news arrives restoring confidence and markets reopen or bad news arrives making buyers more pessimistic and forcing capitulation that is a partial sell off of low value assets conditions under which the equilibrium is unique are provided we analyze welfare and efficiency as they depend on the quality of the news higher quality news can lead to more inefficient outcomes our model encompasses settings with or without a standard static adverse selection problem in a dynamic setting with sufficiently informative news reservation values arise endogenously from the option to sell in the future and the two environments have the same equilibrium structure k eywords dynamic games adverse selection information economics signaling 1 introduction c onsider an entrepreneur who is interested in selling her company due to liquidity constraints naturally she is better informed than the market about her company s fundamentals she would like to sell yet there is no reason she is forced to do so on any given day nor can she commit to delaying trade with every passing day that she retains ownership she gains or loses the day s profit and maintains the option to sell the next day if trade is in fact delayed then the market may learn about the value of the firm by observing cash flows investments customer base and so forth herein lies the key innovation of this paper we introduce an exogenous public information process news into a model of such settings we then study the implications for trading behavior efficiency and welfare we model the environment as a game played in continuous time where a risk neutral seller faces a competitive market there is common knowledge of gains from trade but the seller is privately informed about the asset s value i e her type which may be either high or low at each point in time prior to trade the seller receives offers from the market if an offer is accepted then the trade is consummated and the game ends if all offers are rejected then the seller consumes the type dependent flow payoff endowed by the asset contemporaneously information about the seller s type is publicly revealed we are grateful to a co editor and three anonymous referees for helpful comments and sug gestions we are greatly indebted to jeremy bulow michael harrison and andrzej skrzypacz for useful conversations comments and encouragement special thanks also to peter demarzo johannes horner ilan kremer jon levin paul milgrom yuliy sannikov bob wilson and sem inar participants at chicago chicago gsb duke mit kellogg nyu penn stanford olin wharton unc yale and the 7th annual duke northwestern texas io theory conference 2012 the econometric society doi 10 3982 ecta9278

bargaining with surplus destruction in a two player alternating offer bargaining model if one player can destroy the surplus to be allocated then the value to bargain for is endogenous except at the beginning even with complete information the model has perfect equilibria with delayed agreement and or surplus destruction the model therefore explains inefficiency and destruction that may appear irrational we characterize the set of equilibrium payoffs and its limiting be haviour as the time between offers vanishes real time delay remains possible even in the limit we also consider the case of surplus destruction that is exogenously limited by the

dynamic market for lemons with endogenous quality choice by the seller we analyze a dynamic market for lemons in which the quality of the good is endogenously determined by the seller potential buyers sequentially submit offers to one seller the seller can make an investment that determines the quality of the item at the beginning of the game which is unobservable to buyers at the interim stage of the game the information and payoff structures are the same as in the market for lemons our main result is that the possibility of trade does not create any efficiency gain if i the common discounting is low and ii the static incentive constraints preclude the mutually agreeable ex ante contract under which the trade happens with probability one our result does not depend on whether the offers by buyers are private or public

delay in contests abstract why is there delay in contests in this paper we follow and extend the line of reasoning of carl von clausewitz to explain delay for a given contest technology delay may occur if there is an asymmetry between defense and attack if the expected change in relative strengths is moderate and if the additional cost of investment in future strength is low

a decentralized market with common values uncertainty non steady states we analyse a market where i trade proceeds by random and anonymous pairwise meetings with bargaining ii agents are asymmetrically informed about the value of the traded good and iii no new entrants are allowed once the market is open we show that information revelation and efficiency never obtain in equilibrium even as discounting is removed this holds whether the asymmetry is two sided or one sided in some cases there exist equilibria where a substantial amount goes untraded this contrasts with the earlier literature which was based on the steadystate equilibria of a model where agents enter the market every period

a bargaining model with incomplete information multiplicity of sequential equilibria is a common problem in bargaining models with incomplete information in which the informed player makes an offer most of these equilibria are supported by optimistic conjectures by the uninformed player this paper re examines the bargaining model in rubinstein 1985a b monotonicity restrictions are placed on off the equilibrium path beliefs to exclude equilibria supported by optimistic conjectures sequential equilibria that survive these restrictions are characterized

a multistage model of bargaining this paper presents a simple multistage model of bargaining wherein a seller makes an offer that can be either accepted or refused if rejected the process continues how the seller s ability to make commitments affects bargaining outcomes is analysed by comparing the commitment equilibria to those arising when commitment is impossible the effects of increasing uncertainty about preferences and varying the length of the bargaining horizon are analysed the ways in which the bargaining environment can be changed to improve outcomes are discussed

dynamic hedging of synthetic cdo tranches with spread risk and default contagion the paper is concerned with the hedging of credit derivatives in particular synthetic cdo tranches in a dynamic portfolio credit risk model with spread risk and default contagion the model is constructed and studied via markov chain techniques we discuss the immunization of a cdo tranche against spread and event risk in the markov chain model and compare the results with market standard hedge ratios obtained in a gauss copula model in the main part of the paper we derive model based dynamic hedging strategies and study their properties in numerical experiments

exchange traded funds a new investment option for taxable investors exchange traded funds etfs are a new variety of mutual fund that first became available in 1993 etfs have grown rapidly and now hold nearly 80 billion in assets etfs are sometimes described as more tax efficient than traditional equity mutual funds since in recent years some large etfs have made smaller distributions of realized and taxable capital gains than most mutual funds this paper provides an introduction to the operation of exchange traded funds it also compares the pre tax and post tax returns on the largest etf the spdr trust that invests in the s p500 with the returns on the largest equity index fund the vanguard index 500 the results suggest that between 1994 and 2000 the before and after tax returns on the spdr trust and this mutual fund were very similar both the after tax and the pre tax returns on the fund were slightly greater than those on the etf these findings suggest that etfs offer taxable investors a method of holding broad baskets of stocks that deliver returns comparable to those of low cost index funds this abstract was borrowed from another version of this item

common values unobserved heterogeneity and endogenous entry in u s offshore oil lease auctions although an auction of drilling rights is often cited as an example of common values formal evidence has been limited by the problem of auction level unobserved heterogeneity we develop an empiri

wage bargaining with time varying threats we study wage bargaining in which the union is uncertain about the firm s willingness to pay and threat payoffs vary over time strike payoffs change as replacement workers are hired as strikers find temporary jobs and as inventories or strike funds run out we find that bargaining outcomes are substantially altered if threat payoffs vary if dispute costs increase in the long run then dispute durations are longer settlement rates are lower and wages decline more slowly during the short run and may even increase the settlement wage is largely determined from the long run threat rather than the short run threat

signaling through obstruction obstruction is a time honored tradition in legislative politics in many cases obstruction can be foreseen to be ultimately unsuccessful and in some of these cases purely costly even to the obstructor in this article i construct a model of obstruction in which the individual obstruction of a fait accompli policy proposal is potentially informative precisely and ironically because it is inefficient the theory based on the legislators reelection motivations offers comparative static predictions about the frequency and length of obstruction as a function of the individual characteristics of the legislator and his or her electoral setting including the legislator s value for reelection the appeal of the legislator s challenger the legislator s individual specific seniority competence and or valence and the visibility of the legislator s obstruction efforts to the voter finally the theory illustrates the potential for transparency of legislators individual actions to be strictly welfare reducing even in the absence of pandering

optimal portfolio selection with transaction costs and finite horizons we examine the optimal trading strategy for a crra investor who maximizes the expected utility of wealth on a finite date and faces transaction costs closed form solutions are obtained when this date is uncertain we then show a sequence of analytical solutions converge to the solution to the problem with a deterministic finite horizon consistent with the common life cycle investment advice the optimal trading strategy is found to be horizon dependent and largely buy and hold moreover it might be optimal for the investor in our model not to buy any stock even when the risk premium is positive further analysis of the optimal policy is also provided financial advisers typically recommend that younger investors should allocate a greater share of wealth to stocks than older investors and all investors

optimal tax timing with asymmetric long term short term capital gains tax we develop an optimal tax timing model that takes into account asymmetric long term and short term tax rates for positive capital gains and limited tax deductibility of capital losses in contrast to the existing literature this model can help explain why many investors not only defer short term capital losses to long term but also defer large long term capital gains and losses because the benefit of tax deductibility of capital losses increases with the short term tax rates effective tax rates can decrease as short term capital gains tax rates increase

search adverse selection and market clearing we examine a dynamic decentralized trading model with infinitesimal sellers and buyers to investigate whether or not the market fails to clear in the limit of search friction vanishing a seller who has private information about product quality and a buyer are matched to bargain over price they form a long term relationship if they reach agreement they return to the matching pool if they fail to agree or the existing relationship is dissolved the market fails to clear if and only if the ratio of agents patience over the dissolution rate exceeds a threshold

delay in trade networks we study decentralized markets involving producers and consumers that are facilitated by middlemen we do this by analyzing a noncooperative networked bargaining game we assume a complete information setup wherein all the agents know the structure of the network the values of the consumers and the transaction costs involved but allow for some search friction when either producers or consumers trade with middlemen in such a setting we show that sunk cost problems and a heterogeneous network can give rise to delay or failure in negotiation and therefore reduce the total trade capacity of the network in the limiting regime of extremely patient agents we provide a sharp characterization of the trade pattern and the segmentation of these markets

forecasting and decomposition of portfolio credit risk using macroeconomic and frailty factors this paper presents a dynamic portfolio credit model following the regulatory framework using macroeconomic and latent risk factors to predict the aggregate loan portfolio loss in a banking system the latent risk factors have three levels global across the entire banking system parent sectoral for the intermediate loan sectors and sector specific for the individual loan sectors the aggregate credit loss distribution of the banking system over a risk horizon is generated by monte carlo simulation and a quantile estimator is used to produce the aggregate risk measure and economic capital the risk contributions of the individual sectors and risk factors are measured by combining the hoeffding decomposition with the euler capital allocation rule for the u s banking system we find that the real gdp growth rate the global and sector wide frailty risk factors and their spillovers significantly affect loan defaults and the impacts of the frailty factors are not only economy wide but also sector specific we also find that the frailty risk factors make more significant risk contributions to the aggregate portfolio risk than the macroeconomic factors while the macroeconomic factors help to improve the accuracy and efficiency of the credit risk forecasts

bridging the gap bargaining with interdependent values abstract we study dynamic bargaining with asymmetric information and interdependent values we base our analysis on the equilibria characterized by deneckere and liang 2006 for the gap case we show that as the gap between the cost and value of the weakest type shrinks to zero the continuous time limit of equilibria changes dramatically from rare bursts of trade with long periods of inactivity to smooth screening over time in the double limit prices are independent of the shape of the distribution of values when the uninformed agent s ability to commit to prices disappears so do her rents yet trade still exhibits delay

dynamic trading with developing adverse selection abstract we study a dynamic trading game in which the information asymmetry between the agents develops over time a seller and potential buyers start out symmetrically uninformed about the quality of a good but the seller becomes informed after the game begins we show that this developing adverse selection gives rise to novel trading dynamics in particular if the seller s learning speed is high the equilibrium features collapse and recovery behavior both the equilibrium price and the trade probability first drop and then increase over time while the trade surplus monotonically decreases as the learning speed increases the seller s surplus may change non monotonically

a bargaining model with incomplete information about time preferences etude d un jeu de negociation strategique sequentiel avec information incomplete caracterisation d une classe d equilibres sequentiels appeles equilibres sequentiels de negociation et demonstration de l unicite de cet equilibre

the optimal trading and pricing of securities with asymmetric capital gains taxes and transaction costs this article explores the optimal trading and pricing of taxable securities with asymmetric capital gains taxes and transaction costs in the long term region investors realize all gains below some critical cutoff level which we derive analytically in the short term region investors defer all gains and depending upon the time remaining in the short term region may also defer small losses contrary to common intuition deferral of short term losses can be optimal even without transaction costs the value of tax timing is considerably bigger under the optimal trading strategy than under alternative strategies previously analyzed the impact of offset rules is also explored article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

bargaining with common values this paper examines a bargaining model with asymmetric information in which the private valuations of the two bargaining agents are correlated it shows that equilibria in such models typically exhibit a significant probability of a significant delay to agreement the paper characterizes the unique perfect bayesian equilibrium to the game in which an uninformed buyer makes offers to a privately informed seller it also shows by example that in this framework bargainers may rationally break off negotiations even in the presence of commonly known gains from trade

uncertainty and delay in bargaining this paper investigates the relationship between uncertainty and delay of agreement in the one sided offer bargaining model with two sided uncertainty where the seller makes offers we construct a weak stationary equilibrium in which different types of the seller charge different prices in every period we completely characterize the separating equilibrium by three regularity conditions and show that the time interval between offers converges to zero the seller s initial price offer in a separating equilibrium converges with probability 1 to the lowest valuation of the buyer if and only if the gain from trading is common knowledge we have witnessed a proliferation of sequential bargaining models that with a few remarkable exceptions fudenberg and tirole 1983 cramton 1984 and chatterjee and samuelson 1987 are based on models with one sided uncertainty the importance of studying bargaining models with one sided uncertainty is that despite their highly special informational structure we can derive valuable insights into the role of uncertainty in the delay in reaching an agreement while keeping the computational exercise tractable however the assumption of one sided uncertainty essentially excludes the situation where the buyer s actual reservation value is lower than the seller s actual reservation value though they are still engaged in the bargaining process the primary objective of this paper is to investigate the role of uncertainty about the gain from trading in a sequential bargaining model with two sided incomplete information in the models with one sided incomplete information important studies fudenberg levine and tirole 1985 and gul sonnenschein and wilson 1986 are often based on weak stationary equilibria where the equilibrium strategy of each player only depends upon the posterior conjecture about the other player and the previous period s offer although the importance of two sided uncertainty and the weak stationary equilibrium is well recognized previous research on sequential bargaining models has not combined the two features within the same framework studies on the models under two sided uncertainty have not focused on weak stationary equilibria for example cramton 1984 computes a specific sequential equilibrium with interesting properties in which the equilibrium strategies of both players depend upon histories in a rather complex fashion on the other hand it is only in models under one sided uncertainty that the weak stationary equilibrium has been extensively studied this paper computes and analyzes the weak stationary equilibria in a model under two sided uncertainty in order to investigate the effect of uncertainty on the delay in agreement we will extend the results from previous studies of one sided uncertainty models the computation of the equilibrium in models with two sided uncertainty is generally very complicated furthermore we must identify a sensible outcome if more than one equilibrium exists in the model to simplify the analysis we choose a standard bargaining

strategic bargaining models and interpretation of strike data attrition screening and signalling models of strategic bargaining are characterized in terms of their predictions about the incidence mean duration and settlement rates of strikes and the terms of wage settlements these predictions are compared with the general features observed in empirical studies of strikes in canada and the united states conclusions are drawn about the types of models capable of generating these features and about the conformity of the models to the evidence methods are described for computing the numerical examples used to illustrate the models

resistance redistribution and investor friendliness abstract poor communities sometimes resist private investment and destroy economic surplus even if the government has the willingness and ability to redistribute we interpret such acts of resistance as demands for redistribution destruction contains credible information about how the affected group values surplus and such information is used by the government in implementing the optimal redistribution policy the extent of destruction is increasing in the extent of political marginalization of the affected group resistance not only destroys economic surplus it also mutes the investor s incentives to create surplus the government uses a tax subsidy on the investor to maximize weighted social surplus and we show that the possibility of destruction may force the government to be too soft in its negotiations with the investor we discuss several policy instruments that have the potential to improve welfare these include compensation floor for the affected group legal or financial protection for the investor and licensing fees for the investor

strategic voting over strategic proposals prior research on strategic voting has reached the conclusion that unanimity rule is uniquely bad it results in destruction of information and hence makes voters worse off we show that this conclusion depends critically on the assumption that the issue being voted on is exogenous that is independent of the voting rule used we depart from the existing literature by endogenizing the proposal that is put to a vote and establish that under many circumstances unanimity rule makes voters better off moreover in some cases unanimity rule also makes the proposer better off even when he has diametrically opposing preferences in this case unanimity is the pareto dominant voting rule voters prefer unanimity rule because it induces the proposing individual to make a more attractive proposal the proposing individual prefers unanimity rule because the acceptance probabilities for moderate proposals are higher we apply our results to jury trials and debt restructuring

on durable goods markets with entry and adverse selection we investigate the nature of trading and sorting induced by the dynamic price mechanism in a competitive durable good market with adverse selection and exogenous entry of traders over time the model is a dynamic version of akerlof 1970 identical cohorts of durable goods whose quality is known only to potential sellers enter the market over time we show that there exists a cyclical equilibrium where all goods are traded within a finite number of periods after entry market failure is reflected in the length of waiting time before trade the model also provides an explanation of market fluctuations jel classification d82 a propos des marches de biens durables quand il y a entree de nouveaux commercants et selection adverse les auteurs analysent la nature du commerce et du triage engendres par le mecanisme dynamique des prix dans un marche concurrentiel de biens durables quand il y a selection adverse et entree exogene de nouveaux commercants dans le temps ce modele est une version dynamique du modele d akerlof 1970 des cohortes identiques de biens durables dont la qualite est connue seulement des vendeurs potentiels arrivent sur le marche dans le temps il semble qu il y ait plus de commerce actif que ce qui est prevu par un modele statique en particulier on montre qu il existe un equilibre cyclique ou tous les biens sont transiges a l interieur d un nombre fini de periodes apres leur arrivage et que a chaque phase du cycle l eventail de qualite des biens transiges s accroit les commercants qui transigent des produits de plus haute qualite attendent plus longtemps et l imperfection du marche se traduit par la longueur de temps d attente avant la transaction le modele fournit aussi une explication des fluctuations du marche