but who will monitor the monitor suppose that providing incentives for a group of individuals in a strategic context requires a monitor to detect their deviations what about the monitor s deviations to address this question i propose a contract that makes the monitor responsible for monitoring and thereby provides incentives even when the monitor s observations are not only private but costly too i also characterize exactly when such a contract can provide monitors with the right incentives to perform in doing so i emphasize virtual enforcement and suggest its implications for the theory of repeated games jel c78 d23 d82 d86

the cyclical behavior of the department of justice s antitrust enforcement activity abstract we study the cyclical behavior of antitrust enforcement as measured by the number of cases initiated by the us department of justice the key result is that antitrust case activity is countercyclical this finding is robust across alternate indicators of economic activity which include stock prices corporate profits and business cycles and across different types of cases the finding of countercyclical case activity does not appear to lend support to interest group theories that predict greater regulatory protection towards producers during economic contractions one interpretation of our result would be that antitrust violations tend to increase during economic downturns leading to an increase in the number of cases initiated the broad implication being that the antitrust division primarily acts as an antitrust law enforcement agency our results show that politics as measured by the party of the president and the republican versus democrat composition of the house and senate does not have a clear impact on case activity finally the number of cases initiated are significantly affected by the extent of funding

the early exercise of options on treasury bond futures this paper presents a test of the theory of rational option exercise exercise data from the market for options on treasury bond futures are used to test the model of rational early exercise developed by barone adesi and whaley 1987 baw the results show that the baw model underestimates the futures price that will trigger exercise for calls and overestimates this price for puts the exercise bias is observed to change across option maturities and the direction of the bias is consistent with the direction of the model pricing bias observed by whaley 1986

efficient selection of insured currency positions protective puts vs fiduciary calls we examine the empirical results from implementation of portfolio insurance strategies employing currency spot and futures options hypotheses are generated from ogden and tucker s 1988 generalizations concerning the relative values of american spot currency options and currency futures options we find that protective puts using futures options are generally dominated by both protective puts that use options on spot currencies and by fiduciary calls on futures contracts this suggests that the prices of puts on foreign currency futures contracts are too high relative to foreign currency futures calls and to puts on spot currencies

international antitrust enforcement and multimarket contact this article analyzes cartel formation and international antitrust enforcement when multinational firms operate in several jurisdictions with local antitrust authorities we are concerned with how the sustainability of collusion in one local market is affected by the existence of collusion in other markets when they are linked by a negative demand relationship the interdependence of cartel stability across markets leads to potential externalities in antitrust enforcement across jurisdictions local antitrust enforcement equilibrium enforcement may exhibit a nonmonotonicity in the degree of market integration we compare it with globally optimal antitrust enforcement policy and discuss the role of international antitrust coordination

the analytic valuation of american options no analytic solutions exists for the valuation of american options written on futures contracts and foreign currencies for which early exercise may be optimal this article formulates the american option valuation problem in economically and mathematically meaningful ways this enables us to derive valuation formulas for american options the properties associated with the optimal exercise boundary are examined and a numerical technique to implement the valuation formulas is presented article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

modeling the birth and death of cartels with an application to evaluating competition policy one of the primary challenges to measuring the impact of antitrust policy on collusion is that the cartel population is unobservable we observe only the population of discovered cartels to address this challenge a model of cartel creation and dissolution is developed to endogenously derive the populations of cartels and discovered cartels it is then shown how one can infer the impact of antitrust policy on the population of cartels by measuring its impact on the population of discovered cartels in particular the change in the distribution on the duration of discovered cartels could be informative in assessing whether a new antitrust policy is reducing the latent rate of cartels

continuous time methods in finance a review and an assessment i survey and assess the development of continuous time methods in finance during the last 30 years the subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing term structure theory asset pricing and optimal consumption and portfolio choices during the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance this latter subperiod has seen significant progress in econometric theory computational and estimation methods to test and implement continuous time models capital market frictions and bargaining issues are being increasingly incorporated in continuous time theory the roots of modern continuous time methods in finance can be traced back to the seminal contributions of merton 1969 1971 1973b in the late 1960s and early 1970s merton 1969 pioneered the use of continuous time modeling in financial economics by formulating the intertemporal consumption and portfolio choice problem of an investor in a stochastic dynamic programming setting merton 1973b also showed how such a framework can be used to develop equilibrium asset pricing implications thereby significantly extending the asset pricing theory to richer dynamic settings and expanding the scope of applications of continuous time methods to study problems in financial economics 1 within a span of about 30 years from the publication of merton s inf luential papers continuous time methods have become an integral part of financial economics indeed in certain core areas in finance such as e g asset pricing derivatives valuation term structure theory and portfolio selection continuoustime methods have proved to be the most attractive way to conduct research and gain economic intuition the continuous time approach in these areas has produced models with a rich variety of testable implications the econometric theory for testing continuous time models has made rapid strides in the last decade and has thus kept pace with the impressive progress on the theoretical front one hopes that the actual empirical investigations and estimation using the new procedures will follow suit soon

what is the effect of bid rigging on prices abstract this paper develops and applies a method for estimating the price effects of bid rigging and price fixing conspiracies a fairly typical bid rigging scheme is found to have raised prices by over 20 for over 4 years

economic integration and the sustainability of multimarket collusion abstract we examine the impact of and links between two types of economic integration on the stability of multimarket collusion when firms interact in quantities in segmented markets 1 multilateral trade liberalization captured by a reduction of trade costs across all markets and 2 preferential trade liberalization captured by an expansion in the size of individual markets while holding the level of external trade costs tariffs constant in general collusive stability is non monotonically related to economic integration in the case of multilateral liberalization the effect depends on the initial level of trade costs and the extent of liberalization however on the average the complete elimination of trade costs is pro competitive when these costs are sufficiently high initially in the case of regional integration the effect of liberalization is pro competitive when external trade barriers are sufficiently high but anti competitive when these barriers are sufficiently low

global cartels leniency programs and international antitrust cooperation in this paper we analyze cartel formation and self reporting incentives when firms operate in several geographical markets and face antitrust enforcement in different jurisdictions we are concerned with the effectiveness of leniency programs and the benefits of international antitrust cooperation between agencies when international antitrust prosecution is uncoordinated multi market contact allows firms to reduce the amount of self reporting in equilibrium and sustain cartels more effectively we then discuss the effects of information sharing among antitrust authorities as a function of how much and which type of information is exchanged we show that extensive information sharing might have an adverse effect on self reporting by cartel members

optimal corporate leniency programs this study characterizes the corporate leniency policy that minimizes the frequency with which collusion occurs though it can be optimal to provide only partial leniency plausible sufficient conditions are provided whereby the antitrust authority should waive all penalties for the first firm to come forward it is also shown that restrictions should be placed on when amnesty is awarded though it can be optimal to award amnesty even when the antitrust authority is very likely to win the case without insider testimony

on the stability of multimarket collusion in price setting supergames abstract in this paper we examine how trade liberalization affects collusive stability in the context of multimarket interactions the model we consider is a segmented markets duopoly with differentiated goods in which price setting firms pool their incentive constraints across markets to sustain their most collusive outcome we find that when goods are very close substitutes and trade costs are sufficiently high a marginal reduction in trade costs facilitates collusion exactly the opposite is true if for any given degree of product substitutability trade costs are sufficiently low we also study the dependence of multimarket collusion on product differentiation

a tip of the iceberg the probability of catching cartels summary reliable estimates of crime detection probabilities could help in designing better sanctions and improve our understanding of the efficiency of law enforcement for cartels we only have limited knowledge on the rate at which these illegal practices are discovered in comparison to previous works this paper offers a more parsimonious and simple to use method to estimate time dependent cartel discovery rates while allowing for heterogeneity across firms it draws on capture recapture methods that are frequently used in ecology to make inferences on various wildlife population characteristics an application of this method provides evidence that less than a fifth of cartelising firms are discovered copyright 2013 john wiley sons ltd

currency option pricing with stochastic domestic and foreign interest rates this study develops a currency option pricing model under stochastic interest rates when interest rate parity holds and it is assumed that domestic and foreign bond prices have local variances that depend only on time we demonstrate how existing currency option models are simply derived from one framework empirical tests employing transactions option data reveal that a particularly simple form of the stochastic rate model is uniformly more accurate than a constant rate model for all boundaries and maturities tested

options on the spot and options on futures this paper analyzes and compares the valuation of two types of options that relate to the same asset options on the asset itself and options on the futures on the asset the early exercise privilege plays a central role in explaining the differences between the values of the two options it is shown that in the case of a cash instrument that does not make interim payments such as gold the value of a call option on the spot is smaller than the call option on the futures contract the opposite is true for put options the early exercise boundaries which characterize when it pays to exercise are also compared and analyzed the financial markets have recently witnessed a proliferation of various types of listed options on commodities and on financial assets commencing with call options on individual common stocks recent innovations have included call and put options on treasury bonds metals foreign currencies and stock market

leniency programs for multimarket firms the effect of amnesty plus on cartel formation we examine the effect of amnesty plus on dynamic cartel formation in a multimarket setting the amnesty plus program has been adopted as part of the us corporate leniency policy in 1999 and is now vigorously advertised as one of the most compelling tools in generating successful cartel investigations amnesty plus is aimed at attracting amnesty applications by encouraging firms convicted in one market to report their collusive agreements in other markets we show that amnesty plus has two opposite effects on firms ability and incentives to collude which are both increasing in the fine reduction granted first amnesty plus can reduce the deterrence of cartel activities by making it easier for firms to sustain multimarket collusion through strategies involving self reporting after a first cartel detection second it can reduce the expected duration of cartels or delay their formation by increasing firms incentives to self report after a first cartel detection

price fixing the probability of getting caught the authors estimate the probability that a price fixing conspiracy will be indicated by federal authorities to be at most between 0 13 and 0 17 in a given year the authors estimate is based on conspiracy durations calculated from data reported for a large sample of department of justice cases and a statistical birth and death process model describing the onset and duration of conspiracies copyright 1991 by mit press

strategic leniency and cartel enforcement the cornerstone of cartel enforcement in the united states and elsewhere is a commitment to the lenient prosecution of early confessors a burgeoning game theoretical literature is ambiguous regarding the impacts of leniency i develop a theoretical model of cartel behavior that provides empirical predictions and moment conditions and apply the model to the complete set of indictments and information reports issued over a 20 year span statistical tests are consistent with the notion that leniency enhances deterrence and detection capabilities the results have implications for market efficiency and enforcement efforts against cartels and other forms of organized crime jel d43 l12 l13 k21 in 1993 the department of justice doj introduced a new leniency program with the intent of destabilizing existing cartels and deterring new cartels the program commits the doj to the lenient prosecution of early confessors in particular it guarantees complete amnesty from federal prosecution to the first confessor from each cartel provided that an investigation into the confes sor s cartel is not already underway it also offers discretionary penalty reductions to conspirators who confess when an investigation is already ongoing the new leniency program has become the cornerstone of cartel enforcement efforts in the united states e g scott d hammond 2004 and recently has inspired antitrust authorities in australia canada the european union japan south korea and elsewhere to introduce similar programs oecd 2002 2003 this paper tests the efficacy of the new leniency program the results have implications for market efficiency and enforcement efforts against cartels and other forms of organized crime a burgeoning game theoretical literature is ambiguous regarding the impacts of leniency a common finding is that leniency may destabilize cartels because conspirators can simultane

intra day tests of the efficiency of the treasury bill futures market in this paper we use intra day prices to examine the efficiency of the treasury bill futures market the use of intra day data allows us to carefully match in time trades in the futures and cash markets by matching trades and allowing delays between observing apparent inefficiencies and the trade we are examining realistic trading strategies we find profitable arbitrage swaps and a preferred strategy for initial purchase these profits do not depend on an assumption of an equilibrium model hence these tests are direct tests of efficiency rather than a joint test of efficiency and equilibrium t his paper examines the efficiency of the treasury bill futures market this subject has been examined before by capozza and cornell 1979 cornell 1981 lang and rasche 1978 rendleman and carabini 1979 vignola and dale 1979 poole 1978 and puglisi 1978 there are a number of reasons why this paper makes an important contribution to the literature the first reason is that by using trade by trade futures prices we can make more realistic assumptions about the pnces at which trades could have taken place this paper uses intra day prices to examine efficiency prior studies at best used closing prices to examine apparent inefficiencies and assumed that transactions took place at these closing prices there are two problems with this procedure first simultaneous transactions cannot actually occur at closing prices there is almost an hour difference between the closing of the chicago futures and new york spot markets thus when the closing spot market price is observed the futures market has been closed for about an hour closing prices could be used to judge apparent discrepancies however it would be necessary to execute trades at the open making decisions based on closing prices and then assuming trades can take place at these prices is an approximation which could significantly affect results in addition using only closing prices ignores any intra day trades which could lead to profits in this study we match in time intra day prices in the spot and futures market these matched prices are used to identify apparently profitable trading rules we then assume trades take place at prices which are observed later in the day this is a test of a trading rule which an investor could actually follow as we discuss later in the paper our results differ from prior studies these differences are primarily due to using intra day prices and carefully matching times so that information used to initiate trades would actually be available to the investor at the time of the trade the second reason is that we examine more complex trading strategies than those which have been employed in other studies the random walk literature provides a useful analogy the original random walk studies simply correlated past and future prices or returns later studies examined filter rules and other more complicated trading rules in this study we employ alternative trading rules of increased complexity to test for the existence of trading profits finally we explicitly examine the consequence of t bills futures contracts being futures rather than forward contracts futures contracts unlike forward contracts involve flows every settlement day the intermediate cash flows on futures contracts can affect the profitability of any strategy the only prior study that even considered this effect is the one by rendleman and carabini 1979 they used the theoretical model of cox ingersoll and ross 1981 to try to estimate whether the difference between forward and futures prices was likely to be large enough to affect the payoff from alternative trading strategies this is a useful first attempt however ultimately the effect of daily settlement or marking to the market has to be examined directly as part of trading strategies to see if it affects the outcome of these strategies there are other problems with prior studies these involve gross estimates of prices and averaging data in a way that can mask inefficiencies since these problems are discussed in some detail in rendleman and carabini there is no reason to review them further here probably no area in finance has received more attention than the efficiency literature the reader may well wonder why even given the approximareceived for publication august 23 1982 revision accepted for publication may 20 1983 new york university new york university and baruch college respectively the authors would like to thank the center for the study of futures markets at columbia business school for financial support

the impact of leniency and whistle blowing programs on cartels antitrust authorities have set up leniency programs for cartel members that denounce their collusive agreements these programs help prosecute participants and can thereby deter collusion we compare the impact of reduced fines and positive rewards and argue that rewarding individuals including firm employees can deter collusion in a more effective way we discuss possible adverse effects of whistle blowing programs on firms behavior and particularly on turnover incentives to innovate and cooperation we also explore explanations for the puzzling fact that managers keep incriminating evidence and argue reward programs actually provide additional incentives for keeping such evidence

the valuation of options on futures contracts rational restrictions are derived for the values of american options on futures contracts for these options the optimal policy in general involves premature exercise a model is developed for valuing options on futures contracts in a constant interest rate setting despite the fact that premature exercise may be optimal the value of this american feature appears to be small and a european formula due to black serves as a useful approximation finally a model is developed to value these options in a world with stochastic interest rates it is shown that the pricing errors caused by ignoring the location of the interest rate relative to its long run mean range from 5 to 7 when the current rate is 200 basis points from its long run value the role of interest rate expectations is therefore crucial to the valuation optimal exercise policies are found from numerical methods for both models in recent years there has been a steady growth in the number of financial assets which one might properly call derivative assets that are available for trading on the organized exchanges among these the most recent and notable are options contracts written on available futures contracts options are now traded on the futures contracts on stock market indexes on the futures contracts on treasury instruments on the futures contracts on foreign exchange rates and on the futures contracts on some metals in design these options contracts do not differ substantially from the well known options contracts on common stock except that the underlying asset is a futures contract the received theory of the valuation of these options suggests that such contracts provide a direct vehicle for investors to alter the terminal payoffs on their portfolios to a desired distribution in the absence of these contracts investors would be forced to pursue a dynamic portfolio policy at the expense of considerable transactions in order to achieve a similar distribution indeed the availability of put options on the futures contracts on stock market indexes now enables well diversified investors to purchase portfolio insurance in his seminal work black 1 provided a complete description of forward and futures contracts as well as the description and valuation of european options on forward contracts and on spot commodities breeden 3 has examined the use of commodity options in a theoretical framework and courtadon 6 has studied the valuation of options on treasury bond futures french 13 cox

taxes and the pricing of stock index futures stock index futures prices are generally below the level predicted by simple arbitrage models this paper suggests that the discrepancy between the actual and predicted prices is caused by taxes capital gains and losses are not taxed until they are realized as constantinides demonstrates in a recent paper this gives stockholders a valuable timing option if the stock price drops the investor can pass part of the loss on to the government by selling the stock on the other hand if the stock price rises the investor can postpone the tax by not realizing the gain since this option is not available to stock index futures traders the futures prices will be lower than standard no tax models predict on 24 february 1982 the kansas city board of trade began trading futures contracts on the value line average stock index during the next two months both the chicago mercantile exchange and the new york futures exchange also initiated trading in stock index futures although these contracts are actively traded their prices have puzzled both practitioners and academics the observed

the relative valuation of american currency spot and futures options theory and empirical tests this study empirically tests contingent claims pricing models for american currency spot and futures options numerical analysis indicates that the difference in the model prices of spot and futures put call options with the same exercise price and maturity is for a premium discount currency positive and an increasing function of a the absolute dif ference in the prices of the underlying spot and futures contracts and b the maturity of the options tests on british pound deutsche mark and swiss franc options indicate many violations ofthe ordinal pricing relationships noted above additional tests indicate that option prices are inconsistent with functional relationship b above most of the ob served violations are sufficiently large to provide arbitrage profits net of transaction costs assuming interest rates are constant and the interest rate parity theorem holds continu ously alternatively both the violations and the inconsistent functional relationship may be due to violation of the assumption of constant interest rates

accomplice witnesses and organized crime theory and evidence from italy we develop an agency model of organized crime accounting for the main trade offs involved in the introduction of an accomplice witness program we characterize the optimal policy and identify its main determinants in a framework where public officials can be dishonest our predictions are tested by using data for italy before and after the introduction of the 1991 accomplice witness program as predicted by the model and the earlier antitrust literature the program appears to have strengthened deterrence and enhanced prosecution moreover consistent with a novel prediction of our theory the evidence suggests that the program efficacy is affected by the judicial system efficiency

self reporting investigation and evidentiary standards abstractself reporting schemes have become a substantial part of law enforcement this paper analyzes the optimal use of such schemes when the authority cannot commit to an ex post investigation effort i show that this leads to a negative relationship between self reporting incentives and investigation effort three main conclusions arise first violators self report with a probability of 1 if and only if full amnesty is offered second self reporting schemes are not efficient when the level of harm of the act is high finally authorities can increase the incentives to self report when they convict without hard evidence however a hard evidence standard provides more deterrence and is weakly welfare superior

options on stock indices and options on futures abstract this paper analyzes and compares the valuation of stock index options and stock index futures options the early exercise privilege plays a central role in explaining the differences between the values of the two options it is shown that the difference in value depends on the differences between the dividend yield and interest rates using numerical procedures we compute the options values and find that the difference in values is larger for longer maturities and in the money options

price fixing policy abstract the prohibition against price fixing is competition law s most important and least controversial provision yet there is far less consensus than meets the eye on what constitutes price fixing and prevalent understandings cannot be reconciled with principles of oligopoly theory this article 1 presents a fundamental reconceptualization of our understanding of horizontal agreements 2 develops a systematic analysis of price fixing policy that focuses on its deterrence benefits and chilling costs and 3 compares this direct approach to commentators favored formulations that typically involve some sort of formalistic communications based prohibition by targeting a subset of means rather than the illicit ends conventional formulations tend to impose liability in cases with lower deterrence benefits and greater chilling costs than those reached under a direct approach and to incur greater administrative costs as well

the relation between forward prices and futures prices abstract this paper consolidates the results of some recent work on the relation between forward prices and futures prices it develops a number of propositions characterizing the two prices these propositions contain several testable implications about the difference between forward and futures prices many of the propositions show that equilibrium forward and futures prices are equal to the values of particular assets even though they are not in themselves asset prices the paper then illustrates these results in the context of two valuation models and discusses the effects of taxes and other institutional factors

futures options and the volatility of futures prices assuming nonstochastic interest rates european futures options are shown to be european options written on a particular asset referred to as a futures bond consequently standard option pricing results may be invoked and standard option pricing techniques may be employed in the case of european futures options additional arbitrage restrictions on american futures options are derived the efficiency of a number of futures option markets is examined assuming that at the money american futures options are priced accurately by black s european futures option pricing model the relationship between market participants ex ante assessment of futures price volatility and the term to maturity of the underlying futures contract is also investigated empirically

economic ordering quantity models for items with imperfect quality abstract in this paper we first look at the issue of non shortages in models with proportional imperfect quality when the proportion of the imperfects is a random variable more specifically we revisit the papers of salameh and jaber int j prod econom 64 2000 59 and chan et al prod plann control 14 2003 588 and we point out that the sufficient conditions given in these papers to ensure that shortages will not occur may not really prevent their occurrence next considering the timing of withdrawing the imperfect quality items from stock we clarify a point not clearly stated in salameh and jaber int j prod econom 64 2000 59 and we extented this model to the case in which withdrawing takes place at the end of the planning horizon finally we establish that the objective of maximizing the mean average profit which was set in salameh and jaber int j prod econom 64 2000 59 is superfluous and the results given there can be obtained by ignoring the revenue issues assumed in the model and minimizing directly the mean average cost

quantifying the deterrent effect of anticartel enforcement this paper presents a rare attempt to quantify the deterrent effect of anti cartel policy it develops a conceptual framework which establishes the sort of information necessary for such quantification this is then illustrated and calibrated by drawing upon existing literatures and using evidence from legal cartels to approximate what would be observed absent policy measuring impact by the proportion of all potential harm that is deterred our best estimate is two thirds and even on conservative assumptions at least half of all harms or seven times the detected harm is deterred

self disclosure at international cartels we study revelation behavior at illegal international cartels our hypotheses suggest that a resource advantage induces executives of large multinational enterprises mnes to be more likely to reveal the cartel and to cooperate with the antitrust agency during the prosecution stage moreover we expect the cultural background to influence the firm s inclination to reveal incriminating evidence empirical tests based on data about cartel breakdowns under the eu leniency program show that large mnes are indeed more likely to reveal the cartel however they largely fail to explain variation in legal actions along cultural dimensions

cartel overcharges survey and meta analysis abstract the article presents a novel meta regression analysis of the size of cartel overcharges from a sample of more than 800 observations collected from a wide variety of published sources the analysis of a subsample of 395 cartel episodes finds that duration legal environment and organizational characteristics of cartels explain variation in overcharge rates to a greater extent than the type of publication or the method of calculation overcharges tend to be significantly higher for durable international cartels secular decline is observed as antitrust enforcement regimes have stiffened