comparing optima do simplifying assumptions affect conclusions consider a family of maximization models in which the optimum trades off beneficial and costly effects then comparative statics derived under many kinds of simplifying assumptions about the benefits technology are also true for general convex and nonconvex technologies for example any comparative statics conclusion about investment by a risk averse decision maker under uncertainty that holds when expected returns are described by a general linear function also holds for an arbitrary nonlinear expected return function

the boundaries of loss aversion abstract in this article the authors propose some psychological principles to describe the boundaries of loss aversion a key idea is that exchange goods that are given up as intended do not exhibit loss aversion for example the authors propose that money given up in purchases is not generally subject to loss aversion the results of several experiments provide preliminary support for the hypotheses the authors find that consistent with prospect theory loss aversion provides a complete account of risk aversion for risks with equal probability to win or lose the authors propose boundaries for this result and suggest further tests of the model

salience in experimental tests of the endowment effect starting with knetsch 1989 experiments on the endowment effect thaler 1980 typically rely on a two stage procedure in the first stage subjects are endowed with a good such as a mug in the second stage the same subjects are given the opportunity to trade this good for another good of similar value such as a pen the endowment effect holds that very few subjects chose to trade sometimes as few as ten percent in related experiments subjects state selling prices for their endowment that are much higher than their buying prices for the same good these patterns are hard to reconcile with standard choice theory which predicts that about half the subjects would trade and that selling prices and buying prices are similar the common explanation of this evidence relies on prospect theory s loss aversion tversky and kahneman 1979 because the pain of parting with the endowment looms larger in the decision maker s mind than the pleasure of acquiring a good of similar value kahneman knetsch and thaler 1990 a decision maker endowed with a mug is unwilling to trade it for a

management ownership and market valuation an empirical analysis we investigate the relationship between management ownership and market valuation of the firm as measured by tobin s q in a 1980 cross section of 371 fortune 500 firms we find evidence of a significant nonmonotonic relationship tobin s q first increases then declines and finally rises slightly as ownership by the board of directors rises for older firms there is evidence that q is lower when the firm is run by a member of the founding family than when it is run by an officer unrelated to the founder

a reference price theory of the endowment effect abstract the common finding that selling prices exceed buying prices the so called endowment effect is typically explained by the assumptions that consumers evaluate potential transactions with respect to their current holdings and that the owners of a good regard its potential loss to be more significant than nonowners regard its potential acquisition in contrast to this pain of losing account the authors propose that the endowment effect reflects a reluctance to trade on terms that appear unfavorable with respect to salient reference prices in six experiments and eight more summarized in appendixes the authors show that manipulations that reduce the gap between valuations and reference prices reduce or eliminate the endowment effect these results suggest that the endowment effect is often best construed as an aversion to bad deals rather than an aversion to losing possessions

antitakeover charter amendments and stockholder wealth abstract many large corporations have recently adopted antitakeover charter amendments which make the transfer of corporate control more difficult this paper develops and tests competing theoretical explanations for the passage of these amendments in one view antitakeover provisions are adopted because incumbent management seeks job protection at stockholders expense the alternative hypothesis is that antitakeover provisions benefit stockholders perhaps by extracting greater payment in exchange for corporate control although inconclusive the evidence provides weak preliminary support for the hypothesis that antitakeover amendments are best explained as a device for managerial entrenchment

measuring the effects of regulation with stock price data this article examines the usefulness of stock returns in measuring the effects of regulation when the dates on which market expectations change are not known and standard sources e g the wall street journal are used to choose announcement dates twenty major changes in regulatory constraint since 1887 are considered tests using either monthly or daily data are found to have surprisingly little ability to detect the effects of regulation the evidence shows that formal regulatory announcements are generally anticipated in cases where it is unclear when expectations change

institutional investment patterns and corporate financial behavior in the united states and japan abstract this paper examines the agency problem between shareholders and debtholders of japanese and u s firms whereas u s institutional investors are restricted from doing so japanese financial institutions take large equity positions in firms to which they lend particularly in firms more susceptible to the agency problem debt ratios of u s firms are negatively related to the firm s potential to engage in risky suboptimal investments whereas japanese debt ratios show no such relation the evidence is consistent with the notion that the agency problem is mitigated to a greater degree in japan than in the u s

on the psychology of loss aversion possession valence and reversals of the endowment effect loss aversion states that losses loom larger than gains we consider two types of loss aversion defined by two interpretations of loss a loss can be defined 1 in terms of valence or 2 in terms of possession correspondingly valence loss aversion vla entails greater sensitivity to negative vs positive changes and possession loss aversion pla entails greater sensitivity to items leaving vs entering one s possession both types of loss aversion imply an endowment effect for attractive items but pla implies a reversal of the endowment effect for unattractive items experimental results show endowment effect reversals consistent with pla

the design of securities abstract this paper investigates the determinants of security design we consider the assignment of both cash flows and voting rights focusing on corporate control we postulate that a conflict of interest exists between contestants for control and outside investors the conflict arises because private benefits of control give contestants an incentive to acquire control even when this reduces firm value security design is a tool for resolving these conflicts and maximizing firm value our main result is that a single voting security is optimal

learning public good provision and the information trap abstract we consider an economy with uncertainty about the true production function for a public good by using bayes rule the economy can learn from experience we show that it may learn the truth but that it may also converge to an inefficient policy where no further inference is possible so that the economy is stuck in an information trap we also show that our results are robust with respect to small experimentation

an analysis of stock price reaction to management change in distressed firms abstract this study analyzes excess returns to shareholders at announcement of a change in senior management of distressed firms excess returns are significantly positive which is consistent with the internal corporate control hypothesis that management change following poor performance is associated with gains to shareholders cross sectional tests of the effects reveal a significant title effect and significant interactions between title and appointment of an outside successor and title and firm size these findings present new insights into the circumstances in which external vs internal markets for managers will affect shareholder wealth

toward an economic model of the japanese firm i owe a great deal to professor moses abramovitz who suggested that i write this article i appreciate his constant encouragement and guidance which aided me throughout its preparation i am also indebted to three anonymous referees of the journal and to professors ryutaro komiya and michael riordan for their critical comments and helpful suggestions needless to say i am solely responsible for the views expressed in this paper

demand shifts due to salience effects experimental evidence we conduct a laboratory experiment that tests two fundamental predictions unique to salience theory if an agent purchases one of two vertically differentiated products salience theory makes the following two distinct predictions first it hypothesizes that a higher expected price level for both products shifts demand toward the more expensive high quality product second it predicts that demand for the high quality product is larger if the price level is expectedly high than if it is unexpectedly high in our experiment subjects purchased fast or slow internet access at different price levels our results strongly support both predictions of salience theory

majority voting with single crossing preferences we clarify and extend a number of sufficient conditions for the existence of a majority voting equilibrium on one dimensional choice domains these conditions variously stated in the previous literature all impose order restrictions on voter preferences for instance monotone marginal rates of substitution which we show to imply or be equivalent to a general ordinal version of the single crossing condition this simple property is economically intuitive and easily checked in applications this ease of application is demonstrated through an examination of voting models of redistributive income taxation and trade union bargaining behaviour

an endowment effect for risk experimental tests of stochastic reference points recent models of reference dependent preferences indicate that expectations may play a prominent role in the presence of behavioral anomalies a subset of such expectations based models predicts an endowment effect for risk that risk attitudes differ when reference points change from certain to stochastic in two purposefully simple risk preference experiments eliminating often discussed confounds i demonstrate both between and within subjects such an endowment effect for risk these results provide needed separation between expectations based reference dependent models allow for evaluation of recent theoretical extensions and may help to close a long standing debate in decision science on inconsistency between utility elicitation methodologies

estimating labour supply responses using tax reforms the 1980 s tax reforms and the changing dispersion of wages offer one of the best opportunities yet to estimate labor supply effects nevertheless changing sample composition aggregate shocks the changing composition of the tax paying population and discontinuities in the tax system create serious identification and estimation problems we develop grouping estimators that address these issues our results reveal positive and moderately sized wage elasticities we also find negative income effects for women with children

exchange asymmetry in experimental settings abstract we review past trading experiments and present 11 new experiments designed to show how the trading rate responds to alterations of the experimental procedure in agreement with earlier studies results show that if the trade decision is converted to one resembling a choice between goods the exchange asymmetry disappears but otherwise the asymmetry is remarkably robust results also indicate that when trading is public herding can occur which may have caused some of the more extreme examples of the exchange asymmetry and that some of the lack of trade may result from preference indifference nevertheless some form of status quo bias which may consist of a combination of loss aversion gain attraction regret avoidance and dislike of trading and which may be enhanced by indifference between the goods offered probably remains as an important influence on the trading rate

salience and consumer choice we present a theory of context dependent choice in which a consumer s attention is drawn to salient attributes of goods such as quality or price an attribute is salient for a good when it stands out among the good s attributes relative to that attribute s average level in the choice set or more broadly the choice context consumers attach disproportionately high weight to salient attributes and their choices are tilted toward goods with higher quality price ratios the model accounts for a variety of disparate evidence including decoy effects and context dependent willingness to pay it also suggests a novel theory of misleading sales

expectations as endowments evidence on reference dependent preferences from exchange and valuation experiments while evidence suggests that people evaluate outcomes with respect to reference points little is known about what determines them we conduct two experiments that show that reference points are determined at least in part by expectations in an exchange experiment we endow subjects with an item and randomize the probability they will be allowed to trade subjects that are less likely to be able to trade are more likely to choose to keep their item in a valuation experiment we randomly assign subjects a high or low probability of obtaining an item and elicit their willingness to accept for it the high probability treatment increases valuation of the item by 20 30 copyright 2011 oxford university press

exchange asymmetries for bads experimental evidence abstract this study provides the first incentivized test of exchange asymmetries for unpleasant items the so called bads while prospect theory predicts an endowment effect for goods and bads attention based theories predict an endowment effect for goods but a reverse exchange asymmetry that is a particularly high willingness to switch for bads the investigation of exchange asymmetries for bads is a key element to distinguish between the validity of loss aversion and attention based theories as we find a strong endowment effect for bads our results speak in favor of prospect theory

top executive rewards and firm performance a comparison of japan and the united states this paper studies top executive turnover and compensation and their relation to firm performance in the largest japanese and u s companies japanese executive turnover and compensation are related to earnings stock returns and to a lesser extent sales performance measures the fortunes of japanese top executives therefore are positively correlated with stock performance and current cash flows or with factors contributing to such performance the relations for the japanese executives are generally economically and statistically similar to those for their u s counterparts there is some evidence however that the fortunes of japanese executives are more sensitive to low income but less sensitive to stock returns than those of u s executives

voting under ignorance of job skills of unemployed the overtaxation bias abstract usual models on voting over basic income flat tax schedules rest on the assumption that voters know the whole distribution of skills even if at equilibrium some individuals do not work if individuals productivity remains unknown until they work it may be more convincing to assume that voters have only beliefs about the distribution of skills and that a learning process takes place in this paper at each period individuals vote according to their beliefs which are updated when getting new information from the job market the voting process converges towards some steady state equilibrium that depends on both the true distribution of skills and the initial beliefs the equilibrium tax rate is higher than or equal to the tax rate achieved in the perfect information framework an illustration is provided on french data if voters are over pessimistic as to the potential productivity of unemployed people majority voting may lock the economy in an informational trap with a high tax rate and a high level of inactivity

mobility and redistribution the ability of individuals to move freely from one jurisdiction to another is generally seen as a constraint on the amount of redistribution that each jurisdiction within a system of governments can undertake in this paper we look at this proposition by developing a positive analysis of income redistribution by local governments in a federal system we ask how much redistribution occurs when only local governments can have tax transfer instruments individuals can move freely among jurisdictions and voters in each jurisdiction are fully aware of the migration effects of redistributive policies local redistribution is shown to induce sorting of the population with the poorest households located in the communities that provide the most redistribution while the threat of out migration affects the potential for redistribution our results suggest that significant local redistribution is nonetheless feasible numerical computations indicate that the proportion of residents who are renters is a major factor affecting the local choice of level of redistribution

voting power in the proxy process abstract the likelihood that a firm will enact a management sponsored antitakeover charter amendment depends on ownership structure this implies that the adoption of antitakeover amendments may be anticipated then announcement returns provide a biased estimate of wealth effects an estimator that corrects for the bias induced by anticipation indicates that the enactment of an antitakeover amendment is associated with a statistically significant decrease in shareholder wealth the voting power of employee stock ownership plans and the chief executive officer plays a prominent role in determining whether a firm will adopt this type of takeover defense

exchange asymmetries in productive assets tools fertilizer or cash abstract exchange asymmetries in individual decision making have attracted substantial attention from economists since thaler 1980 referred to the phenomenon that losses are weighted more heavily than gains as an endowment effect and related it to loss aversion and prospect theory we used a field experiment to investigate exchange asymmetries in productive assets among poor rural respondents in ethiopia farmers were randomly allocated two types of productive assets tool or fertilizer or cash with a choice to keep the productive asset cash or exchange it for cash productive asset loss aversion was proxied with a separate experiment and was used to assess the importance of endowment effect theory to explain exchange asymmetries our study finds a significant exchange asymmetry and a greater exchange asymmetry for the more popular tool than for fertilizer loss aversion could explain a small but significant part of the exchange asymmetry in tools but trade experience did not reduce the exchange asymmetry the findings are relevant for whether to use targeted in kind or cash transfers to stimulate technology adoption and enhance food security among poor rural households the results imply that in kind transfers may stimulate input use or investments more than cash transfers

does the japanese governance system enhance shareholder wealth evidence from the stock price effects of top management turnover this article examines the stock price effects of top management turnover announcements for 432 japanese corporations from 1985 to 1990 we find that these announcements are associated with significantly positive abnormal returns the returns are greater when turnover is forced than when turnover represents normal succession the stock price effects are also significantly positive when turnover is forced and the successor is appointed from outside the firm we find that large shareholders play an important role during outside succession this evidence suggests that the disciplinary decisions of japanese governance mechanisms are consistent with shareholder wealth maximization article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

ends against the middle determining public service provision when there are private alternatives abstract public provision of a service coexists with private market provision the quality of public provision is determined by majority vote preferences are not single peaked owing to the presence of private alternatives we identify two cases in one majority voting equilibrium always exists and the median income voter is pivotal in the other a necessary condition for equilibrium indentifies the pivotal voter who must have income below the median when equilibrium exists a coalition of middle income households who consume the public alternative will be opposed by a coalition of rich and poor households with the rich choosing private consumption

on corporate governance a study of proxy contests abstract this paper examines a sample of firms experiencing proxy contests for seats on their board of directors dissident shareholders usually fail to obtain a majority of board seats nevertheless they capture some seats via mechanisms such as cumulative voting in over half of the sample contests regardless of proxy contest outcome positive and statistically significant share price performance is associated with the contest that finding is predicted by the standard economic analysis of proxy contests in which the challenges benefit shareholders by improving corporate performance the finding runs counter to the claim of berle 1962 that the economists view of proxy contests is a wholly imaginary picture a portion of the positive share price changes taking place in the early stages of some proxy contests is not permanent however and as suggested by manne 1962 is at least partially attributable to temporary increases in the market value of the vote attached to corporate shares

the role of demandable debt in structuring optimal banking arrangements demandable debt finance by banks warrants explanation because it entails costs of bank suspension liquidation and idle reserve holdings an explanation is developed in which demandable debt provides incentive compatible intermediation where the banker has comparative advantage in allocating investment funds but may act against the interests of uninformed depositors demandable debt attracts funds by giving depositors an option to force liquidation its usefulness in transacting follows from information sharing between monitors and nonmonitors copyright 1991 by american economic association

optimal income tax under the threat of migration by top income earners we examine how allowing individuals to emigrate to pay lower taxes changes the optimal nonlinear income tax scheme in a mirrleesian economy an individual emigrates if his domestic utility is less than his utility abroad net of migration costs utilities and costs both depending on productivity a simple formula that complements saez s formula obtained in closed economy is derived for the marginal tax rates faced by top income earners it depends on the labour elasticity the tax rate abroad and the migration costs expressed as a fraction of the utility obtained abroad the rawlsian marginal tax rates obtained for the whole population illustrate a curse of the middle skilled simulations are provided for the french economy

do markets reveal preferences or shape them we contrast the proposition that markets reveal independently existing preferences with the alternative possibility that they may help to shape them using demand revealing experimental market institutions we separate the shaping effects of price cues from the effects of market discipline we find that individual valuations and prevailing prices are systematically affected by both exogenous manipulations of price expectations and endogenous but divergent price feedback these effects persist to varying degrees in spite of further market experience in some circumstances market experience may actually consolidate them we discuss possible explanations for these effects of uninformative price cues on revealed preferences

uncertainty and the size of government abstract voters decide on a proportional income tax uncertainty about government revenue can lead to a larger or smaller tax rate depending on the voters degree of prudence it is possible for rich voters to be better off under uncertainty

the design of internal control and capital structure we study the design of internal control and capital structure we pose the question when is control allocated only to shareholders and when is it allocated to other stakeholders such as debtholders or the management team we show that shareholders debtholders get control when the firm s cash flow is relatively sensitive insensitive to managerial effort our theory implies that the signs of the correlations between endogenous variables when shareholders have absolute control are reversed when debtholders have veto power in particular debt level and firm value are negatively positively correlated when debtholders have veto power shareholders have absolute control article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

imperfect information and the meltzer richard hypothesis standard majority voting models predict that redistribution is positively linked to the mean to median income ratio but empirical evidence is mixed this paper shows that the different empirical reactions to rising mean to median income ratios can be rationalized in a simple romer roberts meltzer richard framework with imperfect information in such a model it is important to consider the source of rising mean to median ratios income growth of the poor can lead to less redistribution as more agents perceive themselves to be rich which tends to reduce the support for redistribution an empirical application reveals that the model can explain a substantial part of the first reagan tax cut

public provision of private goods government may provide a good that can if legally permitted be supplemented by private purchases policy is determined by majority rule under standard assumptions on preferences a majority voting equilibrium exists a regime of positive government provision with no restriction on private supplements is shown to be majority preferred to a regime of either only market provision or only government provision combined public and private expenditure on the good is higher under this dual provision regime than under either of the alternatives under some preference configurations the median income voter is pivotal under others a voter with income below the median is pivotal

balancing acquisition and retention spending for firms with limited capacity this paper discusses the interaction between revenue management and customer relationship management for a firm that operates in a customer retention situation but faces limited capacity we present a dynamic programming model for how the firm balances investments in customer acquisition and retention as well as retention across multiple customer types we characterize the optimal policy and discuss how the policy changes depending on capacity limitations we then contrast the modeling results with those of a behavioral experiment in which subjects acted as managers making acquisition and retention decisions in the modeling part of the paper we introduce a concept of the value of an incremental customer vic and show that when capacity is unlimited vic equals customer lifetime value clv but when capacity is limited vic is much smaller and changes dynamically depending on the number of customers and their mix as a result the optimal spending is constant and depends on clv for the firms with unlimited capacity but changes dynamically and is generally unrelated to clv when capacity is limited in the experimental part we introduce a concept of conditional optimality for the analysis of state dependent decisions applying this concept to our data we document a number of decision biases specifically the subjects tendency to overspend on retaining high value customers and underspend on lower value customers retention and acquisition we show that providing clv information exacerbates these biases and leads to a loss of net revenue when capacity is limited but providing information about the marginal costs of acquisition and retention eliminated these biases and increases net revenue data as supplemental material are available at http dx doi org 10 1287 mnsc 2013 1842 this paper was accepted by yossi aviv operations management

the effect of pre emptive right amendments on shareholder wealth abstract pre emptive rights allow existing shareholders to purchase a new offering of shares before the general public this paper investigates the effect on shareholder wealth of removing pre emptive rights from corporate charters two hypotheses are constrasted 1 shareholder wealth maximization suggests that management uses this extra degree of freedom to pick the least cost method for raising new equity hence the amendment increases shareholder wealth 2 management welfare maximization holds that management will use the passage of the amendment to maximize their own welfare sometimes to the detriment of shareholders hence the amendment decreases shareholder wealth the evidence indicates that the amendment decreases shareholder wealth

interpreting common stock returns around proxy statement disclosures and annual shareholder meetings numerous studies have analyzed the stock market reaction to information released in proxy statements two possible biases in proxy statement research are suggested frequently misspecification of the return benchmark and a sample selection bias from analyzing only clean events this paper presents evidence that most of the conclusions of existing studies are not affected by these potential biases a significantly positive abnormal return was found around a random sample of shareholder meeting dates the result indicates that interpreting event study results for announcements occurring around annual shareholder meetings must be conducted carefully the results are consistent with the findings of kalay and loewenstein 14 who argue that risk and expected return can increase around predictable information producing events alternatively the study can be viewed as being consistent with several recent studies that find anomalous results using daily return data and large samples

alternative mechanisms for corporate control we examine performance and management characteristics of fortune 500 firms experiencing one of three types of control change internally precipitated management turnover hostile takeover and friendly takeover we find that firms experiencing internally precipitated management turnover perform poorly relative to other firms in their industries but are not concentrated in poorly performing industries in contrast targets of hostile takeovers are concentrated in troubled industries there is also weaker evidence that hostile takeover targets underperform their industry peers we interpret this evidence as consistent with the idea that the board of directors is capable of firing managers whose leadership leads to poor performance relative to industry but that an external challenge in the form of a hostile takeover is often required when the whole industry is in decline the evidence also indicates that firms run by a member of the founding family are less likely to experience either internally precipitated top management turnover or a hostile takeover on the other hand firms whose top management team is dominated by a single relatively young top executive while lacking in internal discipline are more likely to experience a hostile takeover this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

the achilles heel of salience theory and a way to fix it abstract salience theory has been successfully used to explain a wide range of empirical and experimental phenomena such as the allais paradox framing effect the preference reversal phenomenon or the decoy and compromise effects in this paper we show that salience theory carries a notable flaw and under certain circumstances it suggests that a salient thinker may prefer a dominated option even when a strictly dominant alternative is available to her to solve this problem we propose a possible alteration of the theory and show how it accounts for the same phenomena as the salience theory

an empirical investigation of the impact of antitakeover amendments on common stock prices abstract antitakeover amendments are amendments to a corporation s charter that impede the ability of an outsider to gain control of the firm a number of individuals and institutions have onjected to such amendments on the grounds that they are not in the best interests of the shareholders of the firms that adopt them this paper employs event time methodology to investigate the impact of antitakeover amendments on the common stock prices of firms that adopt them the results indicate that the announcement of such amendments is associated with a positive revaluation of stock price contrary to the concerns of their critics we conclude that antitakeover amendments are proposed by managers who seek to increase the value of the firm and are approved by stockholders who share that objective

endowment effects in the field evidence from india s ipo lotteries we study a unique field experiment in india in which 1 5 million stock investors face lotteries for the random allocation of shares we find that the winners of these randomly assigned initial public offering ipo lottery shares are significantly more likely to hold them than lottery losers 1 6 and even 24 months after the random allocation this finding strongly evokes laboratory findings of an endowment effect for risky gambles and persists in samples of highly active investors suggesting along with additional evidence that this behaviour is not driven by inertia alone the effect decreases as experience in the ipo market increases but remains even for very experienced investors leading theories of the endowment effect based on reference dependent preferences are unable to fully explain these and other findings in the data