pricing and hedging in incomplete markets with model uncertainty abstract we search for a trading strategy and the associated robust price of unhedgeable assets in incomplete markets under the acknowledgement of model uncertainty our set up is that we postulate the management of a firm that wants to maximise the expected surplus by choosing an optimal investment strategy furthermore we assume that the firm is concerned about model misspecification this robust optimal control problem under model uncertainty leads to i risk neutral pricing for the traded risky assets and ii adjusting the drift of the nontraded risk drivers in a conservative direction the direction depends on the firm s long or short position and the adjustment that ensures a robust strategy leads to what is known as actuarial or prudential pricing our results extend to a multivariate setting we prove existence and uniqueness of the robust price in an incomplete market via the link between the semilinear partial differential equation and backward stochastic differential equations for viscosity and classical solutions

recent applications of theory of the firm under uncertainty this paper provides a comprehensive synthesis and analysis of the current and recent empirical implementations of the theory of the firm under uncertainty including multiple sources of uncertainty in so doing it identifies the major estimation obstacles and it offers the future empirical researcher ways to derive simple estimation procedures under multiple sources uncertainty

general linear formulations of stochastic dominance criteria abstract we develop and implement linear formulations of general n th order stochastic dominance criteria for discrete probability distributions our approach is based on a piece wise polynomial representation of utility and its derivatives and can be implemented by solving a relatively small system of linear inequalities this approach allows for comparing a given prospect with a discrete set of alternative prospects as well as for comparison with a polyhedral set of linear combinations of prospects we also derive a linear dual formulation in terms of lower partial moments and co lower partial moments an empirical application to historical stock market data suggests that the passive stock market portfolio is highly inefficient relative to actively managed portfolios for all investment horizons and for nearly all investors the results also illustrate that the mean variance rule and second order stochastic dominance rule may not detect market portfolio inefficiency because of non trivial violations of non satiation and prudence

the ellsberg paradox and risk aversion an anticipated utility approach the paper describes a decision process under which it is rational to prefer a lottery with known probabilities to a similar ambiguous lottery where the decision maker does not know the exact values of the probabilities the ellsberg paradox this is done by modeling ambiguous lotteries as two stage lotteries by assuming the independence axiom without the reduction of compound lotteries axiom and by using the anticipated utility functional this paper also gives conditions under which less ambiguity is preferred and presents some comparative statics analysis as well as some inter personal comparisons finally it proves that within the anticipated utility framework risk and ambiguity are almost identical copyright 1987 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

efficient sequential assignment with incomplete information abstract we study the welfare maximizing assignment of several heterogeneous commonly ranked objects to impatient agents with privately known characteristics who arrive sequentially according to a poisson or renewal process there is a deadline after which no more objects can be allocated we first show that the dynamically efficient allocation characterized by albright albright s c 1974 optimal sequential assignments with random arrival times manage sci 21 1 60 67 is implementable by the dynamic version of vcg mechanism we then obtain several properties of the welfare maximizing policy using stochastic dominance measures of increased variability and majorization arguments we also propose redistribution mechanisms that 1 implement the efficient allocation 2 satisfy individual rationality 3 never run a budget deficit 4 may run a budget surplus that vanishes asymptotically

gathering imperfect information before signing a contract i study information gathering for rent seeking purposes in contracting in my model an agent learns his payoff type only after accepting a contract but can at costs acquire imperfect information while deliberating whether to accept i show that the principal deters the acquisition if and only if the costs are high the result stands in contrast to a finding by cremer and khalil 1992 who demonstrate that the acquisition of perfect information will always be deterred a key insight is that the case of imperfect information is an instance of a sequential screening problem

optimal investment under ambiguous technology shocks abstract this paper analyzes the behavior of a firm facing an ambiguous technology shock and the effects of the attitude toward ambiguity on optimal capital investment using the smooth ambiguity model of klibanoff et al 2005 although it seems intuitive that an increase in ambiguity aversion always reduces the optimal capital investment this is not necessarily true because the shape of the production function plays a key role in determining the effect under some conditions we show that the optimal amount of capital investment increases decreases in ambiguity aversion if the production function is substitute complement and that this result is counterintuitive when the production function is substitute furthermore our main results hold if we assume the maxmin preferences in ghirardato et al 2004

progressive screening long term contracting with a privately known stochastic process we examine a model of long term contracting in which the buyer is privately informed about the stochastic process by which her value for a good evolves in addition the realized values are also private information we characterize a class of environments in which the profit maximizing long term contract offered by a monopolist takes an especially simple structure we derive sufficient conditions on primitives under which the optimal contract consists of a menu of deterministic sequences of static contracts within each sequence higher realized values lead to greater quantity provision however an increasing proportion of buyer types are excluded over time eventually leading to inefficiently early termination of the relationship moreover the menu choices differ by future generosity with more costly up front plans guaranteeing greater quantity provision in the future thus the seller screens process information in the initial period and then progressively screens across realized values so as to reduce the information rents paid in future periods copyright oxford university press

designing efficient mechanisms for dynamic bilateral trading games this paper studies the problem of allocating a good between two players in each period of an infinite horizon game the players valuations in each period are private information and the valuations change over time we analyze two special cases for the dynamics of valuations serially correlated valuations where players valuations are exogenous but serially correlated and learning by doing where a player s past consumption improves his current distribution of valuations but his valuations are otherwise uncorrelated we analyze conditions under which there exists an efficient bayesian incentive compatible bic individually rational ir budget balanced bb mechanism when the mechanism designer has commitment power we consider

optimal auctions with information acquisition this paper studies optimal auction design in a private value setting with endogenous information acquisition first we develop a general framework for modeling information acquisition when a seller wants to sell an object to one of several potential buyers who can each gather information about their valuations prior to participation we then show that under certain conditions standard auctions with a reserve price remain optimal but the optimal reserve price lies between the mean valuation and the standard reserve price in myerson 1981 we provide sucient conditions under which the value of information to the seller is positive and also characterize the necessary and sucient conditions under which equilibrium information acquisition in private value auctions is socially excessive the key to the analysis is the insight that buyer incentives to acquire information become stronger as the reserve price moves toward the mean valuation

optimal dynamic auctions for revenue management we analyze a dynamic auction in which a seller withc units to sell faces a sequence of buyers separated intot time periods each group of buyers has independent private values for a single unit buyers compete directly against each other within a period as in a traditional auction and indirectly with buyers in other periods through the opportunity cost of capacity assessed by the seller the number of buyers in each period as well as the individual buyers valuations are random the model is a variation of the traditional single leg multiperiod revenue management problem in which consumers act strategically and bid for units of a fixed capacity over time for this setting we prove that dynamic variants of the first price and second price auction mechanisms maximize the seller s expected revenue we also show explicitly how to compute and implement these optimal auctions the optimal auctions are then compared to a traditional revenue management mechanism in which list prices are used in each period together with capacity controls and to a simple auction heuristic that consists of allocating units to each period and running a sequence of standard multiunit auctions with fixed reserve prices in each period the traditional revenue management mechanism is proven to be optimal in the limiting cases when there is at most one buyer per period when capacity is not constraining and asymptotically when the number of buyers and the capacity increases the optimal auction significantly outperforms both suboptimal mechanisms when there are a moderate number of periods capacity is constrained and the total volume of sales is not too large the benefit also increases when variability in the dispersion in buyers valuations or in the number of buyers per period increases

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

optimal procurement contracts with pre project planning the paper studies procurement contracts with pre project investigations in the presence of adverse selection and moral hazard to model the procurer s problem we extend a standard sequential screening model to endogenous information acquisition with moral hazard the optimal contract displays system atic distortions in information acquisition due to a rent effect adverse selection induces too much infor mation acquisition to prevent cost overruns and too little information acquisition to prevent false project cancellations moral hazard mitigates the distortions related to cost overruns yet exacerbates those related to false negatives the optimal mechanism is a menu of option contracts that achieves the dual goal of providing incentives for information acquisition and truthful information revelation

multi period contracts between principal and agent with adverse selection abstract multi period contracts with adverse selection at the time of contracting are studied with risk neutrality and independent private information all inefficiency arises in the first period only with positive serial correlation inefficiency is more pervasive but declines over time

loss averse preferences and portfolio choices an extension abstract in this paper we generalise existing models of loss averse preferences this extension clarifies the impact of stochastic changes in risk on the optimal degree of risk taking our more general model highlights an intuitive link between the literature on loss averse behaviours and the notions of prudence and temperance recently introduced in the literature we also stress the link between our approach and the use of var and cvar as risk measures

uncertainty shocks asset supply and pricing over the business cycle this article estimates a business cycle model with endogenous financial asset supply and ambiguity averse investors firms shareholders choose not only production and investment but also capital structure and payout policy subject to financial frictions an increase in uncertainty about profits lowers stock prices and leads firms to substitute away from debt as well as reduce shareholder payout this mechanism parsimoniously accounts for the postwar comovement in investment stock prices leverage and payout at both business cycle and medium term cycle frequencies ambiguity aversion permits a markov switching var representation of the model while preserving the effect of uncertainty shocks on the time variation in the equity premium

optimal voting schemes with costly information acquisition a group of individuals with identical preferences must make a decision under uncertainty about which decision is best before the decision is made each agent can privately acquire a costly and imperfect signal we discuss how to design a mechanism for eliciting and aggregating the collected information so as to maximize ex ante social welfare we first show that of all mechanisms a sequential one is optimal and works as follows at random one agent at a time is selected to acquire information and report the resulting signal agents are informed of neither their position in the sequence nor of other reports acquiring information when called upon and reporting truthfully is an equilibrium we next characterize the ex ante optimal scheme among all ex post efficient mechanisms in this mechanism a decision is made when the precision of the posterior exceeds a cut off that decreases with each additional report the restriction to ex post efficiency is shown to be without loss when the available signals are sufficiently imprecise on the other hand ex post efficient mechanisms are shown to be suboptimal when the cost of information acquisition is sufficiently small

the behavior of competitive exporting firms under multiple uncertainty evaluates the effect of exchange rate and commodity price uncertainty from cost and production on a competitive risk averse exporting firm s behavior role of forward future markets in the presence of background uncertainty information on the behavior of the firm when missing markets were introduced

optimal dynamic mechanism design and the virtual pivot mechanism we consider the problem of designing optimal mechanisms for settings where agents have dynamic private information we present the virtual pivot mechanism which is optimal in a large class of environments that satisfy a separability condition the mechanism satisfies a rather strong equilibrium notion it is periodic ex post incentive compatible and individually rational we provide both necessary and sufficient conditions for immediate incentive compatibility for mechanisms that satisfy periodic ex post incentive compatibility in future periods the result also yields a strikingly simple mechanism for selling a sequence of items to a single buyer we also show that the allocation rule of the virtual pivot mechanism has a very simple structure a virtual index in multiarmed bandit settings finally we show through examples that the relaxation technique we use does not produce optimal dynamic mechanisms in general nonseparable environments

from bottom of the barrel to cream of the crop sequential screening with positive selection in a number of interesting environments dynamic screening involves positive selection in contrast with coasian dynamics only the most motivated remain over time the paper provides conditions under which the principal s commitment optimum is time consistent and uses this result to derive testable predictions under permanent or transient shocks it also identifies environments in which time consistency does not hold despite positive selection and yet simple equilibrium characterizations can be obtained

awarding monopoly franchises the authors analyze how to award a monopoly franchise when the objective is to maximize expected consumers surplus net of transfer payments to the producer potential producers initially possess independent private information about uncertain production costs only the chosen producer subsequently observes realized production costs after awarding the franchise to the producer with the lowest expected costs prices are optimally set above realized marginal cost these ex post distortions foster more competitive bidding ex ante the distortions for any bid cost pair are invariant to the number of bidders n though expected distortions and profits decline with n copyright 1987 by american economic association

discriminatory information disclosure we consider a price discrimination problem in which a seller has a single object for sale to a potential buyer at the time of contracting the buyer s private type is his incomplete private information about his value and the seller can disclose additional private information to the buyer we study the question of whether discriminatory information disclosure can be protable to the seller under the assumption that for the same disclosure policy the amount of additional private information that the buyer can learn depends on his private type we establish sucient conditions under which it is prot maximizing for the seller to grant each private type of the buyer full access to all additional private information under her control in general however discriminatory disclosure can be optimal because it reduces the information rent accrued to private types of the buyer without much impact on the trade surplus

revenue implications of money creation under leviathan most governments possess a monopoly franchise in the creation of money economists provide an analytical justification for this institutional arrangement either in terms of the use of monetary aggregates for macro economic stabilization or in terms of the alleged inability of competitive markets to generate tolerably efficient monetary results any complete case for the government s monetary monopoly must however depend on a comparison of market and political arrangements a comparison that requires predictions about how governments are likely to behave once a monopoly franchise is assigned similarly such predictions are crucial in evaluating restrictions that might be imposed on the government s exercise of its money creation power in designing a monetary constitution in the analysis of political arrangements the revenue implications of the money creation power are probably more significant than considerations of either macro economic stability or optimality in the money supply although those revenue implications are incidental to demonstrating the nature of market failure in monetary arrangements they are fundamental in understanding how the government might exploit a monopoly in money creation once granted our interest in the revenue effects of money creation stems from a broader study of constitutional restrictions on the revenueraising authority of government see our book the power to create money is naturally encompassed in this restrictions on the revenue raising power must embody restrictions on the power to create money consequently the fiscal constitution has important implications for the monetary constitution in this paper we examine both the revenue implications of money creation and desirable consitutional restrictions on the money creation power within the context of a specific model of political processes

continuous time smooth ambiguity preferences abstract this study extends the smooth ambiguity preferences model proposed by klibanoff et al 2005 to a continuous time dynamic setting it is known that the original smooth ambiguity preferences converge to the subjective expected utility as the time interval shortens so that decision makers do not exhibit any ambiguity sensitive behavior in the continuous time limit accordingly this study proposes an alternative model of these preferences that interchanges the role of the second order utility function with that of the second order probability to prevent the smooth ambiguity attitude of decision maker from evaporating in the continuous time limit by utilizing the utility convergence results established by kraft and seifried 2014 our model is eventually represented by the stochastic differential utility with distorted beliefs so that most existing techniques in economics and financial studies can be made applicable together with these distorted beliefs we give an asset pricing example to demonstrate the applicability of our model

an efficient dynamic mechanism this paper constructs an efficient budget balanced bayesian incentive compatible mechanism for a general dynamic environment with quasilinear payoffs in which agents observe private information and decisions are made over countably many periods first under the assumption of private values other agents private information does not directly affect an agent s payoffs we construct an efficient ex post incentive compatible mechanism which is not budget balanced second under the assumption of independent types the distribution of each agent s private information is not directly affected by other agents private information we show how the budget can be balanced without compromising agents incentives finally we show that the mechanism can be made self enforcing when agents are sufficiently patient and the induced stochastic process over types is an ergodic finite markov chain publication abstract

interest rates and prices in an inventory model of money with credit abstract using a segmented market model that includes state dependent asset market decisions along with access to credit we analyze the impact that transactions credit has on interest rates and prices the availability of credit allows agents to significantly smooth consumption reduce the movements in velocity prices become quite flexible and liquidity effects are dampened as credit costs decline in the model so does the effectiveness of monetary policy we also investigate the recessionary consequences of a shock to the cost of credit and find that the model s predictions align well with the empirical evidence

search and knightian uncertainty suppose that uncertainty about labor market conditions has increased does this change induce an unemployed worker to search longer or shorter this paper shows that the answer is drastically different depending on whether an increase in uncertainty is an increase in risk or that in true uncertainty in the sense of frank knight we show in a general framework that while an increase in risk the mean preserving spread of the wage distribution that the worker thinks she faces increases the reservation wage an increase in knightian uncertainty a decrease in her confidence about the wage distribution reduces it

stochastic dominance and expected utility survey and analysis while stochastic dominance has been employed in various forms as early as 1932 it has only been since 1969 1970 that the notion has been developed and extensively employed in the area of economics finance agriculture statistics marketing and operations research in this survey the first second and third order stochastic dominance rules are discussed with an emphasis on the development in the area since the 1980s

repeated bargaining with persistent private information the paper analyses repeated contract negotiations involving the same buyer and seller where the contracts are linked because the buyer has persistent but not fully permanent private information the size of the surplus being divided is specified as a two state markov chain with transitions that are synchronized with contract negotiation dates equilibrium involves information cycles triggered by the success or failure of aggressive demands made by the seller because there is persistence in the markov chain generating the surplus a successful demand induces the seller to make another aggressive demand in the next negotiation since the buyer s acceptance reveals that the current surplus is large rejection of an aggressive demand on the other hand leads the seller to be pessimistic about the size of the surplus in the next contract so the seller makes a soft offer that is sure to be accepted then after several such offers have been accepted the seller is optimistic enough to again make an aggressive demand creating an information cycle an interesting feature of this cycle is that the soft price is not constant but declines as the cycle continues so as to offset the buyer s option value of re starting the cycle when the current state is bad an explicit mapping is given for the relationship between the basic parameters and the equilibrium prices and quantities in particular there is a closed form solution for the threshold belief that makes the seller indifferent between hard and soft offers

production decisions under joint price and production uncertainty abstract while production decisions in the presence of price uncertainty have been extensively studied this is not so for the case in which the level of production is itself uncertain in this paper we provide a decision analysis under multiplicative production uncertainty both with and without price uncertainty we depict equilibrium and obtain comparative statics results with the aid of a diagram based on the difference between expected price and marginal cost comparative statics results are obtained for the model with production uncertainty alone and also for simultaneous price and production uncertainty including two special cases we first derive results based on the arrow pratt coefficients of risk aversion and then supplement these with the ross measure of relative risk aversion since this proves useful in the presence of multiple sources of uncertainty we find that increases in risk both price and production or input prices reduce expected output however expected output supply is an increasing function of expected price only for low levels of risk aversion and in general the relationship is ambiguous

learning about the future and dynamic efficiency we analyze the conditions under which an efficient allocation of resources is achievable in a dynamic private values setting where the designer gradually learns about the distribution of agents values as an application consider the sequential allocation of scarce spectrum to emerg ing technologies whenever a new technology appears a benevolent designer is faced with a problem should he allocate a valuable chunk of spectrum right now while forfeiting for a long period of time the option of allocating it to a possibly superior future technology it makes sense to assume here that current firms have a better knowledge of their technological prow ess than the designer and that the designer s assessment of future technological possibilities is improved by observing the current technology if technology owners are strategic we show below that the learning process about the future disturbs the ability to extract the information necessary for efficient decision making another good example is hiring by an organization that fills positions at different hierarchy levels over time while all candidates prefer higher level positions some aspect of their ability to perform the needed tasks at each level is privately known to the candidates if contracts with current employees are difficult to adjust the designer must carefully compare the quality of present candidates which can serve as a signal about the market to the expected quality of candidates that may become available in the future finally consider a firm allocating franchises in a country where it did not operate before and where contractual clauses or other impediments prevent reallocation during a significant period of time local potential franchisees may have some superior information regarding future prof itability in the respective market and hence the elicitation of private information is crucial for a franchisor that is supposed to get a share of the future profits

ex post information rents in sequential screening abstract we study ex post information rents in sequential screening models where the agent receives private ex ante and ex post information the principal has to pay ex post information rents for preventing the agent to coordinate lies about his ex ante and ex post information when the agent s ex ante information is discrete these rents are positive whereas they are zero in continuous models consequently full disclosure of ex post information is generally suboptimal optimal disclosure rules trade off the benefits from adapting the allocation to better information against the effect that more information aggravates truth telling

long term contracting with markovian consumers to study how a firm can capitalize on a long term customer relationship we characterize the optimal contract between a monopolist and a consumer whose preferences follow a markov process the optimal contract is nonstationary and has infinite memory but is described by a simple state variable under general conditions supply converges to the efficient level for any degree of persistence of the types and along any history though convergence is history dependent in contrast as with constant types the optimal contract can be renegotiation proof even with highly persistent types these properties provide insights into the optimal ownership structure of the production technology

a note on the theory of the firm under multiple uncertainties abstract we develop a dynamic continuous time theory of the competitive firm under multiple correlated uncertainties output price uncertainty and output uncertainty as an example in doing so we completely generalize and extend the previous one period comparative statics results the marginal impact of each parameter on optimal output particularly we relax the assumption of the statistical independence between the risks and the restrictions on the coefficient of absolute relative risk aversion furthermore we generally show the impact of one risk on the aversion to another moreover we show the role of the factor of correlation between risks on the decisions of the firm

good deals and benchmarks in robust portfolio selection abstract this paper deals with portfolio selection problems under risk and ambiguity the investor may be ambiguous with respect to the set of states of nature and their probabilities both static and discrete or continuous time dynamic pricing models are included in the analysis risk and ambiguity are measured in general settings the considered risk measures contain as particular cases the usual deviations and the coherent and expectation bounded measures of risk four contributions seem to be reached firstly necessary and sufficient optimality conditions are given secondly the portfolio selection problem may be frequently solved by linear programming linked methods despite the fact that risk and ambiguity cannot be given by linear expressions thirdly if there is a market price of risk then there exists a benchmark that creates a robust capital market line when combined with the riskless asset the global risk of every portfolio may be divided into systemic and specific moreover if there is no ambiguity with respect to the states of nature only their probabilities are uncertain then classical capm formulae may be found fourthly some recent pathological findings for ambiguity free analyses also apply in ambiguous frameworks in particular there may exist arbitrage free markets such that the ambiguous agent can guarantee every expected return with a maximum risk bounded from above by zero i e the capital market line risk return becomes vertical for instance in the non ambiguous black and scholes model this property holds for important risk measures such as the absolute deviation or the cvar nevertheless in ambiguous settings adequate increments of the ambiguity level will allow us to recover capital market lines consistent with the empirical evidence the introduction of ambiguity may overcome several caveats of many important pricing models

risk aversion and the choice between risky prospects the preservation of comparative statics results most results in what can be termed the comparative statics of risk aversion are obtained when there is only one source of uncertainty the primary example which originally motivated the definition of risk aversion is that more risk averse people are willing to pay a higher premium for insuring against risk it is known that the results do not generally carry over when there is another source of uncertainty the paper develops conditions under which comparative statics results are robust against the introduction of additional sources of uncertainty

information incentives and organizational mode we examine the choice of organizational mode for a two stage production process wherein cost realizations at each stage are observed only by the producing party when these costs are positively correlated the principal prefers to undertake second stage production herself when the correlation is negative and sufficiently small she will prefer that the agent who performs the first stage also perform the second for large negative correlation either mode might be preferred when costs are uncorrelated the principal is indifferent between modes

choosing the wrong calling plan ignorance and learning when a firm offers several tariff options to its customers the possibility arises that they will make an ex post mistake in tariff choice this occurs since consumers cannot commit to a certain purchase level at the time they subscribe to the service option and thus they might find out later that a different choice of tariff could have resulted in a lower payment for their actual level of consumption this is a common feature of increasingly important subscriptions markets in which buyers and sellers maintain long term nonanonymous relations and where learning induces interesting dynamics on the one hand buyers may learn their taste over time thus making the right choice as times goes by on the other hand the seller may design options to identify the type of each buyer and if possible to extract a higher proportion of their consumer surplus by offering tariff options that are better tailored to the profile of the consumer this paper focuses on the first type of learning in turn i document buyer behavior in a subscriptions market using data from a tariff experiment run by south central bell scb in kentucky during the second half of 1986 the most frequently studied case of subscriptions markets is the choice among optional calling plans ocps in the telephone industry this paper shows that contrary to the conven

the role of commitment in dynamic contracts evidence from life insurance we use data on life insurance contracts to study the properties of long term contracts in a world where buyers cannot commit to a contract the data are especially suited to test a theory of dynamic contracting since they include information on the entire proele of future premiums all the patterns in the data et the theoretical predictions of a model with symmetric learning and one sided com

optimal government policies in models with heterogeneous agents abstract in this paper we develop a new approach for finding optimal government policies in economies with heterogeneous agents using the calculus of variations we present three classes of equilibrium conditions from government s and individual agent s optimization problems 1 the first order conditions the government s lagrange euler equation and the individual agent s euler equation 2 the stationarity condition on the distribution function and 3 the aggregate market clearing conditions these conditions form a system of functional equations which we solve numerically the solution takes into account simultaneously the effect of the government policy on individual allocations the resulting optimal distribution of agents in the steady state and therefore equilibrium prices we illustrate the methodology on a ramsey problem with heterogeneous agents finding the optimal limiting tax on total income

contracting institutions and ownership structure in international joint ventures abstract this paper examines the role of contracting institutions on a multinational firm s optimal ownership strategy we develop a model in which both a multinational firm and its local joint venture partner can ex post engage in costly rent seeking actions to increase their ex ante agreed upon revenue share we show that the host country s level of contract enforcement and level of judicial favoritism affect the parties incentives to contribute to the international joint venture the model allows us to identify testable hypotheses relating these institutional features with the performance and optimal ownership structure of international joint ventures

stochastically dominating shifts and the competitive firm abstract the production responses of the competitive firm to stochastically dominating shifts in the distribution of output price have been the object of much research in a recent paper simpson and sproule metroeconomica 51 2 2000 168 181 present five sets of sufficient conditions any one of which may be used to jointly sign the production responses of the competitive firm to first second and third order stochastically dominating shifts this paper demonstrates that one of the conditions outlined in the above mentioned reference is unnecessarily restrictive in the case of the logarithmic and the positive power utility functions

monotone comparative statics under uncertainty this paper analyzes monotone comparative statics predictions in several classes of stochastic optimization problems the main results characterize necessary and sufficient conditions for comparative statics predictions to hold based on properties of primitive functions that is utility functions and probability distributions the results apply when the primitives satisfy one of the following two properties i a single crossing property which arises in applications such as portfolio investment problems and auctions or ii log supermodularity which arises in the analysis of demand functions affiliated random variables stochastic orders and orders over risk aversion

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

optimal dynamic mechanism design with deadlines a seller maximizes revenue from selling an object in a dynamic environment with buyers that differ in their patience each buyer has a privately known deadline for buying and a privately known valuation first we derive the optimal mechanism neglecting the incentive constraint for the deadline the deadline of the winner determines the time of the allocation and therefore also the amount of information available to the seller when he decides whether to allocate to a buyer depending on the shape of the markup that the seller uses this can lead to a violation of the neglected incentive constraint we give sufficient conditions on the type distribution under which the neglected constraint is fulfilled or violated second for the case that the constraint cannot be neglected we consider a model with two periods and two buyers here the optimal mechanism is implemented by a fixed price in period one and an asymmetric auction in period two the asymmetry which is introduced to prevent the patient type of the first buyer from buying in period one leads to pooling of deadlines at the top of the type space

portfolio choices and asset prices the comparative statics of ambiguity aversion we investigate the comparative statics of more ambiguity aversion as defined by klibanoff marinacci and mukerji 2005 in the context of the static two asset portfolio problem it is not true in general that more ambiguity aversion reduces the demand for the uncertain asset we exhibit some sufficient conditions to guarantee that ceteris paribus an increase in ambiguity aversion reduces the demand for the ambiguous asset and raises the equity premium for example this is the case when the set of plausible distributions of returns can be ranked according to the monotone likelihood ratio order we also show how ambiguity aversion distorts the price kernel in the alternative portfolio problem with complete markets for contingent claims

robust reinsurance contracts with uncertainty about jump risk abstract we investigate robust reinsurance contracts in two reinsurance modes namely proportional reinsurance and excess loss reinsurance in a continuous time principal agent framework insurance claims follow the classic cramer lundberg process the reinsurer principal is concerned about potential ambiguity in the claim intensity but the insurer agent is not the reinsurer designs a robust reinsurance contract that maximizes the penalty based multiple priors utility of terminal wealth subject to the insurer s incentive compatibility constraint we derive the analytical expressions of the robust reinsurance contacts our results show that the reinsurer dynamically decreases the reinsurance price which makes the demand for reinsurance increase over time however the reinsurer s ambiguity aversion increases the price of reinsurance which decreases demand moreover the price of excess loss reinsurance is greater than that of proportional reinsurance finally when the insurer s risk aversion is low or the reinsurer s risk aversion is high both the insurer and the reinsurer prefer the proportional reinsurance contract

optimal information disclosure in auctions and the handicap auction we analyze a situation where a monopolist is selling an indivisible good to risk neutral buyers who only have an estimate of their private valuations the seller can release without observing certain additional signals that affect the buyers valuations our main result is that in the expected revenue maximizing mechanism the seller makes available all the information that she can and her expected revenue is the same as it would be if she could observe the part of the information that is new to the buyers we also show that this mechanism can be implemented by what we call a handicap auction in interesting applications in the first round of this auction each buyer picks a price premium from a menu offered by the seller a smaller premium costs more then the seller releases the additional signals in the second round the buyers bid in a second price auction where the winner pays the sum of his premium and the second highest non negative bid in the case of a single buyer this mechanism simplifies to a menu of european call options