forecasting recessions the puzzle of the enduring power of the yield curve for over two decades researchers have provided evidence that the yield curve specifically the spread between long and short term interest rates contains useful information for signaling future recessions despite these findings forecasters appear to have generally placed too little weight on the yield spread when projecting declines in the aggregate economy indeed we show that professional forecasters are worse at predicting recessions a few quarters ahead than a simple real time forecasting model that is based on the yield spread this relative forecast power of the yield curve remains a puzzle the appendix is included online as supplementary material

consensus building how to persuade a group many decisions in private and public organizations are made by groups the paper explores strategies that the sponsor of a proposal may employ to convince a qualified majority of group members to approve the proposal adopting a mechanism design approach to communication it emphasizes the need to distill information selectively to key members of the group and to engineer persuasion cascades in which members who are brought on board sway the opinion of others the paper unveils the factors such as the extent of congruence among group members and between them and the sponsor and the size and governance of the group that condition the sponsor s ability to maneuver and get his project approved

strategic extremism why republicans and democrats divide on religious values party platforms differ sharply from one another especially on issues with religious content such as abortion or gay marriage given the high return to attracting the median voter why do vote maximizing politicians take extreme positions in this paper we find that strategic extremism depends on an intensive margin where politicians want to induce their core constituents to vote or make donations and the ability to target political messages toward those core constituents our model predicts that the political relevance of religious issues is highest when around one half of the voting population attends church regularly using data from across the world and within the united states we indeed find a nonmonotonic relationship between religious extremism and religious attendance

innovations improvements and the optimal adoption of new technologies abstract this paper extends the literature on technology adoption by introducing a distinction between technological breakthroughs innovations and the engineering refinements improvements that follow such a breakthrough firms do not necessarily wait for a future technological breakthrough but instead have an incentive to delay the adoption of a new technology until it is sufficiently advanced we characterize a firm s adoption decision as the solution to a continuous time infinite horizon dynamic programming problem which gives rise to an ordinary differential equation that is highly non linear and does not have a closed form solution we thus employ projection techniques and show how these techniques can be applied to the analysis of optimal stopping problems

communication structure and coalition proofness experimental evidence abstract the paper analyzes the role of the structure of communication i e who is talking with whom in a coordination game we run an experiment in a three player game with pareto ranked equilibria where a pair of players has a profitable joint deviation from the pareto superior equilibrium we show that specific communication structures lead to different coalition proof equilibria in this game results match the theoretical predictions subjects communicate and play the pareto superior equilibrium when communication is public when pairs of players exchange messages privately subjects play the pareto inferior equilibrium even in these latter cases however players beliefs and choices tend to react to messages despite the fact that these are not credible

the informational theory of legislative committees an experimental analysis we experimentally investigate the informational theory of legislative committees gilligan and krehbiel 1989 two committee members provide policy relevant information to a legislature under alternative legislative rules under the open rule the legislature is free to make any decision under the closed rule the legislature chooses between a member s proposal and a status quo we find that even in the presence of biases the committee members improve the legislature s decision by providing useful information we obtain evidence for two additional predictions the outlier principle according to which more extreme biases reduce the extent of information transmission and the distributional principle according to which the open rule is more distributionally efficient than the closed rule when biases are less extreme we find that the distributional principle dominates the restrictive rule principle according to which the closed rule is more informationally efficient overall our findings provide experimental support for gilligan and krehbiel s informational theory

the finance growth nexus evidence from bank branch deregulation this paper provides evidence that financial markets can directly affect economic growth by studying the relaxation of bank branch restrictions in the united states we find that the rates of real per capita growth in income and output increase significantly following intrastate branch reform we also argue that the observed changes in growth are the result of changes in the banking system improvements in the quality of bank lending not increased volume of bank lending appear to be responsible for faster growth

financial intermediation and endogenous growth an endogenous growth model with multiple assets is developed agents who face random future liquidity needs accumulate capital and a liquid but unproductive asset the effects of introducing financial intermediation into this environment are considered conditions are provided under which the introduction of intermediaries shifts the composition of savings toward capital causing intermediation to be growth promoting in addition intermediaries generally reduce socially unnecessary capital liquidation again tending to promote growth

growth forecasts belief manipulation and capital markets abstract we analyze how a benevolent privately informed government agency would optimally release information about the economy s growth rate when the agents hold heterogeneous beliefs we model two types of agent conforming and dissenting the former has a prior that is identical to that of the government agency whereas the latter has a prior that differs from that of the government agency we identify both informative and uninformative equilibria informative equilibria are equilibria in which the government agency s equilibrium signal leads to a revision of beliefs we demonstrate that the uninformative equilibria can in fact dominate the informative ones in terms of ex post social welfare

technological expectations and adoption of improved technology abstract attention is focused upon the adoption demand rather than the creation supply of new technology which improves from time to time based on the expected flow of technological progress over which the firm demander has no control it must decide either to adopt the current best available technology or to postpone adoption the distinguishing features of the model are that more than one technological innovation is anticipated and expectations about the likelihood of such innovations are revised as time passes since the last innovation our analysis shows that the firm will adopt the current best practice if its technological lag exceeds a certain threshold moreover as time passes without new technological advances it may become profitable to purchase a technology that has been available even though it was not profitable to do so in the past

inflexible rules in incentive problems in practice contracts involve standard terms or rules allowing for variations only under exceptional circumstances we develop a simple model in which optimal contracts display this feature even in the absence of transactions costs rules arise when an agent has countervailing incentives to misrepresent private information these incentives are created by endowing the agent with a critical factor of production ex ante applications in regulatory labor and legal settings

sequential investment in renewable energy technologies under policy uncertainty although innovation and support schemes are among the main forces that drive investment in renewable energy re technologies both involve considerable uncertainty we develop a real options framework to analyse the impact of technological policy and electricity price uncertainty on the decision to invest sequentially in successively improved versions of a re technology technological uncertainty is reflected in the random arrival of innovations and policy uncertainty in the likely provision or retraction of a subsidy that takes the form of a fixed premium on top of the electricity price we show that greater likelihood of subsidy retraction provision lowers raises the incentive to invest and by comparing a stepwise to a lumpy investment strategy we show how an embedded option to adopt an improved technology version mitigates the impact of subsidy retraction on investment timing specifically we show how stepwise investment facilitates earlier technology adoption compared to lumpy investment and that under stepwise investment technological uncertainty accelerates technology adoption thus further offsetting the incentive to delay investment in the light of subsidy retraction

collective memory cultural transmission and investments memory plays a crucial role in the transmission of cultural and national identity in every soci ety and every country the collective memory1 transmitted to the young by the older generation through a variety of channels e g school textbooks the media monuments and commemora tive rituals influences their perception of their cultural identity and values and their willingness to invest in them with major economic as well as political and social consequences this natu rally raises two questions first what would be the socially optimal transmission of collective memory to the young is it the case as intuition might suggest that the older generation should strive to be as unbiased accurate and comprehensive as possible in communicating its collec tive memory to the younger generation if not why and how should it depart from this objec tive second is collective memory transmission in practice likely to differ from what would be socially optimal and if so how these questions are at the heart of many current debates including those over education policy e g how history should be taught the level of control the state should have over school textbooks and curriculum 2 over the media e g the role of the corporation for public broadcasting cpb in the united states or the british broadcasting corporation bbc in the united kingdom 3 and over cultural integration e g centralized ver sus decentralized institutions in the european union legislation affecting freedom of speech in the united kingdom 4

basic analytics of multilateral lending and surveillance abstract i analyse the role of multilateral financial institutions in a world of global capital markets assuming that they have an informational advantage over private lenders in the market for sovereign debt i show that the adverse selection problem in this market may be solved through certification if the multilateral agency does not care too much about borrower country welfare however with lending the private information of the agency will be revealed whatever its weighting of borrower welfare vs private lenders profits multilateral lending on concessional terms also alleviates the moral hazard problem that investment in creditworthy borrowers is reduced as private lenders seek to avoid ex post default by constraining credit

a servant of two masters communication and the selection of international bureaucrats international bureaucrats must often serve multiple principals who collectively choose policy how does this affect bureaucrats incentives to truthfully reveal their private information i construct a cheap talk model in which a bureaucrat possesses private information about how policies translate into outcomes the bureaucrat can communicate publicly observable messages about this information to two policymakers who must then bargain over a set of policy choices i find that both the bureaucrat s willingness to communicate informatively and the choice of an optimal bureaucrat are highly contingent on the bargaining powers of the two policymakers when each policymaker is bound to adhere to the bargaining outcome moderate bureaucrats are most preferred in contrast when at least one policymaker can leave the bargaining table and exercise an outside option biased bureaucrats can be optimal i illustrate my findings by examining un weapons inspections in iraq from 1991 to 2003 i wish to thank bruce bueno de mesquita michael gilligan catherine hafer matias iaryczower dimitri landa adam meirowitz alastair smith and the editor and two anonymous reviewers for their feedback previous drafts of this article were presented in the new york university politics department research workshop and the 2006 annual conference of the midwest political science association

why only nixon could go to china right wing politicians sometimes can implement policies that left wing politicians cannot and vice versa contemporary wisdom has it that only nixon could have gone to china we develop a model to explain this phenomenon a policy issue could depend on information on which every one could potentially agree on policy or on values on which agreement is impossible politicians who value both reelection and policy outcomes realize the nature of the issue whereas voters do not only a right wing president can credibly signal the desirability of a left wing course of action the nixon paradox can hold then if citizens vote retrospectively on the issue

information aggregation and optimal structure of the executive we model two aspects of executives in parliamentary democracies decision making authority is assigned to individuals and private information is aggregated through communication when information is relevant to all policies and communication is private all decisions should be centralized to a single politician a government that holds cabinet meetings where information is made available to all decision makers outperforms one where communication is private a multimember cabinet can be optimal it need not be single peaked around the most moderate politician or ideologically connected centralization is nonmonotonic in the degree of ideological divergence in a large cabinet all power should be given to the most moderate politician even when uncertainty is policy specific and a single politician is informed on each policy power should never be fully decentralized our model provides a justification for centralized authority and cabinet meetings that enhance the quality of policy

marketing information a competitive analysis selling information that is later used in decision making constitutes an increasingly important business in modern economies jensen jensen fred o 1991 information services congram friedman eds the ama handbook of marketing for the service industries chapter 22 ama com new york 423 443 information is sold under a large variety of forms industry reports consulting services database access and or professional opinions given by medical engineering accounting financial and legal professionals among others this paper is the first attempt in marketing to study competition in the rapidly emerging information sector specifically we are interested in answering the following questions 1 is competition fundamentally different when competing firms sell information rather than traditional goods and services and if yes why 2 what are the implications of such differences for decision makers marketers and regulators 3 can we explain some of the observed marketing strategies in the information industry as such the audience of the paper includes academics as well as professionals who are interested in understanding what is specific about competition in information markets familiarity with the practical implications of such differences and understanding of the mechanisms that drive them is essential for those who are faced with the problem of marketing information to answer the above research questions we build a simple game theoretic model that consists of two firms selling information to a population of consumers who are heterogeneous in their willingness to pay for the quality of information the most important features of the model are the following information products sold by the two firms are modeled as random draws from two normal distributions having equal mean the variances of these distributions and their correlatedness constitute the product attribute space which is assumed to be common knowledge consumers are interested in assessing the mean of the distributions and to do so they can buy the sample from any of the firms or they can buy both samples and combine them to obtain a more accurate estimate quality of information is linked to the accuracy of consumers estimate of the mean which in turn is influenced by the accuracy of each sample as well as by their correlatedness consumers utility depends on the quality of information they purchased on their inherent utility for quality taste and on the total price they paid to acquire information knowing consumer preferences firms simultaneously price their information products the main finding of the paper is that information markets face unique competitive structures in particular the qualitative nature of competition changes depending on basic product characteristics while traditional products and services compete either as substitutes or as complements in the relevant product attribute space information may be one or the other depending on its position within the same product attribute space said differently the nature of competition changes qualitatively with a continuous change in basic product attribute levels the intuition behind this finding is the following when purchasing information consumers facing important decisions may find it beneficial to purchase from several information sellers this is more likely to happen when the reliability of information is low and the sources of information are independent under such conditions information products tend to be complements and as a result competition between sellers is relatively mild in the opposite case when information is reliable and or sellers sources are highly correlated consumers are satisfied after consulting a single source in this case information products are substitutes and sellers tend to undercut one another s prices to induce consumers to choose their brand understanding this discontinuity in competitive structures has important implications for decision makers as very different strategies are optimal under different product characteristics under substitution traditional strategies to avoid competition e g differentiation are recommended when the competing products reliability is generally low they are complements firms are better off accommodating competition in fact we find that a firm may benefit from inviting a competitor finally our findings are also important for regulators of information markets as the literature on complementarity suggests price fixing agreements between firms offering complementary products may benefit firms as well as consumers

reputation and discretion in financial contracting the authors explain the use of legally unenforceable discretionary financial contracts in circumstances where legally enforceable contracts are feasible a discretionary contract allows a contracting party to choose whether or not to honor the contract it is shown that such a contract liquefies reputational capital by permitting it to be depreciated in exchange for the preservation of financial capital and information reusability in financially impaired states in addition discretionary contracts foster the development of reputation this explains discretion among highly confident letters holding company relationships mutual fund contracts bank loan commitments and other financial and nonfinancial contracts copyright 1993 by american economic association

information provision by interest groups we investigate interest groups incentives to inform consumers about the damaging practices of firms and the impact such an ig has on firms technology choices the ig aims to reduce the production of some bad say pollution it can at a cost investigate firms production practices and inform consumers about its findings since consumers care about the environment revealing differences in pollution levels between firms leads to vertical product differentiation the information by shifting sales from dirty towards clean firms reduces pollution we show that the ig is most inclined to investigate firms in relatively competitive industries and that the threat of being unmasked as a polluter prompts dirty firms to adopt a clean technology

efficient secrecy public versus private threats in crisis diplomacy this paper explores when and why private communication works in crisis diplomacy conventional audience cost models suggest that state leaders must go public to reveal information in interstate crises because leaders cannot enhance their credibility by tying their hands if domestic audiences cannot observe their private signals i present a crisis bargaining game where both the sender and the receiver of signals have a domestic audience the equilibrium analysis demonstrates that a private threat albeit of limited credibility can be equally compelling as a fully credible public threat secrecy works in crisis diplomacy despite its informational ine cacy because secrecy insulates leaders from domestic political consequences when they capitulate to a challenge to avoid risking unwarranted war the logic of e cient secrecy may shed light on the unaccounted history of private diplomacy in international crises the alaska boundary dispute illustrates this logic

cheap talk with two senders and complementary information this paper studies a cheap talk model with two senders having partial and non overlapping private information communicating with an uninformed receiver the two senders private information is complementary in the sense that the marginal impact of one sender s private information on the receiver s ideal action depends on the other sender s private information when the two senders communicate simultaneously their information transmission exhibits strategic complementarity more information transmitted by one sender leads to more information transmitted by the other sender when the two senders have like biases it is always optimal for the receiver to delegate the decision rights to the sender with a smaller bias when two senders have opposing biases simultaneous communication is more likely to dominate delegation

persuasion by cheap talk we consider the credibility persuasiveness and informativ eness of multidimensional cheap talk by an expert to a decision maker we find that an expert with state independent preferences can always make credible comparative statements that trade off the expert s incentive to exaggerate on each dimension such communication benefits the expert cheap talk is persuasive if her preferences are quasiconvex communication benefits a decision maker by allowing for a more informed decision but strategic interactions between multiple decision makers can reverse this gain we apply these results to topics including product recommendations voting auction disclosure and advertising jel d44 d72 d82 d83 m37

lobbying and asymmetric information informational lobbying the use by interest groups of their alleged expertise or private information on matters of importance for policymakers in an attempt to persuade them to implement particular policies is often regarded as an important means of influence this paper analyzes this phenomenon in a game setting on the one hand the interest group is assumed to have private information which is relevant to the policymaker whilst on the other hand the policymaker is assumed to be fully aware of the strategic incentives of the interest group to mis report or conceal its private information

cheap talk and bogus network externalities in the emerging technology market many emerging technologies exhibit path dependent demands driven by positive network feedback such network effects profoundly impact marketing strategists thinking in today s network economy however the significant network externalities expected by many people often fail to materialize in the emerging technology market we analyze this phenomenon in the context of a technology distribution channel by studying cheap talk strategies under information asymmetry we show that incentive compatible contracts are essential for achieving credible information transmission in our model the better informed technology vendor has an incentive to inflate the retailer s ex ante belief of network externalities when a wholesale price contract is adopted when properly termed revenue sharing contracts are implemented there are information efficient cheap talk equilibria where truthful information transmission is mutually beneficial when the vendor s information is imperfect even revenue sharing contracts cannot guarantee credible information transmission if there is significant prior belief disparity between the vendor and the retailer this study demonstrates how information inefficient equilibria e g information blockage arise because of the conflict of interest or the conflict of opinion among channel members it also explores the role of cheap talk in facilitating channel coordination

predicting u s recessions financial variables as leading indicators this paper examines the out of sample performance of various financial variables as predictors of u s recessions series such as interest rates and spreads stock prices and monetary aggregates are evaluated individually and in comparison with other financial and nonfinancial indicators the analysis focuses on out of sample performance from one to eight quarters ahead results show that stock prices are useful with one to three quarter horizons as are some well known macroeconomic indicators beyond one quarter however the slope of the yield curve emerges as the clear individual choice and typically performs better by itself out of sample than in conjunction with other variables

the esteem theory of norms when esteem is costless to supply does it provide an effectivemeans of enforcing norms for public goods production i examine thebasic mechanics of an enforcement through esteem model whileesteem may enforce norms to considerable degree systematicunderenforcement remains the general result even in very basicsettings with a minimum of transactions costs i also examine whyesteem has positive value in equilibrium if it can be producedcostlessly i e why esteem remains scarce and what collectiveaction problems plague the supply of esteem

horizontal reputation and strategic audience management we study how a decision maker uses his reputation to simultaneously influence the actions of multiple receivers with heterogenous biases the reputational payoff is single peaked around a bliss reputation at which the incentives of the average receiver are perfectly aligned we establish the existence of two equilibria characterized by repositioning toward this bliss reputation that only differ through a multiplier capturing the efficiency of reputational incentives repositioning is moderate in the more efficient equilibrium but the less efficient equilibrium features overreactions and welfare may then be lower than in the no reputation case we highlight how strategic audience management e g centralization delegation to third parties with dissenting objectives alleviates inefficient reputational incentives and how multiple organizational or institutional structures may arise in equilibrium as a result

bank liquidity creation and recessions abstract we investigate the relationship between bank liquidity creation and recessions in the u s for the 1984 2010 sample we find that i lower bank on balance sheet liquidity creation signals recessions four quarters into the future ii off balance sheet liquidity creation is not a robust predictor of recessions at longer forecast horizons iii off balance sheet liquidity creation falls in tandem with on balance sheet liquidity creation one quarter prior to recessions and aggregate on and off balance sheet bank liquidity creation continue to decline during and up to five quarters after recessions and iv liquidity creation of larger banks contains more information about future recessions than that of smaller ones

the effects of the market structure on the adoption of evolving technologies abstract we study the speed at which technologies are adopted depending on how the market power is shared between the firms that sell technologies and the firms that buy them our results suggest that because of a double marginalization problem adoption is fastest when either sellers or buyers hold all the market power thus competition between sides of the market may delay the adoption of technologies

optimal delegation with multi dimensional decisions this paper investigates optimal communication mechanisms in a framework with a twodimensional policy space and no monetary transfers contrary to the one dimensional setting if the conflicts of interests between the principal and the agent are different on each dimension the optimal mechanism never exhibits any pooling and the agent s ideal policies are never chosen simple delegation sets that trade off inflexible rules and full discretion are no longer optimal but take more complex shapes

warning labels as cheap talk why regulators ban drugs abstract one explanation for drug bans is that regulators know more than consumers about product quality but why not just communicate the information in their ban perhaps via a would have banned label because product labeling is cheap talk any small market failure tempts regulators to lie about quality inducing consumers who suspect such lies to not believe everything they are told in fact when regulators expect market failures to result in under consumption of a drug and so would not ban it for informed consumers regulators ex ante prefer to commit to not banning this drug for uninformed consumers

cheap talk and burned money we augment the standard crawford sobel 1982 econometrica 50 1431 1451 model of cheap talk communication by allowing the informed party to use both costless and costly messages the issues on which we focus are the consequences for cheap talk signaling of the option to burn money and the circumstances under which both cheap talk and burned money are used to signal information

cheap talk with two audiences these problems have in common a simple structure an informed sender says something to two interested but uninformed receivers who then take actions based on their beliefs these actions affect the sender as well as the receivers in this paper we study how costless nonverifiable claims cheap talk can affect these beliefs and hence the actions and how the incentives for truthful revelation to one receiver are affected by the presence of the other we then ask how welfare is affected by whether claims are made in public or in private as some of the above examples suggest public messages may be more credible than private messages addressed to either audience one possibility is that the presence of one audience can discipline the sender s relationship with the other we call this one sided

the net present value method versus the option value of waiting a note on farzin huisman and kort 1998 abstract using the tools of real options theory farzin huisman and kort 1998 investigate the optimal timing of technology adoption in a model in which there is ongoing technological progress and the firm s investment decision is irreversible when the firm can switch technologies n farzin et al 1998 obtain the surprising result that the criterion for adopting a new technology derived from real options theory coincides with the net present value criterion for all but the last switch this note points out a mistake in farzin et al s 1998 derivations that leads to the above result we show that compared to the net present value approach the firm will defer the adoption of a new technology when it takes the option value of waiting into account

strategic communication networks in this paper we consider situations in which individuals want to choose an action close to others actions as well as close to a payoff relevant state of nature with the ideal proximity to the common state varying across the agents before this coordination game with heterogeneous preferences is played a cheap talk communication stage is offered to players who decide to whom they reveal the private information they hold about the state the strategic information transmission taking place in the communication stage is characterized by a strategic communication network we provide a direct link between players preferences and the strategic communication network emerging at equilibrium depending on the strength of the coordination motive and the prior information structure equilibrium strategic communication networks are characterized in a very tractable way and compared in term of efficiency in general a maximal strategic communication network may not exist and communication networks cannot be ordered in the sense of pareto however expected social welfare always increases when the communication network expands strategic information transmission can be improved when group or public communication is allowed and or when information is certifiable

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

announcement entry and preemption when consumers have switching costs i study the incentives of innovating firms to announce their entry in markets in which consumers incur a cost of switching from one product to another announcing entry can prevent the lock in of potential demand before the launch of the new product at the same time however the incumbent firm learns about the impending entry and has the opportunity to cut prices and preempt the market in equilibrium entrants do not always announce and i show that this behavior maximizes ex ante total welfare by contrast consumers might be better off with a ban on announcements when the entrant s claims are not verifiable vaporware announcements arise in equilibrium and i demonstrate that they can be beneficial for consumers

repeated real options optimal investment behaviour and a good rule of thumb abstract this paper extends the standard investment under uncertainty set up with a single investment option to the case of infinitely repeated options analytical solutions are derived and it is shown that repeated options not only imply a smaller value of waiting than in the case of a single option but also that the optimal stopping rule is affected differently by changes in underlying parameters this is shown to allow for the use of a simple hurdle rate rule as a good and robust approximation to optimal behaviour when investment options are repeated something which is unlikely in the single option case

cheap talk and the fed a theory of imprecise policy announcments this paper examines the problem faced by the federal reserve in announcing its private information about its future policies because it would like to manipulate expectations and pursue a time inconsistent policy the fed cannot reveal its policy objectives precisely and credibly it can however communicate some information about its goals through the cheap talk mechanism of vincent crawford and joel sobel making announcements that are imprecise and only giving ranges within which these goals may lie copyright 1989 by american economic association

technology adoption with uncertain future costs and quality in this paper we study the impact of uncertainty about future innovations in quality and costs on consumers technology adoption decisions we model the uncertainty in the technology s quality and costs as a markov process and consider three models of the adoption decision the first model assumes that consumers do a simple net present value npv analysis that compares the npv of adopting to that of not adopting without considering the possibility of waiting the second model is a stochastic dynamic program that considers the possibility of waiting and views the adoption decision as a one time event i e the consumer will only make a single purchase the only question is when the third model allows repeat purchases so the consumer may upgrade by purchasing new versions of the technology whenever it suits her we study structural properties of these models e g the following what changes in qualities and costs will make the consumer better off what changes will encourage adoption we will see that the simple npv and single purchase model have many intuitive properties with the right notion of improvements and reasonable assumptions about the technology changes we find that improvements in the technology make the consumer better off and encourage adoption here improvements are defined using a partial order on quality and cost pairs the results are more complicated in the repeat purchase model under the same conditions on technology changes technology improvements will make the consumer better off however except for special cases of transitions these improvements may make the consumer better off and discourage adoption

the yield spread puzzle and the information content of spf forecasts while the yield spread has long been recognized as a good predictor of recessions it seems to have been largely overlooked by professional forecasters we examine this puzzle established by rudebusch and williams 2009 in a data rich environment including not just the yield spread but many other predictors as well we confirm the puzzle in this context by examining the contributions of both the spf forecasts and the yield spread in predicting recessions and by examining the information content of spf forecasts directly furthermore we take the first step towards a possible resolution of this puzzle by recognizing the heterogeneity across professional forecasters

market distortions and government transparency in this paper we investigate how government transparency depends on economic distortions we first consider an abstract class of economies in which a benevolent policy maker is privately informed about the exogenous state of the economy and contemplates whether to release this information our key result is that distortions limit communication even if transparency is ex ante pareto superior to opaqueness it cannot constitute an equilibrium when distortions are sufficiently high we next confirm this broad insight in two applied contexts in which monopoly power and income taxes are the specific sources of distortions jel d82 e61

who benefits from a sender s credibility concern the sender or a receiver abstract in an information transmission situation a sender s concern for its credibility could endow itself with an invisible power to control a receiver s decision so that the sender can manipulate information without being detected the current paper models this paradoxical role of the sender s credibility concern

language meaning and games a model of communication coordination and evolution language is a powerful coordination device we generalize the cheap talk approach to pre play communication by way of introducing a meaning cor respondence between messages and actions and by postulating two axioms met by natural languages players have a lexicographic preference second to material payoffs against deviating from the meaning correspondence under two sided communication in generic and symmetric n 3 n coordination games a nash equilibrium component in such a lexicographic communication game is evolutionarily stable if and only if it results in the unique pareto efficient out come of the underlying game we extend the analysis to one sided communica tion in arbitrary finite two player games jel c72 c73 z 3

a model of electoral competition with incomplete information a model of two candidate electoral competition is developed in which voters are uncertain about the policy either candidate would implement if elected candidates simultaneously announce policy positions from which voters attempt to infer the true positions the candidates would adopt announcing a position different from the true position is costly to the winning candidate with these costs increasing as the difference between the true policy and the announced policy increases a refinement of the sequential equilibrium concept is used to describe the behavior of candidates and voters

budgetary devices for curbing spending prone ministers and bureaucrats in this paper i study asimple game of the budgetary process thegame has three players a spending proneminister who proposes a budget a primeminister who accepts or vetoes and abureaucrat who provides non verifiableinformation about policy the bureaucratis appointed by the spending minister ishow that in this setting public spendingis excessive this result stems from theproposal power of the minister and hisincentive to appoint a spending pronebureaucrat next i examine two devices forcontrolling public spending binding budgettargets imposed by the prime minister anddelegating veto power to a spending aversefinance minister it is shown that thelatter device is more effective than theformer device to curb a spending proneminister because it not only reduces theproposal power of the spending minister but also induces him to appoint lessspending prone bureaucrats

communication in bargaining over decision rights abstract this paper develops a model of bargaining over decision rights between an uninformed principal and an informed but self interested agent we introduce two different bargaining mechanisms tacit and explicit bargaining in tacit bargaining an uninformed principal makes a take it or leave it price offer to the agent who then decides whether to accept or reject the offer in the equilibrium of the game the principal inefficiently screens out some agent types so that the agent s private information cannot be fully utilized when the decision is made in explicit bargaining in which parties can communicate explicitly via cheap talk before tacit bargaining however an equilibrium with no such inefficient screening exists even when the conflict of interest is arbitrarily large we also follow a mechanism design approach showing that under certain conditions explicit bargaining is an optimal bargaining mechanism that maximizes the joint surplus of the parties

market information and firm performance the value of new information depends on how accurate the information is but it may also depend on the characteristics of the firm and the nature of the industry it operates in we develop a game theoretic model to understand how firm and industry characteristics moderate the effect of market information on firm profits our results suggest that information is more valuable when product substitutability is higher suggesting that information is of greater value in more competitive industries our results also suggest that although industry size does not affect the value of information information is more valuable for larger firms we find that except under some conditions more precise market information has a greater impact on profits in a stackelberg mode of conduct than in a bertrand nash mode

optimal regime switching under risk aversion and uncertainty abstract technology adoption is key for corporate strategy often determining the success or failure of a company as a whole however risk aversion often raises the reluctance to make a timely technology switch particularly when this entails the abandonment of an existing market regime and entry in a new one consequently which strategy is most suitable and the optimal timing of regime switch depends not only on market factors such as the definition of the market regimes as well as economic and technological uncertainty but also on attitudes towards risk therefore we develop a utility based regime switching framework for evaluating different technology adoption strategies under price and technological uncertainty we assume that a decisionmaker may invest in each technology that becomes available compulsive or delay investment until a new technology arrives and then invest in either the older laggard or the newer technology leapfrog our results indicate that if market regimes are asymmetric then greater risk aversion and price uncertainty in a new regime may accelerate regime switching in addition the feasibility of a laggard strategy decreases increases as price uncertainty in an existing new regime increases finally although risk aversion typically favours a compulsive and a laggard strategy a leapfrog strategy may be feasible under risk aversion provided that the output price and the rate of innovation are sufficiently high

do loan commitments cause overlending i begin with a model that generates quantity credit rationing by banks in the spot credit market when the real interest rate is high and there is an economic downturn then i rationalize a bank loan commitment as partial insurance against such future rationing incorporating uncertainty about both the creditworthiness of borrowers and the abilities of banks to screen borrowers i extend the bank contracting literature wherein i examine banks decisions of whether to lend under the commitments sold earlier i show that this discretion of whether to honor borrowing requests under commitments generates reputational concerns on the part of banks and can lead to an equilibrium in which loan commitments serve their role in increasing credit supply relative to the spot credit market but produce the inefficiency of excessive credit supply when the real interest rate is low and the economy is doing well despite this welfare is higher with loan commitments than with spot credit numerous empirical predictions and policy implications are drawn out

the strategy of manipulating conflict two decision makers choose hawkish or dovish actions in a con ict game with incomplete information the decision making can be manipulated by extremists who send publicly observed cheaptalk messages the power of extremists depends on the nature of the underlying con ict game if actions are strategic complements a hawkish extremist provocateur can increase the likelihood of con ict by sending messages which trigger a fear spiral of hawkish actions this reduces the welfare of both decision makers if actions are strategic substitutes a dovish extremist paci st can send messages which cause one decision maker to back down and become more dovish this reduces his welfare but bene ts the other decision maker the hawkish extremist is unable to manipulate the decision makers if actions are strategic substitutes and the paci st is equally powerless if actions are strategic complements

how to escape a declining market capacity investment or exit this paper considers a firm that faces a declining profit stream for its established product the firm has the option to invest in a new technology with which it can produce an innovative product while having the option to exit at any point in time in the presence of an exit option earlier work determined the optimal timing to invest where it was shown that higher uncertainty might accelerate investment timing in the present paper the firm also decides on capacity this extension leads to monotonicity i e higher uncertainty delays investment timing we also find that higher potential profitability of the innovative product market increases the incentive to invest earlier where however we get the counterintuitive result that the firm invests in smaller capacity finally if quantity has a smaller negative effect on price the firm wants to acquire a larger capacity at a lower investment threshold

cheap talk coordination and entry we show how costless nonbinding nonverifiable communication cheap talk can achieve partial coordination among potential entrants into a natural monopoly industry where the payoffs are qualitatively like the battle of the sexes the analysis would apply equally in other economic situations with such payoffs for example bargaining under complete information or choosing compatibility standards while cheap talk helps achieve asymmetric coordination in a symmetric mixed strategy equilibrium it cannot achieve complete coordination if the game involves even a small amount of conflict

vaporware suddenware and trueware new product preannouncements under market uncertainty a firm may want to preannounce its plans to develop a new product in order to stimulate future demand but given that such communications can affect rivals incentives to develop the same new product a firm may decide to preannounce untruthfully in order to deter competitors we examine an incumbent s preannouncement strategy when there is uncertainty regarding the commercial viability of a new product opportunity and a threat of rival entry each firm has a private assessment of the market potential for the new product two competitive incentives arise for the incumbent in terms of discouraging rival entry it can use preemptive communication or it can remain silent and instill a pessimistic market potential outlook we find that an incumbent prefers to follow a vaporware strategy i e declares plans to pursue a new product opportunity even when it may have no development intentions when its market forecasting capabilities are weak and the demand side benefits from preannouncing are small by contrast when the incumbent has strong market forecasting capabilities and the demand side benefits are small the incumbent adopts a suddenware strategy i e remains silent about its new product plans even when it actually plans to develop the new product finally when its market forecasting capabilities are strong and the demand side benefits are large the incumbent prefers to engage in a trueware strategy i e truthfully preannounces development plans we show that an interplay between competition related and demand related considerations is what allows trueware to emerge as an equilibrium in the absence of any ex post cost to engaging in vaporware in an extension we let the incumbent s actual development plans leak out and allow the entrant to wait and learn those plans prior to setting a research and development level we identify conditions for the entrant to postpone development despite the risk of being late to market as well as conditions for the entrant to commence development immediately despite not knowing the incumbent s plans based on the observed preannouncement strategy

money or friends social identity and deception in networks abstract strategic communication occurs in virtually all committee decision environments theory suggests that small differences in monetary incentives between committee members can leave deception a strategically optimal decision crawford and sobel 1982 galeotti et al 2013 at the same time in natural environments social incentives can also play an important role in determining the way people share or withhold truthful information unfortunately little is known about how monetary and social incentives interact to determine truth telling we investigate this issue by first building a novel model and then testing its equilibrium predictions using laboratory data in the absence of social identity the model s predictions are supported there is more truthful communication between those who share monetary incentives than those who do not we find that the effect of identity is asymmetric sharing the same identity does not promote truth telling but holding different identities reduces truthfulness overall as compared to environments lacking social identity committees with both monetary and social incentives exhibit truthful communication substantially less frequently

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

language and government coordination an experimental study of communication in the announcement game one of the key roles of government is to coordinate the activities of citizens one reason why governments are efficient facilitators of coordinated action in addition to their ability to force compliance or tax is that they are typically endowed with more information than the individuals they govern this advantage creates a dilemma for them however since it forces them to decide on how they should distribute the information in their possession to the population this paper investigates this question we investigate the announcement game defined by the government and those it governs and focus on communication strategy that government uses to communicate private information to the citizens this communication strategy involves 1 partitioning the state space in an attempt to mask the true state of the world and 2 choosing what type of language to use in order to communicate elements of this partition we present evidence that the language used to execute a communication strategy does affect the efficiency of the equilibrium convergence process and also demonstrate that subjects playing the role of the government exhibit a great deal of sophistication in the communication strategies they employ and the language they use to execute them

a signal jamming theory of predation we propose a new theory ofpredation based on signal jamming in our model the predator s characteristics are common knowledge while the entrant is uncertain of his own future profitability the entrant uses his current profit to decide whether to remain in the market and the predator preys to jam or interfere with this inference problem thus our model differs from those based on reputation effects in which the predator preys to signal information about himself

vaporware as a means of entry deterrence firms in the computer industry are often accused of vaporware the untruthful pre announcement of a new version of their product by claiming they have a new product critics argue these firms try to deter potential entrants the paper analyzes this phenomenon it shows that vaporware is an equilibrium strategy in a signaling game in which the possibility to market a new product is private information in this model the possibility of vaporware can hurt consumers also in the case the incumbent does have a new version of its product the welfare effects of vaporware are ambiguous

optimal timing of technology adoption abstract in a dynamic programming framework this paper investigates the optimal timing of technology adoption by a competitive firm when technology choice is irreversible and the firm faces a stochastic innovation process with uncertainties about both the speed of the arrival and the degree of improvement of new technologies a numerical example illustrates how the optimal timing decision is affected by changes in parameter values reflecting market conditions the firm s initial technological attributes and the characteristics of the stochastic innovation process some of these effects turn out to be in sharp contrast to common intuition contrasting the optimal decision rule derived here with the rule obtained under the net present value shows that the former implies a slower pace of adoption than implied by the latter the optimal decision rule is generalized for the case of multiple technology switches and it is shown that for all the switching decisions except the last one the optimal rule satisfies the net present value criterion

secessions and political extremism why regional referenda do not solve the problem this paper shows that an uninformed player can increase his bargaining power by committing to receive information from an expert more skeptical to cooperation this general idea is applied to a model in which a regional political leader the expert influences voting in a referendum on independence by strategically disseminating information about the consequences of separation i show that this motivates a moderate electorate to appoint a more extreme leader to receive biased information that increases their bargaining power over the gains of staying unified however a trade off between bargaining power and precision of information causes inefficient outcomes in equilibrium jel c73 d72 d82 h77

when does ethical code enforcement matter in the inter organizational context the moderating role of switching costs drawing on signaling theory we suggest that a supplier s enforcement of ethical codes sends signals about the supplier that affect a buyer s decision to continue their commitment to the supplier we then draw on side bet theory to hypothesize how switching costs influence the importance of a supplier s enforcement of ethical codes in predicting a buyer s continuance commitment to a supplier we empirically test our model with data from 158 purchasing managers across three manufacturing industries results confirm the connection between ethical code enforcement and continuance commitment but suggest that a supplier s enforcement of ethical codes matter less when switching suppliers is perceived as too costly

dynamic incentives by environmental policy instruments a survey abstract in this paper i survey and discuss recent developments on the incentives provided by environmental policy instruments for both adoption and development of advanced abatement technology a main conclusion to be drawn from the literature is that under competitive conditions market based instruments usually perform better than command and control moreover taxes may provide stronger long term incentives than tradable permits if the regulator is myopic if the government can anticipate new technology or is able to react on it optimally regulatory policies by virtue of administered prices taxes and policies by setting quantities issuing tradable permits are almost equivalent the literature also shows that under competitive conditions there is no difference between auctioning permits and grandfathering moreover timing and commitment of environmental policy is not crucial for adoption under competitive conditions commitment has positive incentive effects however if an r d sector has market power in the presence of market imperfections the ranking of the different policy instruments is ambiguous

the moderating role of capital on the relationship between bank liquidity creation and failure risk abstract we examine the role of bank capital in moderating the relationship between bank liquidity creation and the failure risk in u s banks over the period of 2003 2014 we find that conditional on bank capital bank liquidity creation is related to bank failure risk negatively the negative relationship is moderated positively i e strengthened by changes in bank capital this finding is consistent with the view that banks may strengthen their solvency through increased capital in response to the illiquidity risk associated with liquidity creation and higher capital enhances the ability of banks to create liquidity the result is robust to different estimation methods and alternative measures of liquidity creation bank failure risk and bank capital further analysis shows that the significant and negative effect is more prominent for small banks and the impact of bank capital was more pronounced during the recent financial crisis of 2007 2009

strategic factor market intelligence an application of information economics to strategy formulation and competitor intelligence this paper develops a model of information acquisition decisions by firms that are competing in a strategic factor market barney 1986 to purchase a scarce resource whose value is unknown and differs across firms the model builds on the argument that more accurate expectations about the firm specific value of resources is other than luck the only way for firms to obtain the specific resources required for competitive advantage we address the more specific question of what types of information firms should gather to accomplish this goal the model generates a series of testable hypotheses about how a firm s optimal mix of different types of information is affected by a number of factors including the level of uncertainty about the value of the resource being acquired the rarity imitability and nonsubstitutability of that resource the level of inscrutability of firms pre existing stocks of resources and firms information gathering and information processing capacities

liquidity shortages and banking crises we show in this article that bank failures can be contagious unlike earlier work where contagion stems from depositor panics or contractual links between banks we argue that bank failures can shrink the common pool of liquidity creating or exacerbating aggregate liquidity shortages this could lead to a contagion of failures and a total meltdown of the system given the costs of a meltdown there is a possible role for government intervention unfortunately liquidity and solvency problems interact and can cause each other making it hard to determine the cause of a crisis we propose a robust sequence of intervention banks are often found at the center of systemic financial crises the causes of these crises have long been debated do they stem from depositor panics or do they arise because bank balance sheets are exposed to common factors if it is the latter then is there any sense in which bank failures can be contagious can anything be done to prevent these crises or stop them from propagating once they begin our purpose in this paper is to reexamine whether bank failures can start and propagate systemic crises even if we assume that depositors do not panic that is even if depositors actions are coordinated and they do not run simply because they fear others will run our focus is not because we think that panics are empirically unimportant the jury is still out on that instead we show that contagion can stem from an underlying real general equilibrium problem rather than just from lack of coordination among depositors from a policy perspective attempts to reassure investors through confidence building measures will not work if panic and lack of coordination are not the reasons for a crisis we begin in this paper with a model of a bank that we developed in diamond and rajan 2001 assets in this model are illiquid they cannot be borrowed against or sold for the full value of resources they will generate in their best use because the human capital necessary to generate that full value cannot

deregulation technological change and the business lending performance of large and small banks according to deyoung et al journal of financial services research 2004 deregulation and technological change has divided the us banking industryinto two primarysize based groups verylarge banks specializing in the use of hard information to make standardized loans and smaller banks specializing in the use of soft information and relationship development to make non standardized loans we evaluate business lending performance for small and large banks over the 1993 2001 period small business lending bysmall banks is characterized byrelationship development and non standardized loans consistent with deyoung et al s model we find that after controlling for market concentration cost of funds and a variety of other factors that might influence yields smaller banks perform better than larger banks in the small business lending market however larger banks appear to have the advantage in credit card lending a market characterized byimpersonal relationships and standardized loans interestingly we find evidence that larger banks have been making inroads in the market for the smallest business loans a result consistent with the use of credit scoring bylarge banks to make

setting quality expectations when entering a market what should the promise be this paper examines optimal advertised quality actual quality and price for a firm entering a market it develops a two period model where advertised quality influences expectations and hence trial and the gap between actual quality and expectations determines satisfaction which in turn impacts second period sales in such situations a company makes a choice between advertising high quality and getting trial but little repeat and advertising low quality and getting low trial but high repeat results are derived by numerical methods as well as analytically for a special case of the model the model suggests it is optimal to overstate quality when i customers rely relatively less on advertising to form quality expectations and ii customers intrinsic satisfaction with a product is high these results are consistent with deceptive advertising cases at the ftc which showed more deception for unknown firms and for firms whose customers were more satisfied they are also consistent with the decisions made by future managers mbas except that the respondents would advertise higher versus lower quality when advertising was effective

persuasive puffery sellers often make claims about product strengths without providing evidence even though such claims are mere puffery we show that they can be credible because talking up any one strength comes at the implicit trade off of not talking up another potential strength puffery pulls in some buyers who value product attributes that are talked up or emphasized while pushing away other buyers who infer that the attributes they value are relative weaknesses when the initial probability of making a sale is low there are more potential buyers to pull in than to push away so puffery is persuasive overall this persuasiveness requires that buyers have some privacy about their preferences so that the seller does not completely pander to them more generally the results show how comparative cheap talk by an expert to a decision maker can be credible and persuasive in standard discrete choice models used throughout marketing economics and other disciplines

stock and bond market liquidity a long run empirical analysis this paper establishes liquidity linkage between stock and treasury bond markets there is a lead lag relationship between illiquidity of the two markets and bidirectional granger causality the effect of stock illiquidity on bond illiquidity is consistent with flight toquality or flight to liquidity episodes monetary policy impacts illiquidity the evidence indicates that bond illiquidity acts as a channel through which monetary policy shocks are transferred into the stock market these effects are observed across illiquidity of bonds of different maturities and are especially pronounced for illiquidity of short term maturities the paper provides evidence of illiquidity integration between stock and bond markets

can the government talk cheap communication announcements and cheap talk a great deal of attention has recently been focused on communication in economic contexts while some models of credible announcements have been based on reputational forces or penalties imposed by third parties as in sobel 21 and cothren 4 several recent papers have addressed the possibility of communication through cheap talk that is talk in situations with no explicit penalties for deception perhaps the most prominent application of cheap talk in the literature is the recent model of federal reserve announcements by stein 22 this paper will show that cheap talk equilibria of the sort modeled by stein and others often depend in a fundamental way on implausible discontinuities in public responses to government announcements that is cheap talk equilibria are frequently only possible if certain infinitesimally small changes in government announcements are capable of causing large discontinuous changes in public expectations and behavior intuitively if public expectations are a continuous function of government announcements then the government can fine tune these expectations the government will therefore often be tempted to deviate from the cheap talk equilibrium announcements in order to manipulate expectations this causes the equilibrium to unravel discontinuous public reactions sometimes prevent these equilibria from unraveling because they convert continuous choice problems which allow manipulative fine tuning into discrete choice problems where such fine tuning is impossible these discontinuities are implausible however and this may often rule out cheap talk as a realistic model of governmental policy announcements 2

information reliability and welfare a theory of coarse credit ratings abstract an enduring puzzle is why credit rating agencies cras use a few categories to describe credit qualities lying in a continuum even when ratings coarseness reduces welfare we model a cheap talk game in which a cra assigns positive weights to the divergent goals of issuing firms and investors the cra wishes to inflate ratings but prefers an unbiased rating to one whose inflation exceeds a threshold ratings coarseness arises in equilibrium to preclude excessive rating inflation we show that competition among cras can increase ratings coarseness we also examine the welfare implications of regulatory initiatives

optimal quality and quantity provisions for centralized vs decentralized distribution market size uncertainty effects abstract we provide insights on how market size uncertainty affects the optimal quality quantity provision in distribution channels when consumers are heterogeneous in their willingness to pay for product quality in this context we denote the difference between the manufacturer s optimal quality quantity provision for a centralized channel and its optimal analog for a decentralized channel as the quality quantity differential we find that market size uncertainty creates or increases the quantity differential but it does not affect the differential s polarity in contrast market size uncertainty decreases the quality differential and it does so to the extent that depending on the level of consumer heterogeneity it reverses the differential s polarity moreover we find that the higher the inherent uncertainty level the more pronounced are the effects we likewise find that the effects of market size uncertainty are amplified if the notion of consumer heterogeneity is replaced with retail level competition

lying for strategic advantage rational and boundedly rational misrepresentation of intentions starting from hendricks and mcafee s 2000 example of the allies decision to feint at calais and attack at normandy on d day this paper models misrepresentation of intentions to competitors or enemies allowing for the possibility of bounded strategic rationality and rational players responses to it yields a sensible account of lying via costless noiseless messages in many cases the model has generically unique pure strategy sequential equilibria in which rational players exploit boundedly rational players but are not themselves fooled in others the model has generically essentially unique mixed strategy sequential equilibria in which rational players strategies protect all players from exploitation

strategic technology switching under risk aversion and uncertainty abstract firms devising green investment strategies within a deregulated environment must take into account not only economic and technological uncertainty but also strategic interactions due to competition also further complicating green investment decisions is the fact that firms are likely to exhibit risk aversion since alternative energy technologies entail risk that cannot be diversified therefore we develop a utility based real options framework for pre emptive and non pre emptive competition in order to analyse how economic and technological uncertainty interact with risk aversion to impact the adoption of an existing technology in the light of uncertainty over the arrival of an improved version we confirm that greater risk aversion delays investment and show that technological uncertainty accelerates the follower s entry delays the entry of the pre emptive leader and intriguingly does not affect the non pre emptive leader s investment decision also we show how the relative loss in the leader s value due to the follower s entry is affected by economic and technological uncertainty as well as risk aversion and how the risk of pre emption under increasing economic uncertainty raises the value of direct investment in the new technology relative to stepwise investment