price discrimination in broadway theater a common thread in the theory literature on price discrimination has been the ambiguous welfare effects for consumers and the rise in profit for firms relative to uniform pricing in this study i resolve the ambiguity for consumers and quantify the benefit for a firm i describe a model of price discrimination that includes both second degree and third degree price discrimination using data from a broadway play i estimate the structural model and conduct various experiments to investigate the implications of alternative pricing policies the observed price discrimination may improve the firm s profit by approximately 5 relative to uniform pricing while the difference for aggregate consumer welfare is negligible also i show that the gain from changing prices in the face of fluctuating demand is small under the observed price discrimination

bonus culture competitive pay screening and multitasking to analyze the impact of labor market competition on the structure of compensation we embed multitasking and screening within a hotelling framework competition for talent leads to an escalation of performance pay shifting effort away from long term investments risk management and cooperation efficiency losses can exceed those from a single principal who dulls incentives to extract rents as competition intensifies monopsonistic underincentivization of low skill agents first decreases and then gives way to growing overincentivization of high skill ones aggregate welfare is thus hill shaped while inequality tends to rise monotonically bonus caps can help restore balance in incentives but may generate other distortions

nonlinear valuation under credit funding and margins existence uniqueness invariance and disentanglement abstract since the 2008 global financial crisis the banking industry has been using valuation adjustments to account for default risk and funding costs these adjustments are computed separately and added together by practitioners as if the valuation equations were linear this assumption is too strong and does not allow to model market features such as different borrowing and lending rates and replacement default closeout hence we argue that the full valuation equations are nonlinear and this paper is devoted to studying the nonlinear valuation equations introduced in pallavicini et al 2011 we illustrate all the cash flows exchanged by the parties involved in a derivative contract in presence of default risk collateralisation with re hypothecation and funding costs then we show how to obtain semi linear pdes or forward backward stochastic differential equations fbsdes from present valuing said cash flows in an arbitrage free setup and we study the well posedness of these pdes and fbsdes in a viscosity and classical sense moreover from a financial perspective we discuss cases where classical valuation adjustments xva can be disentangled we show how funding costs are offset by treasury valuation adjustments when one takes a whole bank perspective in the valuation while the same costs are not offset by such adjustments when taking a shareholder perspective we show that although we use a risk neutral valuation framework based on a locally risk free bank account our final valuation equations do not depend on the risk free rate finally we show how to consistently derive a netting set valuation from a portfolio level one

designing supply contracts contract type and information asymmetry this paper studies the value to a supplier of obtaining better information about a buyer s cost structure and of being able to offer more general contracts we use the bilateral monopoly setting to analyze six scenarios three increasingly general contracts wholesale pricing schemes two part linear schemes and twopart nonlinear schemes each under full and incomplete information about the buyer s cost structure we allow both sides to refuse to trade by explicitly including reservation profit levels for both for the supplier this is implemented through a cutoff policy we derive the supplier s optimal contracts and profits for all six scenarios and examine the value of information and of more general contracts our key findings are as follows first the value of information is higher under two part contracts second the value of offering two part contracts is higher under full information and third the proportion of buyers the supplier will choose to exclude can be substantial

non constant discounting in finite horizon the free terminal time case abstract this paper derives the hjb hamilton jacobi bellman equation for sophisticated agents in a finite horizon dynamic optimization problem with non constant discounting in a continuous setting by using a dynamic programming approach special attention is paid to the case of free terminal time strotz s model a cake eating problem of a non renewable resource with non constant discounting is revisited a consumption saving model is used to illustrate the results in the free terminal time case

taking versus taxing an analysis of conscription in a private information economy most countries currently man their militaries through conscription i e a draft conventional wisdom suggests that by lowering the budgetary cost of the military a draft reduces distortionary taxation especially when military needs are large we find that this intuition is misguided when income taxes are set optimally voluntary enlistments lead to less distortionary taxation than a draft because the tax base left behind by a volunteer army tends to be more productive than that after a draft for reasonable parameter values drafts are more distortionary and less socially desirable when military needs are large

empirical measures of inflation uncertainty a cautionary note a direct ex ante measure of inflation uncertainty in the us is compared with a number of proxies used in empirical studies the direct estimate is the root mean subjective variance of the probability distributions for inflation reported by respondents to the asa nber survey the proxies include forecast standard deviations from arima arch and structural models of inflation these proxies are not significantly correlated with the direct measure nor with one another use of the proxies leads to incorrect inferences about the correlation between inflation and inflation uncertainty and between inflation uncertainty and the real interest rate

optimal pricing of a congestible good with random participation abstract this paper studies the optimal pricing of a congestible network good offered by a monopoly who faces a double asymmetry of information concerning both users valuations and users unit waiting costs which leads to a random participation problem we show that the textbook price is lower than the price with random participation

on two part tariff competition in a homogeneous product duopoly abstract we explore aspects of two part tariff competition between duopolists providing a homogeneous service when consumers differ with respect to their usage levels competition in only one price component the fee or the rate may allow both firms to enjoy positive profits if the other price component has been set at levels different enough between firms fixing one price component alters the nature of competition indirectly introducing an element of product differentiation endogenous market segmentation emerges with the heavier users choosing the lower rate firm and the lighter users choosing the lower fee firm when no price component can be negative competition becomes softer profits tend to be higher but there is also a disadvantage for the firm that starts with a higher fee than that of its rival

the relationship between the level and variability of inflation theory and evidence summary this paper emphasizes the role played by asymmetric stabilization policies in producing the widely reported positive association between the level and variability of inflation a simple theoretical model is constructed which shows how asymmetric policies give rise to this association the empirical findings presented provide support to the proposition that variations in inflation uncertainty are policy induced

anomalies in intertemporal choice evidence and an interpretation research on decision making under uncertainly has been strongly influenced by the documentation of numerous expected utility eu anomalies behaviors that violate the expected utility axioms the relative lack of progress on the closely related topic of intertemporal choice is partly due to the absence of an analogous set of discounted utility du anomalies we enumerate a set of du anomalies analogous to the eu anomalies and propose a model that accounts for the anomalies as well as other intertemporal choice phenomena incompatible with du we discuss implications for savings behavior estimation of discount rates and choice framing effects

the relationship between relative prices and the general price level it is very nearly a truismi amaong neoclassical economists that the public is wont to confuse changes in the general price level with relative price changes correspondingl y one might speak of the independence between the two as one of the central postulates of the neoclassical tradition william stanley jevons was aml ong the first to identify this basic dichotomin economic life as well as to attempt to explain the ordinary citizen s seenming incapacity to understand it

nonlinear pricing of information goods this paper analyzes optimal pricing for information goods under incomplete information when both unlimited usage fixed fee pricing and usage based pricing are feasible and administering usage based pricing may involve transaction costs it is shown that offering fixed fee pricing in addition to a nonlinear usage based pricing scheme is always profit improving in the presence of nonzero transaction costs and there may be markets in which a pure fixed fee is optimal this implies that the optimal pricing strategy for information goods is almost never fully revealing moreover it is proved that the optimal usage based pricing schedule is independent of the value of the fixed fee a result that simplifies the simultaneous design of pricing schedules considerably and provides a simple procedure for determining the optimal combination of fixed fee and nonlinear usage based pricing the introduction of fixed fee pricing is shown to increase both consumer surplus and total surplus the differential effects of setup costs fixed transaction costs and variable transaction costs on pricing policy are described these results suggest a number of managerial guidelines for designing pricing schedules for instance in nascent information markets firms may profit from low fixed fee penetration pricing but as these markets mature the optimal pricing mix should expand to include a wider range of usage based pricing options minimum fees quantity discounts and adoption levels across the different pricing schemes are characterized strategic pricing responses to changes in market characteristics are described and the implications of the paper s results for bundling and vertical differentiation of information goods are discussed

an empirical analysis of competitive nonlinear pricing abstract we estimate a model of competitive nonlinear pricing with multidimensional preference heterogeneity using individual level data on advertisements bought by local businesses e g doctors electricians from two yellow page directories in one u s city market variation in individual choices and payments allows us to identify the joint density of preferences marginal costs of publishing and common utility parameters our estimates suggest substantial welfare loss due to asymmetric information comparing duopoly outcomes with counterfactual monopoly outcomes we find that with less competition i producer surplus increases substantially ii more low type consumers are excluded iii product variety increases but benefits accrue only to the high type consumers iv total consumer surplus decreases v but its distribution across consumers does not change

unplanned purchases and retail competition i propose a framework in which consumers have biased beliefs about their future purchase probabilities leading them to make unplanned purchases us ing this framework i examine the phenomenon of below cost pricing and the welfare eects of banning it when the market is covered a ban on below cost pricing raises social surplus although consumers need not gain they are only guaranteed to ben et if the market is perfectly competitive when the market is not covered a ban always hurts at least some consumers also there is a pro competitive justica tion for the observation that larger rms sometimes charge below cost on the core product lines of smaller rms consumer bias is crucial for this justication multi product retailers sometimes sell certain products beneath cost with the hope of at tracting additional customers who will also buy other higher margin items this practice often referred to as loss leading is controversial with below cost pricing having been banned in a number of countries including belgium germany france and ireland and in approximately half of all us states 1 many us cities also have such prohibitions in this article i examine the welfare consequences of prohibitions on below cost pricing in a market where multi product retailers compete for boundedly rational consumers who practice one stop shopping that is visit at most one store when rivals are symmetric and the market is covered so that all consumers shop a ban on loss leading raises social surplus but when the market is not covered a ban presents a social welfare tradeo fewer consumers choose to shop although those who do generate higher levels of social surplus perhaps surprisingly for those consumers who shop both before and after a ban a ban is guaranteed to make them better o if the market is perfectly competitive but otherwise may harm them taken together these results indicate that it is simplistic to argue that by limiting the scope of competition below cost pricing bans must hurt consumers and society but i also assess below cost pricing laws in the presence of asymmetric competition as when a large rm with a full product line competes against a small rm with a limited product

singular dividend optimization for a linear diffusion model with time inconsistent preferences abstract with the advancement of behavioral economics the use of exponential discounting for decision making in neoclassical economics has been questioned since it cannot provide a realistic way to explain certain decision making behavior the purpose of this paper is to investigate strategic decision making on dividend distribution policies of insurance companies when the management adopts a more realistic way for discounting namely stochastic quasi hyperbolic discounting the use of this more realistic way for discounting is motivated by some recent developments in behavioral economics a game theoretic approach is adopted to establish economic equilibrium results namely subgame perfect markov equilibrium strategies it is shown that 1 under certain mild technical conditions the barrier strategy with an optimal barrier which is widely used in the traditional approach to optimal dividend problems is a perfect markov equilibrium strategy 2 the optimal barrier is lower than the barrier of an optimal strategy obtained from the respective time consistent optimal dividend problem and 3 the solution based on the barrier strategy does not exist in some situations

consumption investment strategies with non exponential discounting and logarithmic utility abstract in this paper we revisit the consumption investment problem with a general discount function and a logarithmic utility function in a non markovian framework the coefficients in our model including the interest rate appreciation rate and volatility of the stock are assumed to be adapted stochastic processes following yong 2012a b s method we study an n person differential game we adopt a martingale method to solve an optimization problem of each player and characterize their optimal strategies and value functions in terms of the unique solutions of bsdes then by taking limit we show that a time consistent equilibrium consumption investment strategy of the original problem consists of a deterministic function and the ratio of the market price of risk to the volatility and the corresponding equilibrium value function can be characterized by the unique solution of a family of bsdes parameterized by a time variable

an empirical analysis of expected stock price movements the livingston survey of economists forecasts of key economic variables has served as the data source for a number of studies investigating the forrnation and effects of expectations much of this work has utilized the price level predictions from the survey to proxy anticipated inflation l this measure of expected inflation has also been analyzed by several researchers to see if it conforrns to the notion of rational expectations with differing conclusions 2 this paper extends the analysis of the livingston data by examining the forecasts of common stock prices made by the individual survey participants since predicted movements in stock prices may play an important role in portfolio decisions and according to tobin s q model real investment decisions it seems useful to explore the characteristics of these forecasts the paper addresses two main issues first are the stock price predictions in accord with rational expectation forrnation second how are the respondents expectations of stock price movements related to their forecasts of inflation and real

nonlinear pricing with random participation the canonical selection contracting programme takes the agent s participation decision as deterministic and finds the optimal contract typically satisfying this constraint for the worst type upon weakening this assumption of known reservation values by introducing independent randomness into the agents outside options we find that some of the received wisdom from mechanism design and nonlinear pricing is not robust and the richer model which allows for stochastic participation affords a more general empirical specification we develop a multidimensional methodology for addressing this class of problems providing two important applications to nonlinear pricing first with nonlinear pricing by a monopolist the familiar nodistortion at the top result persists but in tandem with the surprising conclusion that there is either no distortion at the bottom or bunching second in a simple model of product differentiated duopolists competing with nonlinear pricing we show that generally the duopoly outcome is qualitatively similar to the monopoly outcome however when marginal costs are symmetric and competition is sufficiently intense distortions disappear and the equilibrium outcome takes a remarkably simple form efficient quality allocations with cost plus fee pricing

consumption and portfolio rules for time inconsistent investors abstract this paper extends the classical consumption and portfolio rules model in continuous time merton r c 1969 lifetime portfolio selection under uncertainty the continuous time case review of economics and statistics 51 247 257 merton r c 1971 optimum consumption and portfolio rules in a continuous time model journal of economic theory 3 373 413 to the framework of decision makers with time inconsistent preferences the model is solved for different utility functions for both naive and sophisticated agents and the results are compared in order to solve the problem for sophisticated agents we derive a modified hjb hamilton jacobi bellman equation it is illustrated how for crra functions within the family of hara functions logarithmic and power utilities the optimal portfolio rule does not depend on the discount rate but this is not the case for a general utility function such as the exponential cara utility function

contractual distortions in a market with frictions abstract this paper analyses contract design in a decentralized market environment with frictions while principals e g firms have all contractual power their market power is constrained as agents e g workers can choose to wait and search for better offers we find that results depend crucially on how market frictions affect agents utilities with type independent costs of search and waiting equilibrium contracts are always first best if agents are impatient and discount future payoffs however distortions vanish only gradually in the latter case we also characterize equilibrium offers and show that the market exhibits two types of externalities both of which are absent in the case of type independent costs of search

multinationals tax competition and outside options abstract we analyze tax competition when a multinational firm has invested in two countries but also has an outside option e g towards a third country an interesting finding is that more attractive outside options for firms may constitute a win win situation the firm as well as its present host countries may gain when this occurs the reason that it benefits the host countries is that an enhanced outside option reduces the inefficiencies of tax competition an implication of the result is that better outside options for multinational firms may reduce the gains from host countries policy coordination and thus reduce those countries incentives to coordinate their policies also with a development where outside options become more accessible the perceived costs of tax competition e g in terms of underprovision of public goods may be overestimated our findings may also have implications for international negotiations since it provides an argument for mutual reduction of entry barriers as this may improve outside options

bundling and competition for slots we consider competition between sellers selling multiple distinct products to a buyer having k slots under independent pricing a pure strategy equilibrium often does not exist and equilibrium in mixed strategy is never efficient when bundling is allowed each seller has an incentive to bundle his products and an efficient technology renting equilibrium always exists furthermore in the case of digital goods or when sales below marginal cost are banned all equilibria are efficient comparing the mixed strategy equilibrium with the technology renting equilibrium reveals that bundling often increases the buyer s surplus finally we derive clear cut policy

product design in selection markets insurers choose plan characteristics to sort for profitable consumers in a model with multidimensional types this sorting incentive is proportional to the covariance among marginal consumers between marginal willingness to pay and cost to the insurer standard forms of cost sharing successfully repel costly consumers but reducing plan comprehensiveness instead alienates the risk averse in a perfectly competitive equilibrium the sorting incentive must vanish market power increases insurance quality and welfare nonetheless a competitive equilibrium with positive insurance is possible when insurance value is suciently negatively correlated with cost however in a calibration to handel hendel and whinston 2013 s data equilibrium still fails to exist

competitive screening under heterogeneous information we study the interplay between informational frictions and second degree price discrimination our theory recognizes that consumers differ in their tastes for quality as well as in the information they possess about available offers which leads to dispersion over price quality menus in equilibrium while firms are ex ante identical we show that their menus are ordered so that more generous menus leave more surplus to consumers of all valuations we explore the cross section of equilibrium menus and variations in market conditions to generate empirical predictions on prices qualities and markups across firms and within a firm s product line for instance more competition may raise prices for low quality goods yet consumers are better off as the qualities they receive also increase the predictions of our model illuminate empirical findings in many markets such as those for cell phone plans yellow pages advertising cable tv and air travel

perfect competition in markets with adverse selection this paper proposes a perfectly competitive model of a market with adverse selection prices are determined by zero profit conditions and the set of traded contracts is determined by free entry crucially for applications contract characteristics are endogenously determined consumers may have multiple dimensions of private information and an equilibrium always exists equilibrium corresponds to the limit of a differentiated products bertrand game we apply the model to establish theoretical results on the equilibrium effects of mandates mandates can increase efficiency but have unintended consequences with adverse selection an insurance mandate reduces the price of low coverage policies which necessarily has indirect effects such as increasing adverse selection on the intensive margin and causing some consumers to purchase less coverage

two part tariff competition in duopoly abstract this paper develops two models of two part tariff competition when consumers are differentiated a la hotelling equilibrium prices equal marginal cost if and only if the demand of the marginal consumer equals the average demand entry fees are socially optimal in a symmetric equilibrium if all consumers participate in the market two part tariffs tend to result in lower prices higher profits and social welfare relative to uniform pricing in the logit model marginal cost pricing holds but entry fees are higher than socially optimal and two part tariffs lead to lower aggregate net consumer surplus but higher profits than uniform pricing

dispersed communication by central bank committees and the predictability of monetary policy decisions the paper asks whether members of central bank decision making committees should communicate with the public in a collegial manner by conveying the consensus or majority view of the committee or in an individualistic way by providing the diversity of views among the committee members it finds that more active as well as more consistent communication by committee members improves the predictability of monetary policy decisions significantly this effect is sizeable as communication dispersion across committee members accounts on average for one third to one half of the market s prediction errors of fomc policy decisions moreover more active and more consistent communication are found to also reduce the degree of uncertainty about the future path of interest rates these findings suggest that a collegial communication which stresses the consensus view on policy inclinations can enhance the effectiveness of central bank communication

ramsey meets laibson in the neoclassical growth model the neoclassical growth model is modified to include a variable rate of time preference with no commitment ability and log utility the equilibrium features a constant effective rate of time preference and is observationally equivalent to the standard model the extended framework yields testable linkages between the extent of commitment ability and the rates of saving and growth the model also has welfare implications including the optimal design of institutions that facilitate household commitments steady state results are obtained for general concave utility functions and some properties of the transitional dynamics are characterized for isoelastic utility

indexation and the effect of inflation uncertainty on real gnp this article examines the combined effects of inflation uncertainty and indexation on the growth rate of real gross national product gn p the evidence suggests that greater indexation partially reduces t he adverse effect of inflation uncertainty on real gnp growth over time it also indicates that in contrast to earlier findings regarding th e effect of inflation uncertainty on employment the overall effect of inflation uncertainty on real gnp growth may be permanent a preliminary assessment of whether the discrepancy is the result of in flation uncertainty permanently affecting the growth rate of the capi tal stock is inconclusive copyright 1988 by the university of chicago

wage indexation openness and inflation uncertainty the case of italy this article uses annual data of the italian economy to test the validity of the hypotheses of friedman 1977 and aizenman 1985 that the level of inflation uncertainty and the degree of openness of an economy have positive effects on the level of wage indexation it was found that the estimated wage indexation equation supports the validity of the aizenman hypothesis that the degree of openness of an economy has positive effects on the level of wage indexation on the other hand the regression of the wage indexation equation does not generally support the validity of the friedman hypothesis that the level of inflation uncertainty has positive effects on the level of wage indexation

estimating risk preferences from deductible choice we develop a structural econometric model to estimate risk preferences from data on deductible choices in auto insurance contracts we account for adverse selection by modeling unobserved heterogeneity in both risk claim rate and risk aversion we find large and skewed heterogeneity in risk attitudes in addition women are more risk averse than men risk aversion exhibits a u shape with respect to age and proxies for income and wealth are positively associated with absolute risk aversion finally unobserved heterogeneity in risk aversion is greater than that of risk and as we illustrate has important implications for insurance pricing

inflation uncertainty inflationary shocks and the credibility of counterinflation policy abstract this paper assesses the contributions of price shocks general price variability and the credibility of counterinflation policy to changes in inflation uncertainty in the u k uncertainty is measured by the root mean square error of consumer inflation forecasts in contrast to the assumptions of much theory uncertainty is not significantly affected by noise in individual or aggregate inflation rates factors which determine policy credibility are more important the political party in government the proximity of elections and under fixed exchange rates the rate of inflation itself however government initiatives to increase credibility through incomes policies and monetary targets have failed to reduce uncertainty

optimal equity auctions with two dimensional types abstract we analyze the design and performance of equity auctions when bidder s valuations and opportunity costs are private information distributed according to an arbitrary joint density that can differ across bidders we identify for any incentive compatible mechanism an equivalent single dimensional representation for uncertainty we then characterize the revenue maximizing and surplus maximizing equity mechanisms and compare revenues in optimal equity and cash auctions unlike in cash auctions the adverse selection arising from bidders two dimensional types in equity auctions can lead to a global violation of the regularity condition which represents a maximal mismatch between incentive compatibility and maximization of revenue or surplus such mismatch can lead a seller to exclude bidders and demand a bidder specific stake from a non excluded bidder providing insights into when a firm should employ an auction and when it should just negotiate with a single bidder

inflation expectations revisited this paper describes the construction and main features of a new monthly time series for the mean and standard deviation of consumer inflation expectations in the united kingdom in the years 1961 85 based on a number of consumer surveys this involves generalizing to four and five category tendency survey data the method used by j a carlson and m parkin 1975 to quantify the results of a three category tendency survey of inflation expectations the new series exhibit very different time series properties from the original carlson parkin data copyright 1988 by the london school of economics and political science

the choice of exchange rate regime and speculative attacks we develop a framework for studying the choice of exchange rate regime in an open economy where the local currency is vulnerable to speculative attacks the optimal regime is determined by a policymaker who trades off the loss from nominal exchange rate uncertainty against the cost of maintaining a given regime this cost is affected in turn by the likelihood of a speculative attack searching for the optimal regime within the class of exchange rate bands we show that the optimal regime is either a peg a zero width band a free float an infinite width band or a non degenerate finite width band the paper shows that lower costs of moving across currencies induce policymakers to set more flexible exchange rate systems this lowers ceteris paribus the likelihood of financial crises one implication is that a tobin tax does not necessarily reduce the likelihood of currency crises the paper also investigates the effects of country size openess variability in fundamentals and reputation on the choice of exchange rate regime the role of abrupt changes in reputation in triggerering crises even with unchanged fundamentals as an alternative to sunspots is discussed and illustrated

quality based price discrimination and tax incidence the market for gasoline and diesel cars in europe the existing tax policies toward gasoline and diesel cars in european countries provide a unique opportunity to analyze quality based price discrimination and the implied tax incidence in my econometric framework consumers choose the type of engine based on their annual mileage prices are set by the manufacturers the relative pricing of gasoline and diesel cars appears to be consistent with monopolistic price discrimination effectively segmenting low mileage from high mileage consumers on average about 75 to 90 of the price differentials between gasoline and diesel cars can be explained by markup differences i draw implications for the effectiveness and the revenue effects of tax policy

exclusive contracts and market dominance we propose a new theory of exclusive dealing the theory is based on the assumption that a dominant firm has a competitive advantage over its rivals and that the buyers willingness to pay for the product is private information in this setting the dominant firm can impose contractual restrictions on buyers without necessarily compensating them implying that exclusive dealing contracts can be both profitable and anticompetitive we discuss the general implications of the theory for competition policy and illustrate by examples its applicability to antitrust cases jel d21 d43 d82 d86 k21 l13 l40