dynamic oligopolies without full information and with continuously distributed time lags abstract dynamic oligopolies are examined without full information on the price function with each firm using a perceived price function that usually differs from the actual inverse demand function of the market it is assumed that firms experience time lags in obtaining and implementing information on the price and also on output under realistic assumptions we show that without time lags the steady state is always locally asymptotically stable whereas in the presence of time lags situations of local instability may occur the possibility of limit cycles is examined and some special cases are considered

when behavior matters games and computation in a behavioral theory of the firm abstract a behavioral theory of the firm presents a computational model of a duopoly that is based on observations of firm behavior and that incorporates a range of behavioral constructs because this model is starkly different from the traditional game theoretic analysis of duopoly it useful to compare the performance of a game theoretic version of this model shorn of all behavioral constructs with the original cyert and march paradigm to do this we calibrate the game theoretic model with all the economic components of the computational model and we assume that firms could choose either cooperative or non cooperative strategies we find that the pricing strategy of the computational firms is similar to that found in a non cooperative game theoretic outcome and that the advertising choice of the computational firms is less than what non cooperative or cooperative game theoretic behavior would predict we also consider how initializing the choices of the computational firm with those of the game theoretic firms affects their performance informing the computational firms in this way led to greater changes in advertising than pricing strategies profits of the computational firms were greatest when their initial choices were those found in a non cooperative equilibrium

the distance effect in banking and trade abstract the empirical gravity literature finds geographical distance to be a large and growing obstacle to trade contradicting the popular notion that globalization heralds the end of geography this distance puzzle disappears however when measuring the effect of cross border distance relative to that of domestic distance yotov 2012 we uncover the same result for banking when comparing cross border positions with domestic credit using the most extensive dataset on global bank linkages between countries the role of distance remains substantial for trade as well as for banking where transport cost is immaterial pointing to the role of information frictions as a common driver a second contribution is to show that the forces of globalization are also evident in other less prominent parts of the gravity framework

on the international spillovers of us quantitative easing this article analyses the effects of the federal reserve s quantitative easing qe on global portfolio flows differentiating across recipient region of the flows type of flow and qe rounds furthermore the analysis differentiates between the impact of qe expansionary announcements and the actual market operations the analysis shows that qe1 resulted in slight rebalancing towards the us while qe2 and qe3 resulted in rebalancing towards non us assets this suggests that qe increased the pro cyclicality of flows outside the us in particular into emerging market equities the results also suggest a link between us macro financial conditions and the transmission of qe to portfolio flows

oligopoly game price makers meet price takers abstract the paper studies an oligopoly game where firms can choose between price taking and price making strategies on a mixed market price takers are always better off than price makers though the profits of both types decline in the number of price takers we investigate and confront two possibilities of firms decisions about their types forward looking equilibrium reasoning and backward looking individual learning we find that the cournot outcome is the only equilibrium prediction and it is learnable if firms are sufficiently sensitive to profit differences however with a larger number of firms a unilateral deviation from cournot behavior becomes profitable under learning this incentive creates a space for permanent oscillations over different markets with a positive but low number of price takers

bilateral portfolio dynamics during the global financial crisis abstract there has been considerable bilateral variation in the pattern of portfolio capital flows during the global financial crisis for a given destination investors from different countries adjusted their holdings to different degrees we show that the size of the initial bilateral holding geographical distance common language the level of trade and common institutional linkages help to explain the pattern of adjustment these bilateral factors are more important for equities than for bonds and for investors from developing countries than for investors from advanced countries

thomas schelling s contributions to game theory thomas schelling brings game theory to life and does so in two senses first instead of the abstract and austere beauty of mathematical theorems that we find in most of game theory going back to von neumann morgenstern and nash he gives us lively and memorable examples to explain and illustrate his ideas schelling s 1960a p 21 pictures of bargaining when two dynamite trucks meet on a road wide enough for one who backs up and of tacit coordination can two people who are told to meet each other in new york city on a specified day but are not told the place or time and are unable to contact each other successfully meet 1960a pp 55 56 are among the best known but my personal favorite is schelling s 1965 pp 66 67 example of the strategy of salami tactics for defeating threats by incremental escalation

home bias and cross border taxation abstract the relationship between cross border taxation and free float home bias is examined this explicitly recognizes that insider shares are unavailable to foreigners other important explanations for home bias information asymmetry behavioural and governance issues are controlled when examining the impact of cross border tax variables in our sample of countries about sixty percent eighty percent withhold taxes on realized capital gains dividends of foreign investors and about thirty percent of the mature economies provide imputation of taxes paid on dividend income by domestic corporations dividend imputation is a statistically significant impediment to cross border equity flows a tax credit variable for foreign taxes paid on dividends is constructed and found to be statistically significant in reducing home bias a relatively high foreign tax rate that cannot be offset by tax credits is found to significantly increase home bias these results hold for float adjusted home bias and traditional international portfolio home bias

shirking and sorting in a political market with finite lived politicians this paper analyzes principal agent slack in the context of a political market composed of voters challengers and incumbents the introduction of a last period via finite livedness in combination with voters imperfect information about politicians preferences causes time varying shirking behavior on the part of politicians political markets eventually sort out those politicians with significantly deviant policy preferences potentially providing a solution to the last period problem and enabling politicians to make credible commitments in the extreme sorting can insure that it is not worthwhile for potential shirkers to run for office a systematic relationship between political shirking and number of terms in office may exist and depends on how quickly sorting takes place we show that evidence of little if any shirking is quite consistent with politicians having diverse and strongly held policy preferences in addition if sorting is a significant feature of political markets cross sectional studies will tend to oversample little and non shirking politicians compared to longitudinal studies reinterpretations of existing empirical work are also discussed

on the complexity of strategy switching dynamics abstract a new approach has been proposed to analyze the strategy switching dynamics in a discrete model or a non cooperative game with the following characteristics i the agents are motivated by absolute payoffs rather than relative ones ii the payoffs vary as the composition of the population changes iii the agents are boundedly rational in the sense that they can only predict the outcomes of their own actions rich dynamic phenomena are exhibited for such discrete dynamic models or games the approach is then applied to explore the relative profitability of price taking behavior in a quantity competing heterogeneous oligopoly

dynamics of the cobweb model with adaptive expectations and nonlinear supply and demand the price quantity dynamics of the cobweb model with adaptive expectations and nonlinear supply and demand curves is analysed we prove that chaotic dynamical behaviour can occur even if both the supply and demand curves are monotonic the introduction of adaptive expectations into the cobweb model leads to price quantity fluctuations with a smaller amplitude however at the same time the price quantity cycles may become unstable and chaotic oscillations may arise we present a geometric explanation why chaos can occur for a large class of nonlinear monotonic supply and demand curves

trade finance specialization and synchronization i investigate the determinants of business cycle synchronization across regions the linkages between trade in goods financial openness specialization and business cycle synchronization are evaluated in the context of a system of simultaneous equations the main results are as follows i specialization patterns have a sizable effect on business cycles most of this effect is independent of trade or financial policy but directly reflects differences in gdp per capita ii a variety of measures of financial integration suggest that economic regions with strong financial links are significantly more synchronized even though they also tend to be more specialized iii the estimated role of trade is closer to that implied by existing models once intra industry trade is held constant the results obtain in a variety of data sets measurement strategies and specifications they relate to a recent strand of international business cycle models with incomplete markets and transport costs and on the empir

searching for symptoms of political shirking congressional foreign travel despite the hypothesized propensity for shirking to marklegislative institutions the evidence is rather equivocal moreover most of the research has focused exclusively onlegislator voting thereby constraining whatevergeneralizations might emerge the purpose of this paper is tocontribute to the debate over the question of politicalshirking by extending the range of phenomena examined toinclude congressional foreign travel our analysis providesevidence that opportunism is a problem in congress we findthat last period problems have arisen in the area of foreigntravel and that increased scrutiny to the problem on the partof congress only shifted consumption patterns i e legislators began taking foreign junkets near but not at theend of their legislative careers not all foreign travelshould be construed as worthless junketing since there isstrong evidence that some foreign travel is related tomembers responsibilities on congressional committees

unequal treatment of identical agents in cournot equilibrium oligopoly models where prior actions by firms affect subsequent marginal costs have been useful in illuminating policy debates in areas such as antitrust regulation environmental protection and international competition we discuss properties of such models when a cournot equilibrium occurs at the second stage aggregate production costs strictly decline with no change in gross revenue or gross consumer surplus if the prior actions strictly increase the variance of marginal costs without changing the marginal cost sum therefore unless the cost of inducing second stage asymmetry more than offsets this reduction in production costs the private and social optima are asymmetric

sunk costs and strategic commitment a proposed three stage equilibrium dixit s i980 paper in this journal the role of investment in entry deterrence has attracted considerable interest from economists concerned with constructing a modern theory of strategic behaviour towards entry in fact the paper has spawned quite an industry of commitment models in which the equilibrium payoffs in some final period game can be influenced by strategic commitments made by the players in an earlier period for similar models with important insights into strategic entry deterrence see eaton and lipsey i980 i98i schmalensee i98i the purpose of this note is to argue that when the instrument of stragetic commitment takes the form of sunk costs which both entrant and incumbent have to bear as it does in dixit s paper and in many other examples a three stage model rather than the two stage model presented by dixit is required although the proposed equilibrium differs from dixit s its qualitative features are the same it may or may not be profitable to deter entry and if it is the first mover may still prefer to play an accommodation strategy and allow entry to take place following dixit we restrict our attention to the asymmetric case in which one firm the incumbent makes the first move the two stage game involves the first mover sinking part of its costs in advance so that in the second stage equilibrium it will have a current cost advantage over the entrant which must incur the full cost of producing any desired output level the second period cost asymmetry ensures the incumbent a lar ger share of the post entry market which may be sufficient to deter entry altogether the problem with the two stage game lies in the nature of sunk costs sunk costs by definition are committed before the production period takes place if they were expended as a flow simultaneously with production they would not be sunk the installation of capacity is the natural example employed by dixit and well illustrates the point if installed capacity is a sunk cost which it must be for the incumbent to acquire any strategic advantage at all then the entrant s installed capacity is equally sunk and must also be committed before the production period takes place given this observation the post entry final period equilibrium should not be modelled as if the entrant were simultaneously incurring both variable and sunk costs but the incumbent only incurs variable costs this implies too great an asymmetry in favour of the incumbent the final period equilibrium should involve both firms incurring only variable

financial integration in east asia an empirical investigation the central objective of this paper is to empirically evaluate the degree of linkages among east asian equity and bond markets using data from the imf s coordinated portfolio investment survey cpis we find that intra east asian financial asset holdings of four east asian countries japan korea hong kong and singapore are larger than the levels predicted by the financial gravity model however our analysis suggests that this result is likely to be driven by intra regional trade linkages and reflect those linkages therefore the salient implication for regional policymakers is that they should continue to promote intra regional financial integration this paper also aims to analyse the impact of three different types of country specific risks political economic and financial risks on investment from the four countries this analysis yields a clear positive relationship between destination country risk in particular political risk and capital inflows

taking gravity online the role of virtual proximity in international finance abstract this paper analyses international patterns of bilateral portfolio equity and debt investment in a gravity model framework we contribute to the literature by exploring the role of virtual proximity measured by bilateral internet hyperlinks between countries as a novel proxy for cross border information flows and cultural proximity more generally our findings show that bilateral portfolio investment is significantly affected by virtual proximity indicating that countries which are more closely connected in terms of web content are more integrated financially the effect is stronger for equity than for debt investment highlighting the larger information sensitivity of equity investments and is largest for investments among advanced economies moreover including virtual proximity in estimations reduces the importance of traditionally used proxies for information asymmetries and cultural proximity

constituent interest vs legislator ideology the role of political opportunity cost this paper applies the economic model of legislative voting to the automobile industry domestic content vote in the u s house of representatives in 1982 we consider constituent interests for and against the ml and compare the predictive powers of alternative indicators of ideological preferences we also examine the role of political opportunity cost and find that lame ducks were significantly less likely to vote for the bill than were returnees to congress given the political advantages of voting for the bill this is consistent with the view that legislators were influenced by the case for freer trade

industrial structure and capital flows this paper provides a new theory of international capital flows in a framework that integrates factor proportions based trade and financial capital flows a novel force emerges capital tends to flow toward countries that become more specialized in capital intensive industries this composition effect competes with the standard force that channels capital toward the location where it is scarcer if the composition effect dominates capital flows away from the country hit by a positive labor force productivity shock a flow reversal extended to a quantitative framework the model generates sizable current account imbalances between developing and developed countries broadly consistent with the data

an equilibrium selection theory of monopolization we develop a duopoly model in which firms compete for the market e g investing in process innovation or product development as well as in the market e g setting quantities or prices competition for the market generates multiple equilibria that differ in the firms investment levels relative size and profitability we show that monopolization that affects competition in the market can act as an equilibrium selection device in competition for the market in particular it eliminates equilibria that are undesirable for the monopolizing firm while not generating new equilibria this result complicates the task of determining whether a firm s dominance in a given market is the result of fair competition or unlawful monopolization we discuss a number of implications for antitrust policy and litigation and illustrate these by means of two well known antitrust cases

market organisation and trading relationships in this paper we give a theoretical model of buyers behaviour on a market for a perishable good where no prices are posted we show that if buyers learn from their own previous experience there is a sharp division between those who learn to be loyal to certain sellers and those who continue to shop around this feature remains in more general models which are simulated and is consistent with empirical data from the marseille fish market

dynamic analysis of discontinuous best response with innovation abstract starting from the static analysis in eckert et al 2017 we study a cournot duopoly where firms can decide to incur fixed costs in activities that improve their competitiveness i e product development or process innovation innovation costs generate discontinuities in the firms quantity best response functions and in turn a variety of equilibrium configurations including multiple equilibria we provide a dynamic global analysis of the equilibria and show the way in which firms initial expectations regarding the rivals level of output are crucial in defining the configuration of the long run equilibrium

flight home flight abroad and international credit cycles this paper shows that banks exhibit a weaker stronger home bias in the extension of new loans when funding conditions in their home country improve deteriorate we refer to these changes in home bias as flight abroad and flight home effects respectively and show that they are unrelated to the better known flight to quality effect that arises during periods of market turmoil our results also indicate that global banks amplify the effect of homegrown shocks on foreign countries while they are a stabilizing factor for the supply of credit in their home countries

bounded rationality dynamic oligopoly and conjectural variations abstract we propose a dynamic model of n firm oligopoly that provides a logically consistent reinterpretation of conjectural variations each firm solves a dynamic optimization problem believing that the other firms will alter their future choices in proportion to its own current change these beliefs adapt in light of observed behavior we show that steady state equilibria can range from complete cooperation to predatory play and provide conditions under which the firms behavior and beliefs converge to a steady state the sufficient conditions for stability are more easily satisfied the smaller the cross effects among firms through demand or belief parameters they are also more easily satisfied in a price setting than in a quantity setting differentiated products model

convergence in the finite cournot oligopoly with social and individual learning abstract convergence to the nash equilibrium in a cournot oligopoly is a question that recurrently arises as a subject of controversy in economics the development of evolutionary game theory has provided an equilibrium concept more directly connected with adjustment dynamics and the evolutionary stability of the equilibria of the cournot game have been extensively studied in the literature several articles show that the walrasian equilibrium is the stable ess of the cournot game but no general result has been established for the difficult case of simultaneous heterogenous mutations authors propose specific selection dynamics to analyze this case vriend 2000 proposes using a genetic algorithm for studying learning dynamics in this game and obtains convergence to cournot equilibrium with individual learning the resulting convergence has been questioned by arifovic and maschek 2006 the aim of this article is to clarify this controversy it analyzes the mechanisms that are behind these contradictory results and underlines the specific role of the spite effect we show why social learning gives rise to the walrasian equilibrium and why in a general setup individual learning can effectively yield convergence to the cournot equilibrium we also illustrate these general results by systematic computational experiments

does electoral accountability affect economic policy choices evidence from gubernatorial term limits this paper analyzes the behavior of u s governors from 1950 to 1986 to investigate a reputation building model of political behavior we argue that differences in the behavior of governors who face a binding term limit and those who are able to run again provides a source of variation in discount rates that can be used to test a political agency model we find evidence that taxes spending and other policy instruments respond to a binding term limit if a democrat is in office the result is a fiscal cycle in term limit states which lowers state income when the term limit binds

evolutionary dynamics in club goods binary games abstract a dynamic adjustment mechanism based on replicator dynamics in discrete time is used to study the time evolution of a population of players facing a binary choice game with social influence characterized by payoff curves that intersect at two interior points also denoted as thresholds so besides the boundary equilibria where all players make the same choice there are two further steady states where agents playing different strategies coexist and get identical payoffs such binary game can be interpreted as a club good game in which players have to choose either joining or not the club in the presence of cost sharing so that they can enjoy a good or a service provided that a participation threshold is reached at the same time congestion occurs beyond a second higher threshold these binary choice models can be used and indeed have been used in the literature to represent several social and economic decisions such as technology adoption joining a commercial club r d investments production delocalization programs for environmental protection existence and stability of equilibrium points are studied as well as the creation of more complex attractors periodic or chaotic related with overshooting effects the study of some local and global dynamic properties of the evolutionary model proposed reveals that the presence of the participation threshold causes the creation of complex topological structures of the basins of coexisting attracting sets so that a strong path dependence is observed the dynamic effects of memory both in the form of convex combination of a finite number of previous observation moving average and in the form of memory with increasing length and exponentially fading weights are investigated as well

does remuneration affect the discipline and the selection of politicians evidence from pay harmonization in the european parliament we study the harmonization of the base pay for the members of the european parliament meps prior to this reform implemented in 2009 base pay was aligned with that of national parliamentarians causing large differences in pay between the meps representing 27 member states based on detailed information on individual meps between 2004 and 2011 we find that the reform which introduced an exceptional base pay increase of 200 per national delegation on average has a positive incentive effect on in office effort proxied by the number of speeches written declarations and reports drafted however more generous remuneration is associated with higher rates of absenteeism with respect to political selection we find that higher pay also raises reelection rates the composition of the pool of meps in terms of ex ante quality approximated by formal education previous political experience in elected office and occupational background is however unaffected if we restrict our attention to newly elected meps a salary increase is related to fewer meps with previous political experience at the highest national level

do trade costs in goods market lead to home bias in equities abstract two of the main puzzles in international economics are the consumption and the portfolio home biases we solve for international equity portfolios in a two country two good stochastic equilibrium model with trade costs in goods markets we show that introducing trade costs as suggested by obstfeld and rogoff obstfeld m rogoff k 2000a the six major puzzles in international macroeconomics is there a common cause nber macroeconomics annual 15 is not sufficient to explain these two puzzles simultaneously on the contrary we find that trade costs create a foreign bias in portfolios for reasonable parameter values this result is robust to the addition of non tradable goods for standard calibrations of the preferences

insecurity and the pattern of trade an empirical investigation corruption and imperfect contract enforcement dramatically reduce international trade this paper estimates the reduction using a structural model of import demand in which insecurity acts as a hidden tax on trade we find that inadequate institutions constrain trade as much as tariffs do we also find that omission of indices of institutional quality biases the estimates of typical gravity models obscuring a negative relationship between per capita income and the share of total expenditure devoted to traded goods finally we argue that cross country variation in the effectiveness of institutions and the consequent variation in the prices of traded goods offer a simple explanation for the stylized fact that high income capital abundant countries trade disproportionately with each other

an illustration of the essential difference between individual and social learning and its consequences for computational analyses abstract drawing a conclusion from recent insights in evolutionary game theory we show that a so called spite effect implies that there is an essential difference between individual and social learning we illustrate its consequences for the choice of computational tools in economics and social settings in general by analyzing two variants of a genetic algorithm

measuring financial market integration over the long run is there a u shape abstract using long time series for sovereign bond markets of fifteen industrialized economies from 1875 to 2009 i find that financial market integration by the end of the 20th century was higher than in earlier periods and exhibited a j shaped trend with a trough in the 1920s the main reason for the higher financial integration seen today is the recent extensive globalization around the turn of the 20th century countries frequently drifted apart conversely in recent years the bond markets of most countries have moved together both policy variables and the global market environment play a role in explaining the time variation in integration while unexplained changes in the overall level of country risk are also empirically important my methodology based on principal components analysis is immune to outliers and accounts for global and country specific shocks and hence can capture trends in financial integration more accurately than standard techniques such as simple correlations

working or shirking expenses and attendance in the uk parliament this paper studies the determinants of mps expense claims and of their attendance at parliamentary meetings using a multiple regression framework we correlate the expenses with three sets of variables constituency characteristics political variables and individual characteristics we then look at the ratio of parliamentary expenses claimed to votes cast in parliament as a crude measure of value for money this take on the data provides a somewhat benign view of the usage of expense claims we use the results to reflect on two views of the motivation of mps the public choice view and the public service view

the determinants of cross border equity flows abstract we explore a new panel data set on bilateral gross cross border equity flows between 14 countries 1989 1996 we show that a gravity model explains international transactions in financial assets at least as well as goods trade transactions gross transaction flows depend on market size in source and destination country as well as trading costs in which both information and the transaction technology play a role distance proxies some information costs and other variables explicitly represent information transmission an information asymmetry between domestic and foreign investors and the efficiency of transactions the geography of information is the main determinant of the pattern of international transactions while there is weak support in our data for the diversification motive once we control for the informational friction we broaden the scope of our results by presenting some evidence linking the results on equity transactions to equity holdings

a note on price and quantity competition in differentiated oligopolies abstract in this note we show that the results developed in n singh and x vives 1984 rand j econ 15 546 554 are sensitive to the duopoly assumption if there are more than two firms prices may be higher under price competition than under quantity competition this will be the case if quality differences are large and goods are complements if goods are substitutes high quality firms may earn higher profits under price competition than under quantity competition hence it is not evident which kind of competition is more efficient journal of economic literature classification numbers d43 l13

increasing returns path dependence and the study of politics it is increasingly common for social scientists to describe political processes as path dependent the concept however is often employed without careful elaboration this article conceptualizes path dependence as a social process grounded in a dynamic of increasing returns reviewing recent literature in economics and suggesting extensions to the world of politics the article demonstrates that increasing returns processes are likely to be prevalent and that good analytical foundations exist for exploring their causes and consequences the investigation of increasing returns can provide a more rigorous framework for developing some of the key claims of recent scholarship in historical institutionalism specific patterns of timing and sequence matter a wide range of social outcomes may be possible large consequences may result from relatively small or contingent events particular courses of action once introduced can be almost impossible to reverse and consequently political development is punctuated by critical moments or junctures that shape the basic contours of social life

international shock transmission after the lehman brothers collapse evidence from syndicated lending after lehman brothers filed for bankruptcy in september 2008 cross border bank lending contracted sharply to explain the severity and variation in this contraction we analyze detailed data on cross border syndicated lending by 75 banks to 59 countries we find that banks that had to write down sub prime assets refinance large amounts of long term debt and experienced sharp declines in their market to book ratio transmitted these shocks across borders by curtailing their lending abroad while shocked banks differentiated between countries in much the same way as less constrained banks they restricted their lending more to small borrowers

is local bias a cross border phenomenon evidence from individual investors international asset allocation abstract extant literature consistently documents that investors tilt their domestic equity portfolios towards regionally close stocks local bias we hypothesize that individual investors local bias is not limited to the domestic sphere but instead also determines their international investment decisions our results confirm the presence of a cross border local bias specifically we show i that the stockholdings of individual investors living within regional proximity to a foreign country display a significantly lower foreign investment bias towards investment opportunities in that country and ii that this drop in foreign investment bias levels is disproportionately driven by investments in regionally close neighbor country companies the impact of cross border local bias on investors bilateral foreign equity investments is economically significant and holds even after controlling for previously identified explanations of international asset allocation

oligopoly experimentation of learning with simulated markets abstract learning is investigated using experimental methods agents have no information about demand conditions the same oligopoly market is finitely repeated and the only link between successive markets is that agents acquire experience over time as the game is played adaptive as well as least squares learning are tested the model of price adjustment followed by firms indicates that the non cooperative bertrand nash equilibrium constitutes an attractor to players strategies

learning cycles in bertrand competition with differentiated commodities and competing learning rules this paper stresses the importance of heterogeneity in learning we consider a bertrand oligopoly with firms using either least squares learning or gradient learning for determining the price we demonstrate that convergence properties of the rules are strongly affected by heterogeneity in particular gradient learning may become unstable as the number of gradient learners increases endogenous choice between the learning rules may induce cyclical switching stable gradient learning gives higher average profit than least squares learning making firms switch to gradient learning this can destabilize gradient learning which because of decreasing profits makes firms switch back to least squares learning

oligopoly games with local monopolistic approximation we propose an oligopoly game where quantity setting firms have incomplete information about the demand function at each time step they solve a profit maximization problem assuming a linear demand function and ignoring the effects of the competitors outputs despite such a rough approximation that we call local monopolistic approximation lma the repeated game may converge at a nash equilibrium of the game played under the assumption of full information an explicit form of the dynamical system that describes the time evolution of oligopoly games with lma is given for arbitrary differentiable demand functions provided that the cost functions are linear or quadratic in the case of isoelastic demand we show that the game based on lma always converges to a nash equilibrium this result compared with best reply dynamics shows that in this particular case less information implies more stability

innovation threats and strategic responses in oligopoly markets this paper deals with the strategic reaction of firms to competitive threats stemming from newly developed products of actual competitors product innovation projects go through multiple time consuming stages with several continuation termination decisions hence competitors can react to the threat before the new product is introduced and thereby may prevent or facilitate the product s introduction we consider a duopoly model where firm 1 can start a two stage product innovation project for obtaining a horizontally and vertically differentiated product in between the two stages firm 2 can react by making an investment that improves the competitive position of the current product we find that under weak vertical differentiation firm 2 wants firm 1 to innovate horizontal differentiation softens competition and firm 2 over invests to induce firm 1 to launch the new product second under strong vertical differentiation firm 1 starts the product innovation project triggering under investment by firm 2 but never finishes it the under investment makes firm 2 a weaker competitor which induces firm 1 not to innovate third under very strong vertical differentiation firm 2 prevents a launch of the new product by over investing this results in a strong competitive position of firm 2 it therefore captures such a big market share that firm 1 will not introduce the new product the situation of firm 1 in the old market has worsened the option to complete the innovation created by initiating the first stage of the innovation project has a negative value for firm 1

genetic algorithm learning and the cobweb model this paper presents the cobweb model in which competitive firms in a market for a single good use a genetic algorithm to update their decision rules about next period production and sales the results of simulations show that the genetic algorithm converges to the rational expectations equilibrium for a wider range of parameter values than other algorithms frequently studied within the context of the cobweb model price and quantity patterns generated by the genetic algorithm are also compared to the data of experimental cobweb economies it is shown that the algorithm can capture several features of the experimental behavior of human subjects better than three other learning algorithms that are considered

home bias in open economy financial macroeconomics standard theory would predict that investors hold a well diversified portfolio of equities across the world but despite the process of financial globalization investors still hold a disproportionate share of local equities in their portfolio the equity home bias french and poterba 1991 we review the various explanations of this puzzling phenomenon in the context of recent developments in macroeconomic modelling that have allowed to incorporate sophisticated international portfolio choices in standard two country general equilibrium models we refer to this literature as open economy financial macroeconomics we focus on three broad classes of explanations i hedging motives in frictionless financial markets real exchange rate and non tradable income risk ii asset trade costs in international financial markets such as transaction costs differences in tax treatments between national and foreign assets iii informational frictions and behavioural biases these recent developments raise the need for new portfolio facts beyond the equity home bias and we will present some new evidence on cross border asset holdings across different types of assets equities bonds and bank lending we also present some new micro data on institutional holdings of equity at the fund level these data should inform macroeconomic modelling of the open economy and a growing literature of models of delegated investment

legal harmonization institutional quality and countries external positions a sectoral analysis abstract motivated by the action plan for a european capital markets union cmu this paper analyzes the potential for legal harmonization and convergence in institutional quality to affect capital market integration based on hand collected data on the implementation of eu directives our analysis yields three key insights first legal harmonization promotes portfolio equity holdings second discrepancies in institutional quality matter primarily for cross border debt positions third the relationship between external investments and harmonization varies significantly across sectors the non bank financial corporations which account for a large share of portfolio positions react more to institutional harmonization than do banks and the non financial private sector

can cross listing relax financial frictions in trade and equity holdings a sector level analysis previous studies have documented the positive mutual relationship between bilateral aggregate goods trade and asset holdings this article examines whether financial frictions play an important role in this mutual relationship instrumental variable poisson pseudo maximum likelihood iv ppml estimation method is applied to a new panel of data on us imports and foreign equity holdings in 20 manufacturing sectors from 43 countries over the period 2001 2007 the results confirm the significantly positive relationship between goods trade and equity holdings and show that financial frictions are an important factor causing this positive correlation in addition we find that equity cross listings in the us stock markets provide external funds to relax financial frictions and promote goods trade this impact varies with different measures of financial frictions in developing and developed countries

cournot duopoly when the competitors operate multiple production plants this article considers a cournot duopoly under an isoelastic demand function and cost functions with built in capacity limits the special feature is that each firm is assumed to operate multiple plants which can be run alone or in combination each firm has two plants with different capacity limits so each has three cost options the third being to run both plants dividing the load according to the principle of equal marginal costs as a consequence the marginal cost functions come in three disjoint pieces so the reaction functions derived on basis of global profit maximization may also consist of disjoint pieces this is reflected in a particular bifurcation structure due to border collision bifurcations and to particular basin boundaries related to the discontinuities it is shown that stable cycles may coexist and the non existence of unstable cycles constitutes a new property we also compare the coexistent short periodic solutions in terms of the resulting real profits

the evolution of walrasian behavior consider an evolutionary context where a given number of quantity setting oligopolists tend to mimic successful behavior occasionally experimenting with some small probability in this context it is shown that the unique long run outcome of the process has all firms playing walrasian i e choosing an output that maximizes profits when taking the market clearing price as given

price taking behavior versus continuous dynamic optimizing abstract in a quantity competition oligopoly previous studies have shown that a price taking firm can outperform any rival with identical technology that produces at a different output level at any intertemporal equilibrium this research seeks to examine this seemingly counter intuitive fact in a heterogeneous duopoly consisting of an adaptive price taker and a dynamic optimizer who dynamically optimizes its either absolute or relative profit stream over an infinite planning horizon with conventional economic assumptions the hamiltonian system always converges to a saddle point if goal of the dynamic optimizer is absolute profit the price taker produces more than the dynamic optimizer at the equilibrium around which there exists a long run relative profitability portion for the price taker consequently the price taker unconsciously makes higher relative profit than the dynamic optimizer in the long run in contrast if the dynamic optimizer pursues the relative profit both firms produce at the competitive level at the equilibrium while the whole optimal path lies in the relative profitability regime of the dynamic optimizer so that it will enjoy a higher profit than the price taker before reaching equilibrium these results provide economical justification for ever growing evolutionary game theoretical literatures in appreciating price taking behavior and additionally clarify possible misunderstandings in interpreting their conclusions

the trade creating effects of business and social networks evidence from france using theory grounded estimations of trade flow equations this paper investigates the role that business and social networks play in shaping trade between french regions the bilateral intensity of networks is quantified using the financial structure and location of french firms and bilateral stocks of migrants compared to a situation without networks migrants are shown to double bilateral trade flows while networks of firms multiply trade flows by as much as four in some specifications finally taking network effects into account divides the estimation of the impact of transport costs and of the effect of administrative borders by around three

an evolutionary cournot model with limited market knowledge abstract in this paper we analyze a dynamic game of cournot competition with heterogeneous firms choosing between two different adaptive behavioral rules in deciding output strategies the underlying oligopoly structure is standard using a constant return to scale technology n firms produce homogeneous goods which are sold in a market characterized by constant price elasticity in this setup we assume that a fraction of firms employs a quite rough rule of thumb the so called local monopolistic approximation lma whereas the complementary fraction plays best reply br a more demanding strategy in terms of information and computation requirements the model is first considered with exogenously fixed fractions of firms in the two complementary groups then it is generalized by considering an endogenous evolutionary switching process between the two behavioral strategies based on profit driven replicator dynamics the role of the number of firms information costs and inertia or anchoring attitude in production decisions is analyzed as well as the influence in the evolutionary process of random noise in the demand function and memory of past profits global properties of the oligopoly with evolutionary pressure between behavioral rules are discussed with particular regard to cases in which the nash equilibrium is unstable

managing rational routes to randomness abstract within the seminal cobweb model of brock and hommes firms adapt their price expectations by a profit based switching behavior between free naive expectations and costly rational expectations brock and hommes demonstrate that fixed point dynamics may turn into increasingly complex dynamics as the firms intensity of choice increases we show that policy makers are able to manage such rational routes to randomness by adjusting profit taxes in particular policy makers should increase decrease profit taxes if destabilizing expectations generate higher lower profits than stabilizing expectations to alter the composition of applied expectation rules and thereby to promote market stability our results are not restricted to cobweb models a huge body of literature demonstrates that rational routes to randomness may emerge in many different markets

gravity in international finance abstract the past decade has witnessed an explosion of papers estimating gravity equations for cross border financial holdings without much of a theoretical foundation in this paper we develop a theory for bilateral asset holdings that takes a gravity form we discuss how to estimate international financial frictions and conduct comparative statics analysis within the context of the theory we also find though that reasonable extensions of the model no longer generate a gravity form while this does not significantly complicate estimation and comparative statics analysis it raises questions about the empirical validity of gravity specifications for cross border financial holdings that need to be addressed in future work

information and capital flows the determinants of transactions in financial assets abstract we show that a gravity model explains international transactions in financial assets at least as well as goods trade transactions our results support the hypothesis that informational asymmetries are responsible for the strong negative relationship between asset trade and distance this result is very important for theories of asset trade portfolio adjustments and home bias we strengthen it by investigating the roles of explicit informational variables as well as distance in explaining separately cross border trade in corporate equities corporate bonds and government bonds

n firm oligopolies with production adjustment costs best responses and equilibrium abstract n firm single product oligopolies will be examined without product differentiation and with production adjustment costs the best response functions of the firms will be first determined in terms of the outputs of the rest of the industry and the firm s own outputs of the previous time period this function is always decreasing not necessarily continuous and might have two different values then the best response will be determined when the output of the rest of the industry is replaced by the output of the entire industry we will show that this function might have infinitely many values leading to infinitely many equilibria a complete description of the equilibrium set will also be given the theoretical findings will be illustrated with the case of linear price and linear cost functions

home country interest rates and international investment in u s bonds abstract we analyze how interest rates affect cross border portfolio investments data on u s bond holdings by foreign investors from 31 countries for the period 2003 2016 and a large variety in movements in interest rates in these countries provide for a unique way to analyze shifts in investment behavior in response to interest rates we find that low er interest rates now prevailing in many advanced countries lead to greater investment in general into the united states with the effects generally driven by investment in higher yielding corporate bonds rather than in treasury bonds in addition to affecting overall investments lower interest rates at home are associated with a greater weight on corporate bonds consistent with search for yield the results are economically important and robust to controlling for a number of country specific macroeconomic and financial conditions as well as to sample restrictions and choices of interest rate our findings have important policy implications in that they suggest that low interest rates can lead to shifts in the volume and composition of overseas investments

does trade cause capital to flow evidence from historical rainfall abstract we use a historical quasi experiment to estimate the causal effect of trade on capital flows we argue that fluctuations in regional rainfall within the ottoman empire capture the exogenous variation in exports from the empire to germany france and the u k during the period of 1859 1913 the identification is based on the following historical facts first only surplus production was allowed to be exported from the empire provisionistic policy second different products grown in different regions were subject to variation in regional rainfall third different bundles of products were exported to germany france and the u k by the empire using the export bundle weighted regional rainfall as an instrument for ottoman exports to each country our instrumental variable regression suggests the following when a given region of the empire received more rainfall than others the resulting surplus production was exported more to countries that historically imported more of those products and this leads to higher foreign investment by those countries in the empire our findings support theories predicting complementarity between trade and finance in which causality runs from trade to capital flows

the geography of trade in goods and asset holdings gravity models have been widely used to describe bilateral trade in goods portes and rey portes r rey h 2005 the determinants of cross border equity flows journal of international economics 65 2 269 296 applied this framework to cross border equity flows and found that distance which proxies information asymmetries is a surprisingly very large barrier to cross border asset trade we adopt a different point of view and explore the complementarity between bilateral trade in goods and bilateral asset holdings in a simultaneous gravity equations framework providing different instruments for both endogenous variables we show that a 10 increase in bilateral trade raises bilateral asset holdings by 6 to 7 the reverse causality is also significant albeit smaller controlling for trade the impact of distance on asset holdings is drastically reduced keywords gravity models international finance international trade simultaneous equations

holding idle capacity to deter entry in this journal dixit i980 carefully analysed the extent to which an established firm facing a prospective entrant might make an investment in capacity beyond that which is optimal for its pre entry output in his model both the established firm and prospective entrants understand that a quantity setting nash equilibrium would be established in any post entry game dixit showed that spence i977 had studied an imperfect equilibrium that is an equilibrium that depended upon a threat that was not credible to obtain his result that firms might hold excess capacity to deter entry in a perfect equilibrium a firm would not wish to install capacity that would be left idle if entry did not occur dixit s conclusion however depends on his assumption that each firm s marginal revenue is always decreasing in the other s output this is quite a restrictive assumption for example it is never satisfied in the relevant range for economists second favourite demand curve constant elasticity demand the basic point is unchanged if the firms anticipate price competition with differentiated products rather thanquantity competition in any post entry game under quite plausible conditions rational firms facing rational potential entrants may install capacity that will certainly be left idle we are thus able to rehabilitate spence s original proposition in a perfect equilibrium setting

location matters an examination of trading profits the electronic trading system xetra of the german security exchange provides a unique data source on the equity trades of 756 professional traders located in 23 different cities and eight european countries we explore informational asymmetries across the trader population traders located outside germany in non german speaking cities show lower proprietary trading profit their underperformance is not only statistically significant it is also of economically significant magnitude and occurs for the 11 largest german blue chip stocks we also examine whether a trader location in frankfurt as the financial center or local proximity of the trader to the corporate headquarters of the traded stock or affiliation with a large financial institution results in superior trading performance the data provide no evidence for a financial center advantage or of increasing institutional scale economies in proprietary trading however we find evidence for an information advantage due to corporate headquarters proximity for high frequency intraday trading

global banks and crisis transmission abstract we study the effect of financial integration through banks on the transmission of international business cycles in a sample of 18 20 developed countries between 1978 and 2009 we find that in periods without financial crises increases in bilateral banking linkages are associated with more divergent output cycles this relation is significantly weaker during financial turmoil periods suggesting that financial crises induce co movement among more financially integrated countries we also show that countries with stronger direct and indirect financial ties to the u s experienced more synchronized cycles with the u s during the recent 2007 2009 crisis we then interpret these findings using a simple general equilibrium model of international business cycles with banks and shocks to banking activity the model suggests that the relation between integration and synchronization depends on the type of shocks hitting the world economy and that shocks to global banks played an important role in triggering and spreading the 2007 2009 crisis

a naive but optimal route to walrasian behavior in oligopolies a paradoxical phenomenon where irrationality or ignorance lead to higher profits is shown to prevail in an oligopolistic market where three firms produce a homogeneous product with identical technologies under the conventional assumption on the convexity of cost function the profit made by a naive price taker will always be higher than or at least as much as the other two rivals no matter what kind of strategies the latter may take and whether they form a coalition or not by sticking to the price taking strategy a firm always gains a positive profit improvement should any one of its rivals try to upgrade from price taker to the cournotor with these incentives a firm prefers to remain as a naive price taker

indeterminacy of equilibria in a hyperinflationary world experimental evidence the authors design and study an olg experimental economy where the government finances a fixed real deficit through seigniorage the economy has continua of nonstationary rational expectations equilibria and two stationary rational expectations equilibria the authors do not observe nonstationary rational expectations paths observed paths tend to converge close to or somewhat below the low inflation stationary state the adaptive learning hypothesis is consistent with the data in selecting the low inflation stationary state rational expectations equilibrium as a long run stationary equilibrium nevertheless simple adaptive learning models do not capture the market uncertainty or the biases observed in the data copyright 1993 by the econometric society

preference falsification policy continuity and collective conservatism through a model that distinguishes between privately held and publicly declared preferences and between private and public beliefs this paper explains why a society might c ling to its past choices all four variables are endogenous to the mo del following the introduction of a measure of collective conservati sm the paper turns to the determinants and consequences of feedback from society s choices to its members private beliefs and preference s the theory is applied to the persistence of india s caste system t o explain why the lowest castes have been among the system s most com mitted supporters copyright 1987 by royal economic society

the long run benefits of chaos to oligopolistic firms abstract conventional economic beliefs that equilibrium is better than disequilibrium and stability is better than fluctuation are challenged with a heterogeneous oligopolistic model that consists of a naive firm and a group of sophisticated firms the naive firm is assumed to adopt a simple cobweb strategy while the sophisticate firms who command all market information form a collusion and best respond the naive firm s current action when the market equilibrium is unstable the naive firm is able to turn an explosively diverging market into a bounded but chaotic one by adopting simultaneously a cautious adjustment strategy that is limiting the growth rate of output there exists an upper bound such that as long as the growth rate does not exceed this bound the average profits made by all oligopolistic firms are higher than their respective equilibrium profits moreover the average economic surplus can also be higher than the equilibrium surplus in this sense chaos is beneficial not only to all oligopolistic firms but also to the economy as a whole

endogenous fluctuations under evolutionary pressure in cournot competition abstract an evolutionary game theoretic model of cournot competition is investigated individuals choose from a finite set of different behavioral rules each rule specifies the quantity to be produced in the current period as a function of past quantities using more sophisticated rules may require extra information costs based upon realized payoffs the fractions of the population choosing a certain behavioral rule are updated according to the replicator equation with noise the long run behavior of the evolutionary system consisting of the population dynamics coupled with the quantity dynamics of the cournot game may be complicated and endogenous fluctuations may arise we consider a typical example where firms can choose between two rules the nash rule and the best reply rule we show that a homoclinic tangency between the stable and unstable manifold of the equilibrium occurs as evolutionary pressure increases implying bifurcation routes to complicated dynamics and strange attractors

impact of organizational structure on oligopolistic pricing abstract the main point of this paper is to suggest that to maintain price discipline certain organizational and historical features of an industry s information set need to be maintained in particular the place of the pricing decision in the organizational structure of firms is a critical determinant of the equilibrium price level in oligopolistic industries offering products that are commodities the model identifies the dynamics of oligopolistic pricing with price discipline breaking down as a result of intensified non price competition and decentralization of the pricing decision examples from the steel nuclear turbine airline and the telecommunication industries provide some empirical support for the model the analysis integrates industrial organization theory and the behavioral theory of the firm in fact the one thing that his decentralization in early 1988 had accomplished was that it gave the sales force more freedom to interpret orders such as akers s 1989 edict that losing market share would no longer be tolerated salesmen now had much of the control over pricing that had previously been reserved for senior management and they realized even if akers didn t that competitors products were now so similar to ibm s that the only weapon ibm could use to stop market share losses was lower prices the salesmen used their weapon they began a price war that gave customers discounts as high as 50 percent and that eventually rendered list prices meaningless buying a mainframe started to include as much wheeling and dealing as buying a used car in paul carrll s big blues the unmaking of ibm page 221

new product introduction and capacity investment by incumbents effects of size on strategy we analyze a duopoly where capacity constrained firms offer an established product and have the option to offer an additional new and differentiated product we show that the firm with the smaller capacity on the established market has a higher incentive to innovate and reaches a larger market share on the market for the new product an increase in capacity of the larger firm can prevent its competitor from innovating whereas an increase in capacity of the smaller firm cannot prevent innovation of its larger competitor in equilibrium the firm with smaller capacity on the established market might outperform the larger firm with respect to total payoffs

what lies beneath the euro s effect on financial integration currency risk legal harmonization or trade abstract although recent research shows that the euro has spurred cross border financial integration the exact mechanisms remain unknown we investigate the underlying channels of the euro s effect on financial integration using data on bilateral banking linkages among twenty industrial countries in the past thirty years we also construct a dataset that records the timing of legislative regulatory harmonization policies in financial services across the european union we find that the euro s impact on financial integration is primarily driven by eliminating the currency risk legislative regulatory convergence has also contributed to the spur of cross border financial transactions trade in goods while highly correlated with bilateral financial activities does not play a key role in explaining the euro s positive effect on financial integration

the currency composition of international portfolio assets in this paper we empirically assess the importance of gravity type variables and measures of macroeconomic and financial volatilities in explaining portfolio holdings denominated across the main global currencies us dollar usd euro eur pound sterling gbp japanese yen jpy and swiss franc chf our findings underscore the importance of trade ties and common membership euro area we also find that international positions co move with the level of macroeconomic and financial uncertainty importantly we identify heterogeneous patterns at a currency level

equilibrium selection in a nonlinear duopoly game with adaptive expectations abstract we analyze a nonlinear discrete time cournot duopoly game where players have adaptive expectations the evolution of expected outputs over time is generated by the iteration of a noninvertible two dimensional map the long run behavior is characterized by multistability that is the presence of coexisting stable consistent beliefs which correspond to nash equilibria in the quantity space hence a problem of equilibrium selection arises and the long run outcome strongly depends on the choice of the players initial beliefs we analyze the basins of attraction and their qualitative changes as the model parameters vary we illustrate that the basins might be nonconnected sets and reveal the mechanism which is responsible for this often neglected kind of complexity the analysis of the global bifurcations which cause qualitative changes in the topological structure of the basins is carried out by the method of critical curves

on the consistency of backward looking expectations the case of the cobweb in dynamic models of economic fluctuations backward looking expectations with systematic forecasting errors are inconsistent with rational behaviour in non linear dynamic models exhibiting seemingly unpredictable chaotic fluctuations however simple habitual rule of thumb backward looking expectation rules may yield non zero but nevertheless non systematic forecasting errors in a chaotic model expectational forecasting errors may have zero autocorrelations at all lags even for rational agents patterns in these forecasting errors may be very difficult to detect especially in the presence of small noise backward looking expectations are then not necessarily inconsistent with rational behaviour we investigate whether simple expectation schemes such as naive or adaptive expectations can be consistent with rational behaviour in the simplest of all non linear dynamic economic models the non linear cobweb model

cournot versus walras in dynamic oligopolies with memory abstract this paper explores the impact of memory in cournot oligopolies where firms learn through imitation of success as suggested in alchian j polit econ 57 1950 211 and modeled in vega redondo econometrica 65 1997 375 as long as memory includes at least one period the long run outcome corresponds to any quantity between the cournot one and the walras one the evolutionary stability of the walrasian outcome relies on interfirm comparisons of simultaneously observed profits i e whether a firm earns more than others in a given period whereas the stability of the cournot nash equilibrium is derived from intertemporal comparisons of profits for each given firm i e whether a deviation pays off for that firm

a re evaluation of adaptive expectations in light of global nonlinear dynamic analysis we undertake an analysis of the dynamic behaviour of a discrete time nonlinear monetary dynamics model with adaptive expectation that is a basic mechanism in a broad class of descriptive macrodynamic models we consider in particular a variety of ways in which the adaptive expectations mechanism may be formulated these differ in the degree of rationality of the economic agents that inhabit the model we study in detail the local and global properties of the maps determining the price dynamics

time series evidence on shirking in the u s house of representatives this paper presents time series evidence on the voting behavior of members of the u s house of representatives from 1975 to 1990 the empirical results indicate that voting behavior of individual congressmen is remarkably stable over time we find no evidence of economically significant last term effects on voting behavior nor are there important effects of legislative tenure on voting patterns the most significant deviations in voting behavior occur for congressmen who failed to win their reelection bid suggesting that sizable deviations from previous policy positions may result in swift retribution by constituents in the district