international institutional lending arrangements to sovereign borrowers abstract recent financial crises in east asia and elsewhere have illustrated the problems that plague emergency liquidity arrangements and the lender of last resort role of the international monetary fund and other international institutions in particular these act under conditions of extreme uncertainty where potential sovereign borrowers as well as private financial institutions are kept in the dark regarding the intentions of the emergency lenders and the amounts and terms of emergency liquidity that can be tapped from april 1999 longer term credit lines are being offered by the imf designed to be awarded to healthy countries before they experience contagion or distress the paper evaluates the advantages of this form of imf lending and this new trend in imf operations it is argued that provision of imf financing through such long term lending facilities is better in some senses than shorter term lending long term contracts reduce the uncertainty with respect to imf intentions moral hazard problems are reduced for the borrowing country and financial markets know the future level and terms of imf support another advantage is that long term loan contracts improve the allocation of resources within the borrowing country much as private sector facility lending is the dominant mode of finance in many markets so facility lending has efficiency advantages when it is provided by the imf this efficiency advantage is derived formally it is shown that sovereign borrowers are actually better off when utilizing these as backup lines of credit instead of emergency borrowing that is conducted after distress occurs facility lending by international institutions can lead to a welfare improvement and superior resource allocation for sovereign borrowers the intuition for this is that when financial distress drives these borrowers to increase their debt risk premia in borrowing rates would not rise at least up to the limits established by the size of the facility

financial intermediary coalitions abstract in this article an environment in which the investment opportunities of agents are private information is studied and it is shown that financial intermediaries arise endogenously within that environment it is established that financial intermediaries are part of an efficient arrangement in the sense that they are needed to support the authors private information core allocations these intermediaries which are coalitions of agents exhibit the following characteristics in equilibrium they borrow from and lend to large groups of agents they produce information about investment projects and they issue claims that have different state contingent payoffs than claims issued by ultimate borrowers

product market imperfections and loan commitments i show in a model of competitive banks that the characteristics of loan contracts are affected by product market imperfections in the borrower s industry a bank loan commitment increases the value of a borrower firm operating in an imperfectly competitive industry and thus dominates a simple loan even in the absence of risk sharing considerations and informational asymmetries between the borrower and the bank while it is individually rational for a firm to obtain a loan commitment all the firms in that industry taken together are made worse off by the existence of loan commitments a loan commitment is a contract guaranteeing future availability of credit to a borrower at a prespecified fixed or stochastic interest rate although bank loan commitments are an important financial instrument and there exists an extensive literature analyzing them the rationale for their existence is still a matter of research this paper provides an explanation for the existence of bank loan commitments to borrowers from industries in which there is imperfect competition in the product market it is shown that in such industries the option to acquire financing at predetermined rates enhances the borrower s strategic power and thus creates value for the individual borrower consider an industry with imperfect competition where firms face the problem of noncooperatively exploiting a product market opportunity the optimal product market strategy of a firm depends on the output of its rivals a firm with access to resources at a lower marginal cost than its competitors has a strategic advantage that it can exploit to gain a larger market share and profits it is shown here that a firm that does not have such a strategic advantage can create it by purchasing for a fixed initial fee an option to acquire a factor of production such as financing at favorable terms specifically by initially negotiating a bank loan commitment the firm can finance an expansion of output to meet a strategic contingency at more favorable terms than would be possible if the expansion had to be financed in the spot market the ability to exercise the commitment enables the firm to threaten its rivals strategically and moves the industry to an equilibrium more favorable to that firm thus creating value for the borrower it is shown below that it is optimal for all firms to acquire bank loan commitments altering the industry equilibrium in the process

am i getting a good deal reference dependentdecision making when the reference price is uncertain models of consumer decision making commonly incorporate reference dependent preferences in these models the reference point is typically assumed to be known by the consumer however research on price recall and the reference formation process reveals that the reference price is often uncertain at the time of purchase reference price uncertainty creates ambiguity for the consumer about whether they are getting a good or bad deal this paper develops a model of consumer choice in the presence of reference dependent preferences when the reference price is uncertain data from two empirical studies that vary the product category and order of the elicitation of reference prices show that the new model generally outperforms conventional discrete choice models that either ignore reference prices or treat reference prices as certain the new model provides insights into the effect of reducing reference price uncertainty on consumer choice and reveals that high uncertainty smoothes the kink in the demand curve that is present in traditional reference price demand models

incentives for information production and disclosure comment ponssard 1979 showed that firms prefer not to share their information about linear market demand with their rivals prima facie this result looks as though it should generalize firms should do better against uninformed than informed rivals fried s 1984 interesting paper forces one to rethink this intuition again using a linear model he showed that a duopolist is better off disclosing its costs unless its rival is unable to observe its own costs and the two firms costs are sufficiently positively correlated fried s results are important both for their implications with respect to regulatory agencies and for the light they cast on games of incomplete information it is therefore interesting to consider whether they will generalize fried s interpretation of his results runs as follows if firm 2 can observe its own unit costs w2 then it will raise its supply q2 when informed that w1 is relatively high and conversely fried refers to this phenomenon as counteradjustment if costs are sufficiently positively correlated and w2 is not observed by 2 then 2 s counteradjustment to a high w1 will be dominated by the impact of its belief that w2 is also high in effect counteradjustment aq2 aw1 0 amounts to the existence of downward sloping reaction functions and will therefore arise in more general cournotian models fried s interpretation suggests that revelation will be preferred in a far wider class of models in this note we reconsider fried s interpretation we shall argue in section ii that his results derive from a quite different intuition concerned with the preference of a risk neutral agent for ex ante more risky prospects and that counteradjustment generates sufficient conditions for revelation to be more risky in fried s model more importantly we shall show in section iii how our interpretation leads to a variety of possible counterexamples these are designed to show that counteradjustment is in general neither necessary nor sufficient we suggest that these give greater insight into general conditions under which revelation will be

the role of market forces in assuring contractual performance the conditions under which transactors can use the market repeat purchase mechanism of contract enforcement are examined increased price is shown to be a means of assuring contractual performance a necessary and sufficient condition for performance is the existence of price sufficiently above salvageable production costs so that the nonperforming firm loses a discounted steam of rents on future sales which is greater than the wealth increase from nonperformance this will generally imply a market price greater than the perfectly competitive price and rationalize investments in firm specific assets advertising investments thereby become a positive indicator of likely performance

an economic rationale for the pricing structure of bank loan commitments abstract an economic rationale is provided for the competitive equilibrium deployment of commitment and usage fees in loan commitment pricing it is shown that under perfect information assessing both fees rather than just one permits optimal risk sharing when the borrower is privately informed about its probability of future commitment utilization commitment and usage fees can be used to induce borrowers to identify themselves by self selection through contract choice the equilibrium characterized here is dissipative and thus raises the usual existence questions which are addressed in the paper

dutch book arguments and learning in a nonexpected utility fremework if an individual follows maximin expected utility theory then a smart outsider cannot in general make a bet with him her that is certain to win in a single time period however the author shows that when there are many time periods this is possible in his model unless the decisionmaker uses strategic behavior there are some exceptions in particular for small deviations from expected utility profits may be less than the transactions costs copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

on the consensus effect abstract individuals often tend to conform to the choices of others in group decisions compared to choices made in isolation we show that this behavior which we term the consensus effect is equivalent to a well known violation of expected utility namely strict quasi convexity of preferences which is shared by many popular non expected utility models in contrast to the equilibrium outcome when individuals are expected utility maximizers quasi convexity of preferences imply that group decisions may fail to properly aggregate preferences and strictly pareto dominated equilibria may arise

evaluating income streams a decision analysis approach most important decision problems virtually all capital investiments and planning situations involve risky cash flows with uncertainties that are resolved over time in most of these problems the decision maker has access to financial markets and may borrow and lend to smooth consumption over time yet because of the difficulty of incorporating these borrowing and lending decisions into the evaluation models these opportunities are rarely explicitly modeled in decision and risk analyses of these investments in this paper we study the errors induced by failing to account for these borrowing and lending decisions and we develop extensions to the standard decision and risk analysis procedures that given certain market and preference assumptions take these borrowing and lending opportunities into account without overburdening the evaluation models

commercial paper bank reserve requirements and the informational role of loan commitments abstract an explanation is provided of the often observed purchase of back up bank loan commitments by corporations immediately preceding their sale of dealer placed commercial paper since loan commitments are typically viewed as hedging instruments our paper explains why a risk neutral corporation would purchase this type of instrument and how it is priced it is assumed that while firms know their own credit risks neither banks nor the paper market can distinguish between some credit applicants we show that the purchase of a commitment can identify these firms to the market the equilibrium is partially revealing of the firms with unobservable quality those with higher quality identify themselves by purchasing commitments while those with lower quality sell unbacked paper and are pooled together unbacked paper is sold also by firms whose quality is observable unidentified firms in the lowest quality range do not sell commercial paper

financial contagion and attention allocation this paper explains financial contagion between two stock markets with uncorrelated fundamentals by fluctuations in international investors attention allocation we model the process of attention allocation that underlies portfolio investment in international markets using investors who face information processing constraints investors optimally allocate more attention to a region hit by a financial crisis to the detriment of other markets the resulting endogenous increase in uncertainty causes a reduction in the capacity to bear risks by international investors that induces them to liquidate their positions in all risky assets hence there is a collapse in stock prices around the world we show that the degree of non anticipation of a crisis is crucial for the existence of contagion using data from the east asian crisis and the number of news stories about thailand in the financial times relative to news stories about argentina brazil and chile as a proxy for the relative attention allocated to the asian stock market we find evidence consistent with two key predictions of our model first the higher the volatility of the originator market the more relative attention allocated to this market and second the more relative attention allocated to the originator market the higher the volatility of the other markets our findings support the attention reallocation channel as a transmission mechanism of financial crises between regions during the period from january 1997 to july 1998

on the role of information in decision making the case of sorghum yield in burkina faso this paper investigates the role of temporal uncertainty and information issues in economic decisions it shows that the nature of the economic environment e g the production technology can influence the valuation of information which in turn affects the choice functions this is illustrated by an empirical application to sorghum yield response analysis in burkina faso the paper stresses the importance of technology and information valuation in risk behaviour

decision making under uncertainty capturing dynamic brand choice processes in turbulent consumer goods markets we construct two models of the behavior of consumers in an environment where there is uncertainty about brand attributes in our models both usage experience and advertising exposure give consumers noisy signals about brand attributes consumers use these signals to update their expectations of brand attributes in a bayesian manner the two models are 1 a dynamic model with immediate utility maximization and 2 a dynamic forward looking model in which consumers maximize the expected present value of utility over a planning horizon given this theoretical framework we derive from the bayesian learning framework how brand choice probabilities depend on past usage experience and advertising exposures we then form likelihood functions for the models and estimate them on nielsen scanner data for detergent we find that the functional forms for experience and advertising effects that we derive from the bayesian learning framework fit the data very well relative to flexible ad hoc functional forms such as exponential smoothing and also perform better at out of sample prediction another finding is that in the context of consumer learning of product attributes although the forward looking model fits the data statistically better at conventional significance levels both models produce similar parameter estimates and policy implications our estimates indicate that consumers are risk averse with respect to variation in brand attributes which discourages them from buying unfamiliar brands using the estimated behavioral models we perform various scenario evaluations to find how changes in marketing strategy affect brand choice both in the short and long run a key finding obtained from the policy experiments is that advertising intensity has only weak short run effects but a strong cumulative effect in the long run the substantive content of the paper is potentially of interest to academics in marketing economics and decision sciences as well as product managers marketing research managers and analysts interested in studying the effectiveness of marketing mix strategies our paper will be of particular interest to those interested in the long run effects of advertising note that our estimation strategy requires us to specify explicit behavioral models of consumer choice behavior derive the implied relationships among choice probabilities past purchases and marketing mix variables and then estimate the behavioral parameters of each model such an estimation strategy is referred to as structural estimation and econometric models that are based explicitly on the consumer s maximization problem and whose parameters are parameters of the consumers utility functions or of their constraints are referred to as structural models a key benefit of the structural approach is its potential usefulness for policy evaluation the parameters of structural models are invariant to policy that is they do not change due to a change in the policy in contrast the parameters of reduced form brand choice models are in general functions of marketing strategy variables e g consumer response to price may depend on pricing policy as a result the predictions of reduced form models for the outcomes of policy experiments may be unreliable because in making the prediction one must assume that the model parameters are unaffected by the policy change since the agents in our models choose among many alternative brands their choice probabilities take the form of higher order integrals we employ monte carlo methods to approximate these integrals and estimate our models using simulated maximum likelihood estimation of the dynamic forward looking model also requires that a dynamic programming problem be solved in order to form the likelihood function for this we use a new approximation method based on simulation and interpolation techniques these estimation techniques may be of interest to researchers and policy makers in many fields where dynamic choice among discrete alternatives is important such as marketing decision sciences labor and health economics and industrial organization

asymmetries in the valuation of risk and the siting of hazardous waste disposal facilities recently several economists richard thaler 1980 jack knetsch and j a sinden 1984 following suggestions of psychologists daniel kahneman and amos tversky 1979 have argued that current economic models of consumer behavior fail to explain observed asymmetries in how individuals respond to gain vs losses in perceived entitlements attention to their arguments is increasing because they relate to many current policy issues especially those associated with undesirable land uses most of the papers suggesting this limitation with the conventional economic framework have been motivated by the large differences between the estimates of willingness to pay vs willingness to accept as measures of the change in individual well being that would result from a change in the conditions of access to or the quality of a commodity in this paper we report the first evidence of a sizable property rights effect using only willingness to pay measures this change is potentially important because both the recent appraisal of contingent valuation surveys see ronald cummings et al 1986 an important source of the available empirical evidence and laboratory experiments suggest that individuals may have difficulty in dealing with the concept of compensation this is especially true when there is no opportunity for individuals to learn about transactions that involve compensation through experience based on a contingent valuation survey of households in suburban boston we found that respondents bid significantly more to reduce risk than they indicated they were willing to pay to avoid an equivalent risk increase while our findings support suggestions that changes in the implied entitlements to safety can lead to large differences in welfare measures for risk changes several of these earlier arguments would have implied that individuals were willing to pay more to avoid a risk increase the opposite to our results thus these differences imply that the determinants of individuals valuations for risk changes are more complex than past studies have acknowledged

are food choices really habitual integrating habits variety seeking and compensatory choice in a utility maximizing framework given the large number of food choices that consumers make each day it seems likely that they will adopt decision strategies that minimize cognitive effort to examine this issue we develop a conceptual and empirical model of habitual choice and the factors that result in transitions to two strategies other than habitual selection utility maximizing choice and a variety seeking strategy our approach provides an alternative to traditional state dependence methods used in this type of panel data we apply this framework to the choice of two food products that illustrate the heterogeneity across types of products in decision strategies and routine choice patterns copyright 2013 oxford university press

comparative statics and non expected utility preferences abstract researchers have shown that many though not all of the basic results of expected utility analysis can be more or less directly generalized to non expected utility preferences this paper describes the essential difference between results which can be extended in this manner and those which cannot and shows that an important family of comparative statics theorems falls into the former class

choice and temporal welfare impacts incorporating history into discrete choice models abstract static cross sectional discrete choice models are often employed to calculate welfare measures in environmental valuation these measures will be biased if the underlying preference function includes temporally related attributes and lagged dependent variables nevertheless static models continue to dominate the literature in this paper we provide an approach to estimating discrete choice models that includes consideration of prior behavior and past attribute perceptions and allows for testing consistency with random utility maximization in a time series context we apply this model to the case of recreational fishing site choice and participation comparing our time series approach to static versions we find that the time series model provides a richer behavioral characterization of site choice we also find significant differences between cross section and time series welfare measures the time series model raises several concerns about the specification of the policy impact and the subsequent welfare measurement that are not apparent in the static case

information reliability and a theory of financial intermediation this paper is an analysis of when it will be beneficial for agents engaged in the production of information to form coalitions the model is cast in a financial market framework thus leading to an identification of conditions sufficient for the existence of financial intermediaries intermediation is shown to improve welfare if informational asymmetries are present and the information generated to rectify these asymmetries is potentially unreliable the usual appeal to transactions costs to explain intermediation is not needed

induced preferences dynamic consistency and dutch books we assume that a decision maker has expected utility preferences over a large space which includes some variables not observable by the theorist these will induce preferences over observable variables which typically will not have the expected utility form this paper focuses on implications for multi period decisions we show that such preferences are not vulnerable to dutch books in particular we consider preferences arising from non additive subjective probabilities and show how they can arise as induced preferences

flexibility and the demand for risky assets abstract the fact that reduced flexibility always increases the demand for insurance has led to the belief that reduced flexibility always makes individuals more risk averse however it is quite possible for reduced flexibility to lead to less risk averse behavior in the standard asset demand sense

modeling multiple sources of state dependence in random utility models a distributed lag approach we propose a utility theoretic brand choice model that accounts for four different sources of state dependence 1 effects of lagged choices structural state dependence 2 effects of serially correlated error terms in the random utility function habit persistence type 1 3 effects of serial correlations between utility maximizing alternatives on successive purchase occasions of a household habit persistence type 2 and 4 effects of lagged marketing variables carryover effects our proposed model also allows habit persistence to be a function of lagged marketing variables while accommodating the effects of unobserved heterogeneity in household choice parameters this model is more flexible than existing state dependence models in marketing and labor econometrics using scanner panel data we find structural state dependence to be the most important source of state dependence marketing mix elasticities are systematically understated if state dependence effects are incompletely accounted for the seetharaman and chintagunta 1998 model is shown to recover spurious variety seeking effects while overstating habit persistence effects ignoring habit persistence type 1 leads to an underestimation while ignoring habit persistence type 2 leads to an overestimation of structural state dependence effects we find lagged promotions to have carryover effects on habit persistence ignoring one or more sources of state dependence underestimates the total incremental impact of a sales promotion we draw implications for manufacturer pricing

economic behavior under temporal uncertainty a considerable amount of research has focused on the effects of uncertainty on economic behavior in the absence of complete risk markets private risk bearing is widely believed to influence economic decisions arrow 1 sandmo 23 chavas 4 dalal 6 and others have investigated the role of uncertainty in resource allocation for example sandmo 23 has proposed a theory of the firm under risk he showed how risk and risk aversion can have a negative effect on production decisions

quadratic social welfare functions john harsanyi has provided an intriguing argument that social welfare can be expressed as a weighted sum of individual utilities his theorem has been criticized on the grounds that a central axiom that social preference satisfies the independence axiom has the morally unacceptable implication that the process of choice and considerations of ex ante fairness are of no importance this paper presents a variation of harsanyi s theorem in which the axioms are compatible with a concern for ex ante fairness the implied mathematical form for social welfare is a strictly quasi concave and quadratic function of individual utilities

credible commitments contract enforcement problems and banks intermediation as credibility assurance abstract we consider contract enforceability problems in credit transactions and justify a bank as an organizational solution to market breakdown due to unenforceable contracts specifically we explain i why loan commitments exist and ii why banks exist to sell such commitments a loan commitment resolves moral hazard more efficiently than any combination of inside equity and spot credit however the market breaks down if commitment sellers are individuals because their promises to honor contracts are not credible with a large bank a perfect sequential equilibrium is obtained in which credibility is restored

a dual self model of impulse control we propose that a simple dual self model gives a unified explanation for several empirical regularities including the apparent time inconsistency that has motivated models of quasi hyperbolic discounting and rabin s paradox of risk aversion in the large and small the model also implies that self control costs imply excess delay as in the o donoghue and rabin models of quasi hyperbolic utility and it explains experimental evidence that increased cognitive load makes temptations harder to resist the base version of our model is consistent with the gul pesendorfer axioms but we argue that these axioms must be relaxed to account for the effect of cognitive load

state dependence and alternative explanations for consumer inertia for many consumer packaged goods products researchers have documented inertia in brand choice a form of persistence whereby consumers have a higher probability of choosing a product that they have purchased in the past using data on margarine and refrigerated orange juice purchases we show that the finding of inertia is robust to flexible controls for preference heterogeneity and not due to autocorrelated taste shocks thus the inertia is at least partly due to structural not spurious state dependence we explore three economic explanations for the observed structural state dependence preference changes due to past purchases or consumption experiences which induce a form of loyalty search and learning our data are consistent with loyalty but not with search or learning properly distinguishing among the dierent sources of inertia is important for policy analysis because the alternative sources of inertia imply qualitative dierences in firm s pricing incentives and lead to quantitatively dierent equilibrium

competitive equilibrium with type convergence in an asymmetrically informed market this article studies an asymmetric information game with type convergence in which under some realizations of a common uncertainity inducing informed agents to reveal their types through self selection by contract choice is either costly or impossible under other realizations self selection permits costless distinctions between informed agents i obtain sufficient conditions under which contracting with options prior to the realization of the common uncertainity leads to the existence of a perfectly separating costless nash equilibrium applications to variable rate loan commitments and life insurance contracting are discussed article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

moral hazard and information sharing a model of financial information gathering agencies we propose a theory of information gathering agencies in a world of informational asymmetries and moral hazard in a setting in which true firm values are certified by screening agents whose payoffs depend on noisy ex post monitors of information quality the formation of information gathering agencies groups of screening agents is justified on two grounds first it enables screening agents to diversify their risky payoffs second it allows information sharing the first effect itself is insufficient despite the risk aversion of screening agents and the stochastic independence of the monitors used to compensate them this paper develops a model that explains the formation of financial institutions which acquire and process information for the purpose of certifying asset qualities but do not get involved in funding the model makes two basic assumptions the first is that there is an informational asymmetry in the capital market involving insiders possessing more accurate information about the true economic values of their firms than outsiders and the second is that those engaged in the production of information to rectify this asymmetry can gain from sharing their information examples of the information gathering agencies iga s we study are creditrating agencies financial newsletters standard and poor s value line investment counselors credit bureaus etc iga s are distinct from funding financial intermediaries ffi s like banks and credit unions that in addition to acquiring and processing information also issue claims against themselves fund their customers needs and transform asset characteristics from a modeling standpoint a key distinction between iga s and ffi s is that in the case of the latter outsiders depositors for instance do not necessarily have to assess the quality of the intermediary s information since the intermediary can be made accountable for this quality through the positions it takes in the screened assets thus models that explain ffi s focus on how the contracts offered by the intermediary ensure information reliability without reliance on explicit monitoring on the other hand because of the absence of loan and deposit type contracts to dissipate informational problems a model explaining iga s must rely on monitoring related mechanisms

competition risk neutrality and loan commitments abstract we rationalize fixed rate loan commitments forward credit contracting with options in a competitive credit market with universal risk neutrality future interest rates are random but there are no transactions costs borrowers finance projects with bank loans and choose ex post unobservable actions that affect project payoffs credit contract design by the bank is the outcome of a non cooperative nash game between the bank and the borrower the initial formal analysis is basically in two steps first we show that the only spot credit market nash equilibria that exist are inefficient in the sense that they result in welfare losses for borrowers due to the bank s informational handicap second we show that loan commitments because of their ability to weaken the link between the offering bank s expected profit and the loan interest rate enable the complete elimination of informationally induced welfare losses and thus produce an outcome that strictly pareto dominates any spot market equilibrium perhaps our most surprising result is that if the borrower has some initial liquidity it is better for the borrower to use it now to pay a commitment fee and buy a loan commitment that entitles it to borrow in the future rather than save it for use as inside equity in conjunction with spot borrowing

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

collateral and competitive equilibria with moral hazard and private information the authors examine equilibrium credit contracts and allocations under different competitivity specifications and explain the economic roles of collateral under these specifications both moral hazard and adverse selection are considered the principal message is that how a competitive equilibrium is conceptualized significantly affects the characterization of equilibrium credit contracts specifically some well known results in the rationing literature are shown to rest delicately on the adopted equilibrium concept two somewhat surprising results emerge first high quality borrowers with unlimited collateral may be priced out of the market despite the bank having idle deposits second high quality borrowers may put up more collateral this paper explores the allocational consequences of alternative credit market competitivity specifications and explains the different economic roles of collateral under these specifications we model banks that lend to borrowers financing projects with payoffs depending on a priori unknown borrower attributes and ex post unobservable borrower actions borrowers are assumed to have unconstrained access to collateral our analysis is based on two concepts of competitive equilibrium under both banks compete in the sense that they earn zero expected profits however under the first concept of equilibrium ti as in jaffee and russell 11 all rents accrue to borrowers whereas under the second concept t2 all rents accrue to depositors as in stiglitz and weiss 17 our research makes two main points first we demonstrate that the manner in which a competitive equilibrium is conceptualized importantly influences the characterization of equilibrium credit allocations specifically one of the findings is that the rationing equilibria of stiglitz and weiss 17 and others should be viewed as rather delicate things in that they are very sensitive to the competitivity specification used for instance

choice experiments are not conducted in a vacuum the effects of external price information on choice behavior abstract consumers carry a wealth of external knowledge and experience into a study that may affect choices in even the most well crafted experiment we derive a conceptual model showing how the level and variability of price perceptions outside the task at hand might affect choice behavior and we conduct an experiment to test the model by manipulating information provided to respondents in a way to alter the outside the experiment perceptions mixed logit error component models show that reference dependent models best describe the choice data and we find that consumer choice is significantly affected by the experiment manipulations the predictions of the model are borne out in the data as expected price sensitivity is generally higher for price changes above a price reference point than below also as predicted exogenously increasing external reference prices and exogenously reducing the variability in references prices both serve to increase the probability of making a purchase and reduce the probability of choosing none these results have important implications for the design and practice of choice experiments as they show that consumer choice is affected by perceptions of the level and variability of prices outside the experiment more generally the results highlight the need to understand the formation and distribution of reference prices when predicting consumer choice

nonuse values in benefit cost analysis benefit cost analysis bca is a pragmatic realization of the theory of welfare economics much of the research associated with bca has sought to expand the types of benefits that can be measured in dollar terms with this research there has been a progressive movement of goods and services from the set without measures usually designated as intangibles in bca terminology to the set with for example the recreational services provided by projects associated with dams for hydroelectric power or flood control were regarded as intangible until the development of the travel cost model for estimating the demand for outdoor recreation sites one of the current frontiers in bca research is associated with modeling and measuring nonuse benefits in contrast to the past efforts with intangibles research on this topic has remained controversial with few direct effects on the practice of applied welfare economics there are two principal reasons for this outcome first there has not been an accepted set of definitions for nonuse benefits and second applied studies with empirical estimates of nonuse benefits have until recently been non existent clearly these problems are related a consistent set of definitions is a necessary prerequisite for empirical implementation i will argue that consistent definitions for nonuse benefits have been elusive because the conceptual frameworks used in the literature to describe its primary components option value and existence values are not mutually consistent in the process of demonstrating this result i will describe the elements of a consistent framework for treating both use and nonuse benefits and apply it in explaining some of the problems with the available empirical estimates of nonuse benefits

third degree stochastic dominance here f x and g x are less than cumulative probability distributionis where x is a continuous or discrete random variable representing the outcome of a prospect the closed interval a b is the sample space of both prospects the integral shown in rule 2 and those shown throughout the paper are stieltjes integrals recall that the stieltjes integral fb f x dg x exists if one of the functions f and g is continuous and the other has finite variation in a b let d1 d2 and d3 be three sets of utility functions x d1 is the set containing all utility functions with 4 x and 1 x continuous and 41 x 0 for all xe a b d2 is the set with x 1 x 2 x continuous and q j x 0 02 x o for all xc a b d3 is the set with x 1 x 2 x 3 x continuous and 1 x 04 2 x o o for all xc a b here 1 x denotes the ith derivative of x hadar and russell proved that rule 1 is valid for all cd1 and rutle 2 is valid for all ed2 the authors point out that the set of probability distributions that can be ordered by means of second degree stochastic dominance is in general larger than that which can be ordered by means of first degree stochastic dominance note that in rule 2 they assume that x is not only an increasing function of x but also exhibits weak global risk aversion a condition guaranteed by requiring the second derivative of x to be nonpositive in this paper a condition which will be called third degree stochastic dominance is considered it is based on the following assumption about the form of the utility function x from a normative point of view one expects the risk premium associated with an uncertain prospect to become smaller the greater is the individual s wealth the plausibility and implications of this assumption h ave been explored by john pratt as well as others the risk premium of an uncertain prospect is that amount by which the certainty equivalent of the prospect differs from its expected value in mathematical terms given the prospect f x with expected value a the corresponding risk premium t is obtained by solving the following equation rb

information and consumer willingness to pay for biofortified yellow cassava evidence from experimental auctions in nigeria in this article we use the becker degroot marschak mechanism to estimate consumer demand for biofortified yellow cassava varieties in two states of nigeria imo in the southeast and oyo in the southwest these two states exhibit distinct habitual product color preferences for staple food made with cassava we estimate the effect of nutrition information campaigns and nature of planting material delivery institutions on consumer demand willingness to pay estimations account for the effect of product endowment censoring in bids and nonpayment in oyo consumers are willing to pay a premium for light yellow cassava variety even in the absence of nutrition information the article finds that nutrition information results in a large and significant price premium for biofortified cassava in both states and the nature of delivery institution has no significant effect

the demand for variety a household production perspective abstract economists have devoted substantial attention to firms supply of variety but little to consumers demand for variety employing the framework of home production we trace differences in demand to differences in the opportunity costs of activities associated with investments in human capital schooling alters time costs and changes the variety of activities household members choose time budgets from australia israel and west germany show that higher own and spouses incomes raise variety suggesting positive income effects education increases variety independent of income and earnings part of its impact goes beyond a correlation of educational attainment with preferences for variety

bank loan commitments and interest rate volatility bank loan commitments are examined in the context of option pricing models and a valuation formula is obtained the partial takedown phenomenon which is both distinctive and vexatious is considered in detail finally estimates of the value of u s bank loan commitments and their sensitivity to interest rate changes are provided

equilibrium without independence abstract because players whose preferences violate the von neumann morgenstern independence axiom may be unwilling to randomize as mixed strategy nash equilibrium would require a nash equilibrium may not exist without independence this paper generalizes nash s definition of equilibrium retaining its rational expectations spirit but relaxing its requirement that a player must bear as much uncertainty about his own strategy choice as other players do the resulting notion equilibrium in beliefs is equivalent to nash equilibrium when independence is satisfied but exists without independence this makes it possible to study the robustness of equilibrium comparative statics results to violations of independence

the design of contracts and remedies for breach in the first part of this article hypothetical contracts providing for all possible uncertain contingencies are considered in the next part contracts providing for only some contingencies are examined and are shown to be advantageous due both to difficulties that could arise in making and enforcing contingent terms and to the presence of implicit substitutes for them in the following major part of the article two of these substitutes for contingent terms are analyzed remedies for breach and the opportunity for renegotiation the existence of both is demonstrated to induce parties to behave approximately as they would under detailed contracts

litigation and settlement under two sided incomplete information this paper deals with a simple game of litigation and settlement with incomplete information parties are assumed to have the choice between settling their dispute out of court or resorting to costly litigation the set of sequential equilibria is characterized and conditions are given under which an efficient equilibrium does exist efficient equilibria however will be ruled out by various tests of refinement a comparative statics analysis is carried out with respect to the quality of private information which parties are assumed to receive before any moves have to be made

modeling heterogeneity and state dependence in consumer choice behavior in frequently purchased consumer goods markets consumer brand choices exhibit substantial persistence across purchase occasions in this article i estimate a choice model that admits of both heterogeneity in preferences and true state dependence as sources of this persistence using nielsen scanner data on ketchup i find evidence for true state dependence in the choice process even after controlling for a rich heterogeneity structure simulation of the model indicates that the long term effect of a promotion induced purchase on future purchase probabilities is positive but small

access to variety contributes to dietary diversity in china in the canonical consumer demand problem an agent makes a decision about quantities to consume under the assumption that all varieties can be accessed at zero cost in reality the cost of accessing variety may not be zero in this paper we study the effect of variety access cost on the consumption of food variety and its role in explaining regional differences in dietary diversity in china we find that a higher cost of access negatively affects the individual s ability to diversify her diet in terms of both the total counts and the balancing of varieties consumed the primary policy implication of this research is that attempts to create a healthy food environment in china must be differentiated along rural and urban lines in rural communities where consumers have been limited in their ability to diversify food baskets by high electricity and transportation costs infrastructure development and modernization may effectively improve nutritional balance for more urbanized communities where the cost of consuming additional food variety is relatively low food policies might instead focus on interventions that promote healthy eating to mitigate the burden of over nutrition

income and ir rational food choice abstract increasing affluence is associated with increases in the variety and diversity of consumers diets while this relationship likely reflects a heightened ability of consumers to satisfy unique preferences it is also possible that higher income and food expenditure are associated with more preference instability as the relative cost of a mistake falls with income this paper shows that the ability to detect preference instability increases with income in an empirical application involving almost 540 000 food choices by almost 60 000 people 47 committed at least one preference reversal the odds a preference reversal are 1 8 2 5 times higher for individuals who spend at least 160 week on food at home away from home compared to individuals who spend less than 20 week individuals who commit preference reversals are less likely to rate price and are more likely to rate novelty as important food values

efficient reliance and damage measures for breach of contract this article considers a situation where the buyer or the seller of a good must engage in expenditures on specific capital before the exchange either to prepare to use the product or to prepare to sell it it is assumed that postbreach bargaining is possible and carried out in a cooperative fashion and that buyers and sellers form expectations about the outcome of such bargaining in a specific way without enforceable contracts the potential appropriability of specific rents results in inefficiently low levels of investment three damage measures commonly used to enforce contracts are shown to produce inefficiently high levels of investment and to be pareto ranked from best to worst as follows specific performance expectation damages and reliance damages

loan commitments and the debt overhang problem the debt overhang problem is shown to arise in the context of an entrepreneurial project that requires a sequence of investments financed by an outside lender the entrepreneur not internalizing losses accruing to the lender which financed the initial investments may inefficiently cancel the project and instead pursue an outside opportunity it is shown that loan commitments contracts that allow the entrepreneur to borrow a variable amount at a set interest rate in return for a fixed fee are the optimal financial contracts in this setting strictly dominating standard debt the existence of the fixed fee allows loan commitments to set a relatively low interest rate improving the entrepreneur s incentives to continue the project the paper specifies the optimal contract fully derives robust comparative statics properties using an extension of milgrom and roberts 1994 and extends the results to more realistic settings e g allowing the market risk free rate to be stochastic

efficient contracting with reliance and a damage measure this article reexamines the problem of breach of contract studied by shavell 1980 1984 and rogerson 1984 by considering explicitly the incentive problems that arise from asymmetric information and transaction specific investment we derive the optimal contract which consists of variable price and damage payment schedules each of which is set before any private information is observed we show that the optimal contract attains full classical efficiency

auctions experiments and contingent valuation laboratory experiments are a welcome development that promise to make a significant contribution to the study of economic behavior heiner 1985 plott 1982 smith 1982 1985 while relatively new to economics controlled laboratory studies of human behavior have long constituted the core of experimental psychology where there is a wealth of methodological experience from which experimental economists might profitably draw in particular current attempts to apply laboratory auction methods to valuing nonmarket environmental goods would be improved by more rigorous experimental design and data analysis procedures

brand inertia in u s household cheese consumption to analyze u s consumers brand choices for cheese purchases we derive a set of discrete choice models from dynamic utility maximization acnielsen homescan survey data on u s households is used to estimate a dynamic probit model for each of the top brands for cheddar shredded and sliced cheese in four u s regions we find that households have strong brand inertia a result robust across alternative specifications predicted probabilities confirm greater inertia in the top brands and consumers are more likely to switch into them brand inertia is relatively larger in cheddar and sliced cheese especially in the central and southeast regions copyright 2008 oxford university press

optimal choice and beliefs with ex ante savoring and ex post disappointment we propose a new decision criterion under risk in which individuals extract both utility from anticipatory feelings ex ante and disutility from disappointment ex post the decision maker chooses his degree of optimism given that more optimism raises both the utility of ex ante feelings and the risk of disappointment ex post we characterize the optimal beliefs and the preferences under risk generated by this mental process and apply this criterion to a simple portfolio choice insurance problem we show that these preferences are compatible with first degree and second degree stochastic dominance and yield a preference for early resolution of uncertainty furthermore they are consistent with observed violations of the independence axiom such as the preference reversal in the allais paradox and predict that the decision maker takes on less risk compared to an expected utility maximizer our decision criterion can thus help explain the equity premium puzzle and the preference for low deductibles in insurance contracts

the economics of loan commitment contracts credit pricing and utilization abstract our purpose is to examine the circumstances under which enduring customer relationships such as revolving credit agreements will become predominant we compare loan commitment contracts under which borrowers may take down funds at fixed marginal mark up to spot lending under which funds are priced in consideration of customers leverage under the first arrangement insurance against default risk is priced as a fixed front end fee under the second arrangement it is priced under a rising leverage specific markup schedule we show that when default risk is independent of take down the loan commitment contract will always dominate spot loans when default risk increases with credit use spot loans may become dominant

choice under uncertainty problems solved and unsolved ffifteen years ago the theory of choice under uncertainty could be considered one of the success stories of economic analysis it rested on solid axiomatic foundations it had seen important breakthroughs in the analytics of risk risk aversion and their applications to economic issues and it stood ready to provide the theoretical underpinnings for the newly emerging information revolution in economics 1 today choice under uncertainty is a field in flux the standard theory is being challenged on several grounds from both within and outside economics the nature of these challenges and of our profession s responses to them is the topic of this paper

some stronger measures of risk aversion in the small and the large with applications the arrow pratt measures of risk aversion for von neumann morgenstern utility functions have become workhorses for analyzing problems in the microeconomics of uncertainty they have been used to characterize the qualitative properties of demand in insurance and asset markets to examine the properties of risk taking in taxation models and to study the interaction between risk and life cycle savings problems to name just a few applications equally importantly they have generated the linear risk tolerance class of utility functions which has provided canonical examples in such diverse areas as portfolio theory and the theory of teams despite these successes there have been a number of areas for which the results have been weaker than hoped it is natural to use the risk aversion measures to compare the behavior of individuals in risky choice situations for example consider the individual portfolio choice problem in a two asset world with a riskless asset and a risky asset if individual a has a uniformly higher arrow pratt coefficient of risk aversion than individual b then b will always choose a portfolio combination with more wealth invested in the risky asset but suppose that both assets are risky now there is no obvious sense in which the more risk averse individual can be said to hold a less risky portfolio but it seems strange that such a simple alteration should destroy the analytics which support the basic intuition similarly consider the basic insurance problem if one individual a is more risk averse than another b in the arrow pratt sense it follows that a will pay a larger premium to insure against a random loss than will b typically though an individual evaluates partial rather than total insurance that is only some gambles can be insured against and others must be retained in this case even when the gambles which are retained are independent from those which are insured it is no longer true that the individual whose arrow pratt measure of risk aversion is higher will pay a larger insurance premium the situation is no better when we consider comparative statics exercises for a single individual decreasing absolute risk aversion in the sense of arrow and

investigating purchase incidence brand choice and purchase quantity decisions of households we develop a comprehensive utility maximizing framework to study the impact of marketing variables on the category purchase brand choice and purchase quantity decisions of households for frequently purchased packaged goods the model allows for dependence among the three decisions while ensuring that these decisions provide in combination the greatest possible utility to the household by accounting for variations in reservation prices and intrinsic brand preferences across households the modeling framework explicitly captures the effects of unobserved heterogeneity on all three purchase decisions the principal empirical finding from analyzing the a c nielsen data for the yogurt product category is that the substantive implications for the effects of marketing variables are sensitive to whether these effects are determined conditional or unconditional on a product category purchase our results show that reservation prices and intrinsic brand preferences vary across households and not accounting for these variations in the estimation could lead to biased estimates for the coefficients of the marketing variables a comparison of our results to those obtained from a nested logit model of purchase incidence and brand choice reveals that our proposed model performs better using both a formal statistical test as well as the criterion of predictive validity in a holdout sample of panelists further the purchase quantity model compares favorably with two alternative models of quantity choice in the validation sample

temporal risk and the nature of induced preferences abstract it has been known since the work of h markowitz portfolio selection efficient diversification of investments yale univ press 1959 and j mossin amer econ rev 59 1969 172 174 that even an individual whose underlying preferences satisfy the von neumann morgenstern axioms will not choose over delayed i e temporal risky prospects in a manner which can be modelled as expected utility maximizing since most economically important instances of risk taking insurance real investment agriculture career training involve delayed as opposed to immediately resolved risk the standard use of expected utility theory to model such decisions must be questioned in this paper the technique of generalized expected utility analysis m j machina econometrica 50 1982 277 323 and the theory of support functions r t rockafellar convex analysis princeton univ press 1970 are applied to exactly model and hence determine the nature of preferences over temporal risky prospects

the price consideration model of brand choice the workhorse brand choice models in marketing are the multinomial logit mnl and nested multinomial logit nmnl these models place strong restrictions on how brand share and purchase incidence price elasticities are related in this paper we propose a new model of brand choice the price consideration pc model that allows more flexibility in this relationship in the pc model consumers do not observe prices in each period every week a consumer decides whether to consider a category only then does he she look at prices and decide whether and what to buy using scanner data we show the pc model fits much better than mnl or nmnl simulations reveal the reason the pc model provides a vastly superior fit to inter purchase spells

intrinsic preference for information abstract suppose agents value information not only to make contingent plans but also intrinsically how are such attitudes toward information related to attitudes toward risk we generalize the kreps porteus recursive expected utility model dropping both recursivity and expected utility there is a geometric analogy between risk and information we characterize intrinsic information loving in general by a substitution property analogous to multivariate risk loving and for smooth preferences by the convexity of gateaux derivatives even with recursivity preference for information does not imply expected utility we provide an example we examine connections between information loving and risk aversion for early and late resolving risks journal of economic literatureclassification numbers d80 d81

model of brand choice with a no purchase option calibrated to scanner panel data abstract in usual practice researchers specify and estimate brand choice models from purchase data ignoring observations in which category incidence does not occur i e no purchase observations this practice can be problematic if there are unobservable factors that affect the no purchase and the brand choice decisions when such a correlation exists it is important to model simultaneously the no purchase and the brand choice decisions the authors propose a model suitable for scanner panel data in which the no purchase decision depends on the price feature and display of each brand in the category and on household stock of inventory they link the no purchase model to the brand choice outcome through marketing mix covariates and through unobservables that affect both outcomes the authors assume that model parameters are heterogeneous across households and allow for a flexible correlation structure between the coefficients in the no purchase model and those in the brand choice model the model fo