the impact of fat tails on equilibrium rates of return and term premia abstract we investigate the impact of ignoring fat tails observed in the empirical distributions of macroeconomic time series on the equilibrium implications of the consumption based asset pricing model with habit formation fat tails in the empirical distributions of consumption growth rates are modeled as a dampened power law process that nevertheless guarantees finiteness of moments of all orders this renders model implied mean equilibrium rates of return and equity and term premia finite comparison with a benchmark gaussian process reveals that accounting for fat tails lowers the model implied mean risk free rate by 20 percent raises the mean equity premium by 80 percent and the term premium by 20 percent bringing the model implications closer to their empirically observed counterparts fat tails also increase the model implied volatility of the risk free rate and the equity premium

option profit and loss attribution and pricing a new framework this paper develops a new top down valuation framework that links the pricing of an option investment to its daily profit and loss attribution the framework uses the black merton scholes option pricing formula to attribute the short term option investment risk to variation in the underlying security price and the option s implied volatility taking risk neutral expectation and demanding no dynamic arbitrage result in a pricing relation that links an option s fair implied volatility level to the underlying volatility level with corrections for the implied volatility s own expected direction of movement its variance and its covariance with the underlying security return

strikes and holdouts in wage bargaining theory and data we develop a private information model of union contract negotiations in which disputes signal a firm s willingness to pay previous models have assumed that all labor disputes take the form of a strike yet a prominent feature of u s collective bargaining is the holdout negotiations often continue without a strike after the contract has expired production continues with workers paid according to the expired contract we analyze the union s decision to strike or hold out and highlight its importance to strike activity strikes are more likely to occur after a drop in the real wage or a decline in unemployment

bargaining on behalf of a constituency abstract we study bargaining situations in which one side consists of a group of people who elect a representative to bargain with another party on their behalf a two phase bargaining model is developed in which a principal agent problem between the constituency and its representative is embedded with a natural refinement of sequential equilibrium we characterize the set of equilibria and examine its efficiency properties we show that agency problems in the delegation relationship rather than asymmetric information between the two bargainers can cause severe bargaining inefficiency i e delay in reaching agreements extensions of the model and applications to union firm bargaining are then discussed briefly journal of economic literature classification numbers c78 d82 j52

the variance gamma v g model for share market returns a new stochastic process termed the variance gamma process is proposed as a model for the uncertainty underlying security prices the unit period distribution is normal conditional on a variance that is distributed as a gamma variate its advantages include long tailedness continuous time specification finite moments of all orders elliptical multivariate unit period distributions and good empirical fit the process is pure jump approximable by a compound poisson process with high jump frequency and low jump magnitudes applications to option pricing show differential effects for options on the money compared to in or out of the money copyright 1990 by the university of chicago

bargaining with imperfect enforcement the game theoretic bargaining literature insists on a noncooperative bargaining procedure but implicitly assumes cooperative implementation of agreements in reality courts cannot implement agreements costlessly and parties often prefer to use noncooperative implementation we present a bargaining model which incorporates the idea that agreements may be enforced noncooperatively we show that this has a substantial impact in limiting the inequality of agreements and results in a nonmonotonicity of the discount rate the model also explains why some parties may have incentives to deliberately write incomplete contracts as a way to enhance their bargaining power

bargaining orders in a multi person bargaining game abstract this paper studies a complete information bargaining game with one buyer and multiple sellers of different sizes or bargaining strengths the bargaining order is determined endogenously with a finite horizon there is a unique subgame perfect equilibrium outcome in which the buyer purchases in order of increasing size from the smallest to the largest with an infinite horizon if the sellers have sufficiently different sizes there is a unique equilibrium outcome which has the same bargaining order if the sellers have similar sizes with an infinite horizon there may be multiple equilibrium outcomes with different bargaining orders

coase theorem complexity and transaction costs this paper by introducing complexity considerations provides a dynamic foundation for the coase theorem and highlights the role of transaction costs in generating inefficient bargaining negotiation outcomes we show when the players have a preference for less complex strategies the coase theorem holds in negotiation models with repeated surplus and endogenous disagreement payoffs if and only if there are no transaction costs specifically complexity considerations select only efficient equilibria in these models without transaction costs while every equilibrium induces perpetual disagreement and inefficiency with transaction costs we also show the latter is true in the rubinstein bargaining model with transaction costs

collective bargaining awareness of general equilibrium effects and unemployment we explore the significance of general equilibrium feedback effects for wage bargaining we examine a two sector economy and show that if agents only consider labor demand effects low real wages and low unemployment are the consequences with an intermediate view i e when partial equilibrium effects within a sector are taken into account high real wages and unemployment result if all general equilibrium effects are perceived simultaneously we once again obtain a situation with low wages and unemployment the results may explain why unemployment is high in some european countries

the limits of attraction consumer research has documented dozens of instances in which the introduction of an irrelevant third option affects preferences between the remaining two in nearly all such cases the unattractive dominated option enhances the attractiveness of the option it most resembles a phenomenon known as the attraction effect in the studies presented here however the authors contend that this phenomenon may be restricted to stylized product representations in which every product dimension is represented by a number e g a toaster oven that has a durability rating of 7 2 and ease of cleaning rating of 5 5 such effects do not typically occur when consumers experience the product e g taste a drink or when even one of the product attributes is represented perceptually e g differently priced hotel rooms whose quality is depicted with a photo the authors posit that perceptual representations of attributes do not support the sorts of comparisons that drive the attraction effect with highly stylized e

multifractality in asset returns theory and evidence this paper investigates the multifractal model of asset returns mmar a class of continuous time processes that incorporate the thick tails and volatility persistence exhibited by many financial time series the simplest version of the mmar compounds a brownian motion with a multifractal time deformation prices follow a semi martingale which precludes arbitrage in a standard two asset economy volatility has long memory and the highest finite moments of returns can take any value greater than 2 the local variability of a sample path is highly heterogeneous and is usefully characterized by the local holder exponent at every instant in contrast with earlier processes this exponent takes a continuum of values in any time interval the mmar predicts that the moments of returns vary as a power law of the time horizon we confirm this property for deutsche mark u s dollar exchange rates and several equity series we develop an estimation procedure and infer a parsimonious generating mechanism for the e

is there a hold up problem most literature on the hold up problem starts from the assumption that ex post bargaining outcomes are insensitive to prior investment costs we argue that this approach is unsatisfactory if the bargaining procedure is relatively symmetric it typically admits multiple perfect equilibria some of which give the investor a high enough payofi to sustain e cient investment even if the bargaining procedure is asymmetric and rigged against the investor there may be investment if agents are driven by moral concerns or if communication creates commitment laboratory experiments indicate that communication is necessary and su cient for agents to coordinate on e cient outcomes when the bargaining game is symmetric when the bargaining game is rigged against the investor the hold up problem is mitigated but not eliminated by moral behavior communication is quite credible and we flnd that promises are more believable than threats

termination restrictions and investment in general training abstract conditional separation payments efficiently increase firms investment in general training if the latter is not directly contractible since training is vested in the worker on separation a firm s return to training is zero when a match ends or more generally when the firm s outside return is binding large enough conditional separation penalties ensure that independently from outside opportunities the ex post situation is one of bilateral monopoly this allows the firm to capture a positive share of the return to the general component of training in all states of nature a fixed wage contract and large enough separation penalties ensure that the firm s investment decision is fully efficient if training is general in becker s 1964 sense

could ralph nader s entrance and exit have helped al gore the impact of decoy dynamics on consumer choice abstract people are frequently faced with making a new choice decision after a preferred option becomes unavailable prior research on the attraction effect has demonstrated how the introduction of an option into a choice set increases the share of one of the original options the authors examine the related but previously unaddressed issue of whether the unexpected exit of an option from a choice set returns the choice shares of the original options to the status quo in a series of experiments they observe that when an option turns out to be unselectable following a choice problem in which it was selectable the choice shares of the remaining options are predictably different from those of a choice problem in which the option was unselectable from the start they also observe that this attraction effect due to the disappearance of a decoy is likely a consequence of changes in the importance of decision criteria they conclude with a discussion of the theoretical and managerial implications of the research

modeling loss aversion and reference dependence effects on brand choice based upon a recently developed multiattribute generalization of prospect theory s value function tversky and kahneman 1991 we argue that consumer choice is influenced by the position of brands relative to multiattribute reference points and that consumers weigh losses from a reference point more than equivalent sized gains loss aversion we sketch implications of this model for understanding brand choice we develop a multinomial logit formulation of a reference dependent choice model calibrating it using scanner data in addition to providing better fit in both estimation and forecast periods than a standard multinomial logit model the model s coefficients demonstrate significant loss aversion as hypothesized we also discuss the implications of a reference dependent view of consumer choice for modeling brand choice demonstrate that loss aversion can account for asymmetric responses to changes in product characteristics and examine other implications for competitive strategy

wage rigidity inflation and institutions we study the possible existence of downward nominal wage rigidity dnwr at wage growth rates different from zero in aggregate data even if dnwr prevails at zero for individual workers compositional effects might lead to falling aggregate wages while changes in relative wages combined with dnwr might lead to positive aggregate wage growth we explore industry data for 19 oecd countries over the 1971 2006 period we find evidence for a floor on nominal wage growth at 6 percent in the 1970s and 1980s at 1 percent in the 1990s and at 0 5 percent in the 2000s furthermore we find that dnwr is stronger in country years with strict employment protection legislation high union density centralized wage setting and high inflation

inventories and wage bargaining abstract a union is assumed to make a sequence of take it or leave it wage demands to a firm which produces a storable good equilibrium has the following properties 1 the firm chooses to accumulate inventories even though there is no uncertainty 2 the accumulation of inventories lowers wages by reducing the rents from further production and therefore harms the union without benefitting the firm 3 there can be intermittent work stoppages i e strikes even though there is no uncertainty these work stoppages limit the firm s inventories and hence raise wages journal of economic literature classification numbers c78 c73 j31

perfect equilibria in a model of bargaining with arbitration abstract we consider an alternating offer bargaining model in which the players may agree to call in an arbitrator in case of disagreement the main message of our study is that the mere presence of an arbitrator who can only become active with the consent of both parties in the background of negotiations may entirely drive their outcome we compare our results with those obtained in models with outside options journal of economic literature classification number c78

breakdown in multilateral negotiations abstract we analyze a complete information multilateral bargaining model in which a buyer is to purchase two complementary goods from two sellers binding cash offer contracts are used to govern transactions in contrast to preexisting literature we do not normalize the parties reservation utilities to zero we show that this assumption holds critical importance by demonstrating that a complete breakdown of negotiations may occur as the unique equilibrium outcome even if only two sellers are present

trade wars trade negotiations and applied game theory what is the value of trade negotiations quantitative measures of the value of trade liberalisation generally ignore the strategic aspects of protection policy the traditional approach is to compare welfare levels under the existing structure of protection with welfare levels under some alternative structure of protection such as unilateral or multilateral free trade we add two additional questions first in a non cooperative context are either of these points of comparison consistent with countries adopting best response policies given the policies of other countries second in the context of a cooperative negotiation are either of these points of comparison consistent with the outcome that meets certain plausible criteria for a bargaining process if the answer to either of these questions is no then the traditional approach provides at best an incomplete answer to the original question and could provide a misleading answer a simple example illustrates our basic point consider the game in table i this is a non cooperative game between the united states and ec in which each agent has just two pure strategies to do nothing and keep k the existing structure of protection in place or to abolish a trade barriers on imports from the other agent only the payoffs shown are the annual welfare impact relative to the status quo as measured by the equivalent variation ev in income in billions of i973 u s dollars the values shown are taken from the simulation results of brown and whalley i980 table i 4 p 864 what is the best response of the united states in this context if the ec decides to keep its protection structure the united states does better by also keeping its protection structure intact in other words given that the ec plays k it is a best response for the united states to also play k thus the traditional approach would imply that the united states gains from protection in this case however what is the best response of the united states if the ec decides to abolish its protection structure in this instance the united states does best by also abolishing its protection structure the point here is simply that the welfare cost of protection to the united states depends on what the ec does without saying something about what the ec will do one cannot answer our question vis a vis the united states as it happens in this particular game we

market boundaries and product choice illustrating attraction and substitution effects what happens to the share of choices each item receives when the choice set boundaries are extended by adding a new item that is extremely good on one dimension but poor on the others first there is a substitution effect whereby the new item takes choice share mainly from similar items in the set second there is an attraction effect resulting in a general shift of preference toward the added item experimental studies show that choice patterns conflict with current theoretical and common sense ideas about the effect of added alternatives on choice

bargaining with endogenous deadlines we develop a two person negotiation model with complete information that makes endogenous both the deadline and the level of surplus destruction after the deadline we show that the undominated nash equilibrium outcome is always unique but might be inefficient moreover as the bargaining period becomes short or as the players become very patient the unique undominated nash equilibrium outcome is always inefficient

time changed levy processes and option pricing abstract the classic black scholes option pricing model assumes that returns follow brownian motion but return processes differ from this benchmark in at least three important ways first asset prices jump leading to non normal return innovations second return volatilities vary stochastically over time third returns and their volatilities are correlated often negatively for equities time changed levy processes can simultaneously address these three issues we show that our framework encompasses almost all of the models proposed in the option pricing literature and it is straightforward to select and test a particular option pricing model through the use of characteristic function technology

the finite moment log stable process and option pricing we document a surprising pattern in s p 500 option prices when implied volatilities are graphed against a standard measure of moneyness the implied volatility smirk does not flatten out as maturity increases up to the observable horizon of two years this behavior contrasts sharply with the implications of many pricing models and with the asymptotic behavior implied by the central limit theorem clt we develop a parsimonious model which deliberately violates the clt assumptions and thus captures the observed behavior of the volatility smirk over the maturity horizon calibration exercises demonstrate its superior performance against several widely used alternatives

does evolution solve the hold up problem abstract the paper examines the theoretical foundations of the hold up problem at the first stage one agent decides on the level of a relationship specific investment there is no contract so at the second stage the agent must bargain with a trading partner over the surplus that the investment has generated we show that the conventional underinvestment result hinges crucially both on the assumed bargaining game and on the choice of equilibrium concept in particular we prove the following two results i if bargaining proceeds according to the nash demand game any investment level is subgame perfect but only a particular efficient outcome is stochastically stable ii if bargaining proceeds according to the ultimatum game with the trading partner as proposer only the minimal investment level is subgame perfect but any investment level is stochastically stable journal of economic literature classification numbers l14 c78

adding asymmetrically dominated alternatives violations of regularity and the similarity hypothesis an asymmetrically dominated alternative is dominated by one item in the set but not by another adding such an alternative to a choice set can increase the probability of choosing the item that dominates it this result points to the inadequacy of many current choice models and suggests product line strategies that might not otherwise be intuitively plausible

decentralized one to many bargaining we study a one to many bargaining model in which one active player bargains with every passive player on how to share the surplus of a joint project the order of bargaining is not fixed and the active player decides whom to bargain with in each period our model admits a rich set of equilibria and we identify the upper and lower bounds of equilibrium payoffs we also examine whether two natural ordering protocols often assumed in existing studies can sustain endogenously although the queuing protocol may indeed arise in an equilibrium the rotating protocol is in general not self enforcing

extracting market information from equity options with exponential levy processes levy processes have been successfully applied in the modeling of financial assets useful information such as implied volatility skewness and risk preferences can be derived from market option prices in this paper we advocate using esscher conjugate levy processes to estimate risk neutral and empirical densities more specifically we employ the exponential meixner and nig processes to calculate in closed form the pricing kernel in the equity market and then study the evolution of equity market behavior between 2002 and 2010 our empirical analysis using s p 500 options shows that the risk preferences of equity investors were signalling an anomaly in the market well before the subprime prime mortgage crisis august 2007 and the crisis of confidence that followed anticipating the downfall in equity markets in 2008 but then returning to normal levels in 2009

different time preferences and non stationary contracts in negotiations abstract when time preferences differ non stationary contracts strictly dominate stationary contracts the unique equilibrium converges to the nash bargaining solution in which the less patient player always receives 50 of his utopia payoff regardless of the difference between the players discount rates

the nash program non convex bargaining problems we define and characterize an extension of the nash bargaining solution to non convex bargaining problems and in the spirit of the nash program of implementing cooperative solutions non cooperatively we show that this solution is supported by rubinstein s econometrica 50 1982 97 110 model of bargaining and its corresponding set of stationary subgame perfect equilibria

u s stock market crash risk 1926 2010 abstract this paper examines how well alternate time changed levy processes capture stochastic volatility and the substantial outliers observed in u s stock market returns over the past 85 years the autocorrelation of daily stock market returns varies substantially over time necessitating an additional state variable when analyzing historical data i estimate various one and two factor stochastic volatility levy models with time varying autocorrelation via extensions of the bates 2006 methodology that provide filtered daily estimates of volatility and autocorrelation the paper explores option pricing implications including for the volatility index vix during the recent financial crisis

a letter to the editor on wage bargaining abstract the rubinstein perfect information alternating offers bargaining model is problematic when applied to wage negotiations a strike or any other industrial action is not an automatic consequence of a delay in reaching an agreement because production can continue normally also when negotiations take place this paper extends the rubinstein model to incorporate the choice of calling a strike and it is shown that in this model there is no longer a unique subgame perfect equilibrium and that strikes with a length in real time can occur in equilibrium

close encounters of two kinds false alarms and dashed hopes people are frequently exposed to potentially attractive events that are subsequently and unexpectedly reversed and to potentially painful events which are also unexpectedly reversed in the process of being returned to the initial asset position does the sequence in which the positive and negative events occur matter this issue of the combined effect of pleasurable and painful stimuli has received scant theoretical or empirical attention we attempt to fill this lacuna in the literature by studying the retrospective evaluation of surprises that return individuals to their original economic state although such surprises do not change an individual s original economic state we argue that the individual s psychological state changes and the final affective state is among other things a function of the sequence in which the events occur from a theoretical standpoint several perspectives can be brought to bear on the issue for instance one reading of mental accounting based on prospect theory s value function would predict that losses should dominate gains and therefore regardless of sequence people should be unhappy when exposed to two economically equivalent outcomes of different signs conversely the literature on intertemporal choice would suggest that a series that ends on an up note is preferred to a series that ends on a down note because people like to defer gratification so that they may savor positive outcomes similarly people apparently have a preference for happy endings finally the extant literature on recency effects would predict that the last event in a series should have a disproportionate influence on overall affect our model relies on a shift in the reference point to explain how a surprising reversal of an event will lead to a nonzero evaluation of the sequence we suggest that people s reference points shift immediately but imperfectly after a stimulus is presented intuitively this implies that the first stimulus will shift the reference point in its direction as a result of which the evaluation of a sequence of events in which an initial event is unexpectedly reversed will be more favorable if the first event is a loss than if it is a gain this model captures the unanticipated nature of the second event i e the surprise element by allowing the first event to move the reference point consequently by the time the next event occurs the reference point has been updated as a result of which the zero economic outcome of the sequence yields nonzero utility we further posit that the magnitude of the reference point shift should be affected by the time elapsed between the two stimuli specifically the reference point shifts gradually with time until it is fully updated consequently the final affective state of the sequence is also a function of the temporal distance between the two events the main predictions of the model were empirically supported first in a survey using a mall intercept sample subsequently we conducted a study of student subjects involving a coin tossing game in which real money was at stake and in which subjects in one condition experienced the second outcome after a two day delay our results from this second study supported the model s prediction regarding the impact of the elapsed time between the events the experimental tasks involved surprising reversals of initial outcomes thus ensuring that savoring dread types of explanations which require that subjects anticipate the second event could not be operating finally in a series of three follow up studies we tested the claim that the magnitude of outcomes would have an impact on observed affect and consistent with our theory and contrary to recency predictions we observed similar results across different magnitudes while theoretically interesting we should also note that our research is of potential pragmatic significance people s reactions to a series of events is of considerable interest to marketers desirous of generating enhanced attitude affect purchase intention and the like without offering economic inducements such as rebates coupons or other costly discounts additionally public policy officials may be interested in protecting people from being manipulated into purchasing a product simply because of changes in the sequence in which a series of offers is made by the merchant

selective acceptance and inefficiency in a two issue complete information bargaining game abstract this paper explores the effects of a selective acceptance rule on the outcome of two issue negotiations the alternating offer game introduced here allows for the possibility that settlement may be reached on one issue while negotiation continues about the other this model captures features of laws that are generally believed to increase efficiency the analysis shows that if one issue is indivisible there are inefficient subgame perfect equilibria with no pareto improving alternative equilibria with opposing valuations rapid communication guarantees inefficiency these are unique examples of this strong form of inefficiency in an alternating offer bargaining game with complete and perfect information journal of economic literature classification numbers c72 j30

disagreement points in trade negotiations abstract this paper analyzes trade negotiations between two large countries in the framework of an alternating offer bargaining model with endogenous interim disagreement actions despite of the flexibility in disagreement tariff selection the countries would keep the status quo tariffs in disagreement periods as far as the country which benefits from keeping the status quo tariffs compensates for the other country s foregone gains from deviating in disagreement actions each equilibrium outcome converges to a corresponding nash bargaining solution whose disagreement point reflects the status quo tariff rates as well as the threat of raising the tariff to the nash tariff rate

tariff retaliation from a strategic viewpoint one of the most perplexing questions in international trade concerns the rationale for the existence of widespread barriers to trade in the current world economy 1 the numerous explanations that have been offered for the existence of tariffs are generally based on one of the following four arguments a the existence of market imperfections monopolies externalities etc invalidates the free trade theorem and thus free trade is not desirable or perhaps not obtainable b sluggish adjustment of the world economy to free trade implies that the existing tariffs are a temporary phase c non economic phenomena such as nationalism induce political or institutional tariff arrangements or d protectionist motives to improve the welfare of a country or a group of individuals in that country induce all countries to simultaneously impose tariffs while all of these factors can be important in the explanation of the existence of tariffs the purpose of this paper is to develop an extended analysis of the protectionist view the protectionist view is based on the optimal tariff theorem which states under very restrictive assumptions that a country can improve its welfare by imposing a tariff 5 12 a serious difficulty with this explanation is that the optimal tariff theorem assumes that no retaliation occurs as scitovsky 12 points out a country that could benefit from charging a tariff has monopoly power in trade surely a country sophisticated enough to exercise monopoly power in trade would expect its rivals to respond when tariffs are erected hence scitovsky argues that if protection is the monopolistic behavior of a collectivity two countries raising tariffs against each other are bilateral monopolists and we know that bilateral monopoly results in the two parties coming to some working agreement whose terms depend on their bargaining skill and are analytically indeterminate scitovsky concluded that a tariff war would result in an indeterminate solution with both countries worse off johnson 6 formalized scitovsky s agrument by allowing each country to adopt a cournot type assumption regarding its rival s reaction to a change in its own tariff thus

the game of negotiations ordering issues and implementing agreements abstract we use a two issue bargaining model with asymmetric information to study agent choice of how to structure bargaining we uncover the settings in which different agenda structures are chosen in equilibrium how the order in which issues are bargained over matters and what impact the rules for implementing agreements have if agreements are implemented as they are reached easy issues are negotiated first and hard issues later if agreements are implemented only after all issues are settled then it is size that matters with large issues settled first all parties prefer the former rules of implementation to the latter

context dependent preferences the standard theory of choice based on value maximization associates with each option a real value such that given an offered set the decision maker chooses the option with the highest value despite its simplicity and intuitive appeal there is a growing body of data that is inconsistent with this theory in particular the relative attractiveness of x compared to y often depends on the presence or absence of a third option z and the market share of an option can actually be increased by enlarging the offered set we review recent empirical findings that are inconsistent with value maximization and present a context dependent model that expresses the value of each option as an additive combination of two components a contingent weighting process that captures the effect of the background context and a binary comparison process that describes the effect of the local context the model accounts for observed violations of the standard theory and provides a framework for analyzing context dependent p

deducing the implications of jump models for the structure of stock market crashes rallies jump arrival rates and extremes this article studies the structure of stock market crashes rallies their jump arrival rates and extremes large market moves are characterized in a pure jump modeling framework based on both raw and devolatized returns it is shown empirically that crashes are more severe in intensity than rallies and have higher arrival rates at the same time both left tail and right tail extreme events conform with frechet limit laws pure jump models which describe well the tail properties of market returns are identified via their levy measures the distribution of extreme events implied by our model s levy measure is closer to the actual realization of extremes than those of competing models finally there is information content in the levy measure of pure jump models for forward arrival rate of jumps

a jump diffusion model for option pricing brownian motion and normal distribution have been widely used in the black scholes option pricing framework to model the return of assets however two puzzles emerge from many empirical investigations the leptokurtic feature that the return distribution of assets may have a higher peak and two asymmetric heavier tails than those of the normal distribution and an empirical phenomenon called volatility smile in option markets to incorporate both of them and to strike a balance between reality and tractability this paper proposes for the purpose of option pricing a double exponential jump diffusion model in particular the model is simple enough to produce analytical solutions for a variety of option pricing problems including call and put options interest rate derivatives and path dependent options equilibrium analysis and a psychological interpretation of the model are also presented

contract adjustment under uncertainty abstract consider trade in continuous time between two players the gains from trade are divided according to a contract and at each point in time either player may unilaterally induce a costly adjustment of the contract players payoffs from trade under the contract as well as from trade under an adjusted contract are exogenous and stochastic we consider players choice of whether and when to adjust the contract payment we show that there exists a nash equilibrium in thresholds where each player adjusts the contract whenever the contract payment relative to the outcome of an adjustment passes the threshold there is strategic substitutability in the choice of thresholds so that if one player becomes more active by choosing a threshold closer to unity the other player becomes more passive

justifiable punishments in repeated games abstract in repeated games subgame perfection requires all continuation strategy profiles must be effective to enforce the equilibrium they serve as punishments should deviations occur it does not require whether a punishment can be justified for the deviation which creates a great deal of freedom in constructing equilibrium strategies resulting the well known folk theorem we introduce justifiable punishments in repeated games after one player deviates the corresponding continuation or punishment is justifiable if either the deviation is bad to the other player or the continuation itself is good to the other player we characterize the set of payoff vectors that can be supported by subgame perfect equilibria with justifiable punishments as the discount factor goes to one this limiting set of equilibrium payoffs can be quite different from the set of subgame perfect equilibrium payoffs any efficient feasible and strictly individually rational payoff can be supported by equilibrium with justifiable punishments

rent seeking and surplus destruction in unanimity bargaining abstract in non cooperative bargaining games in the tradition of rubinstein the proposer s bargaining power stems from the prospect of a delay in case of disagreement since players are impatient this delay is costly for everyone we consider a unanimity bargaining game in which the proposer can strategically choose the length of this delay we assume that the size of the surplus depends endogenously on the chosen length of the prospective delay intuitively the proposer faces the following trade off the more he exploits his proposer power the smaller is the surplus that can be divided one interpretation is that aggressive bargaining tactics hurt the fruitful cooperation among players and thus the surplus we characterize stationary equilibrium strategies and payoffs and obtain sharp predictions on the extent of surplus destruction the size of the social loss and the surplus allocation

a theory of consumer boycotts under symmetric information and imperfect competition this article models strategic interactions between non identical duopolistic firms and a public interest environmental organisation eo that promotes green production practices by threatening consumer boycotts against brown producers the article describes when boycotts are deterred by prior firm commitments to be green and also when a boycott arises in equilibrium despite symmetric information when a boycott arises it is either a small persistent boycott against the small firm in the industry or a large transitory boycott against the large firm in the industry that prompts the target firm to accede to the boycott demands quickly

striking for a bargain between two completely informed agents this paper models the wage contract negotiation procedure between a union and a firm as a sequential bargaining process in which the union must decide in each period whether or not to strike for the duration of that period we show that there exist subgame perfect equilibria in which the union engages in several periods of strikes prior to reaching a final agreement although both parties are completely rational and fully informed this has implications for other inefficient phenomena such as tariff wars debt negotiations and wars in general we characterize the set of equilibria show that strikes can occur in real time and discuss extensions of the model such as lockouts and the possibility of multiple recontracting opportunities copyright 1991 by american economic association

wage bargaining and nominal rigidities abstract delays in wage negotiations do not necessarily mean work stoppage production can continue under the terms of the old contract while the parties are bargaining holdout this holdout option is included in a strategic bargaining game in addition to strike and lock out threats integrating the bargaining model in a standard macroeconomic framework it turns out that holdout threats will prevail under certain circumstances in this case wages will be rigid in nominal terms so that an increase in aggregate nominal demand increases aggregate output

dampened power law reconciling the tail behavior of financial security returns this article proposes a stylized model that reconciles several seemingly conflicting findings on financial security returns and option prices the model is based on a pure jump levy process wherein the jump arrival rate obeys a power law dampened by an exponential function the model allows for different degrees of dampening for positive and negative jumps and also for different pricing for upside and downside market risks calibration of the model to the s p 500 index shows that the market charges only a moderate premium on upward index movements but the maximally allowable premium on downward index movements

choice based on reasons the case of attraction and compromise effects building on previous research this article proposes that choice behavior under preference uncertainty may be easier to explain by assuming that consumers select the alternative supported by the best reasons this approach provides an explanation for the so called attraction effect and leads to the prediction of a compromise effect consistent with the hypotheses the results indicate that 1 brands tend to gain share when they become compromise alternatives in a choice set 2 attraction and compromise effects tend to be stronger among subjects who expect to justify their decisions to others and 3 selections of dominating and compromise brands are associated with more elaborate and difficult decisions

bargaining with surplus destruction in a two player alternating offer bargaining model if one player can destroy the surplus to be allocated then the value to bargain for is endogenous except at the beginning even with complete information the model has perfect equilibria with delayed agreement and or surplus destruction the model therefore explains inefficiency and destruction that may appear irrational we characterize the set of equilibrium payoffs and its limiting be haviour as the time between offers vanishes real time delay remains possible even in the limit we also consider the case of surplus destruction that is exogenously limited by the

bargaining reputation and equilibrium selection in repeated games with contracts consider a two person intertemporal bargaining problem in which players choose actions and offers each period and collect payoffs as a function of that period s actions while bargaining proceeds this can alternatively be viewed as an infinitely repeated game wherein players can offer one another enforceable contracts that govern play for the rest of the game theory is silent with regard to how the surplus is likely to be split because a folk theorem applies perturbing such a game with a rich set of behavioral types for each player yields a specific asymptotic prediction for how the surplus will be divided as the perturbation probabilities approach zero behavioral types may follow nonstationary strategies and respond to the opponent s play in equilibrium rational players initially choose a behavioral type to imitate and a war of attrition ensues how much should a player try to get and how should she behave while waiting for the resolution of bargaining in both respects she should build her strategy around the advice given by the nash bargaining with threats nbwt theory developed for two stage games in any perfect bayesian equilibrium she can guarantee herself virtually her nbwt payoff by imitating a behavioral type with the following simple strategy in every period ask for and accept nothing less than that player s nbwt share and while waiting for the other side to concede take the action nash recommends as a threat in his two stage game the results suggest that there are forces at work in some dynamic games that favor certain payoffs over all others this is in stark contrast to the classic folk theorems to the further folk theorems established for repeated games with two sided reputational perturbations and to the permissive results obtained in the literature on bargaining with payoffs as you go

dynamic contractual enforcement a model of strikes this paper provides a theory of strikes as part of a constrained efficient enforcement mechanism for an implicit contractual agreement a firm possessing contemporaneously private information about demand engages in an enduring relationship with its workforce if the information becomes perfectly observable subsequently then modulo discounting the first best is implementable but strikes are always off the equilibrium path if the observations of the workforce are imperfect strikes occur in equilibrium the dynamic contracting problem is modeled as a repeated game with imperfect monitoring the equilibrium exhibits production inefficiency and incomplete insurance to mitigate the inefficiencies caused by strikes

asymmetric competition in choice and the leveraging of competitive disadvantages studies of grocery sales show that consumers of store brands switch to price discounted national brands more than consumers of national brands switch to discounted store brands such asymmetric price competition can be explained with numerous mechanisms proposed here and elsewhere we report a choice experiment that replicates asymmetric price competition favoring higher quality competitors and demonstrates asymmetric quality competition favoring lower quality competitors also demonstrated are multiple mechanisms contributing to competitive asymmetries where dominance involving the otherwise preferred brand is particularly potent e g when a higher quality competitor matches the price of an otherwise preferred lower quality brand the findings implicate modifications to 1 theories of decision making when extended to repeat choice 2 empirical models of secondary purchase data and 3 strategies for positioning and attacking brands whereas improving competitive disadvantages often attracts consumers from competitors more than does improving competitive advantages this benefit must be weighed against the differentiation sacrificed by improving competitive disadvantages improving competitive advantages in contrast increases differentiation

information quality and options microstructure researchers have long understood that information quality has an effect on price formation in the underlying asset market however option researchers have largely ignored the fact that information quality might also impact the options market this article characterizes the nature of the impact by showing how option prices and implied volatility levels are related to the forward looking information quality path this result follows from a noisy rational expectations model that abandons the normal distribution in favor of the gamma distribution but maintains the standard assumption of exponential utility thus the new model bridges the gap between the microstructure literature that relies so heavily on the normal exponential framework and the options literature that relies exclusively on models that are consistent with the limited liability of stock prices the model s tractability allows for a robustness check against the standard framework and provides a viable setting for analyzing the empirical implications of information quality for the options market jel d8 gl

jumps in financial markets a new nonparametric test and jump dynamics this paper introduces a new nonparametric test to detect jump arrival times and realized jump sizes in asset prices up to the intra day level we demonstrate that the likelihood of misclassiflcation of jumps becomes negligible when we use high frequency returns using our test we examine jump dynamics and their distributions in the u s equity markets the results show that individual stock jumps are associated with prescheduled earnings announcements and other company speciflc news events additionally s p 500 index jumps are associated with general market news announcements this suggests difierent pricing models for individual equity options versus index op

stochastic risk premiums stochastic skewness in currency options and stochastic discount factors in international economies abstract we develop models of stochastic discount factors in international economies that produce stochastic risk premiums and stochastic skewness in currency options we estimate the models using time series returns and option prices on three currency pairs that form a triangular relation estimation shows that the average risk premium in japan is larger than that in the us or the uk the global risk premium is more persistent and volatile than the country specific risk premiums and investors respond differently to different shocks we also identify high frequency jumps in each economy but find that only downside jumps are priced finally our analysis shows that the risk premiums are economically compatible with movements in stock and bond market fundamentals

holdouts backdating and wage negotiations the haller and holden jet 1990 wage bargaining model is extended to incorporate holdouts with and without work to rule inefficient holdouts and backdating of new contracts the union s most effective action inflicts the highest costs upon the firm among the credible actions necessary and sufficient conditions for equilibria with lengthy holdouts are derived backdating does not affect the bargaining positions of the parties the settlement wage negatively depends upon the length of the holdout and this dependence does not disappear as the time between bargaining rounds vanishes this result has implications for empirical work moreover this negative effect is small and confirms empirical evidence for the netherlands

asymmetric decoy effects on lower quality versus higher quality brands meta analytic and experimental evidence prior research demonstrates that adding decoys to choice sets can increase choice shares of brands similar to decoys while reducing shares of brands dissimilar to decoys such effects have been dubbed attraction effects and violate the principles of independence of irrelevant alternatives ha and regularity we report a meta analysis that in addition to revealing heretofore unsupported range effects demonstrates an effect of brand quality decoys reduce shares of lower quality competitors more than they reduce shares of higher quality competitors moreover whereas iia is violated throughout regularity is violated only when higher quality brands are targeted decoys increase shares of higher quality brands but typically do not increase shares of lower quality brands to assess the generalizability of the meta analytic pattern we tested decoy effects on two distinct populations in a large experiment the more traditional population replicated the meta analytic pattern standard asymmetry while the more nontraditional population reversed it these findings suggest that while the standard asymmetry is replicable it may not generalize to all market segments

perfect equilibria in a negotiation model rubinstein s alternating offers bargaining model is enriched by assuming that players payoffs in disagreement periods are determined by a normal form game it is shown that such a model can have multiple perfect equilibria including inefficient ones provided that players are sufficiently patient delay is possible even though there is perfect information and the players are fully rational the length of delay depends only on the payoff structure of the disagreement game and not on the discount factor not all feasible and individually rational payoffs of the disagreement game can be supported as average disagreement payoffs indeed some negotiation games have a unique perfect equilibrium with immediate agreement

on decisions that lead to decisions direct and derived evaluations of preference many consumer choices lead to subsequent decisions in such situations any choice option may be evaluated based on its own characteristics direct evaluations or evaluated based on the characteristics of alternatives it makes available in subsequent decisions derived evaluations we contrast direct and derived evaluations in the context of two consumer research issues first in choices between a lone option and a group of alternatives direct evaluations bias preferences toward the group whereas derived evaluations bias preferences away from the group second in choices between stores sensitivity to price is greater under derived than direct evaluations