competition under consumer loss aversion we address the effect of expectation based consumer loss aversion on firm strategy in imperfect competition consumers are fully informed about match value and price at the moment of purchase however some consumers are initially uninformed about their tastes and form a reference point consisting of an expected match value and price distribution whereas others are perfectly informed all the time we show that if firms have symmetric costs a larger share of informed consumers leads to a more competitive outcome the reverse holds if cost asymmetry in duopoly is sufficiently large

co firing coal with wood pellets for u s electricity generation a real options analysis abstract in contrast to eu u s electric utilities are not employing the bioenergy technology of co firing wood pellets with coal this difference in employment patterns is explored within a real options analysis roa for possible u s utilization of wood pellets considering fuel price series from 2009 to 2014 for analysis these series are divided into two sub periods based on different market conditions infancy 2009 2011 and substitution 2012 2014 roa indicates co firing wood pellets with coal is feasible considering adoption during wood pellets infancy under low discount rates and long power plant lifespans a portfolio effect of employing multiple fuels underlies this result however co firing is not currently economically feasible the different adoption decisions are likely a consequence of recent cheap and abundant u s natural gas for co fired wood pellets to be feasible government incentives and or a market increase in natural gas prices appear necessary

technical change uncertainty and investment the expected investment dynamics of the risk neutral firm is examined in the presence of uncertainty in the future evolution of the real wage and the stock of technical knowledge a model of the adjustment cost firm is developed that is characterized by quasi fixed factor augmenting technical change that is taken exogenously by the firm the effect of wage and technical change uncertainty on investment behavior is assessed using comparative stochastic dynamic analysis

competition and price variation when consumers are loss averse we modify the salop 1979 model of price competition with differentiated products by assuming that consumers are loss averse relative to a reference point given by their recent expectations about the purchase consumers sensitivity to losses in money increases the price responsiveness of demand and hence the intensity of competition at higher relative to lower market prices reducing or eliminating price variation both within and between products when firms face common stochastic costs in any symmetric equilibrium the markup is strictly decreasing in cost even when firms face different cost distributions we identify conditions under which a focal price equilibrium where firms always charge the same focal price exists and conditions under which any equilibrium is focal

technology adoption learning by doing and economic growth abstract we develop a model in which firms choose which technologies to adopt as well as the timing of such adoptions in between adoptions a firm accumulates expertise in its technology which allows it to operate the technology more efficiently thus there is firm specific learning by doing for certain parameterizations of the model and appropriate initial distributions of technologies and expertise equilibria are characterized by positive and constant growth of per capita output and positive but nonconstant growth of each firm s output we find firms adoption decisions and output growth depend upon the efficiency of capital markets journal of economic literature classification numbers o41 o33

a dynamic migration model with uncertainty we study a dynamic version of the harris todaro migration model where a finite population of infinitely lived bayesian agents choose consumption and migration decision rules as a function of their histories the agents do not know the production functions in the two sectors and learn about them through wage draws that they receive from the stochastic production functions the government knows the true production functions but is uninformed about the agents beliefs and the actual wage draws they observe the government maximizes its welfare function using wage subsidies in the two sectors and a migration tax we solve the agents dynamic programming problem and then use the solution to solve the government s dynamic programming problem we study the effects of government policies on the population distribution and illustrate the model by numerically solving a particular parametric example

aggregate fluctuations as an information transmission mechanism a model is presented in which individuals attempt to track shocks with a capital like quantity that is costly to produce and to adjust the shocks have separate individual specific and economy wide components individuals do not have direct access to desired information about economy wide shocks the information is potentially available from the observation of endogenous aggregates but because the aggregates are endogenous there is an informational externality associated with them two polar cases are considered when the desired information is about economy wide real shocks as in townsend 1983 the externality is potentially completely internalized when the desired information is about purely nominal aggregates as in lucas 1973 1975 aggregate fluctuations are a necessary condition of equilibrium

competitive persuasive advertising under consumer loss aversion abstract i present a model to describe the effects of persuasive advertising targeted at consumers with expectation based reference dependent preferences persuasive advertising is competitive and increases the salience of advertised products while decreasing the salience of competing products consumers gain loss utility associated with the expectation to buy the most salient product is inflated while gain loss utility associated with the expectation to buy the least salient product is deflated i show that under moderate levels of loss aversion and product differentiation persuasive advertising has strictly anti competitive effects whenever consumers are aware of prices but uncertain about their individual match value from a purchase

modeling international investment decisions for financial holding companies abstract this research analyzes the internationalization process model developed by johanson and vahlne and derives two integer programming investment decision models that consider the risk attitudes of investment firms johanson and vahlne s model provides a starting point for building a model that suits the investment approach and decision making process of financial holding companies in practice when firms make an international investment decision there is a need for a model that can generate outputs based on financial measures such as profit investment returns and tolerable levels of risk thus in this paper johanson and vahlne s concepts are studied and financial managers are interviewed to derive models that match the investment decision procedures of the firms the model helps firms manage the risks of their investments and derive accurate investment strategies based on investment objectives and constraints

salience and consumer choice we present a theory of context dependent choice in which a consumer s attention is drawn to salient attributes of goods such as quality or price an attribute is salient for a good when it stands out among the good s attributes relative to that attribute s average level in the choice set or more broadly the choice context consumers attach disproportionately high weight to salient attributes and their choices are tilted toward goods with higher quality price ratios the model accounts for a variety of disparate evidence including decoy effects and context dependent willingness to pay it also suggests a novel theory of misleading sales

a sparsity based model of bounded rationality this article defines and analyzes a sparse max operator which is a less than fully attentive and rational version of the traditional max operator the agent builds as economists do a simplified model of the world which is sparse considering only the variables of first order importance his stylized model and his resulting choices both derive from constrained optimization still the sparse max remains tractable to compute moreover the induced outcomes reflect basic psychological forces governing limited attention the sparse max yields a behavioral version of basic chapters of the microeconomics textbook consumer demand and competitive equilibrium i obtain a behavioral version of marshallian and hicksian demand arrow debreu competitive equilibrium the slutsky matrix the edgeworth box roy s identity and so on the slutsky matrix is no longer symmetric nonsalient prices are associated with anomalously small demand elasticities because the consumer exhibits nominal illusion in the edgeworth box the offer curve is a two dimensional surface rather than a one dimensional curve as a result different aggregate price levels correspond to materially distinct competitive equilibria in a similar spirit to a phillips curve the arrow debreu welfare theorems typically do not hold this framework provides a way to assess which parts of basic microeconomics are robust and which are not to the assumption of perfect maximization jel codes d01 d03 d11 d51

optimal policy in a model of endogenous fluctuations and assets assets are coupled to endogenous aggregate output fluctuations in a model of heterogeneous agents those agents wish to avoid reacting inadvertently to an unobservable noise process but to do so must elicit reactions to that noise from each other an abstract institution is modeled that optimizes this elicitation by strategically transmitting information about aggregates i designate this feedback feedback is used by agents and so influences the characteristics of aggregate fluctuations the optimal feedback policy minimizes asset rates of return maximizes the persistence of aggregate output fluctuations and causes the distribution of wealth to widen continually and without limit

capital investment strategies under uncertain regulation this article presents a positive model of investment choices by regulated firms that offers rational explanations for electric utilities recent behavior of delaying investment and choosing smaller shorter lead time technologies the model assumes thatfirms capital investments require long lead times during which the value of the completed project is uncertain firms anticipate regulatory profit and loss restrictions but expectations about the value of a completed project change over time firms decisions are modelled using an option pricing approach that incorporates the value of flexibility to delay or abandon projects the article shows why rational firms invest in smaller shorter lead time plants or delay investment when faced with uncertain and asymmetric profit and loss restrictions it also looks at decisions to abandon partially completed plants and shows that the static result that a higher cost allowance on abandoned projects increases the incentive for investment is not generally true in a dynamic model

competition for attention we present a model of market competition in which consumers attention is drawn to the products most salient attributes firms compete for consumer attention via their choices of quality and price strategic positioning of a product affects how all other products are perceived with this attention externality depending on the cost of producing quality some markets exhibit commoditized price salient equilibria while others exhibit de commoditized quality salient equilibria when the costs of quality change innovation can lead to radical shifts in markets as in the case of decommoditization of the coffee market by starbucks in the context of financial innovation the model generates the phenomenon of reaching for yield

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

the existence of fully rational expectations approximate equilibria with noisy price observations abstract nonrevealing fully rational expectations approximate equilibria exist in microeconomic pure exchange economies in which uninformed agents have suitably dispersed noisy price observations such traders maximize a state dependent expected utility conditional on the price vector they observe the distributions of noisy price observations and the correct equilibrium relationship between states of the world and prices in equilibrium aggregate excess demand is small with high probability in every state of the world and its expectation is also small this magnitude diminishes as the noisy price observations become more accurate equilibria are obtained by applying a fixed point argument to state dependent excess demand functions which are smooth because of the noisy price observations

technical change and irreversible investment under risk abstract a stochastic dynamic model was constructed to analyze investment decisions of an individual farmer under risk in the presence of irreversibilities embedded technical change and indivisible capital an analytical solution was obtained and its local behavior studied by numerical methods optimal investment is obtained by regulating the difference between the desired and actual capital stocks between two barriers that define an inaction interval while the desired capital drifts between the barriers no action is taken if the desired capital touches the upper barrier the farmer invests pushing the average efficiency of the actual capital stock up this in turn raises the desired capital even higher and contracts the inaction interval if these effects are strong enough the farmer will invest again until the potential gains of the technological package are exhausted if the desired capital falls enough the farmer disinvests pushing down the average productivity and expanding the inaction interval disinvestment continues until it stops either because the inaction interval becomes so wide that it is no longer optimal to disinvest or because the actual capital stock is so small that it is no longer profitable to produce

a model of focusing in economic choice we present a generally applicable theory of focusing based on the hypothesis that a person focuses more on and hence overweights attributes in which her options dier more our model predicts that the decisionmaker is too prone to choose options with concentrated advantages relative to alternatives but maximizes utility when the advantages and disadvantages of alternatives are equally concentrated in intertemporal choice because the relative concentrations of an option s costs and benets can be dierent from the perspective of a single period and the perspective of the entire choice problem the decisionmaker often exhibits a form of time inconsistency she is present biased when the costs of current misbehavior are distributed over many future dates such as in harmful consumption but future biased when the benet of many

uncertain demand consumer loss aversion and flat rate tariffs we consider a model of firm pricing and consumer choice where consumers are loss averse and uncertain about their future demand possibly consumers in our model prefer a flat rate to a measured tariff even though this choice does not minimize their expected billing amount a behavior in line with ample empirical evidence we solve for the profit maximizing two part tariff which is a flat rate if a marginal costs are not too high b loss aversion is intense and c there are strong variations in demand moreover we analyze the optimal nonlinear tariff this tariff has a large flat part when a flat rate is optimal among the class of two part tariffs

monetary policy and the information content of prices rational expectations and cleared markets lead to the proposition that feedback monetary policy is irrelevant to real activity as in the analyses of sargent and wallace however if agents are differentially informed and have access to a common price then prospective monetary policy actions future feedback to imperfectly known current circumstances can alter real activity by changing the information content of prices

solving generalized multivariate linear rational expectations models abstract we generalize the linear rational expectations solution method of whiteman 1983 to the multivariate case this facilitates the use of a generic exogenous driving process that must only satisfy covariance stationarity multivariate cross equation restrictions linking the wold representation of the exogenous process to the endogenous variables of the rational expectations model are obtained we argue that this approach offers important insights into rational expectations models we give two examples in the paper an asset pricing model with incomplete information and a monetary model with observationally equivalent monetary fiscal policy interactions we relate our solution methodology to other popular approaches to solving multivariate linear rational expectations models and provide user friendly code that executes our approach

de targeting advertising an assortment of products to loss averse consumers we consider product markets in which consumers are interested only in a specific product category and initially do not know which product category matches their tastes using sophisticated tracking technologies an intermediary can make inferences about a consumer s preferred product category and offer advertising firms the possibility to target their ads to match the consumer s taste such targeting reduces overall advertising costs and as a direct effect increases industry profits however as we show in this paper when consumers form reference prices and are loss averse more precise targeting may intensify competition between firms as a result firms may earn higher profits from de targeted advertising i e when the intermediary deliberately informs about some products and their price quotes from outside a consumer s preferred product category

can real option values explain apparent storage at a loss since decisions to sell grain are irreversible waiting to sell grain can have a real option value this real option value may explain why producers appear to store too long a new seasonal mean reversion model is estimated that allows prices to be a random walk with drift within a season but mean reverting across crop years unless prices are extremely low selling before mean reversion begins is optimal thus the real option value of waiting does not explain why some producers seem to store at a loss in the latter part of crop years

investments in flexible production capacity abstract we examine the technology and capacity choice problem of a multi output firm facing stochastic demands in a continuous time framework the firm can install output specific capital or at greater cost flexible capital that can be used to produce different outputs investment is irreversible the firm must choose a technology and decide how much capital to install knowing it can add more later as demand evolves we formulate the capacity choice problem as a singular stochastic control problem show that the value of the firm equals the value of its installed capital plus the value of its options to add capacity in the future and derive an optimal investment rule that maximizes the firm s market value we also address the analogous problem for a multi input firm that faces stochastically evolving factor costs and can install input specific or flexible capital

investments of uncertain cost abstract this paper examines irreversible investment decisions when projects take time to complete and are subject to two types of cost uncertainty the first is technical uncertainty i e uncertainty over the physical difficulty of completing a project which is only resolved as the investment proceeds the second is input cost uncertainty i e uncertainty over the prices of construction inputs or over government regulations affecting construction costs which is external to the firm these two types of uncertainty have very different effects on the investment decision a simple investment rule is derived that maximizes firm value and is used to analyze the decision to start or continue building a nuclear power plant during the 1980s

dynamic decisions under risk application of ito stochastic control in agriculture in agricultural economics most studies of dynamic decisions under risk have been empirical with less emphasis on theory in finance resource economics and general economics however ito stochastic control is popular for theoretical work optimal decisions can be characterized using the powerful ito stochastic calculus this paper describes the assumptions and methods of ito control constructs a dynamic model of agricultural decisions under risk and illustrates with four examples