optimal incentive schemes with many agents the grossman hart principal agent model of moral hazard is extended to the multiple agent case to explore the use of relative performance in optimal incentive contracting under the assumption that the principal chooses incentive schemes to implement agent actions as nash equilibria necessary and sufficient conditions are derived for the optimality of independent contracts of rank order tournaments and for attainability of the first best in this context the relation of the principal s welfare to the correlation between the underlying randomness in outputs of different agents is also investigated finally some problems with the nash equilibrium implementation assumption are discussed in this paper we extend the grossman hart analysis of the principal agent problem to a multiple agent setting in this version of the problem a risk neutral principal is assumed to observe the output or a performance index for each risk averse agent the output of any agent depends on a privately observable action chosen by the agent and an exogenous random variable the realization of which is not observed either by the principal or by the agent before choosing its action we especially focus attention on the role of relative performance evaluation in optimal incentive contracts and the way this depends on properties of the underlying production technology and the joint distribution of the random variables affecting the outputs of different agents in section 2 of the paper we consider the principal s problem of finding an optimal incentive scheme and an action tuple for agents subject to the constraint that the latter be implemented as a nash equilibrium between agents by the chosen incentive scheme where agents must attain at least their reservation utilities a characterization of optimal incentive schemes is derived analogous to the grossman hart characterization for the single agent problem this characterization is then utilized to find sufficient and generically necessary conditions for a optimal contracts for any agent to be independent of the performance of other agents and b optimality of rank order tournaments where payments depend solely on ordinal comparisons of output across agents we then describe a necessary and sufficient condition for the principal to extract maximum advantage from relative performance clauses i e achieve the first best level of expected utility in the multiagent situation an implication of this result is that under fairly weak conditions perfect correlation in the underlying production uncertainties for different agents enables the principal to attain the first best if and only if sufficiently heavy penalties can be inflicted on agents we then enquire what happens in intermediate cases of non perfect correlation it turns out that while in general the principal s welfare is a continuous function of the correlation coefficient it is not always nondecreasing in the latter because the correlation coefficient is not a general measure of association between two random variables but rather a measure of linear association between them

does the great recession imply the end of the great moderation international evidence in this paper we examine whether or not the great recession had a temporary or permanent effect on output growth volatility after years of low macroeconomic volatility since the early eighties based on break detection methods applied to a set of advanced countries our empirical results do not give evidence to the end of the great moderation period but rather that the great recession is characterized by a dramatic short lived effect on the output growth but not on its volatility we show that neglecting the breaks both in mean and in variance can have large effects on output volatility modeling based on garch specifications

stopping agents from cheating abstract when a principal hires two or more agents to work in a correlated environment each agent s reward will depend on the other s performance unfortunately with just the usual optimal incentive constrained contracts being offered the agents strictly prefer to play equilibrium strategies other than those desired by the principal they cheat however the principal can use a more subtle contractual mechanism to stop them from cheating at no extra cost this mechanism uses one agent to police the other and exploits certain properties of the optimal contracts

implementation in minimax regret equilibrium this note studies the problem of implementing social choice correspondences in environments where individuals have doubts about the rationality of their opponents we postulate the concept of minimax regret as our solution concept and show that social choice correspondences that are maskin monotonic and satisfy the no veto power condition are implementable in minimax regret equilibrium for all 0 1

historical financial analogies of the current crisis this paper tries to shed light on the historical analogies of the current crisis to that end we compare the current sample distribution of dow jones industrial average index returns for a 769 day period from 15 september 2008 the lehman brothers bankruptcy to 30 september 2011 with all historical sample distributions of returns computed using a moving window of 769 days in the 2 january 1900 to 12 september 2008 period using a kolmogorov smirnov and a 2 homogeneity tests which have the null hypothesis of equal distribution we find that the stock market returns distribution during the current crisis would be similar to several past periods of severe financial crises that evolved into intense recessions being the sub sample from 28 may 1935 to 17 jun 1938 the most analogous episode to the current situation furthermore when applying the procedure proposed by diebold gunther and tay 1998 for comparing densities of subsamples we obtain additional support for our findings and discover a period from 10 september 1930 to 13 october 1933 where the severity of the crisis overcome the current situation having sharper tail events finally when comparing historical market risk with the current risk we observe that the current market risk has only been exceeded in the beginning of the great depression

simple mechanisms and preferences for honesty we consider full implementation in complete information environments when agents have an arbitrarily small preference for honesty we offer a condition called separable punishment and show that when it holds and there are at least two agents any social choice function can be implemented by a simple mechanism in two rounds of iterated deletion of strictly dominated strategies

detecting multiple breaks in financial market volatility dynamics the paper evaluates the performance of several recently proposed tests for structural breaks in the conditional variance dynamics of asset returns the tests apply to the class of arch and sv type processes as well as data driven volatility estimators using high frequency data in addition to testing for the presence of breaks the statistics identify the number and location of multiple breaks we study the size and power of the new tests for detecting breaks in the conditional variance under various realistic univariate heteroscedastic models change point hypotheses and sampling schemes the paper concludes with an empirical analysis using data from the stock and fx markets for which we find multiple breaks associated with the asian and russian financial crises these events resulted in changes in the dynamics of volatility of asset returns in the samples prior and post the breaks copyright 2002 john wiley sons ltd

outliers and garch models in financial data abstract we propose to extend the additive outlier ao identification procedure developed by franses and ghijsels franses p h ghijsels h 1999 additive outliers garch and forecasting volatility international journal of forecasting 15 1 9 to take into account the innovative outliers ios in a garch model we apply it to three daily stock market indexes and examine the effects of outliers on the diagnostics of normality

breaks and outliers when modelling the volatility of the u s stock market this study analyses volatility persistence of the u s stock market after taking into account the role of breaks and outliers by employing a wavelet based algorithm it identifies several outliers which are comfortably associated with major events such as the black monday and the asian crisis there is also evidence of clustering of breaks and a substantial variation in the properties of the identified segments

large shocks in the volatility of the dow jones industrial average index 1928 2013 we determine the events that cause large shocks in volatility of the djia index over the period 1928 2013 using a new semi parametric test based on conditional heteroscedasticity models we find that these large shocks can be associated with particular events financial crashes elections wars monetary policies etc we show that some shocks are not identified as extraordinary movements by the investors due to their occurring during high volatility episodes especially the 1929 1934 1937 1938 and 2007 2011 periods

financial constraints and investment decisions evidence from a highly unstable emerging economy this study analyses the role of financial constraints on the investment decisions of 497 brazilian firms we use panel data with firm specific information for different years allowing for the abandonment of the representative firm model information on capital intensity at the firm level is used to group firms we estimate different models and the results suggest the presence of financial restrictions especially for capital intensive firms

undominated nash implementation with collusion and renegotiation abstract this article looks at implementation in economic environments when agents have perfect information about the state of the world but cannot commit not to renegotiate bad outcomes or to collude against each other if renegotiation satisfies a weak condition of disagreement point monotonicity then any pareto efficient social choice function can be implemented if there are at least three agents who play undominated nash equilibria the mechanism does not use modulo or integer games has no bad mixed strategy equilibria and is bounded journal of economic literature classification number d71

financial systems financing constraints and investment empirical analysis of oecd countries this paper investigates the influence of cash flow on corporate investment in 11 oecd countries we find that the sensitivity of investment levels to internally available funds differs significantly across countries and is lower in countries with predominantly close bank firm relationships than in countries with predominantly arm s length bank firm relationships at the same time we find no relationship of the levels of financial constraints to indicators of overall financial development our results are consistent with the view that information and incentive problems in the capital market have important effects on corporate investment and that close bank firm relationships can reduce these problems and thus improve the access of firms to external finance

implementing the core of a two person pure allocation game without free disposal or integer games abstract we show that implementation of the core of a two person pure allocation game can be achieved without the use of free disposal integer games or any refinement of nash equilibria

the effect of macroeconomic news on stock returns new evidence from newspaper coverage abstract previous literature has produced weak evidence to support the hypothesis that real economic news affects stock returns this is in part attributed to the difficulty of measuring how investors interpret macroeconomic announcements in different economic environments in this paper we choose a different approach of measuring macroeconomic news to better estimate its effect on stock returns since newspaper stories provide an interpretation of the statistical releases we choose newspaper stories as our measure of news our findings indicate that news about gdp and unemployment does affect stock returns

political news and stock prices the case of saddam hussein contracts abstract this paper studies the association between the market s expectations of saddam hussein s fall from power as reflected in saddam contract prices and stock prices oil prices and exchange rates during the war a rise in the probability of saddam s fall which also indicated a speedy end to the war was positively and significantly associated with stock prices strengthened the dollar against the euro and lowered oil prices before the war a rise in the probability of saddam s fall which may also have indicated the probability of a costly war breaking out lowered stock prices which adjusted gradually to this information

undominated nash implementation in bounded mechanisms we study implementation in undominated nash equilibrium by bounded mechanisms an undominated nash equilibrium is a nash equilibrium in which no agent uses a weakly dominated strategy a mechanism is bounded if every dominated strategy is dominated by some undominated strategy we identify necessary conditions and sufficient conditions for such implementation these conditions are satisfied in virtually all economic environments and are also satisfied by interesting correspondences from the social choice literature for economic settings we provide a particularly simple implementing mechanism for which the undominated equilibrium outcomes coincide with those obtained from the iterative elimination of weakly dominated strategies

the investment decision a re examination of competing theories using panel data in the united states gross business fixed investments constitute about 10 percent of the gross national product gnp such investments may represent gnp s most important component because a plant and equipment have a long term effect on the economy s productive capacity b changes in investment spending directly affect employment levels and workers incomes in durable goods industries and c supply and demand are sensitive to investment changes economists have long been concerned about what determines capital spending investments using data for us manufacturing firms for 1972 90 the author compares five investment theories accelerator theory cash flow theory neoclassical theory modified neoclassical theory and q theory if the results for cross section regressions can be viewed as representing the long term equilibrium the single most important determinant of capital spending appears to be cash flow apparently managers care more about cash flow and cost of capital than about stock market signals and the level of output and at the firm level managerial perceptions about fundamentals are more important that market perceptions for managers the stock market may be a side show to capital spending decisions to generalize in a way useful for developing countries firm level financial decisions are closely linked to real decisions in the economy internal finance is the most important use of funds so there is a close relationship between real and financial decisions

pre announcement effects news effects and volatility monetary policy and the stock market abstract i examine pre announcement and news effects on the stock market in the context of public disclosure of monetary policy decisions the results suggest that the stock market tends to be relatively quiet conditional volatility is abnormally low on days preceding regularly scheduled policy announcements although this calming effect is routinely reported in anecdotal press accounts it is statistically significant only over the past four to five years a result that i attribute to changes in the federal reserve s disclosure practices in early 1994 the paper also looks at how the actual interest rate decisions of policy makers affect stock market volatility the element of surprise in such decisions tends to boost stock market volatility significantly in the short run and positive surprises higher than expected values of the target federal funds rate tend to have a larger effect on volatility than negative surprises the implications of the results for broader issues in the finance and economics literatures are also discussed

unique implementation of incentive contracts with many agents in this paper we consider the problem of implementation when a principal hires many agents and is not able to monitor their actions we distinguish two cases i when actions are mutually observable among agents ii when actions are not observable at all in i there is a mechanism in which the first best arises as a unique perfect equilibrium in ii we show by two examples that typically there are multiple equilibria if the principal merely offers a set of optimal sharing rules however we prove that the principal can use these optimal sharing rules as a starting point and construct a multi stage mechanism that has a unique second best perfect bayesian equilibrium

implementation in undominated nash equilibria without integer games a mechanism which uses neither integer games nor modulo games is shown to implement any social choice function in a production economy with private and excludable public goods more precisely th

nash implementation and uncertain renegotiation we study nash implementation when the outcomes of the mechanism can be renegotiated among the agents but the planner does not know the renegotiation function that they will use we characterize the social objectives that can be implemented in nash equilibrium when the same mechanism must work for every admissible renegotiation function and show the importance of allowing the planner to sometimes take away resources from the agents

the structural adjustment debate the last decade has witnessed dramatic changes in economic policy in the developing world on every continent countries have moved to open their economies free up prices and reduce the role of the state in managing and regulating economic activity developing nations from mexico to malaysia have made changes in their economies that dwarf anything achieved by ronald reagan the design of structural adjustment programs directed at the four ations stabilization liberalization deregulation privatization has become a cottage industry efforts at structural adjustment have been assisted and encouraged by the international community most directly through multilateral financial institutions the international monetary fund has long conditioned its support on policies consistent with macroeconomic stability the imf has increasingly taken the position that changes in economic structure are necessary if stabilization is to be attained and maintained structural adjustment lending lending conditioned on specific economic policy changes has emerged as a major instrument of world bank support to developing countries and world bank investment lending has increasingly been conditioned on policy reforms given the extent of economic change that structural adjustment programs have wrought it is hardly surprising they have been controversial this paper summarizes the results of the latest world bank review of adjustment lending world bank 1992 and highlights the crucial identification problem involved in assessing structuraladjustment programs we then try to advance the debate over structural adjustment lending by distilling the main lines of criticism levied against structural adjustment programs to four critiques and assessing the validity of each in conclusion we point to three newer issues for which we believe further research and analysis are necessary

world war ii events and the dow jones industrial index abstract this paper investigates which events of world war ii wwii the us investors at that time considered as turning points structural breaks of the war the empirical study employs daily dow jones industrial average stock index and volatility from january 1939 to december 1945 and applies structural shift oriented test to determine endogenously the structural breaks during the wwii period results show that the majority of the wartime events on and off the battlefield labelled important by historians did result in structural breaks in both price movement and stock returns volatility risk these results have major implications for investors of the present and future

coordinating development can income based incentive schemes eliminate pareto inferior equilibria individuals inability to coordinate investment may significantly constrain economic development in this paper we study a simple investment game characterized by multiple equilibria and ask whether an income based incentive scheme can uniquely implement the high investment outcome a general property of this game is the presence of a crossover investment point at which an individual s incomes from investment and noninvestment are equal we show that arbitrarily small errors in the government s knowledge of this crossover point can prevent unique implementation of the high investment outcome we conclude that informational requirements are likely to severely limit a government s ability to use income based incentive schemes as a coordination device

macroeconomic news announcements and stock market jump intensity dynamics abstract this paper examines the effect of macroeconomic releases on stock market volatility through a poisson gaussian garch process with time varying jump intensity which is allowed to respond to such information the day of the announcement per se is found to have little impact on jump intensities employment releases are an exception however when macroeconomic surprises are considered inflation shocks show persistent effects while monetary policy and employment shocks reveal only short lived effects also the jump intensity responds asymmetrically to macroeconomic shocks evidence on macroeconomic variables relevance in explaining jump dynamics and improving volatility forecasts on event days is provided

evolutionary implementation and congestion pricing we consider an implementation problem faced by a planner who manages a roadway network the problem entails both hidden information and hidden actions we solve the planner s problem by introducing a new class of mechanisms and a new notion of implementation the mechanisms called price schemes attach transfers to the available routes they do not involve direct revelation the method of implementation is evolutionary requiring that players who follow any reasonable myopic adjustment process eventually learn to behave as the planner desires we show that efficient behaviour can be guaranteed using simple decentralized price schemes

asymmetric information financing constraints and investment the results of a number of theoretical papers lead to the hypothesis that financial variables affect capital sp ending because of asymmetric information in capital markets the auth ors review the relevant theory and test this hypothesis with a large sample of firm data the results show that financial variables such a s cash flow and interest expense add significant explanatory power to investment equations based on dale jorgenson s neoclassical model w ith a capm specification for the firm s cost of capital and a sales accelerator model the analysis therefore links recent theoretical work on capital markets to long standing empirical debates in the inv estment literature copyright 1987 by mit press

large shocks small shocks and economic fluctuations outliers in macroeconomic time series summary we analyse fifteen post world war i1 us macroeconomic time series using a modified outlier identification procedure based on tsay 1988a large shocks appear to be present in all the series we examined furthermore there are three basic outlier patterns i outliers seem to be associated with business cycles 2 outliers are clustered together both over time and across series 3 there appears to be a dichotomy between outlier behaviour of real versus nominal series also after controlling for outliers much of the evidence of non linearity in many of the time series is eliminated

shifts in volatility driven by large stock market shocks abstract this paper presents an extension of the stochastic volatility model which allows for level shifts in volatility of stock market returns known as structural breaks these shifts are endogenously driven by large return shocks innovations reflecting large pieces of market news these shocks are identified from the data as being bigger in absolute terms than the values of two threshold parameters of the model one for the negative shocks and one for the positive shocks the model can be employed to investigate different sources of stock market volatility shifts driven by market news without relying on exogenous information in addition to this it has a number of interesting features which enable us to study the effects of large return shocks on future levels of market volatility the above properties of the model are shown based on a study for the us stock market volatility

the impact of terrorism on financial markets an empirical study the main focus of this paper is to previous termstudynext term empirically the previous termimpact of terrorismnext term on the behavior of stock bond and commodity previous termmarkets next term we consider terrorist events that took place in 25 countries over an 11 year time period and implement our analysis using different methods an event previous termstudynext term approach a non parametric methodology and a filtered garch evt approach in addition we compare the effect of terrorist attacks on previous termfinancial markets with the impactnext term of other extreme events such as previous termfinancialnext term crashes and natural catastrophes the results of our analysis show that a non parametric approach is the most appropriate method among the three for analyzing the previous termimpact of terrorism on financial markets next term we demonstrate the robustness of this method when interest rates equity previous termmarketnext term integration spillover and contemporaneous effects are controlled we show how the results of this approach can be used for investors portfolio diversification strategies against previous termterrorismnext term risk

subgame perfect implementation of bargaining solutions abstract this paper provides simple four stage game forms that fully implement a large class of two person bargaining solutions in subgame perfect equilibrium the solutions that can be implemented by our game forms are those that maximize a monotonic and quasi concave function of utilities after normalizing each agent s utility function so that the maximum utility is 1 and the utility of the disagreement outcome is 0 this class of solutions includes the nash kalai smorodinsky and relative utilitarian solutions the game forms have a structure of alternating offers and contain no integer device

dominant strategy implementation in economic environments abstract we study dominant strategy implementation especially in economic environments we first show that in general environments strategy proofness and quasi strong non bossiness together are necessary and sufficient for dominant strategy implementation via the associated direct revelation mechanism we next prove that in weak separable environments strategy proofness is sufficient for dominant strategy implementation by using an augmented revelation mechanism similar to the one devised by jackson palfrey and srivastava jackson m o palfrey t r srivastava s 1994 undominated nash implementation in bounded mechanisms games econ behav 6 474 501 moreover we focus on pure exchange economies without free disposal and try to construct another augmented revelation mechanism that satisfies balancedness in and out of equilibrium and which implements all strategy proof social choice functions in dominant strategy equilibria

the effect of financial liberalization on the capital structure and investment decisions of indonesian manufacturing establishments this article analyzes the consequences of financial liberalization using a large panel of indonesian manufacturing establishments it discusses whether financial reforms have had an impact on investment and on the allocation of credit and whether the effects differ depending on the type of firms the overall conclusion is that shifting from administrative toward market based allocation of credit has increased borrowing cost particularly for smaller firms but at the same time has benefited firms by giving them widened access to finance

efficient repeated implementation this paper examines repeated implementation of a social choice function scf with innitely lived agents whose preferences are determined randomly in each period an scf is repeated implementable in nash equilibrium if there exists a sequence of possibly history dependent mechanisms such that i its nash equilibrium set is non empty and ii every nash equilibrium outcome corresponds to the desired social choice at every possible history of past play and realizations of uncertainty we show with minor qualications that in the complete information environment an scf is repeated implementable in nash equilibrium if and only if it is ecient we also discuss several extensions of our analysis including constructions employing only nite mechanisms

the adjustment of stock prices to information about inflation this paper analyzes the reaction of stock prices to the new information about inflation based on daily returns to the standard and poor s composite portfolio from 1953 78 it seems that the stock market reacts negatively to the announcement of unexpected inflation in the consumer price index c p i although the magnitude of the reaction is small it is interesting to note that the stock market seems to react at the time of announcement of the c p i approximately one month after the price data are collected by the bureau of labor statistics

optimal incentive contracts with multiple agents abstract a setting in which a single principal contracts with two agents who possess perfect private information about their own productivity is considered with correlated productivities each agent s private information also provides a signal about the other agent s productivity in contrast to the setting in which there is only one agent it is shown that such private information may be of no value to the agents it is only if the agents are risk averse that their private information may allow them to command rents moreover when the agents are constrained only to reveal their private information truthfully as a nash equilibrium the pareto optimal incentive scheme may induce the agents to adopt strategies other than truth telling this leads to the consideration of truth telling equilibria that are not pareto dominated in the subgame played by the agents among all such equilibria the one preferred by the principal restricts one agent to tell the truth as a dominant strategy and the other as a nash response to truth

the reconstruction finance corporation the gold standard and the banking panic of 1933 the banking crisis of 1933 which forced a national holiday closing the entire u s financial system is often blamed on either publication of the names of banks borrowing from the reconstruction finance corporation a speculative run on the gold backed dollar due to fears that president elect roosevelt would devalue the currency or both evidence presented here indicates that neither factor started the final banking crisis of the depression the michigan bank holiday ignited the panic resulting in a series of bank holidays and a run on the dollar this chain of events toppled the united states financial system

no place to hide the global crisis in equity markets in 2008 2009 this paper provides a broad analysis of the effect of the current financial crisis on global equity markets and their major components we also examine the magnitude of the crisis in terms of value destruction in comparison to other market crashes in brief upon looking at return performance across an array of regions countries and sectors broad market averages are down approximately 40 on their end of 2006 levels while deterioration started in most markets in early to mid 2008 the crisis period of mid september to the end of october 2008 is responsible for the lion s share of the collapse with just about all indices falling 30 40 in this short period financial sectors have taken a bigger hit than non financials over the period though they both suffered similarly during the peak of the crisis due to larger rises in 2007 the emerging markets drop more in 2008 than developed markets but in large part end up at the same level as the other markets the global nature of the crisis is also apparent from the high correlations between markets and investment styles that further increased during the crisis as a result diversification provided little help to investors when needed most as markets dropped in tandem

implementing coordinated team play abstract this note studies a moral hazard model of joint production in which there are strong gains to coordination the mechanism we propose for resolving the tacit collusion problem that arises in our setting makes use of at will contracts which provide the agents with the option to quit at any time journal of economic literature classification numbers c72 d82

black swans before the black swan evidence from international libor ois spreads abstract the libor ois spread is a closely monitored indicator of the financial health of economy previous research has used this spread to identify and anticipate abrupt changes in financial markets taylor and williams 2009 refer to the drastic increase in the us libor ois spread on august 7th 2007 as a black swan in the money market in this paper rather than rely on visual observations of black swans we estimate them using bai and perron s 1998 procedure we estimate structural breaks granger causality tests and innovation accounting in international libor ois spreads and a cds index to better understand their dynamics during the recent crisis our results reveal that black swans appeared in smaller economies prior to that in large ones during the financial crisis in addition we find that only shocks to the us libor ois spread has any statistically significant effects after 30 days

estimating garch volatility in the presence of outliers garch volatilities depend on the unconditional variance which is a non linear function of the parameters consequently they can have larger biases than estimated parameters using robust methods to estimate both parameters and volatilities is shown to outperform maximum likelihood procedures

local versus international crises and bank stability does bank foreign expansion make a difference abstractwe investigate the impact of global and local crises on bank stability in the mena region and examine the effect of owning bank subsidiaries in other countries we consider banks that experienced both types of crises during our sample period our findings highlight a negative impact of the global financial crisis of 2007 2008 on bank stability but on the whole no negative impact of the local crisis a deeper investigation shows that owning bank subsidiaries outside the home country is a source of increased fragility during normal times yet a source of higher stability during the local crisis but not during the international crisis moreover owning foreign subsidiaries in one or two world regions is insufficient to neutralize both types of crises while being present in three or more regions is more stabilizing during a local crisis but also more destabilizing during an international crisis our findings contribute to the literature examining bank stability and have several policy implications

complexity and repeated implementation this paper examines the problem of repeatedly implementing an ecient social choice function when the agents preferences evolve randomly we show that the freedom to set dierent mechanisms at dierent histories can give the planner an additional leverage to deter undesirable behavior even if the mechanisms are restricted to be simple and nite specically we construct a history dependent sequence of simple mechanisms such that with minor qualications every pure subgame perfect equilibrium delivers the correct social choice at every history while every mixed equilibrium is strictly pareto dominated more importantly when faced with agents with a preference for less complex strategies at the margin the ecient social choice function can be repeatedly implemented in subgame perfect equilibrium in pure or mixed strategies our results demonstrate a positive role for complexity considerations in mechanism design

a response to glazer and rosenthal we are most grateful to glazer and rosenthal for the attention they have paid to our work abreu and matsushima 1992a b c in the process of criticizing our mechanism they have provided an elegant exposition of it which usefully supplements our own efforts the criticisms themselves we feel are misplaced and based on a close reading but narrow interpretation of our results glazer and rosenthal seek to show that in our mechanisms the iterative removal of strictly dominated strategies is or indeed ought to be controversial in terms of conventional decision theory the iterative logic is impeccable when iterative deletion leads to a unique profile that profile is the unique rationalizable profile the unique nash equilibrium and so on of course the logic of iterative dominance entails common knowledge of rationality the theoretical coherence of this assumption has been questioned in the context of backward programming in extensive form games see luce and raiffa 1957 pp 80 81 rosenthal 1981 basu 1988 reny 1992a 1992b bonanno 1991 binmore 1987a 1987b and gul 1989 among others these paradoxes of common knowledge of rationality have been highlighted in stylized examples such as the finitely repeated prisoners dilemma and rosenthal s centipede game which in fact has been a seminal inspiration for this recent literature 2 but our mechanisms are simultaneous there is no opportunity to demonstrate irrationality strategic or otherwise and therefore no scope to rationalize iteratively dominated behavior from a decision theory perspective the glazer and rosenthal critique might therefore be viewed as an elaborate revival of the indefensible claim that players in a one short prisoners dilemma will choose not to confess because they are both better off doing so than by both playing their dominant strategies within the standard game theory paradigm there is really nothing more to be said before turning to issues of bounded rationality we note that the glazer and rosenthal critique is essentially premised on the existence of a countervailing focal point but what is a focal point the notion is notoriously vague and we are aware of no widely accepted definition 3 this is not to deny that in very simple and particular games certain behavior may be focal frequently focalness is identified with a pareto dominating equilibrium and this is the point of view glazer and rosenthal seem to adopt 4 this is implicit in their acknowledgement that when the social choice function does satisfy pareto optimality our objection loses much of its immediate

implementation in undominated strategies a look at bounded mechanisms this paper examines the impact of placing natural restrictions on the mechanisms considered for implementation problems it is shown that if all mechanisms are considered and preferences satisfy a basic condition then any social choice correspondence can be implemented in undominated strategies an example points out that the strength of this result derives from the use of mechanisms with questionable features in part of the message space the agent who announces the highest integer is rewarded this sort of tail chasing construction common in the constructive proofs of the literature is used to assure that undesired strategy combinations do not form an equilibrium if such mechanisms are ruled out then the social choice correspondences which can be implemented in undominated strategies satisfy an incentive compatibility type condition called strategy resistence for social choice functions this is equivalent to strategy proofness this contrast suggests that this issue should be examined as it applies to other solution concepts used in implementation theory the last portion of the paper begins to explore the issue as it relates to nash implementation and undominated nash implementation

corporate structure liquidity and investment evidence from japanese industrial groups this paper presents evidence suggesting that information and incentive problems in the capital market affect investment we come to this conclusion by examining two sets of japanese firms the first set has close financial ties to large japanese banks that serve as their primary source of external finance and are likely to be well informed about the firm the second set of firms has weaker links to a main bank and presumably faces greater problems raising capital investment is more sensitive to liquidity for the second set of firms than for the first set the analysis also highlights the role of financial intermediaries in the investment process

a simple forecasting mechanism for moral hazard settings abstract this paper studies a multiagent moral hazard setting we resolve the tacit collusion problem that arises in our setting while employing a solution concept that makes less demanding behavioral assumptions than nash a simple mechanism is constructed that approximately implements the second best solution in two rounds of iteratively removing strictly dominated strategies under our mechanism the agents best reply correspondences are well defined a small message space is employed and the messages can be interpreted as divisional forecasts journal of economic literature classification numbers c72 d82

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

testing for arch in the presence of additive outliers in this paper we investigate the properties of the lagrange multiplier lm test for autoregressive conditional heteroskedasticity arch and generalized arch garch in the presence of additive outliers ao s we show analytically that both the asymptotic size and power are adversely affected if ao s are neglected the test rejects the null hypothesis of homoskedasticity too often when it is in fact true while the test has difficulty detecting genuine garch effects several monte carlo experiments show that these phenomena occur in small samples as well we design and implement a robust test which has better size and power properties than the conventional test in the presence of ao s applications to the french industrial production series and weekly returns of the spanish peseta us dollar exchange rate reveal that sometimes apparent garch effects may be due to only a small number of outliers and conversely that genuine garch effects can be masked by outliers

rates of return on corporate investment in the last two decades productivity has lagged in the united states markets have been lost to foreign competition real income per capita has grown slowly this experience has led to considerable discussion of possible causes 7 one possible cause often mentioned is the quality of managerial investment decisions managers have been accused of overinvesting in obsolete technologies of underinvesting in risky projects with long run payoffs of undertaking unprofitable mergers and of overall poor judgment in their investment policies 39 this paper presents evidence on the returns on investment over the 1970 88 period for a sample of 699 large corporations that is consistent with this view

an analysis of the principal agent problem most analyses of the principal agent problem assume that the principal chooses an incentive scheme to maximize expected utility subject to the agent s utility being at a stationary point an important paper of mirrlees has shown that this approach is generally invalid we present an alternative procedure if the agent s preferences over income lotteries are independent of action we show that the optimal way of implementing an action by the agent can be found by solving a convex programming problem we use this to characterize the optimal incentive scheme and to analyze the determinants of the seriousness of an incentive problem

stock market and investment the signaling role of the market the author examines the role of the stock market as a signal to managers in undertaking capital expenditures he concludes that while both managerial and market perceptions are integral managerial perception is of greater importance the evidence suggeststhat as a statistic the q ratio is not sufficient to explain firms capital expenditure decisions thus the standard q model of investment should be modified to provide a more meaningful description of a firm s capital spending decisions overall the results suggest that stock market activity has only limited implications for the economy s resource allocation process evidence for the q theory of investment confirms previous findings in the literature that the model s poor empirical perfomance was partly the result of using aggregate data for the whole economy also since market perception plays only a limited role in determining capital expenditures shareholder myopia is unlikely to result in managerial myopia the implications for developing countries are while the stock market may not be central to a firm s capital spending decisions it is not a sideshow either the market plays an important signaling role for managers this is a powerful rationale for financial reform and capital development in developing countries the results also suggest that complaints that stock market activity leads to misallocation of resources may be exaggerated

caviar conditional autoregressive value at risk by regression quantiles value at risk var has become the standard measure of market risk employed by financial institutions for both internal and regulatory purposes var is defined as the value that a portfolio will lose with a given probability over a certain time horizon usually one or ten days despite its conceptual simplicity its measurement is a very challenging statistical problem and none of the methodologies developed so far give satisfactory solutions interpreting the var as the quantile of future portfolio values conditional on current information we propose a new approach to quantile estimation which does not require any of the extreme assumptions invoked by existing methodologies such as normality or i i d returns the conditional autoregressive value at risk or caviar model moves the focus of attention from the distribution of returns directly to the behavior of the quantile we specify the evolution of the quantile over time using a special type of autoregressive process and use the regression quantile framework introduced by koenker and bassett to determine the unknown parameters since the objective function is not differentiable we use a differential evolutionary genetic algorithm for the numerical optimization utilizing the criterion that each period the probability of exceeding the var must be independent of all the past information we introduce a new test of model adequacy the dynamic quantile test applications to simulated and real data provide empirical support to this methodology and illustrate the ability of these algorithms to adapt to new risk environments