credible spatial preemption it is often argued that incumbent firms may deter entry by preemptive investment in new goods we show that these conclusions are reversed when multiproduct incumbentfirms may exit in response to entry once entrants are in an industry an incumbent will often want to withdraw some goods to prevent competition with the entrant from reducing profits on other goods such a reaction makes entry more attractive to a potential entrant the equilibrium industry structure is less likely to be monopolistic as the goods are better substitutes as exit costs are low and as the competition between producers of the same good is more intense

overconfidence and moral hazard abstract in this paper i study the effects of overconfidence on incentive contracts in a moral hazard framework agent overconfidence can have conflicting effects on the equilibrium contract on the one hand an optimistic or overconfident agent disproportionately values success contingent payments and thus prefers higher powered incentives on the other hand if the agent overestimates the extent to which his actions affect outcomes lower powered incentives are sufficient to induce any given effort level if the agent is moderately overconfident the latter effect dominates because the agent bears less risk in this case there are efficiency gains stemming from his overconfidence if the agent is significantly overconfident the former effect dominates the agent is then exposed to an excessive amount of risk and any gains arise only from risk sharing under disagreement an increase in optimism or overconfidence increases the effort level implemented in equilibrium

a model of positive self image in subjective assessments this paper suggests a mechanism that describes individuals positive self image in subjective assessments of their relative abilities the mechanism assumes individuals have heterogeneous production functions that determine ability as a function of multiple skills make skill enhancing investments with the goal of maximizing their ability and make ability comparisons using their own production function within this framework the paper provides conditions under which there is positive self image positive self image is increasing in the ease of the task the number of different skills needed for the task and the variability of production technologies in the population

paying not to go to the gym how do consumers choose from a menu of contracts we analyze a novel dataset from three u s health clubs with information on both the contractual choice and the day to day attendance decisions of 7 752 members over three years the observed consumer behavior is difficult to reconcile with standard preferences and beliefs first members who choose a contract with a flat monthly fee of over 70 attend on average 4 3 times per month they pay a price per expected visit of more than 17 even though they could pay 10 per visit using a 10 visit pass on average these users forgo savings of 600 during their membership second consumers who choose a monthly contract are 17 percent more likely to stay enrolled beyond one year than users committing for a year this is surprising because monthly members pay higher fees for the option to cancel each month we also document cancellation delays and attendance expectations among other findings leading explanations for our findings are overconfidence about future self control or about future efficiency overconfident agents overestimate attendance as well as the cancellation probability of automatically renewed contracts our results suggest that making inferences from observed contract choice under the rational expectation hypothesis can lead to biases in the estimation of consumer preferences

overconfidence and social signalling evidence from both psychology and economics indicates that individuals give statements that appear to overestimate their ability compared to that of others we test three theories that predict such relative overconfidence the first theory argues that overconfidence can be generated by bayesian updating from a common prior and truthful statements if individuals do not know their true type the second theory suggests that self image concerns asymmetrically affect the choice to receive new information about one s abilities and this asymmetry can produce overconfidence the third theory is that overconfidence is induced by the desire to send positive signals to others about one s own skill this suggests either a bias in judgement strategic lying or both we formulate this theory precisely using a large data set of relative ability judgements about two cognitive tests we reject the restrictions imposed by the bayesian model and also reject a key prediction of the self image models that individuals with optimistic beliefs will be less likely to search for further information about their skill because this information might shatter their self image we provide evidence that personality traits strongly affect relative ability judgements in a pattern that is consistent with the third theory of social signalling our results together suggest that overconfidence in statements is more likely to be induced by social concerns than by either of the other two factors copyright 2013 oxford university press

evolving standards for academic publishing a q r theory this paper develops models of quality standards to examine two trends academic journals increasingly require extensive revisions of submissions and articles are becoming longer and changing in other ways papers are modeled as varying along two quality dimensions q reflects the importance of the main ideas and r other aspects of quality observed trends are regarded as increases in r quality a static equilibrium model illustrates comparative statics explanations a dynamic model in which referees with a biased view of their own work learn social norms for weighting q and r is shown to produce a long gradual evolution of social norms

why don t you trade only four days a year an empirical study into the abnormal returns of quarters first trading day in this research i examined a calendar anomaly that occurs at the beginning of each quarter through an examination of 34 years of daily and annual returns for the s p500 and 13 years of returns for popular etfs i have demonstrated the existence of the first day of quarter fdq effect by trading only four days a year from the beginning of 2000 until the end of 2013 an investor could have gained 113 1 of the s p500 returns for that period while being exposed to stock risk for only 56 days moreover for 11 of those 14 years of trading the fdq was responsible for more than 10 of the annual returns only for two years since 2000 2001 2005 has the fdq yielded a negative return the biggest beneficiary of the fdq is the financial sector which for the last 13 years of investing has been non fertile showing 6 12 total return investing only at the beginning of each quarter for a total of 52 days would have yielded a return of 40 17 the next beneficiary of the fdq is the technological sector the 82 5 of total return gained in this sector over the last 13 years could have been gained in only 52 days of trading

entry and competitive dynamics in the mobile telecommunications market abstract we propose an extension of the gans stern gans j s stern s 2003 the product market and the market for ideas commercialization strategies for technology entrepreneurs research policy 32 2 333 350 framework that includes entry by existing firms an incumbent firm possessing complementary assets and strong appropriability is in a formidable position teece d j 1986 profiting from technological innovation implications for integration collaboration licensing and public policy research policy 15 6 285 305 however a de alio entrant can leverage complementary assets to enter along a new technological trajectory and then develop appropriability we illustrate how several mobile telecommunications firms ericsson nokia and samsung pursued this strategy to catch up with the market leader motorola we also identify several shortcomings in motorola s approach it was too inward looking in developing technologies but ironically not inward looking enough in exploiting its most valuable patents

unemployed but optimistic optimal insurance design with biased beliefs biased perceptions of risks change the perceived value of insurance and the per ceived returns to avoiding these risks i show empirically that unemployed workers overestimate how quickly they will nd work but underestimate the return to their search eorts i analyze the consequences for the optimal design of unemployment insurance with biased beliefs contracts equalizing the marginal smoothing ben e t and the moral hazard cost of insurance are suboptimal social and private insurance diverge a paternalistic social planner corrects the moral hazard cost for the distortion in the insured s eort choice while private insurers focus on the perceived rather than the true smoothing bene ts when unemployed workers are optimistic privatizing unemployment insurance may result in ine ciently low or rapidly decreasing unemployment bene ts

credible retaliatory entry and strategic toe holds the anticipated profits from entry by an established firm into a new market will depend on how incumbents in that market are expected to respond one possibility suggested by cases and the literature is that an incumbent may respond with retaliatory entry into the first entrant s home market the model presented here describes conditions under which this can be a credible threat that deters the first entry when the conditions are such that it is not credible the paper shows how firms can provide credibility through the establishment of toe hold investments in other markets

when do stronger patents increase continual innovation under continual innovation greater patent strength expands innovating firms profit against imitation but also shifts profit from current to past innovators we show how the impact of patents on innovation as determined by these two opposing effects varies with industry characteristics when the discount factor is sufficiently high the negative profit division effect is negligible and innovation monotonically increases in patent strength otherwise innovation has an inverted u relationship with patent strength and stronger patents are more likely to increase innovation when the discount factor or the fixed innovation cost is higher we also show how the impact of patents on innovation may change with firms innovation capability and with the intensity of competition from imitators

choosing the competition and patent licensing this article examines licensing as a means of choosing the competitors which a patentee monopolist will face in the period after the patent expires the queue of entrants consists of two firms which differ in their relative strengths as competitors for example by size or level of marginal cost by structuring the industry to be composed of weak competitors the incumbent is able to prolong its dominant position in the industry after the patent expires examples are presented in which the evidence suggests that choosing the competition was an important motivation of the licensor s behavior

capital as a commitment strategic investment to deter mobility abstract this paper analyzes how an early entrant in a market can exploit its head start by strategic investment the analysis is based on spence s paper investment strategy and growth in a new market bell j econ 10 1979 1 19 we frist study the investment game in the no discounting case which embodies the key features of mobility deterrence we establish the existence of a set of perfect equilibria and suggest that one particular equilibrium is most reasonable this equilibrium also valid with discounting involves the follower firm being forever deterred from investing to its steady state reaction curve in contrast to spence s proposed solution

persistence of innovation in dutch manufacturing is it spurious this paper studies the persistence of innovation and the dynamics of innovation output in dutch manufacturing using firm data from three waves of the community innovation surveys cis pertaining to the periods 1994 1996 1996 1998 and 1998 2000 we estimate by maximum likelihood a dynamic panel data type 2 tobit model accounting for individual effects and handling the initial conditions problem we find that there is no evidence of true persistence in achieving technological product or process innovations while past shares of innovative sales condition albeit to a small extent current shares of innovative sales

sequential entry industry structure and welfare in this paper we reexamine the relationship between potential competition industry structure and welfare in a market subject to a sequential entry threat where firms can make quantity commitments and have access to a constant returns technology it is shown that provided entry is not blockaded the incumbent s will either prevent entry or allow all the potential entrants in furthermore actual entry may decrease but social welfare never goes down with more potential entrants nevertheless with a finite number of potential entrants policies which lower the cost of entry need not be beneficial in welfare terms

is it the weather we show that results in the recent strand of the literature which tries to explain stock returns by weather induced mood shifts of investors might be data driven inference more specifically we consider two recent studies kamstra mark j kramer lisa a levi maurice d 2003a winter blues a sad stock market cycle american economic review 93 1 324 343 cao melanie wei jason 2005 stock market returns a note on temperature anomaly journal of banking and finance 29 6 1559 1573 that claim that a seasonal anomaly in stock returns is caused by mood changes of investors due to lack of daylight and temperature variations respectively while we confirm earlier results in the literature that there is indeed a strong seasonal effect in stock returns in many countries stock market returns tend to be significantly lower during summer and fall months than during winter and spring months as documented by bouman and jacobsen bouman sven jacobsen ben 2002 the halloween indicator sell in may and go away another puzzle american economic review 92 5 1618 1635 there is little evidence in favor of a sad or temperature explanation in fact we find that a simple winter summer dummy best describes this seasonality our results suggest that without any further evidence the correlation between weather related variables and stock returns might be spurious and the conclusion that weather affects stock returns through mood changes of investors is premature

the role of obsolescence and inventory costs in providing commitment this paper modifies the cournot and stackelberg models to allow the firms to sell less than they have produced and to store the unsold portion of their output as inventory even if one of the firms can choose its output before the other if it is costless to carry unsold goods forward then the cournot outcome emerges we show however that costs of carrying the inventory forward endow the firms with a limited degree of commitment to sell what they have produced this partially restores the first mover advantage if the firms choose their outputs simultaneously the cournot outcome emerges and has locally consistent conjectures

executive overconfidence and the slippery slope to financial misreporting abstract a detailed analysis of 49 firms subject to aaers suggests that approximately one quarter of the misstatements meet the legal standards of intent in the remaining three quarters the initial misstatement reflects an optimistic bias that is not necessarily intentional because of the bias however in subsequent periods these firms are more likely to be in a position in which they are compelled to intentionally misstate earnings overconfident executives are more likely to exhibit an optimistic bias and thus are more likely to start down a slippery slope of growing intentional misstatements evidence from a high tech sample and a larger and more general sample support the overconfidence explanation for this path to misstatements and aaers

invention and innovation under alternative market structures the case of natural resources this paper examines the interactions between market structure and resource allocation over time when there is endogenous technical progress the structures considered are a planned economy pure monopoly and competition with patent rights in an efficient allocation the date of invention coincides with the date of innovation the date at which technology is used this is also true with a pure monopoly but monopoly retards technical progress relative to the efficient level competition for patents rights to a new technology results in excessively rapid technical progress if the resource endowment of the economy is sufficiently large also competition may lead to sleeping patents where invention strictly precedes the date of innovation

high stock returns before holidays existence and evidence on possible causes on the trading day prior to holidays stocks advance with disproportionate frequency and show high mean returns averaging nine to fourteen times the mean return for the remaining days of the year over one third of the total return accruing to the market portfolio over the 1963 1982 period was earned on the eight trading days which each year fall before holiday market closings examination of hourly pre holiday stock returns reveals high returns throughout the day pre holiday stock returns in the post test 1983 1986 period are also examined this paper explores a seeming empirical regularity in the pattern of daily stock index returns surrounding holidays the trading day prior to holidays on average exhibits high positive returns over one third of the return earned by the market over the twenty year test period accrued on the eight trading days which annually fall before holidays intimations of the pre holiday strength have appeared in the academic literature in an examination of the frequency of dow jones industrial average advances on days surrounding weekends during the 1901 to 1932 period fields 1934 finds a disproportionate frequency of advances on trading days preceding long holiday weekends roll 1983a finds high returns accruing to small firms on the trading day prior to new year s day lakonishok and smidt 1984 note that prices also rise in all deciles of market capitalization on the last trading day before christmas and conclude that the high christmas returns of large companies might be considered another mystery a number of stock market advisors have also noted the pre holiday strength merrill 1966 finds a disproportionate frequency of dow jones industrial average advances on days preceding holidays during the 1897 to 1965 period and fosback 1976 has noted high preholiday returns in sp further hourly returns and closing bid ask data are examined to determine when high returns accrue on preholidays tests are also conducted showing that pre holiday strength is not

strategic behaviour of incumbent firms in the uk abstract the main purpose of this paper is to examine the incidence of strategic behaviour in the uk by means of a questionnaire study performed across three broad manufacturing industries food electrical engineering and chemicals of the strategies which have received substantial theoretical attention r d and advertising appear widely used patenting pricing and excess capacity much less so vertical instruments such as purchasing policy also stand out as important but possibly only a minority of firms in our sample actively pursue strategic instruments

looking at the bright side the motivational value of confidence abstract the motivational value of confidence postulates that individual effort provision is increasing in beliefs on one s own ability this relation is supposed to also hold for overconfident individuals who have exaggerated ability beliefs we present the first empirical evidence on the existence of a motivational value of absolute confidence that many microeconomic models with overconfident agents build on moreover we document that negative debiasing information on individual ability diminishes effort provision a result that is of obvious relevance for many contexts such as labor relations or learning at school we also offer a strategy for identifying significant absolute overconfidence at the individual level

preemptive patenting and the persistence of monopoly this article takes a different tack and inquires whether institutions such as the patent system create opportunities for firms with monopoly power to maintain their monopoly power the results apply to other situations such as brand identification spatial location and capacity expansion which share the characteristic that early or preemptive actions may lower the returns to potential competitors

preemptive investment toehold entry and the mimicking principle this article explores the ability offirms to successfully enter against an initial monopolist by pursuing toehold entry sinking entry costs early and planning to produce only later we endow the incumbent with strongfirst mover advantages for example capital is the only input and is completely sunk and in each period the incumbent invests before entrants nevertheless the incumbent s profit can easily be negative if it tries to deter all entry when the market is growing the incumbent may need prohibitive capital in place early on because once toehold entry has occurred the incumbent s planned capital expansion might no longer be rational surprisingly even if market conditions remain stationary the incumbent may still allow some entry in the model some firms are always deterred showing that several firms can deter others more effectively than can a singlefirm the difference arises because onefirm cannot commit to mimicking the aggregate investment path that several independent firms would choose this mimicking principle offers a general perspective for understanding when a monopolist finds deterrence optimal

nonsecular regularities in returns and volume this study addressed u s stock daily returns and volume around days when the market is open that correspond to religious or cultural occasions specifically st patrick s day and the jewish high holy days of rosh hashanah and yom kippur on rosh hashanah and yom kippur volume was found to be down relative to volume on all trading days in the sample the reason may be that the nonfinancial opportunity cost of trading is high for a considerable number of traders on these days returns were significantly higher on the days preceding st patrick s day and rosh hashanah which is consistent with the notion that market returns reflect the festive nature of these occasions evidence was also found of significantly negative returns after yom kippur in the second half of the sample period which accords with the idea that the market reflects the solemn nature of this occasion overall the results are consistent with the view that mood is a viable explanation for some market movements

unrealistic expectations and misguided learning we explore the learning process and behavior of an individual with unrealistically high expectations overconfidence when outcomes also depend on an external fundamental that affects the optimal action moving beyond existing results in the literature we show that the agent s beliefs regarding the fundamental converge under weak conditions furthermore we identify a broad class of situations in which learning about the fundamental is self defeating it leads the individual systematically away from the correct belief and toward lower performance due to his overconfidence the agent even if initially correct becomes too pessimistic about the fundamental as he adjusts his behavior in response he lowers outcomes and hence becomes even more pessimistic about the fundamental perpetuating the misdirected learning the greater is the loss from choosing a suboptimal action the further the agent s action ends up from optimal we partially characterize environments in which self defeating learning occurs and show that the decisionmaker learns to take the optimal action if and in a sense only if a specific non identifiability condition is satisfied in contrast to an overconfident agent an underconfident agent s misdirected learning is self limiting and therefore not very harmful we argue that the decision situations in question are common in economic settings including delegation organizational effort and public policy choices

overconfidence and excess entry an experimental approach psychological studies show that most people are overconfident about their own relative abilities and unreasonably optimistic about their futures e g shelly e taylor and j d brown 1988 neil d weinstein 1980 when assessing their position in a distribution of peers on almost any positive trait like driving ability ola svenson 1981 income prospects or longevity a vast majority of people say they are above the average although of course only half can be if the trait is symmetrically distributed this paper explores whether optimistic biases could plausibly and predictably influence economic behavior in one particular setting entry into competitive games or markets many empirical studies show that most new businesses fail within a few years for example using plant level data from the u s census of manufacturers spanning 1963 1982 timothy dunne et al 1988 estimated that 61 5 percent of all entrants exited within five years and 79 6 percent exited within 10 years most of these exits are failures see also dunne et al 1989a 1989b d shapiro and r s khemani 1987

tax loss selling and the january effect evidence from municipal bond closed end funds this paper provides direct evidence supporting the tax loss selling hypothesis as an explanation of the january effect examining turn of the year return and volume patterns for municipal bond closed end funds which are held mostly by tax sensitive individual investors we document a january effect for these funds but not for their underlying assets we provide evidence that this effect can be largely explained by tax loss selling activities at the previous year end moreover we find that funds associated with brokerage firms display more tax loss selling behavior suggesting that tax counseling plays a role among the numerous stock return anomalies probably none has generated more interest than that of the turn of the year or january effect the phenomenon in which small capitalization stocks realize unusually high returns in early january 1 the literature offers a number of hypotheses to explain this phenomenon including the tax loss selling hypothesis the window dressing hypothesis the insider trading information release hypothesis and the seasonality of the risk return relation hypothesis given existing evidence in some support for the first two hypotheses the debate continues with respect to which of these the tax loss selling of individual investors or the window dressing of

analyzing literature based innovation output indicators the italian experience abstract this paper presents the results of a study on the product innovations introduced in the italian market in 1989 and reported in a selected number of trade journals the analysis of data collected by means of this literature based counting procedure confirms that r d oriented industries and large firms do not in italy have a marked competitive advantage in innovation the country appears to be instead characterized by a significant presence of consumer goods industries and small firms in innovation our data indicate a statistically significant association between trade competitiveness and strength in product innovation and show the comparatively higher capacity for product innovation of some of the industries in which italy achieves a positive performance in international trade moreover the presence of spillovers at the regional level from both private and public r d expenditures proves to be positively correlated with the development of product innovations finally small firms with fewer than 50 employees appear to be more innovative than is usually believed to be the case

self confidence and personal motivation the maintenance and enhancement of self esteem has always been identified as a fundamental human impulse philosophers writers educators and of course psychologists have all emphasized the crucial role played by self image in motivation affect and social interactions the aim of this chapter is to bring these concerns into the realm of economic analysis and show that this has important implications for how agents process information and make decisions conversely the tools of economic modelling can help shed light on a number of apparently irrational behaviours documented by psychologists

divisionalization and entry deterrence this paper assumes that incumbent firms can create new independent divisions more cheaply than potential entrants who must incur the additional overhead costs of new entry the main theoretical result is that such divisionalization ability leads perfectly informed incumbents to preempt all rational entry into their industries in contrast existing models of entry deterrence imply that informed incumbents even those with steadily decreasing average costs will often allow rational entry our result may explain why successful large scale entry by firms with no informational advantage is extremely rare the use of divisions to preempt entry may also explain why large firms in high profit oligopolies often divisionalize allowing their divisions to compete freely despite the negative pecuniary externality that each division imposes on others

product market competition and organizational slack under profit target contracts in a framework a la martin 1993 we introduce a common component in the managers private information in order to address three related questions what is the impact of contracts that reward managers on the basis of realized profits on firms productive and allocative efficiency relative to cost target contracts how do these contracts shape the relationship between competition and organizational slack can we then explain the existing evidence of an inverted u shaped relationship between competition and cost reducing activities as documented in aghion et al aghion p bloom n blundell r griffith r howitt p competition and innovation an inverted u relationship the quarterly journal of economics 120 pp 701 728 2005 we show that profit target contracts introduce a horizontal contractual externality between the competing firms that mitigates organizational slack and improves upon productive efficiency relative to cost plus mechanisms moreover when executive compensations are conditioned on profits an inverted u shaped relationship between product market competition and managerial effort obtains finally we also show that when contractual instruments are endogenous i e when shareholders can choose between profit and cost target rules the equilibrium with profit target contracts always exists and is the only one that survives to standard refinements