speculative investor behavior and learning as traders learn about the true distribution of some asset s dividends a speculative premium occurs as each trader anticipates the possibility of reselling the asset to another trader before complete learning has occurred small differences in prior beliefs lead to large speculative premiums during the learning process this phenomenon helps explain a paradox concerning the pricing of initial public offerings the result casts light on the significance of the common prior assumption in economic models

an approach to asset pricing under incomplete and diverse perceptions we model a dynamic competitive market where in every period risk neutral traders trade a one period bond against an infinitely lived asset with limited short selling of the long term asset traders lack structural knowledge and use different incomplete theories all of which give statistically correct beliefs about next period s market price of the long term asset the more theories there are in the market the higher is the equilibrium price of the long term asset investors with more complete theories do not necessarily earn higher returns than those with less complete ones who can earn above the risk free rate we provide two necessary conditions for a trader to earn above the risk free rate

multidimensional mechanism design for auctions with externalities abstract in an auction with externalities a buyer s type is multidimensional and specifies the payoff he would get for each of the n 1 possible outcomes the seller keeps the object or buyer i i 1 n gets the object we provide a characterization of multidimensional incentive compatible mechanisms similar to that for one dimensional mechanisms although reservation utilities are endogenous and type dependent the participation constraint is binding for only one critical type a main difficulty in a multidimensional setting is the integrability condition we present a geometric characterization for discontinuous conservative vector fields in auctions where the buyers submit scalar bids and the seller transfers the object to one of the buyers for sure a second price auction maximizes revenue with two buyers this auction remains optimal even if the seller can set a reservation price journal of economic literature classification numbers c7 c72

optimal auction with resale this paper investigates the design of seller optimal auctions when winning bidders can attempt to resell the good in that case the optimal allocation characterized by myerson 1981 cannot be achieved without resale i find a sufficient and necessary condition for sincere bidding given the possibility of resale in two bidder cases i prove that the myerson allocation can be achieved under standard conditions supplemented with two assumptions with three or more bidders achieving the myerson allocation is more difficult i prove that it can be implemented in special cases in those cases the myerson allocation is generated through a sequence of resale auctions each optimally chosen by a reseller

a mechanism design approach to ranking asymmetric auctions i propose a new mechanism design approach to the problem of ranking standard auctions with two heterogeneous bidders a key feature of the approach is that it may be possible to rank two auctions even if neither dominates the other for all combinations of types the approach simplifies the analysis and unifies results in the existing literature roughly speaking the first price auction is more profitable than the second price auction when the strong bidder s distribution is flatter and more disperse than the weak bidder s distribution applications include auctions with one sided externalities moreover contrary to previous work reserve prices are easily handled finally the method can be extended to some environments with many bidders

the determinants of occupational success in britain this paper is concerned with measuring the true impact of certain human capital variables on an individual s occupational position the particular variables which are analysed are training qualifications and spells of sickness and unemployment the longitudinal nature of the data enables us to control for all relevant individual attributes which remain fixed over the period of the sample this is vitally important because these attributes are strongly correlated with the variables of interest and would seriously corrupt estimates derived from a single cross section a method of generating consistent estimates as n oo t fixed for a dynamic model with fixed effects is also illustrated

bayesian networks and boundedly rational expectations i present a framework for analyzing decision makers with an imperfect understanding of their environment s correlation structure the decision maker faces an objective multivariate probability distribution his own action is one of the random variables he is characterized by a directed acyclic graph over the set of variables his subjective belief filters the objective distribution through his graph via the factorization formula for bayesian networks this belief distortion implies that the decision maker s long run behavior may affect his perception of the consequences of his actions accordingly i define a personal equilibrium notion of optimal choices i show how recent models of boundedly rational expectations as well as new ones e g reverse causality can be subsumed into this framework as special cases some general properties of the bayesian network representation of subjective beliefs are presented as well as a missing data foundation

on the analysis of asymmetric first price auctions we provide a new set of tools for studying asymmetric rst price auctions connecting their equilibria to the concavity of the underlying type distributions and showing how one can use surplus expressions related to symmetric auctions to bound equilibrium behavior in asymmetric auctions we apply these tools to studying procurement auctions in which as is common in practice one seller is given an advantage re ecting for example better reliability or quality we show conditions under which for any given rst price handicap auction there is a second price auction with bonuses that outperforms it with most of our results involving ex post dominance

correlation misperception in choice we present a decision theoretic analysis of an agent s understanding of the interdependencies in her choices we provide the foundations for a simple and flexible model that allows the misperception of correlated risks we introduce a framework in which the decision maker chooses a portfolio of assets among which she may misperceive the joint returns and present simple axioms equivalent to a representation in which she attaches a probability to each possible joint distribution over returns and then maximizes subjective expected utility using her possibly misspecified beliefs

modeling the economic interaction of agents with diverse abilities to recognize equilibrium patterns we model differences among agents in their ability to recognize temporal patterns of prices using the concept of debruijn sequences in two dynamic models of markets we demonstrate the existence of equilibria in which prices fluctuate in a pattern that is independent of the fundamentals and that can be recognized only by the more competent agents jel c7 d4 s477

optimal bidding in auctions from a game theory perspective abstract the game theoretic perspective in auction bidding has provided a powerful normative framework for the analysis of auctions and it has generated an impressive volume of research contributions tracing this research we review key recent advances which have greatly expanded our understanding of the operation of auctions and produced a more accurate analysis of mechanism design and optimal bidding we follow various experimental studies which have shown that the predictive power of auction theory remains in many cases limited for this reason we concentrate on research themes which enhance the applicability of auction theory leading to more realistic descriptions of bidding behaviors we identify important innovations which expand the environment of auction bidding and carry us beyond rational decision making we conclude providing directions of future research and discussing their implications

behavioral models for first price sealed bid auctions with the one shot decision theory abstract we build an auction model with the one shot decision theory which describes the process of a bidder deciding his her bidding price in first price sealed bid auctions the decision making procedure involves two steps first for each of his her possible bidding prices the bidder examines every possible highest bidding price provided by the other bidders and chooses one as a focus point of this bidding price of him her then the bidder determines such a bidding price as the optimal one that generates the best outcome when its focus point occurs the optimal bidding price can be obtained and two common phenomena in auction markets throwing away and overbidding are well explained

contracting and information sharing under supply chain competition we investigate contracting and information sharing in two competing supply chains each consisting of one manufacturer and one retailer the two supply chains are identical except they may have di

fact free learning aragones acknowledges financial support from the spanish ministry of science and technology grant sec2003 01961 and creabarcelona economics aragones gilboa and schmeidler gratefully acknowledge support from the polarization and conflict project cit 2 ct 2004 506084 funded by the european commission dg research sixth framework programme gilboa and schmeidler gratefully acknowledge support from the israel science foundation grant 790 00 and 975 03 postlewaite gratefully acknowledges support from national science foundation grant sbr 9810693

design competition through multidimensional auctions this article studies design competition in government procurement by developing a model of two dimensional auctions wherefirms bid on both price and quality and bids are evaluated by a scoring rule designed by a buyer three auction schemes first score second score and second preferred offer are introduced and related to actual practices if the buyer can commit to a scoring rule in his best interest the resulting optimal scoring rule underrewards quality relative to the buyer s utility function and implements the optimal outcome for the buyer underfirst and second score auctions absent the commitment power the onlyfeasible scoring rule is the buyer s utility function under which 1 all three schemes yield the same expected utility to the buyer and 2 first and second score auctions induce the first best level of quality which turns out to be excessive from the buyer s point of view

on earnings related unemployment benefits and their relation to earnings an aspect of unemployment in britain that has been much discussed in recent years is the possible disincentive effects of unemployment benefits paradoxically the actual pattern of receipt of those benefits is hardly considered at all one reason for this is the popular belief that actual receipt follows a well defined hypothetical pattern this belief is encouraged by the government s representation of the benefit system for instance the department of health and social security dhss regularly publish hypothetical calculations of benefit receipt e g social security statistics i982 table 46 i4 and government answers to parliamentary questions are typically based on these figures economists frequently take these hypothetical calculations at face value when trying to model the effect of unemployment benefits on labour supply in a time series framework or in the case of micro analysis make similar calculations for each individual in the data set calculations are based on a limited set of stylised rules which are considered to capture the essence of the workings of the benefit system however estimates of the disincentive effects of benefits do not appear to be robust to the method of calculation atkinson et al i984 this emphasises the need for more precise modelling of the determinants of benefit receipt this paper is concerned with modelling the receipt of the benefit that has been at the heart of the incentives debate earnings related supplement ers was the element of national insurance unemployment benefit in the united kingdom that was linked to some measure of past earnings several commentators in the mid1 970s purported to show that its introduction in i 966 led to a marked rise in unemployment in the late i96os e g maki and spindler i975 and its abolition under the i980 social security no 2 act was certainly due in part to the belief that it discouraged work in investigating the receipt of this benefit the paper provides a case study of the difficulties in modelling the incomes of the unemployed and a cautionary tale to any investigator who does not have all the information necessary for precise calculation of budget constraints the typical assumption that has been made when simulating ers in micro data sets of unemployed individuals is that the relevant earnings that generate an ers payment may be successfully proxied by normal weekly earnings immediately prior to unemployment we may call this proxy the hypothetical model of ers receipt and the focus of the analysis is a test of this model using data on

can agents with causal misperceptions be systematically fooled using data on house sales and inventories this paper shows that housing market dynamics are driven mainly by listings and less so by transaction speed thus the decision to move house is key to understanding the housing market the paper builds a model where moving house is essentially an investment in match quality implying that moving depends on macroeconomic developments and housing market conditions the endogeneity of moving means there is a cleansing effect those at the bottom of the match quality distribution move first which generates overshooting in aggregate variables the model is applied to the 1995 2004 housingmarket boom

asymmetric first price auctions abstract a new approach to asymmetric first price auctions is proposed which circumvents the need to examine bidding strategies directly specifically the ratio of bidders endogenous payoffs is analyzed and compared to the ratio of the exogenous distribution functions that describe beliefs most of the results are inferred from this comparison in the existing theoretical literature assumptions of first order stochastic dominance or stronger imply that the latter ratio has very specific properties but no such assumptions are imposed here it is proven that first order stochastic dominance is necessary for bidding strategies not to cross when this assumption is relaxed in the numerical literature it is done in a manner that leads to exactly one crossing however it is straightforward to construct examples with several crossings finally bid distributions will cross in auctions with two bidders whenever second order but not first order stochastic dominance applies

numerical analysis of asymmetric first price auctions abstract we propose numerical algorithms for solving first price auction problems where bidders draw independent valuations from heterogeneous distributions the heterogeneity analyzed in this work is what might naturally emerge when subsets of distributionally homogeneous bidders collude bid functions and expected revenues are calculated for two special cases extensions to more general asymmetric first price auctions are discussed journal of economic literature classification numbers d44 c63 c72 d82

pricing in a supply chain for auction bidding under information asymmetry abstract we examine a supply chain in which a manufacturer participates in a sealed bid lowest price procurement auction through a distributor this form of supply chain is common when a manufacturer is active in an overseas market without establishing a local subsidiary to gain a strategic advantage in the division of profit the manufacturer and distributor may intentionally conceal information about the underlying cost distribution of the competition in this environment of information asymmetry we determine the equilibrium mark up the ex ante expected mark up and expected profit of the manufacturer and the equilibrium bid of the distributor in unilateral communication we demonstrate the informed agent s advantage resulting to higher mark up under information sharing we show that profit is equally shared among the supply chain partners and we explicitly derive the mark up when the underlying cost distribution is uniform in 0 1 the model and findings are illustrated by a numerical example

revisiting games of incomplete information with analogy based expectations this paper studies the effects of analogy based expectations in static two player games of incomplete information players are assumed to be boundedly rational in the way they forecast their opponent s state contingent strategy they bundle states into analogy classes and play best responses to their opponent s average strategy in those analogy classes we provide general properties of analogy based expectation equilibria and apply the model to a variety of well known games we characterize conditions on the analogy partitions for successful coordination in coordination games under incomplete information rubinstein a 1989 the electronic mail game strategic behavior under almost common knowledge amer econ rev 79 385 391 we show how analogy grouping of the receiver may facilitate information transmission in crawford and sobel s cheap talk games crawford v p sobel j 1982 strategic information transmission econometrica 50 1431 1451 and we show how analogy grouping may give rise to betting in zero sum betting games such as those studied to illustrate the no trade theorem

asymmetric auctions with resale we study first and second price auctions with resale in a model with indepen dent private values with asymmetric bidders the resulting inefficiencies create a motive for post auction trade which in our model takes place via monopoly pricing the winner makes a take it or leave it offer to the loser we show a a first price auction with resale has a unique monotonic equilibrium and b with resale the expected revenue from a first price auction exceeds that from a second price auction the inclusion of resale possibilities thus permits a gen eral revenue ranking of the two auctions that is not available when these are excluded jel d44

the organization of supplier networks effects of delegation and intermediation in a one principal two agent model with adverse selection and collusion among agents we show that delegating to one agent the right to subcontract with the other agent always earns lower profit for the principal compared with centralized contracting delegation to an intermediary is also not in the principal s interest if the agents supply substitutes it can be beneficial if the agents produce complements and the intermediary is well informed

asymmetric first price menu auctions under intricate uncertainty abstract this paper studies asymmetric first price menu auctions in the procurement environment where the buyer does not commit to a decision rule and asymmetric sellers have interdependent costs and statistically affiliated signals sellers compete in bidding a menu of contracts where a contract specifies a vector of characteristics and a payment required from the buyer for delivering these characteristics the buyer does not commit ex ante to a decision rule but rather upon observing all the menus offered by sellers chooses the best contract this paper establishes the existence of a continuum of separating monotone equilibria in this game bounded above by the jointly ex post efficient outcome and below by the jointly interim efficient outcome it shows that the jointly ex post efficient equilibrium outcome is the only ex post renegotiation proof outcome and it is also ex ante robust to all continuation equilibria

household unemployment and the labour supply of married women a recent reform to the uk unemployment insurance ui system has reduced the duration of entitlement from 12 to six months the ui and welfare systems interact in the uk in such a way that exhaustion of ut for married individuals has potentially large disincentive effects on the labour supply of spouses a model of labour supply is estimated for married women allowing for endogenous unemployment durations of husbands and wives we distinguish between transfer programme induced incentive effects correlation between labour supply and wages within couples complementarity between the leisure times of spouses and a discouraged worker effect

implications of rational inattention abstract a constraint that actions can depend on observations only through a communication channel with finite shannon capacity is shown to be able to play a role very similar to that of a signal extraction problem or an adjustment cost in standard control problems the resulting theory looks enough like familiar dynamic rational expectations theories to suggest that it might be useful and practical while the implications for policy are different enough to be interesting

price quoting strategies of an upstream supplier this paper studies an upstream supplier who quotes prices for a key component to multiple sellers that compete for an end buyer s indivisible contract at most one of the supplier s quotes may result in downstream contracting and hence produce revenue for her we characterize the supplier s optimal price quoting strategies and show that she will use one of two possible types of strategies with her choice depending on the sellers profit potentials relative to their uncertainties secure whereby she will always have business or risky whereby she may not have business addressing potential fairness concerns we also study price quoting strategies in which all sellers receive equal quotes finally we show that the supplier s optimal mechanism resembles auctioning a single quote among the sellers this paper can assist upstream suppliers in their pricing decisions and provides general insights into multitier supply chains pricing dynamics this paper was accepted by martin lariviere operations management

unemployment benefit duration and incentives in britain how robust is the evidence abstract recent years have seen considerable advances in the econometric treatment of micro data in models of unemployment duration this paper examines the evidence from such models concerning the effects of unemployment benefits on incentives to work in britain widely accepted results of a small but significant benefit effect are reproduced using a sample of 1 231 unemployed men however these results are only found when benefit receipt is assumed to follow a hypothetical pattern which is shown to be unrealistic and over generous when more realistic calculations of benefits are used no benefit effect is found the paper also argues that search theory is of little help in determining the choice between competing functional forms and explanatory variables results concerning benefits are shown to be sensitive to the latter