bonus culture competitive pay screening and multitasking to analyze the impact of labor market competition on the structure of compensation we embed multitasking and screening within a hotelling framework competition for talent leads to an escalation of performance pay shifting effort away from long term investments risk management and cooperation efficiency losses can exceed those from a single principal who dulls incentives to extract rents as competition intensifies monopsonistic underincentivization of low skill agents first decreases and then gives way to growing overincentivization of high skill ones aggregate welfare is thus hill shaped while inequality tends to rise monotonically bonus caps can help restore balance in incentives but may generate other distortions

comparing behavioral models using data from experimental centipede games the centipede game posits one of the most well known paradoxes of backward induction in the literature of experimental game theory given that deviations from the unique subgame perfect nash equilibrium generates a pareto improvement several theoretical models have been employed in order to rationalize this kind of behavior in this social dilemma the available explanations range from social preferences including fairness altruism or cooperation motives errors in playing inability to perform backward induction or different depths of reasoning in the present study we use the blavatskyy s theoretical contribution and relax the assumptions of expected utility maximization and risk neutral attitudes to test an alternative explanation we compare various probabilistic decision theory models in terms of their descriptive in sample and predictive out of sample fit performance using data from experimental centipede games we find that introducing non expected utility preferences to the quantal response equilibrium model along with a nonlinear utility function provides a better explanation compared to alternative specifications such as the level k or the quantal response equilibrium model with altruistic motives jel c72 c92 d81 d82

executive compensation strategic competition and relative performance evaluation theory and evidence we examine compensation contracts for managers in imperfectly competitive product markets we show that strategic interactions among firms can explain the lack of relative performance based incentives in which compensation decreases with rival firm performance the need to soften product market competition generates an optimal compensation contract that places a positive weight on both own and rival performance firms in more competitive industries place greater weight on rival firm performance relative to own firm performance we find empirical evidence of a positive sensitivity of compensation to rival firm performance that is increasing in the degree of competition in the industry

competition and corporate performance are people right to think that competition improves corporate performance my investigations indicate first that there are some theoretical reasons for believing this hypothesis to be correct but they are not overwhelming furthermore the existing empirical evidence on this question is weak however the results reported here based on an analysis of around 670 u k companies do provide some support for this view most important i present evidence that competition as measured by increased numbers of competitors or by lower levels of rents is associated with a significantly higher rate of total factor productivity growth

information competition and markets one of the dominant characteristics of modern capitalist economies is the important role played by competition not the peculiar static form of pure price competition embodied in the arrow debreu model but rather a dynamic competition more akin to the kind of competition represented by sports contests and other races including patent races in recent years there have been several attempts to explain why firms often base the pay of their workers and managers on relative performance see for example edward lazear and sherwin rosen 1981 such compensation schemes become desirable when three conditions are satisfied a the input effort of workers managers must not be directly observable at least without cost thus firms must either expend resources to monitor inputs or devise reward structures in which compensation is a function of variables such as output or profits which are themselves functions of inputs but are less costly to observe b the relationship between input and output must be stochastic so that by observing output one cannot perfectly infer what the input was c finally the stochastic disturbances which affect the relationship between input and output of different firms must be correlated by looking at the performance of one worker relative to that of others one can make better inferences about his effort than one can make without using this information not only can competition provide a basis of comparison which enables the design of reward structures that can simultaneously provide a high level of incentives with relatively low level risk but compensation schemes based on relative performance have the further advantage of automatically adjusting incentives to changes in the economic environment we refer to this as built in flexibility in a first best world with perfect information concerning the nature of the technology but where it is still costly to monitor individuals activities the compensation scheme would vary from time to time as the environment changed such changes in the compensation scheme are costly to implement and the information required to do so is seldom available when a task is easier the individual s rewards for performing the task should be reduced if pay is based on relative performance although all individuals perform better when they exert the same level of effort their compensation is automatically adjusted thus teachers frequently grade on the curve and a significant fraction of the pay of successful salesmen often consists of bonuses based on relative performance

product market competition and managerial slack this article analyzes the effect of product market competition on managerial incentives in contrast to hart 1983a i show that competition may actually exacerbate the incentive problem the difference in results derives from our different assumptions about managerial preferences the importance of assumptions about preferences suggests that we do not yet understand the precise mechanism through which competition affects incentives

competition risk and managerial incentives this paper examines how the degree of competition among firms in an industry affects the optimal incentives that firms provide to their managers a central assumption is that there is free entry and exit in the industry which implies that changes in the nature of competition lead to changes in the equilibrium market structure the main result is that as the intensity of product market competition increases as a result of greater product substitutability or greater market size principals unambiguously provide stronger incentives to their agents to reduce costs at the same time more intense competition also leads to more volatile firm level profits consequently managers incentives are positively correlated with firm level risk consistent with empirical evidence a decrease in the cost of entering the market has the opposite effect on incentives but still induces a positive correlation between risk and incentives

executive incentives and the horizon problem an empirical investigation abstract this paper investigates the hypothesis that ceos in their final years of office manage discretionary investment expenditures to improve short term earnings performance we examine the behavior of r d expenditures for a sample of firms in industries that have significant ongoing r d activities the results suggest that ceos spend less on r d during their final years in office however we find the reductions in r d expenditures are mitigated through ceo stock ownership there is no evidence that the reduced r d expenditures are associated with either poor firm performance or reductions in investment expenditures that are capitalized for accounting purposes

the dynamic in stability of backwards induction abstract the evolutionary basis for predicting the backwards induction solution in finite extensive form games with perfect information is examined evolution is modelled using the replicator dynamic in combination with rare perturbations that introduce a small change in the proportion of each strategy the criterion for our judgement is whether this dynamic stabilizes over time at the subgame perfect equilibrium outcome we find that the backwards induction solution is fully justified by this process only in very simple games examples of more complex games are given in which this process does not select between the subgame perfect equilibrium outcome and alternative nash equilibrium outcomes journal of economic literature classification numbers c72 c79

product market competition and analyst forecasting activity international evidence abstract in this study we investigate how product market competition affects the extent of analyst following and the properties of analyst forecasts using a broad sample of firms from 37 countries over the 1990 2008 period we find that firms that operate in more concentrated industries and with stronger pricing power are associated with greater analyst following higher forecast accuracy and lower forecast dispersion moreover the effect of product market power on analyst following and forecast properties is more pronounced in countries with less effective competition laws and higher entry costs these findings suggest that high industry concentration and a dominant market position enhance the earnings predictability of firms and lower their information uncertainty and that country level institutions that promote competition effectively constrain the power in product markets

rational choice a survey of contributions from economics and philosophy this paper looks at the philosophical foundations of rational choice theory it is argued that l savage s expected utility axioms cannot be defended as requirements of instrumental rationality in part because of their implications for the description of consequences then it is argued that common knowledge of rationality does not imply that rational game players must be in nash equilibrium and for some games is an incoherent concept finally the suggestion that rational choice theory is self defeating is examined in relation to coordination games where the theory cannot explain the role of salience and the concept of resolute choice copyright 1991 by royal economic society

reputation and imperfect information abstract a common observation in the informal literature of economics and elsewhere is that is multistage games players may seek early in the game to acquire a reputation for being tough or benevolent or something else but this phenomenon is not observed in some formal game theoretic analyses of finite games such as selten s finitely repeated chain store game or in the finitely repeated prisoners dilemma we reexamine selten s model adding to it a small amount of imperfect or incomplete information about players payoffs and we find that this addition is sufficient to give rise to the reputation effect that one intuitively expects

reliant behavior in the united states and japan yoshiharu mataga japanese economic success is often attributed to culturally reinforced psychological conditioning that promotes interpersonal reliance cooperation and a group interest orientation this article provides direct experimental evidence on differences in behavior among future businesspeople in the united states and japan utilizing a simple two person extensive form game of perfect information introduced by selten 1975 we provide evidence that contrary to some views the japanese can be less reliant on the behavior of others and are more likely to take actions at variance with group welfare in some settings thus popular explanations of japanese economic achievements may require further exploration jel a14 f00 m14 p52 i introduction the role of culture in economic behavior is an important but controversial topic although it is widely believed that cultural influences affect economically relevant behavior such effects can present difficulties for conventional economic theory discussions of the differences between the united states and japan in the business sphere provide a good example of both the high degree of academic and popular interest in this topic and the complexities involved in obtaining useful characterizations a common popular conclusion in the japan versus united states debate is that japanese business practices differ fundamentally from united states practices and that these differences stem from dissimilar sociological conditioning in the two countries while united states or western culture stresses individualism personal initiative and risk taking the japanese are said to place a higher value on consensus cooperation favoritism toward within group peers and stability 1 therefore a citizen in japan may be more interested in how he or she fits into the social context and his or her relationship with others 2 these contrasting orientations are assumed to manifest themselves in different patterns of behavior having economic implications this article offers a direct controlled experimental test of potentially significant differences in behavior between future japanese and american businesspeople utilizing a simple two person game of perfect information we examine the degree to which united states and japanese business students make differing assessments of the reliability of the behavior of their compatriots and we provide evidence on the implications of these assessments for observed behavior our simple game template introduced by selten 1975 was the focus of a study by beard and beil 1994 and allows comparison of a kind of behavior reliance on maximizing play by others that may have important economic implications in our usage reliance means merely that one player assigns a sufficiently high probability to self interested behavior by other players to induce the first player to take actions that are desirable only when others maximize their own monetary payoffs thus reliance differs from trust as usually defined in gam e theory and the former appears considerably weaker our experiments use as subjects business students in roughly comparable american and japanese universities and we offer nontrivial immediate money payoffs to participants in order to solicit serious efforts on their parts several versions of the basic experiment are conducted to establish payoff dominance and evaluate hypotheses on subject behavior our findings are quite surprising first subjects in both the united states and japan are loath to rely on others maximizing behavior even when that behavior is as in the united states highly reliable second contrary to the assumptions underlying some analysis of japanese business practices subjects in japan appear less reliant than their united states counterparts the article is divided into five sections section ii provides a literature review on the role of culture in u

industry product market competition and managerial incentives abstract while some studies suggest that industry product market competition can substitute for managerial incentives other studies suggest a complementary relation the underlying assumption behind these studies is that competition can be uni dimensionally proxied for by industry concentration however recent studies suggest that competition can reflect several dimensions product substitutability market size and entry costs given the level of industry concentration using these determinants of competition this study contributes to the literature by showing that a firms provide stronger incentives when industry competition is greater b competition is multi dimensional in its relation to incentives and c industry characteristics play a major role in influencing incentives

rationality in extensive form games let us adopt the classical point of view that a theory of games is a description of rational behavior consequently equipped with a book entitled theory of games any individual in any strategic situation need only consult the book to make a rational decision one of the questions to address in this context is indeed whether or not strategies other than those provided by backward induction can ever appear in such a book in offering an answer we shall also explore the logical limits within which any theory of games must operate

bargaining and reputation the paper develops a reputation based theory of bargaining the idea is to investigate and highlight the influence of bargaining postures on bargaining outcomes a complete information bargaining model a la rubinstein is amended to accommodate irrational types who are obstinate and indeed for tractability assumed to be completely inflexible in their offers and demands a strong independence of procedures result is derived after initial postures have been adopted the bargaining outcome is independent of the fine details of the bargaining protocol so long as both players have the opportunity to make offers frequently the latter analysis yields a unique continuous time limit with a war of attrition structure in the continuous time game equilibrium is unique and entails delay consequently inefficiency the equilibrium outcome reflects the combined influence of the rates of time preference of the players and the ex ante probabilities of different irrational types as the probability of irrationality goes to zero delay and inefficiency disappear furthermore if there is a rich set of types for both agents the limit equilibrium payoffs are inversely proportional to their rates of time preference

the spillover effects of md a disclosures for real investment the role of industry competition abstract we explore whether disclosures in the management discussion analysis mda it is stronger when firms operate in industries that have lower entry costs are larger and have less substitutable products we obtain similar results for investment efficiency overall our evidence suggests that md a disclosures have spillover effects for investment that can improve investment efficiency and that spillover effects are moderated by industry competition

is the general public licence a rational choice open source projects are networks of developers distributors and end users of non proprietary created knowledge goods it has been argued that this form of organization has some advantages over the firm or market coordination i show that for sufficiently convex and modular projects proprietary licences are not able to sustain sequential knowledge production which however can be carried out if the project is run on the open source basis

solar pv where the sun doesn t shine estimating the economic impacts of support schemes for residential pv with detailed net demand profiling abstract countries with low irradiation and solar pv adoption rates are increasingly considering policy support for solar pv although consumer electricity demand and solar generation profiles are often mismatched this paper presents a methodology for policymakers in such conditions to examine more precisely the financial performance of residential solar pv from the consumer perspective as part of an ex ante policy assessment we model a range of prospective policy scenarios and compare policy mechanisms that compensate homeowners for generation those that reduce their upfront costs and those that assist with financing using ireland as a case study the results confirm the intuitive notion that more generous financial remuneration schemes provide quicker payback however we observe that in low irradiance regions there is little difference between upfront grants and feed in tariffs to accelerate payback timeframes we also show the importance of retail tariff structure in consumer payback for solar pv systems with one part tariffs generating shorter paybacks than two part tariff structures although the latter is more likely to secure revenue for electricity infrastructure investment drawing from this analysis the paper proposes some options for the design of policy supports and tariff structures to deliver a sustainable residential renewable electricity system in low irradiance regions

a payoff uncertainty explanation of results in experimental centipede games abstract this paper investigates how well a simple two sided incomplete information game with a full support prior can be used to explain non nash equilibrium outcomes observed in the centipede game experiments i estimate the variance of the uncertainty about preferences in several versions of the model select two models and compare these models to the estimation results of the altruism model and the quantal response models it is shown that the two selected models have a better fit than the one parameter altruism and quantal response models and that the estimated variance can explain all qualitative features of these experimental results journal of economic literature classification numbers c72 c19 c 44 c91

optimal incentive contracts in the presence of career concerns theory and evidence this paper studies optimal incentive contracts when workers have career concerns concerns about the effects of current performance on future compensation we show that the optimal compensation contract optimizes total incentives the combination of the implicit incentives from career concerns and the explicit incentives from the compensation contract thus the explicit incentives from the optimal compensation contract should be strongest for workers close to retirement because career concerns are weakest for these workers we find empirical support for this prediction in the relation between chief executive compensation and stock market performance

backward induction normal form perfection and explicable equilibria a weakening of d kreps and r wilson s 1982 notion of sequential rationality is presented the motivation stems from the difficulty in justifying sequentially rational behavior in subgames reachable only through a violation of sequential rationality although the present notion of weak sequential rationality is based upon extensive form considerations it bears a close relation to r selten s 1975 normal form perfect equilibria backward induction outcomes can be achieved in generic games of perfect information with additional restrictions on beliefs an example with imperfect information shows that sequential rationality is not the consequence of equilibrium play and the absence of incredible threats copyright 1992 by the econometric society

measuring market power in the ready to eat cereal industry the ready to eat cereal industry is characterized by high concentration high price cost margins large advertising to sales ratios and numerous introductions of new products previous researchers have concluded that the ready to eat cereal industry is a classic example of an industry with nearly collusive pricing behavior and intense nonprice competition this paper empirically examines this conclusion in particular i estimate price cost margins but more importantly i am able empirically to separate these margins into three sources i that which is due to product differentiation ii that which is due to multi product firm pricing and iii that due to potential price collusion the results suggest that given the demand for different brands of cereal the first two effects explain most of the observed price cost margins i conclude that prices in the industry are consistent with noncollusive pricing behavior despite the high price cost margins leading firms are able to maintain a portfolio of differentiated products and influence the perceived product quality it is these two factors that lead to high price cost margins

the effects of competition on executive behavior economists presume that competition spurs a firm to be more efficient by forcing it to reduce its agency problems this article investigates this presumption it finds that the effects of competition on executive behavior can be decomposed into four effects each of which is of potentially ambiguous sign theory thus offers no definitive defense of this presumption this article also derives sets of conditions under which increased competition has the presumed effect of reducing agency problems in some sets important conditions are that increased competition reduce the executive s expected income and that agency goods e g shirking be normal goods for the executive the article shows that an increase in the shareholder bargaining strength can both reduce the agency problem and make it more sensitive to competition

business cycles and the relationship between concentration and price cost margins using a newly constructed panel data base we examine changes in price cost margins in 284 manufacturing industries between 1958 and 1981 a key finding is a dramatic narrowing of the spread between the margins of concentrated and unconcentrated industries over this period we provide evidence that this narrowing is a result of the greater sensitivity of price cost margins in more concentrated industries to demand fluctuations this finding is robust to the inclusion of other industry variables and to measures of import competition the results indicate that cross sectional estimates of the concentration margins relationship are likely to be both biased and misleading

a measure of competition based on 10 k filings in this paper we develop a measure of competition based on management s disclosures in their 10 k filing and find that firms rates of diminishing marginal returns on new and existing investment vary significantly with our measure we show that these firm level disclosures are related to existing industry level measures of disclosure e g herfindahl index but capture something distinctly new in particular we show that the measure has both across industry variation and within industry variation and each is related to the firm s future rates of diminishing marginal returns as such our measure is a useful complement to existing measures of competition we present a battery of specification tests designed to explore the boundaries of our measure and how it varies with the definition of industry and the presence of other measures of competition

ceo talent ceo compensation and product market competition abstract we develop a structural industry equilibrium model to show how competitive chief executive officer ceo firm matching and product markets jointly determine firm value and ceo pay we analytically derive testable implications for the effects of product market characteristics on firm size ceo pay and ceo impact on firm value ceo talent matters more in more competitive markets with greater product substitutabilities our ceo impact estimates are much higher than those obtained by previous structural approaches that abstract away from ceo market segmentation the estimates differ across industries primarily due to variation in product market competition rather than variation in the ceo talent distribution

equilibrium play and adaptive learning in a three person centipede game the two person centipede game is one of the most celebrated paradoxes of backward induction in complete information extensive form games an experimental investigation of a three person centipede game shows that the paradoxical results are strongly affected by the size of the stakes when the number of players in the game is increased from two to three and the game is played for unusually high stakes with group composition being randomly changed from trial to trial the paradox is considerably weakened as players approach equilibrium play with multiple iterations of the stage game when the game is played with low stakes there is no evidence for equilibrium play or learning across iterations of the stage game an adaptive learning model that assumes updating of the individual probabilities of choice outperforms alternative static and dynamic models in accounting for the major results observed in the high stake experiment

cycles of learning in the centipede game abstract this paper studies the evolutionary properties of the centipede game for this game the use of backward induction as a model of rational behavior has been consistently challenged by the experimental evidence our claim is that backward induction can still accurately predict the players behavior provided that they are given time enough to appreciate the strategic environment in which they operate we support this claim by proving convergence to the backward induction solution for all continuous time monotonic selection dynamics however we also show that this solution is intrinsically unstable and how this instability is positively related to the length of the game journal of economic literature classification numbers c72 c79

admissibility in games suppose that each player in a game is rational each player thinks the other players are rational and so on also suppose that rationality is taken to incorporate an admissibility requirement that is the avoidance of weakly dominated strategies which strategies can be played we provide an epistemic framework in which to address this question specifically we formulate conditions of rationality and mth order assumption of rationality rmar and rationality and common assumption of rationality rcar we show that i rcar is characterized by a solution concept we call a self admissible set ii in a complete type structure rmar is characterized by the set of strategies that survive m 1 rounds of elimination of inadmissible strategies iii under certain conditions rcar is impossible in a complete structure

a positive approach to non cooperative games abstract population steady states are defined for non cooperative games played repeatedly by individuals drawn from large populations these steady states balance the tendencies of immigration to an emigration from strategies according to certain simple measures of their relative performances approximate values for these steady states are computed for some examples and appear intuitively more plausible as descriptors of play than do nash equilibria

behavior in the centipede game a decision theoretical perspective the centipede game is a two player finite game of perfect information where a unique subgame perfect nash equilibrium appears to be intuitively unappealing and descriptively inadequate this paper analyzes behavior in the centipede game when a traditional game theoretical assumption that players maximize expected utility is relaxed we demonstrate the existence of a descriptively adequate subgame perfect equilibrium under two standard decision theoretical assumptions first players choose under uncertainty in a probabilistic manner as captured by embedding a core deterministic decision theory in a model of probabilistic choice second players adopt non linear decision weights and overweight the likelihood of rare events as captured for example by rank dependent utility or prospect theory

games of perfect information predatory pricing and the chain store paradox the thesis of this paper is that finite noncooperative games possessing both complete and perfect information ought to be treated like one player decision problems that is players ought to assign at every move subjective probabilities to every subsequent choice in the game and ought to make decisions via backward induction this view is in contrast with the gametheoretic approach of nash equilibrium after expanding on this view for games in the abstract in sections 2 and 3 attention is turned in section 4 to an example due to reinhard selten called the chain store paradox which possesses the flavor of a situation involving a predatory pricing monopolist it is argued that for the chain store game the decision analytic approach leads under certain assumptions to more realistic outcomes than the standard nash equilibrium approach

managerial incentives and product market competition are imperfectly competitive leibenstein 1966 claims that there may be a substantial amount of x inefficiency where x inefficiency measures the degree to which actual profits depart from the maximum of profits that could be obtained if all operations in the firm were carried out at minimal costs he offers empirical evidence from case studies showing that the welfare loss due to organizational slack is of an order of magnitude bigger than the welfare loss due to monopolistic price distortions on imperfectly competitive markets these results support the common presumption that increasing competition reduces organizational and in particular managerial slack however this early literature does not offer a theoretical explanation for the link between competition and managerial incentives in particular it ignores the fact that managerial incentives can be affected by the design of an incentive scheme in this paper i derive the optimal incentive scheme for a manager as a function of the competitiveness of the environment in which his firm operates the basic impact of increased competition is that it reduces the profits of a firm this has two effects in the model first if a firm has high costs then the reduction of profits may be sufficient to render the firm unprofitable so the probability that it has to be liquidated goes up this unambiguously induces the manager of the firm to work harder for a cost reduction in order to avoid liquidation and to keep his job second the reduction in profits may affect

predation reputation and entry deterrence abstract economists often argue that predatory practices are irrational since there exist cheaper or more certain means to gain or maintain a monopoly our gametheoretic equilibrium analysis suggests that if a firm is threatened by several potential entrants then predation may be rational against early entrants even if it is costly when viewed in isolation because it yields a reputation which deters other entrants asymmetric information plays a crucial role in our analysis since it provides the rationale for entrants to base their expectations of the firm s future behavior on its past actions the analysis also suggests methods to treat general reputational phenomena

an experimental investigation of rating market regulation abstract we introduce a simple game theoretical model that captures the main aspects of the repeated interaction between an issuer and a credit rating agency it involves up front payments of issuer fees and direct publication of requested ratings due to pecuniary injuries for untruthful ratings the credit rating agency should always report truthfully in the subgame perfect equilibrium knowing this the issuer should never request a rating conducting laboratory experiments we find that behavior significantly deviates from the equilibrium prediction in favor of a cooperative solution issuers frequently do request ratings which is often reciprocated with untruthful good ratings

subgame perfect cooperation in an extensive game abstract we propose a new solution concept for games in extensive form that incorporates both cooperation and subgame perfection from its definition and properties the new solution concept named the subgame perfect core is a refinement of the core of an extensive game in the same sense as the set of subgame perfect nash equilibria is a refinement of the set of nash equilibria to further characterize the subgame perfect core we show that each subgame perfect core payoff vector can be implemented as a non cooperative solution as it is a subgame perfect nash equilibrium payoff vector of an extensive form game that is closely related to the original game we also motivate and introduce a related concept of subgame perfect strong nash equilibrium of an extensive game that is coalition proof

prudence in bargaining the effect of uncertainty on bargaining outcomes abstract we investigate the outcome of bargaining when a player s pay off from agreement is risky we find that a risk averse player typically increases his equilibrium receipts when his pay off is made risky this is because the presence of risk makes individuals behave more patiently in bargaining strong analogies are drawn to the precautionary saving literature we show that the effect of risk on receipts can be sufficiently strong that a decreasingly risk averse player may be better off receiving a risky pay off than a certain pay off

on the effects of group identity in strategic environments abstract we examine differences in behavior between subjects interacting with a member of either the same or different identity group in both a centipede game and a series of stag hunt games we find evidence that subjects interacting with outgroup members are more likely to behave as though best responding to uniform randomization of the partner we conclude that group identity not only affects player s social preferences as identified in earlier research but also affects the decision making process independent of changes in the utility function

the limitations of industry concentration measures constructed with compustat data implications for finance research industry concentration measures calculated with compustat data which cover only the public firms in an industry are poor proxies for actual industry concentration these measures have correlations of only 13 with the corresponding u s census measures which are based on all public and private firms in an industry also only when u s census measures are used is there evidence consistent with theoretical predictions that moreconcentrated industries which should be more oligopolistic are populated by larger and fewer firms with higher price cost margins further the significant relations of compustatbased industry concentration measures with the dependent variables of several important prior studies are not obtained when u s census measures are used one of the reasons for this occurrence is that compustat based measures proxy for industry decline overall our results indicate that product markets research that uses compustat based industry concentration measures may lead to incorrect conclusions jel g10 g30 l10 a growing number of studies that consider the effects of product markets on financial economics related phenomena use industry concentration measures calculated with compustat data which cover only the public firms in an industry these studies examine issues related to asset pricing hou and robinson 2006 informed trading tookes 2008 idiosyncratic stock return volatility gaspar and massa 2006 mergers and acquisitions song and walkling 2000 fee and thomas 2004 shahrur 2005 corporate governance defond and park 1999 engel hayes andwang2003 rennie2006 karuna2007 capitalstructure lang and stulz 1992 kaleand shahrur 2007 corporate disclosurepolicy

estimating the value of employee stock option portfolios and their sensitivities to price and volatility the costs associated with compiling data on employee stock option portfolios is a substantial obstacle in investigating the impact of stock options on managerial incentives accounting choice financing decisions and the valuation of equity we present an accurate method of estimating option portfolio value and the sensitivities of option portfolio value to stock price and stock return volatility that is easily implemented using data from only the current year s proxy statement or annual report this method can be applied to either executive stock option portfolios or to firm wide option plans in broad samples of actual and simulated ceo option portfolios we show that these proxies capture more than 99 of the variation in option portfolio value and sensitivities sensitivity analysis indicates that the degree of bias in these proxies varies with option portfolio characteristics and is most severe in samples of ceos with a large proportion of out of the money options however the proxies explanatory power remains above 95 in all subsamples

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

demons and repentance abstract this paper presents a new explanation for the stability of cartels for a large class of repeated cournot duopoly games with discounting strategies are constructed which have the property that cheating on the cartel is followed by repentance it is shown than these repentance strategies are subgame perfect equilibrium strategies and that in the presence of demons infrequently irrational behavior on the part of both players they lead to pareto superior expected discounted payoffs in comparison with either friedman s trigger strategies or abreu s stick and carrot strategies

product market competition and upstream innovation evidence from the u s electricity market deregulation this paper studies the innovation response of upstream technology suppliers when their downstream buyers transition from regulation to competition by modeling the impact of the 1990s u s electricity deregulation on patenting we find that after deregulation the net competition effect comprising the pure competition and the escape competition effect decreased innovation by 18 3 and the appropriation effect increased innovation by 19 6 other deregulation factors have led to a 20 6 decline in aggregate after deregulation innovation by the upstream technology suppliers has declined by 19 3 and upstream innovation quality and generality have declined as well

the impact of market competition on ceo salary in the us energy sector1 abstract in this work we examine the impact of market competition on ceos salaries by analyzing a sample of alls p american firms in the energy sector in the 1992 2015 time span and measuring market competition by means of the so called herfindhal hirschman index we divide industries into three sub groups based on small medium and high market concentration and try to expand our research by exploring the impact of the recent financial crisis the paper investigates how ceos salaries are affected by firm level determinants e g firm size returns on assets returns on equity capital expenditure market concentration tobin s q etc as well as by the individual characteristics of each ceo e g ceos age gender based on our findings the market concentration index in the us energy sector has a negative and statistically significant impact on ceo salary for all firms that operate in either a highly monopolistic or a purely competitive environment the results of this empirical work are robust after examining for different alternative high order fixed effects specifications

dominant firms and their alleged decline abstract by way of a survey of recent literature on the theory of strategic competition this paper focuses on the question of whether dominant firms decline the traditional argument suggesting decline is found to be based on a rather unsatisfactory modelling of dominance and more acceptable conceptualizations suggest that such privileged positions will persist

what happened to the three legged centipede game abstract in the last two decades several frameworks have been proposed to analyze the question of whether common knowledge of rationality is sufficient to justify the play of backward induction bi in games of perfect information three strands of literature have addressed this issue the literature on equilibrium refinements the literature on knowledge based epistemology and the literature on interactive epistemology this paper surveys seminal frameworks within the first two strands of research and assesses the extent to which they provide a satisfactory solution to the problem these approaches are illustrated using a three legged version of rosenthal s centipede game which is the classical example in the literature the paper argues that some of these frameworks provide sensible answers to the riddle of bi or at least succeed in bringing the paradox to another level the paper also points at consistency problems in the body of refinements of nash equilibrium revealed by the surveyed literature

preemption games with private information preemption games are widely used to model economic problems such as patent races we introduce private information into these games and allow for this information to stochastically change over time this reflects e g how r d competitors improve their innovations over time and keep these innovations secret before patenting them the analysis initially appears intractable because of the complexity of the equilibrium updating of beliefs on opponents information however we demonstrate the existence of a class of equilibria and calculate these equilibria in closed form we find that the expected durations in these equilibria are longer than when players information is public but in some cases shorter than in the collusive outcome hence r d secrecy slows down innovation disclosure

modelling cognitively bounded rationality an evaluative taxonomy abstract since its origins in the 1950s the notion of bounded rationality has been incorporated into economic theory using an array of methodological approaches this paper presents a taxonomy by which these approaches can be categorized and understood evaluating each approach against a range of important criteria at a time when the foundations of economic theory are being re examined this paper should be viewed as a first step towards an assessment of the appropriate role that this more realistic view of cognition should take in different areas of economic theory and also of the desirable characteristics of models that incorporate it

the 11 20 money request game a level k reasoning study we study experimentally a new two player game each player requests an amount between 11 and 20 shekels nis he receives the requested amount and if he requests exactly one shekel less than the other player he receives an additional 20 shekels level k reasoning is appealing due to the natural starting point requesting 20 and the straightforward best response operation nevertheless almost all subjects exhibit at most three levels of reasoning using two variants of the game we demonstrate that the depth of reasoning is not increased by enhancing the attractiveness of the level 0 strategy or by reducing the monetary cost of undercutting the other player

iterated reasoning and welfare enhancing instruments in the centipede game abstract this paper investigates the effectiveness of two instruments designed to defer termination in the centipede game an insurance against termination by the opponent and an option to offer the opponent a bonus for not terminating the game the rational prediction in both cases is passing until close to the end empirically however only the bonus option is used by the subjects the results indicate that subjects readily understand the strategic effect of the bonus which once offered renders passing until close to the end the strictly dominant strategy for both players yet they fail to realise the slightly more involved strategic signal entailed in the insurance namely that passing until close to the end is a strictly dominant strategy for an insured player the results are compatible with the common finding that the majority of people exhibit only a limited degree of iterated reasoning

competition for exclusive customers comparing equilibrium and welfare under one part and two part pricing this paper compares one part pricing and two types of two part pricing in a general discretecontinuous choice model providing more extensive welfare results than prior literature under two part pricing rms may set xed fees with or without unit price commitment when unitprice commitment is present both xed fees and unit prices are set before consumers choose their exclusive suppliers in the absence of unit price commitment consumers choose exclusive suppliers based on known xed fees and anticipated future unit prices resulting in high unit prices consistent with models of aftermarket monopolization of the three possible pricing policies we nd that two part pricing with unit price commitment is rms dominant unilateral pricing policy and it also yields the highest joint pro ts under appropriate demand assumptions in terms of both consumer and social welfare two part pricing without unit price commitment is dominated by the other pricing policies with su ciently elastic usage demand and su ciently small customerspeci c xed costs one part pricing produces the highest consumer and social welfare but the lowest rm pro ts of the three pricing policies jel classi cation l1 d4 keywords two part pricing aftermarket monopolization bertrand competition discrete continuous random utility model

checkmate exploring backward induction among chess players it is difficult to overstate the profound impact that game theory has had on the economic approach and on the sciences more generally for that reason understanding how closely the assumptions that underpin game theoretic analysis conform to actual human decision making is a question of first order importance to economists in this spirit backward induction represents one of the most basic concepts in game theory backward induction played a prominent role in reinhard selten s 1965 development of perfect equilibrium and it has helped to shape the modern refinement literature although backward induction is a cornerstone of game theory existing empirical evidence suggests that economic agents engage in backward induction less frequently than theorists might hope backward induction has fared especially poorly in the centipede game which was introduced by robert w rosenthal 1981 and has since been extensively analyzed ken binmore 1987 robert j aumann 1988 philip j reny 1988 david m kreps 1990 geir b asheim and martin dufwenberg 2003 the original centipede game is a two player finite move game in which the subjects alternate choosing whether to end the game or to pass to the other player the subject s payoff to ending the game at a particular node is greater than the payoff he receives if the other player ends the game at the next node but less than the payoff earned if the other player elects not to end the game the player making the final choice gets paid more from stopping than from passing and thus would be expected to stop if the opponent will stop at the last node then conditional on reaching the penultimate node the player maximizes his earnings by stopping at that node following this logic further backward induction leads to the unique subgame perfect equilibrium the game is stopped at the first node as pointed out in prior research

rationality nash equilibrium and backwards induction in perfect information games we say that a player is certain of an event a if she assigns probability 1 to a there is common certainty cc of a if the event a occurred each player is certain of a each player is certain that every other player is certain of a and so forth it is shown that in a generic perfect information game the set of outcomes that are consistent with common certainty of rationality ccr at the beginning of the game coincides with the set of outcomes that survive one deletion of weakly dominated strategies and then iterative deletion of strongly dominated strategies thus the backward induction outcome is not the only outcome that is consistent with ccr in particular cooperation in rosenthal s 1981 centipede game and fighting in selten s 1978 chainstore game are consistent with ccr at the beginning of the game next it is shown that if in addition to ccr there is cc that each player assigns a positive probability to the true strategies and beliefs of the other players and if there is cc of the support of the beliefs of each player then the outcome of the game is a nash equilibrium outcome