effects of cost changes on oligopolists profits this paper considers cost changes affecting all firms in a constantreturns to scale cournot oligopoly cost increases may paradoxically benefit some or even all firms whether a firm benefits or is harmed depends only on whether its market share exceeds a threshold level s on whether industry costs increase or decrease on the number of firms and on the elasticity of the demand curve s slope or equivalently the fraction of cost changes that are passed on conditions where industry structure alone determines the effect of cost changes on firms profits and conditions where cost increases necessarily harm some firms are developed this paper considers the effects of a change in cost on outputs and profits in an industry composed of firms with constant returns to scale these effects are easy to see in the extreme cases of monopoly and perfect competition but

informational asymmetries strategic behavior and industrial organization one of the most active and exciting areas of economic research over the last several years has been the use of noncooperative games of incomplete information to model industrial competition this work has yielded not only a remarkable number of papers but also several new insights on and explanations of fundamentally important issues the purpose of this paper is to attempt an appreciation and evaluation of this work because most of our individual and joint work since about 1979 has been in this mode it will come as no surprise that we are proponents of this line of research however there are several questions and potential problems that we see as arising in connection with this methodology and we will attempt to address these first a disclaimer we are not attempting a survey of the applications of asymmetric information games aig to industrial organization although we will refer in a highly selective fashion to a number of prominent strands in this literature in particular where any references are provided at all they are typically only to the earliest contributions to a subject even more we do not deal with work in which informational asymmetries are important but the analysis is not game theoretic for example search and price dispersion or the early work on the lemons problem and on moral hazard and adverse selection in insurance markets or with game theoretic treatments that assume complete information i aig methods and applications

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

portfolio choice and liquidity constraints we study the infinite horizon model of household portfolio choice under liquidity constraints and revisit the portfolio specialization puzzle we show why the puzzle is robust to several model variations and argue that positive correlation between earnings shocks and stock returns is unlikely to provide an empirically plausible resolution we find that relatively small fixed costs for stock market entry are sufficient to deter stockholding because for a plausible range of parameter values households can achieve desired consumption smoothing with small or zero holdings of stocks such costs could arise from informational considerations sign up fees and investor inertia

material interests moral reputation and crowding out species protection on private land we consider how the reputation of being socially responsible works as an effective source of motivation in protecting a public good such as endangered species this paper investigates the mechanism design for endangered species protection on private land under asymmetric information about reputation and land quality we examine optimal monetary transfer by designing an efficient mechanism which takes into account the crowding out effect of monetary rewards on socially responsible behavior we find landowners who have good reputation contribute more than the optimum level landowners with poor reputation sacrifices information rent rather they buy reputation

the efficiency of equity in organizational decision processes it is now widely accepted that rent seeking anne krueger 1974 or directly unproductive profit seeking jagdish bhagwati 1982 may cause inefficiencies in the context of public sector decisions the possibility that government decisions for example about taxes quotas franchises or standards may create or redistribute rents induces private parties to spend valuable resources to influence that distribution even when such expenditures carry no social benefit moreover the social cost of rent seeking can exceed the value of the resources spent trying to gain and protect rents for example because the fear of losing wealth through redistribution reduces the incentives for wealth creation treating rent seeking activities as characteristic of public sector decision processes ignores the fact that similar phenomena are to be found in firms unions and other private sector organizations our recent work milgrom 1988 our 1988 1990 papers attempts to identify the advantages of decision processes private or public that permit rent seeking and to incorporate these into a cost benefit analysis of optimal decision processes our work begins with an analysis of why rents and quasi rents arise in organizations and of the forms that the rent seeking they engender may take some measures to insulate the decision process from rent seeking such as limits on the provision of information by interested parties or restrictions on the range of options considered may degrade the quality of decisions especially by blocking the flow of valuable information optimal decision processes balance the costs of rent seeking against the value of information obtained several aspects of the rules affect the opportunities that members have to spend resources trying to alter the distribution of rents to ascertain the possibilities for rent seeking the analyst must ask questions like can the parties propose new initiatives at any time can they give volumes of testimony in a form of their own choosing can they appeal adverse decisions are decision makers obliged to respond to the parties initiatives is the range of actions that they can take in response relatively broad rather than being tightly constrained by property rights or other formal rules more affirmative answers to these questions lead to more opportunities or greater incentives for costly rent seeking as a kind of shorthand we call decision processes that have more of these elements more open processes the very elements that make a process open to rent seeking may also add flexibility and responsiveness helping to ensure that important ideas and proposals are fully considered from this perspective the benefits of openness can in principle be measured by a value of information calculation in the usual manner of statistical decision theory weighing the costs and benefits it follows that a more open process is more desirable when the rents available for redistribution are low and the value of the information that might be acquired is high conversely when the potential for redistribution is high and the value of information is low the optimal decision process is less open this kind of reasoning helps to illuminate the variations in the decision processes that are found in many organizations we have discussed a number of examples in our earlier work including the characteristics of personnel departments the contrasting patterns of decision making employment and compensation in u s and japanese firms professor of economics stanford university and jonathan b lovelace professor of economics graduate school of business stanford university stanford ca 94305 respectively this work was supported by the national science foundation

abuse of market power how should competition law deal with anti competitive behaviour by firms with market power in the light of recent ec and us cases this is perhaps the most controversial current issue for competition policy lax policy would jeopardise the competitiveness of markets but rigid policy would chill pro competitive pro consumer conduct this paper gives an economic assessment of evolving legal standards in the area the importance of developing a stronger economic basis for ec law on abuse of market dominance is stressed

information revelation in auctions with common and private values we explore the incentives to reveal verifiable private information when there are both common and private components to agents valuations and when private information is held in both dimensions when agents observe only one signal they have no incentive to reveal the signal because such a revelation would negate their information advantage however when agents observe multiple signals they may be incentivized to reveal certain signals that could lower their opponents bids and thereby result in a higher profit from other signals this paper shows that there exists an equilibrium with revelation of common value signals in standard auctions which is an efficient equilibrium that maximizes the social welfare and could provide the seller with a higher profit than a situation with no information revelation

habit formation in consumer preferences evidence from panel data this paper tests for the presence of habit formation using household data a simple model of habit formation implies a condition relating the strength of habits to the evolution of consumption over time when the condition is estimated with food consumption data from the panel study on income dynamics the results yield no evidence of habit formation at the annual frequency this finding is robust to a number of changes in the specification it also holds for several proxies for nondurables and services consumption created by combining psid variables with weights estimated from consumer expenditure survey data

the determinants of household risky asset holdings australian evidence on background risk and other factors we study the portfolio allocation decisions of australian households using the relatively new household income and labour dynamics in australia hilda survey we focus on household allocations to risky financial assets our empirical analysis considers a range of hypothesised determinants of these allocations we find background risk factors posed by labor income uncertainty and health risk are important credit constraints and observed risk preferences play the expected role a positive age gradient is identified for risky asset holdings and home ownership is associated with greater risky asset holdings a unifying theme for many of our empirical findings is the important role played by financial awareness and knowledge in determining risky asset holdings many non stockholding households appear to lack the experience and financial literacy that might enable them to benefit from direct investment in stocks

quantifying the effects from horizontal mergers in european competition policy this paper starts from a recent case to study how merger analysis in europe may be potentially improved starting from the geographic market definition in the merger decision we formulate and estimate an oligopoly model with differentiated products based on the estimates we compare several alternative market power tests a hypothetical market power test an actual market power test and a comparative market power test our comparison of these alternative tests illustrates that the recently introduced empirical techniques need not be in conflict with traditional policy practices in europe but should be seen as a natural extension of commonly accepted principles furthermore we emphasize the importance of our dynamic comparative market power test in the european context according to this test the relevant point of comparison when assessing a merger is not the status quo but rather a relevant alternative merger scenario that is likely to happen in the event the merger is rejected in a european context the choice is often to accept a sequence of regionally based mergers or rather a sequence of pan european mergers finally we also emphasize the importance of constructing confidence intervals when computing the predicted merger effects especially if one is interested in testing the hypothesis that a merger has no effects

stock market participation and the internet theory indicates that frictions e g information and transaction costs could account for the lower than expected stock market participation rates this paper examines the hypothesis that there has been a fundamental change in participation and links this change to the reduction of these frictions by the advent of the internet using panel data on household participation rates over the past decade the results show computer internet using households raised participation substantially more than non computer using households the increased probability of participation was equivalent to having over 27 000 in additional household income or over two more mean years of education

stockholding behavior of u s households evidence from the 1983 1989 survey of consumer finances most households persistently invest in riskless assets but not stocks and may do so because they perceive information required for market participation to be costly relative to expected benefits in a consumption capital asset pricing model ccapm increased risk aversion income risk and lower resources reduce the information expense sufficient to deter stockholding bivariate probit analysis using the 1983 1989 survey of consumer finances shows that households with lower risk aversion higher education and greater wealth who were nonstockholders in 1983 had an increased conditional probability of entering by 1989 whereas 1983 stockholders with lower resources more limited education and greater risk aversion were more likely to be nonstockholders by 1989

the price of advice we develop a model of consulting advising where the role of the consultant is to reveal signals to her client that refine the client s original private estimate of the profitability of a project although the client can perfectly observe and evaluate these signals the consultant may only be able to do the same imperfectly or not at all this captures the idea that the expert may not fully understand the impact of her advice on the client we characterize the optimal contract between the consultant and her client it is a menu consisting of pairs of transfers specifying payments between the two parties in case the project is undertaken by the client and in case it is not the main result of the article is that in the optimal mechanism the consultant obtains the same profit as though she could perfectly observe and evaluate the impact of the signals whose release she controls on the client s profit estimate

modeling risk aversion in economics to capture the risk aversion intuition the standard approach in economics has been to utilize the model of expected utility in which risk aversion derives from diminishing marginal utility for wealth or diminishing marginal utility for aggregate consumption the expected utility model for risk aversion has been used to derive many important insights but over the years economists and psychologists have identified various problematic issues with expected utility as a descriptive model of choice in this article we urge economists to take seriously the research agenda of developing and assessing different ways to model risk aversion we proceed in three main steps first we highlight that the basic intuition of risk aversion that drives many results in economics is not intimately tied to expected utility second we describe a few alternative models that can also capture the basic intuition of risk aversion finally we discuss that while expected utility and the alternative models might all capture the basic intuition of risk aversion the alternative models can generate additional more nuanced implications not shared with expected utility that in some cases seem to be borne out by data we emphasize that these alternative models also are not perfect and further research is needed to identify even better approaches

who do consumers trust for information the case of genetically modified foods to be effective groups that disseminate information need the trust of consumers when multiple groups provide conflicting information on a new product or process like gm foods consumers place different levels of trust in the various sources we present a model of the contributions of personal and social capital of a consumer and test a multinominal logit model of relative trust in five different sources of information on genetic modification using a unique data set among our findings is that an increase in consumer s education lowers the probability of trusting information from government private industry organizations consumer and environmental groups or other sources relative to information from an independent third party source and conservative religious affiliation reduces the odds of a consumer trusting private industry organization and increases the odds of trusting nobody relative to an independent third party source

household investment decisions and offspring gender parental accounting numerous behavioural factors have been identified as having an impact on household stockholding decisions given there is both theoretical and empirical evidence to support the premise that offspring gender can influence specific types of parental preferences i test the theory that offspring gender has an effect on parental investment decision making i find that offspring gender does influence household stock market participation specifically i find that having only female offspring can significantly increase the probability of stockholding given stockholding can have large effects on household wealth levels and that family wealth levels affect intergenerational transfers this finding could have important implications for understanding distributional welfare issues

first order risk aversion and the equity premium puzzle abstract this paper integrates yaari s dual theory of choice under uncertainty into a multiperiod context and examines its implications for the equity premium puzzle an important property of these preferences is that of first order risk aversion which implies in our model that the risk premium for a small gamble is proportional to the standard deviation rather than the variance since the standard deviation of the growth rate in aggregate consumption is considerably larger than its variance the model can generate both a small risk free rate and a moderate equity premium

information provision by interest groups we investigate interest groups incentives to inform consumers about the damaging practices of firms and the impact such an ig has on firms technology choices the ig aims to reduce the production of some bad say pollution it can at a cost investigate firms production practices and inform consumers about its findings since consumers care about the environment revealing differences in pollution levels between firms leads to vertical product differentiation the information by shifting sales from dirty towards clean firms reduces pollution we show that the ig is most inclined to investigate firms in relatively competitive industries and that the threat of being unmasked as a polluter prompts dirty firms to adopt a clean technology

opinions as incentives we study costs and benefits of differences of opinion between an adviser and a decision maker even when they share the same underlying preferences over decisions a difference of opinion about payoff relevant information leads to strategic information acquisition and transmission a decision maker faces a fundamental trade off a greater difference of opinion increases an adviser s incentives to acquire information but exacerbates the strategic disclosure of any information that is acquired nevertheless when choosing from a rich pool of opinion types it is optimal for a decision maker to select an adviser with some difference of opinion centralization of authority is essential to harness these incentive gains since delegation to the adviser can discourage effort

the economics of breakdowns checkups and cures a market in which the owner of a durable good x contracts with an expert for diagnostic and treatment services is studied good x may be in one of three states health disease or failure only experts can determine whether x is healthy or diseased and perform treatment the owner cannot tell whether recommended treatment is really needed this creates an information based demand for health insurance by risk neutral consumers imperfections in the market for spot insurance may give rise to free diagnostic checks strategic procrastination and long term health maintenance agreements

mergers with differentiated products the case of the ready to eat cereal industry traditional merger analysis is difficult to implement when evaluating mergers in industries with differentiated products i discuss an alternative which consists of demand estimation and the use of a model of postmerger conduct to simulate the competitive effects of a merger i estimate a brand level demand system for ready to eat cereal using supermarket scanner data and use the estimates to 1 recover marginal costs 2 simulate postmerger price equilibria and 3 compute welfare effects under a variety of assumptions the methodology is applied to five mergers two of which occurred and for which i compare predicted to actual outcomes

communication costs information acquisition and voting decisions in proxy contests this article synthesizes some recent progress in the theories of corporate control and political lobbying to model the proxy campaign as a political campaign the model yields a number of testable implications only some of which have been examined in the literature for example if the loss from voting for a bad dissident exceeds the gain from voting for a good dissident the model predicts that as communication costs fall the number of proxy fights increases announcement day returns decrease and the fraction of dissident wins first increases and then decreases article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

sales talk cancellation terms and the role of consumer protection this paper analyses contract cancellation and product return policies in mar kets in which sellers advise customers about the suitability of their oering when customers are fully rational it is optimal for sellers to oer the right to cancel or return on favorable terms a generous return policy makes the seller s cheap talk at the point of sale credible this observation provides a possible explanation for the excess refund puzzle and also has implications for the management of customer reviews when customers are credulous instead sellers have an incentive to set unfavorable terms to exploit the in ated beliefs they induce in their customers the imposition of a minimum statutory standard even if it is not binding can improve welfare and consumer surplus when at least some customers are credulous in con trast competition policy reduces contractual ine ciencies with rational customers but it is not eective with credulous customers

risk preferences in multi period consumption models the equity premium puzzle and habit formation utility abstract the relationship between the relative risk aversion measure for the utility function for consumption and that for the value function for wealth is a derived relationship whose properties depend on how consumption and wealth are defined and measured this fact together with information concerning estimates for these two relative risk aversion measures is used to give another perspective on the equity premium puzzle and to explain why it is that the habit formation utility function is effective in eliminating that puzzle a time separable utility function that can serve as an alternative to the assumption of habit formation is also presented

household asset allocation offspring education and the sandwich generation abstract this paper finds households with children and elderly dependents the sandwich generation significantly reduce both college savings and stockholding having any elderly dependents decreases the probability of both stockholding and college savings by twice as much as poor personal health hence these results have critical implications as they demonstrate the importance and magnitude of links between the pension system college financial aid and wealth accumulation elderly dependents limiting parental funds for offspring education can decrease offspring long term earnings potential via decreased human capital accumulation furthermore decreased stock holdings can decrease long term wealth accumulation and thus intergenerational wealth transfers

the advertising mix for a search good we extend the persuasion game to bring it squarely into the economics of advertising we model advertising as exciting consumer interest into learning more about the product and determine a firm s equilibrium choice of advertising content over quality information price information and horizontal match information equilibrium is unique whenever advertising is necessary the outcome is a separating equilibrium with quality unravelling lower quality firms need to provide more information for a given quality level as a function of consumer visit costs first quality information is disclosed then price information and then horizontal product information are added to the advertising mix some suggestive evidence is provided from airline ads in newspapers this paper was accepted by j miguel villas boas marketing

iq and stock market participation stock market participation is monotonically related to iq controlling for wealth income age and other demographic and occupational information the high correlation between iq and participation exists even among the affluent supplemental data from siblings studied with an instrumental variables approach and regressions that control for family effects demonstrate that iq s influence on participation extends to females and does not arise from omitted familial and nonfamilial variables high iq investors are more likely to hold mutual funds and larger numbers of stocks experience lower risk and earn higher sharpe ratios we discuss implications for policy and finance research

a theory of quits and layoffs with efficient turnover this paper answers the efficient turnover literature s long silence regarding the quit layoff distinction treating quits as worker initiated separations and layoffs as firm initiated separations i establish that the existence of layoffs is compatible with optimizing workers and firms forming and dissolving employment matches to exploit all the gains from trade the efficient turnover approach is shown to be consistent with many empirical regularities that distinguish quits from layoffs structural implications of the model are tested on data from the psid

mergers brand competition and the price of a pint abstract mergers in the uk brewing industry have reduced the number of national brewers from six to four the number of brands in contrast has remained relatively constant we analyze the effects of mergers on brand competition and pricing brand level demand equations are estimated from a panel of draft beers to model brand substitution possibilities we estimate the matrix of cross price elasticities semiparametrically our structural model is used to assess the strength of brand competition along various dimensions and to evaluate the mergers in particular we compute equilibria of pricing games with different numbers of players

competition economics and antitrust in europe this paper aims to assess the influence that economic analysis has had on competition policy in the european union over the last twenty years economists are increasingly used in antitrust cases the annual turnover of the main economic consultancy firms has increased by a factor of 20 since the early 1990s and currently exceeds 20 million this is about 15 of the aggregate fees earned on antitrust cases a proportion close to that in the us the economic resources mobilized by the eu commission are however an order of magnitude smaller and this imbalance is a source of concern the legal framework and the case decisions have also been influenced by economic analysis in important ways for instance the analysis of agreements between firms has increasingly focused on effects the analysis of the factors that determine effective competition has become more sophisticated the concept of collective dominance has been progressively developed in terms of the theory of collusion in repeated interactions and quantitative methods have become more important however enforcement has sometimes appealed to economic reasoning in flawed or speculative ways the paper discusses procedural reasons why this may have occurred this paper assesses the system of evidence gathering implemented by the commission in the light of the law and economics literature it is concluded that while the reforms recently implemented by the commission do address the main weaknesses of this system they may still not allow for the most effective development of economic theory and evidence in actual cases damien j neven

expo power utility a flexible form for absolute and relative risk aversion a new utility function which i call expo power is proposed that exhibits decreasing constant or increasing absolute risk aversion and decreasing or increasing relative risk aversion depending on parameter values numerical analysis suggests that the expo power function performs well in incorporating these risk preference structures and that arbitrary risk preference specifications may lead to biased risk response estimates

public protests and policy making technological advances and the development of social media have made petitions public protests and other form of spontaneous activism increasingly common tools for individuals to influence decision makers to study these phenomena in this article i present a theory of petitions and public protests that explores their limits as mechanisms to aggregate information the key assumption is that valuable information is dispersed among citizens through petitions and protests citizens can signal their private information to the policy maker who can then choose to use it or not i first show that if citizens individual signals are not sufficiently precise information aggregation is impossible no matter how large is the population of informed citizens even if the conflict with the policy maker is small i then characterize the conditions on conflict and the signal structure that guarantee information aggregation when these conditions are satisfied i show that full information aggregation is possible as the population grows to infinity when they are not satisfied i show that information aggregation may still be possible if social media are available

participation constraints in the stock market evidence from unexpected inheritance due to sudden death we use a natural experiment to investigate the impact of participation constraints on individuals decisions to invest in the stock market unexpected inheritance due to sudden deaths results in exogenous variation in financial wealth and allows us to examine whether fixed entry and ongoing participation costs cause non participation we have three key findings first windfall wealth has a positive effect on participation second the majority of households do not react to sizeable windfalls by entering the stock market but hold on to substantial safe assets even over longer horizons third the majority of households inheriting stock holdings actively sell the entire portfolio overall these findings suggest that participation by many individuals is unlikely to be constrained by financial participation costs

how children with mental disabilities affect household investment decisions we analyze how children with mental disabilities influence parental portfolio allocation we find that risky asset holding decreases among households with special needs children however conditional on participating in financial markets households with special needs children invest a larger portion of their wealth in risky assets as risky asset holding is a key component of wealth building these findings have important implications for both policy and household wealth inequality

asset returns with transactions costs and uninsured individual risk abstract we explore whether incorporating an explicit motive for holding liquid assets within an equilibrium asset pricing model helps explain the following features of asset returns and turnover in the post war u s economy i the low risk free real interest rate ii the large spread between returns on liquid assets and stocks and iii the greater transaction velocity of liquid assets relative to stocks we introduce a demand for liquid assets by adding uninsured individual risk together with differential costs of trading securities numerical simulations attempting to match the return data generate a ratio of liquid assets to income considerably below observed levels

do finance professors invest like everyone else comparing the results of the fed s survey of consumer finances with those of a survey of finance professors at u s universities the authors found that finance professors are significantly more likely than others to invest in equities they also found that finance professors are less prone to behavioral biases because their decision not to invest in equities is based on neither the outcome of their past investments nor their short term expectations of the market see comments and response on this article

manipulated news model electoral competition and mass media abstract this paper investigates the relationship between media manipulation the strategic suppression of relevant information by mass media and self mediatization the strategic exploitation of media coverage by candidates in elections in the model a voter cannot directly observe the policies proposed by two office motivated candidates the voter learns this information through media reports before voting takes place while the media outlet suppresses some of this information because the voter s decision making could be incorrect direct distortion the candidates have an incentive to win the election by influencing the media coverage through policy settings indirect distortion as a result policy convergence to the voter s ideal policy occurs if and only if the media bias is sufficiently small we then characterize the set of equilibria in terms of the degree of distortion the results suggest that if either strategic media manipulation or competition among the candidates is omitted then the distortion is nonnegligibly misspecified

marginal taxes and the asset portfolios of swedish households this paper focuses on the effects of marginal tax rates wealth income and a set of socioeconomic and demographic variables on the portfolio composition of households using detailed micro data on 2 000 swedish households in particular efforts are made to disentangle the effects of marginal tax rates on the portfolio behavior of households some econometric problems involved when estimating asset demand equations in the presence of incomplete portfolios are briefly discussed a final section examines the overall effect of marginal tax rates on asset demands by applying estimated discrete and continuous portfolio equations to compute different tax elasticities

new evidence on taxes and portfolio choice abstract identifying the effect of differential taxation on portfolio allocation requires exogenous variation in marginal tax rates marginal tax rates vary with income but income surely affects portfolio choice directly in systems of individual taxation like canada s couples with the same household income can face different effective tax rates on capital income when labor income is distributed differently within households using this source of variation we find portfolio responses to taxation among more affluent households the estimated effects are statistically significant but economically modest in a placebo test using data from the u s which has joint taxation we find no effect of the intra household distribution of labor income on portfolios

delineating markets for bundles with consumer level data the case of triple play abstract the question of whether bundles of telecommunication services are relevant product markets is addressed as a first step demand for bundles of services as well as the associated services is modeled as a discrete choice problem with a potentially large number of products a unique invoice based consumer level data set from portuguese telecommunications firms is collected this choice based data set is combined with survey data to characterize the market shares of all potential combinations of services available several discrete choice models are estimated a cross nested logit model is the most parsimonious description of the substitution patterns between the large number of products available the demand model used coupled with the definition of choice alternatives proposed generates flexible substitution patterns which produce reasonable price elasticities of demand the demand for triple play products is elastic with own price elasticities for the larger firms ranging between 3 2 and 1 3 and a market own price elasticity of 1 4 some of the products analyzed are found to be complementary our results indicate that triple play bundles are a relevant product market

duopoly information exchange the case of unknown slope abstract we model information exchange between duopolists facing a common random demand the slope of the common demand curve facing the firms is assumed unknown and firms observe private signals about this slope we show that for sufficiently large variation in the demand slope firms earn strictly higher profit when they share their information rather than keeping it private even with constant marginal costs and homogeneous goods in this case it is a nash equilibrium for the duopolists to share their information in a quid pro quo information exchange consistent with earlier models information exchange raises welfare

solving consumption models with multiplicative habits this paper provides derivations necessary for solving an optimal consumption problem with multiplicative habits and a crra outer utility function either for a microeconomic problem with both labor income risk and rate of return risk or for a macroeconomic representative agent model

effects of carbon reduction labels evidence from scanner data we investigate the effects of carbon reduction labels using a detailed scanner data set using a difference in differences estimation strategy we find that having a carbon label has no impact on detergent prices or demand we also investigate possible heterogeneous effects of carbon labels using the synthetic control method we find no evidence to indicate that the prices for the counterfactual detergents without the label would have been any different from the prices of the carbon labeled detergents we investigate the reasons for these results and conclude that the specific design of the carbon label is responsible for its lack of success jel d12 d83 l15 q54

media as watchdogs the role of news media in electoral competition abstract we develop an equilibrium model to analyze the role of the media in electoral competition when policy payoffs are state dependent party policies do not converge to the median voter s ideal policy if the media report only party policies news analysis about the state though possibly biased can discipline off equilibrium deviations and make the parties adopt more centrist policies since voters are rational the party favored by the media need not win with a higher probability instead media bias may reduce the effectiveness of electoral competition and lead to more polarized policies

exposing false advertising countries rely on different public and private agents to enforce consumer protection and fair competition regulations to analyze the repercussions of different regimes on social welfare we consider the possibility of false advertising by a firm in an environment with duopolistic competition and with consumers who can be rational or naive regarding the trustworthiness of advertising claims we compare the incentives for and outcomes of false advertisement verification and injunction requests made by one of three parties a government agency with a broad focus maximizing ex post total welfare and two narrowly focused parties the first a public or private party focused on consumer welfare net of its own enforcement costs and the second a competitor interested exclusively in its own profits considering ex ante welfare we find that having a narrowly focused party as the plaintiff can be optimal due to government agency commitment problems the optimal regime depends on both the share of the population s naive consumers and the level of enforcement costs resume denonciation de la publicite mensongere pour veiller a l application des reglementations en matieres de protection des consommateurs et de concurrence loyale les etats s appuient sur differents regimes de controle representes par des agents publics et prives afin d analyser les repercussions de ces differents regimes sur le bien etre nous evaluons la possibilite qu une entreprise puisse diffuser de la publicite mensongere dans un environnement concurrentiel duopolistique avec des consommateurs potentiellement rationnels ou naifs relativement a la veracite des allegations publicitaires nous comparons les mesures incitatives pour controler la publicite mensongere et leurs resultats ainsi que les mises en demeure initiees par l une de ces trois parties une agence gouvernementale a visee large aux fins de maximisation totale du bien etre ex post et deux autres parties a visee plus ciblee l une publique ou privee tournee vers le bien etre des consommateurs deduction faite de ses propres co ts de mise en uvre et l autre representee par un concurrent s interessant exclusivement a ses propres profits en tenant compte du bien etre ex ante et en raison des problemes d engagement des agences gouvernementales nous constatons qu une procedure peut s averer optimale des lors que le demandeur represente une partie a visee plus ciblee le regime optimal depend a la fois de la proportion de consommateurs naifs et du niveau des couts de mise en uvre

decreasing relative risk aversion risk sharing and the permanent income hypothesis this article develops a method for testing the risk sharing hypothesis rsh against various versions of the permanent income hypothesis pih while allowing for heterogeneity in risk preferences across households using 1 year and longer differences in household total nondurable consumption data from indian villages we find evidence that favors the rsh over the pih at the village level

does conflict of interest lead to biased coverage evidence from movie reviews media outlets are increasingly owned by conglomerates inducing a conflict of interest a media outlet can bias its coverage to benefit companies in the same group we test for bias by examining movie reviews in media outlets owned by news corp such as the wall street journal and time warner such as time we find higher ratings for 20th century fox movies in news corp outlets compared to movies by other studios to disentangle bias from correlation of taste we introduce and validate a novel matching procedure using individual movie ratings from online platforms using this procedure we find no evidence of bias in news corp nor time warner outlets we reject even small effects such as bias of one extra star out of four every thirteen movies we test for differential bias when the return to bias is plausibly higher examine bias by media outlet and by journalist as well as editorial bias we also consider bias by omission whether media outlets are more likely to review highly rated movies by affiliated studios and conflict of interest within a movie aggregator in none of these dimensions do we find evidence of bias we relate to previous work and discuss three explanations for the lack of bias in our setting high values of media reputation organizational features in a conglomerate and low returns to bias

portfolio inertia and stock market fluctuations this paper uses population wide data from the panel study of income dynamics and the survey of consumer finances to resolve the conflict between overtrading and inactivity shown in administrative data on brokerage and retirement accounts respectively considerable inertia is found and linked to characteristics e g limited education or resources but less to index movements the downswing has encouraged staying out rather than getting out of the market the small minority with brokerage accounts exhibits important differences in trading patterns relative to the population and invests small fractions of wealth in brokerage accounts results strengthen the case for default options in retirement accounts and built in trading provisions in mutual funds

quality disclosure and certification theory and practice this essay reviews the theoretical and empirical literature on quality disclosure and certification after comparing quality disclosure with other quality assurance mechanisms and describing a brief history of quality disclosure we address two sets of theoretical issues first why don t sellers voluntarily disclose through a process of unraveling and given the lack of unraveling is it desirable to mandate seller disclosure second when we rely on certifiers to act as the intermediary of quality disclosure do certifiers necessarily report unbiased and accurate information we further review empirical evidence on these issues with a particular focus on healthcare education and finance the empirical review covers quality measurement the effect of third party disclosure on consumer choice and seller behavior as well as the economics of certifiers jel d18 k32 l15 m31

information transmission when the sender s preferences are uncertain abstract in deciding on the magnitude of a certain action say investment a decision maker relies on the report of an informed and interested expert who can suppress favorable information the main departure from the related literature is that the decision maker is uncertain as to whether the expert is of a type that wants to minimize the magnitude of the action or to maximize it the unique equilibrium outcome is fully characterized by a threshold level of favorable information if the information is more favorable than that threshold level and if the expert is of the type that wants to maximize the magnitude of the action the information is fully revealed in all other cases the expert report less favorable information and the equilibrium inference is that in expectation the actual information is just as favorable as the threshold level

persuasion with communication costs this paper studies strategic transmission of verifiable information with reporting costs that continuously increase in the precision of the report contrary to previous literature it is shown that the unraveling result first derived by milgrom 1981 is relatively robust to costly reporting a separating equilibrium exists even with arbitrarily high reporting costs intuitively the costs work as a signaling device and a combination of disclosure of information and costly signaling accomplishes full separation with reporting costs there are typically multiple equilibria for example a pooling equilibrium exists if and only if the reporting costs are high finally a separating equilibrium exists when the receiver has to make a costly effort in order to access the information in a report as long as this cost is not too high

when can a news organization lead public opinion ideology versus market forces in decisions to make news do news organizations purposefullylead the public to support a particularideological agenda when debating thisquestion many analysts draw conclusionsfrom weak empirical evidence we introducea model that clarifies how a newsorganization s internal structure combineswith market forces to affect when it canlead public opinion we identify conditionsunder which liberal reporters orpolitically driven media magnates canachieve ideological goals we alsoilluminate important barriers that preventmany would be public opinion leaders fromever satisfying these conditions we showthat internal structure and market forcesare critical determinants of any newsorganization s power over public opinion

liquidity creation through efficient m as a viable solution for vulnerable banking systems evidence from a stress test under a panel var methodology according to the cost efficiency liquidity creation hypothesis celch introduced in this paper a rise in a bank s cost efficiency level increases its liquidity creation by employing a novel stress test scenario under a panel var methodology the celch and the direction of causality between liquidity creation and cost efficiency are tested moreover using new measures of liquidity creation berger and bouwman 2009 the question of whether potential bank mergers and acquisitions m as can enhance liquidity creation and generate additional credit channels in the economy is addressed the robustness of potential consolidation scenarios are evaluated and compared through the use of new half life measures chortareas and kapetanios 2013 in line with celch the positive impact of cost efficiency on liquidity creation is shown the empirical evidence further suggests that potential consolidation activity can enhance the flow of credit in the economy bank shocks seem to have the most persistent effect on both liquidity creation and cost efficiency finally doubts are cast on the strategies followed by policy authorities regarding the recent wave of m as in the banking sector

why do so few hold stocks the authors investigate why 75 percent of u s households do not hold stocks despite the equity premium and predictions of expected utility models the question is relevant for privatization asset pricing and tax progressivity issues they show that risk aversion per se heterogeneity of beliefs habit persistence time nonseparability and quantity constraints on borrowing do not account for the phenomenon a wedge between borrowing and lending rates and minimum investment requirements are plausible but empirically weak factors more promising explanations are inertia and departures from expected utility maximization there is also qualified support for nondiversifiable income risk as a contributing factor copyright 1995 by royal economic society

informational lobbying and political contributions abstract interest groups can potentially influence political decision makers by offering contributions and by providing relevant information that sways the decision in the group s favor what mix of these two instruments should an interest group choose and how does the use of one instrument affect the effectiveness of the other in this paper we identify an information externality that raises the cost of offering contributions and show that this indirect search cost reduces the group s incentive to gather information when contributions are allowed furthermore we analyze how competition among lobby groups as providers of information and contributions affect the choice and effectiveness of the instruments we show that the information externality rewards the group that can abstain from information search and focus its influence on contributions

asset pricing with multiplicative habit and power expo preferences abstract multiplicative habit introduces an additional consumption risk as a determinant of the equity premium and allows time preference and habit strength in addition to risk aversion to affect the price of risk a model combining multiplicative habit and power expo preferences cannot be rejected

understanding the effects of marriage and divorce on financial investments the role of background risk sharing we investigate how changes in marital status affect financial investments and how these effects vary with background risk we use detailed register based panel data and difference in differences estimators to benchmark common unobserved influences on financial investments women increase the fraction of wealth invested in stocks after marriage and decrease it after divorce whereas men show the opposite behavior households whose joint labor income risk is reduced more by marriage have a higher increase in their exposure to risky assets in marriage thus income risk sharing in the household is important for financial risk taking and investment responses to marital transitions jel g11 j12 j16 d14

consumption and portfolio choice under internal multiplicative habit formation this paper explores the optimal consumption and investment behavior of an individual who derives utility from the ratio between his consumption and an endogenous habit we obtain closed form policies under general utility functionals and stochastic investment opportunities by developing a nontrivial linearization to the budget constraint this enables us to explicitly characterize how habit formation affects the marginal propensity to consume and optimal stock bond investments we also show that in a setting that combines habit formation with epstein zin utility consumption no longer grows at unrealistically high rates at high ages and investments in risky assets decrease

conflicts of interest information provision and competition in the financial services industry abstract in some markets sellers have better information than buyers over which products best serve a buyer s needs depending on the market structure this may lead to conflicts of interest in the provision of information by sellers this paper studies this issue in the market for financial services the analysis presents a new model of competition between banks where price competition influences the ensuing incentives for truthful information revelation we also compare conflicts of interest in two different firm structures specialized banking and one stop banking

are you a good employee or simply a good guy influence costs and contract design we develop a principal agent model with a moral hazard problem in which the principal has access to a hard signal the level of output and a soft behavioral signal the supervision signal about the agent s level of effort in our model the agent can initiate influence activities and manipulate the behavioral signal these activities are costly for the principal as they detract the agent from the productive task we show that the agent s ability to manipulate the behavioral signal leads to low powered incentives and increases the cost of implementing the efficient equilibrium as a result interestingly the fact that manipulation activities entail productivity losses may lead to the design of influence free contracts that deter manipulation and lead to high powered incentives this result implies that the optimal contract and whether manipulation is tolerated in equilibrium or not depends on the magnitude of the productivity based influence costs we show that it may be optimal for the principal not to supervise the agent even if the cost of supervision is arbitrarily low

asymmetric information information externalities and efficiency the case of oil exploration in this article we examine the efect of private information and information externalities on the ex post eficiency of investment in oil exploration we show that too much drilling tends to occur ifjirms believe that the area is likely to contain a sizeable pool of oil and too little drilling occurs if the opposite is true bargaining with well defined property rights to the information externality can eliminate underinvestment but overinvestment remains a problem because firms have an incentive not to disclose their private information

decreasing relative risk aversion and tests of risk sharing the relative risk aversion rra coefficient of a household whose consumption is close to the subsistence level may be very high for example if consumption is exactly at the subsistence level the household may not be willing to bear any risk if this is the case then the rra coefficient must be a decreasing function of wealth for poor households therefore we should allow the possibility of decreasing rra drra in testing the full risk sharing hypothesis however existing tests in the empirical literature are derived using preferences that exhibit either increasing or constant rra even when they are applied to data containing low income households we therefore use a hyperbolic absolute risk aversion hara utility which implies increasing constant and decreasing rra as special cases to test full risk sharing hypothesis using the international food policy research institute ifpri and the international crops research institute of the semi arid tropics icrisat household level data sets we find evidence in support of the drra hypothesis along with evidence favoring full risk sharing hypothesis at the village level and evidence against the hypothesis at the inter village level when rra is restricted to be constant we replicate the previous results in the literature reject the full risk sharing hypothesis at both levels our tests however reject this restriction and favor drra in almost all cases these results suggest that it is important to allow for drra in testing the full risk sharing hypothesis when data containing low income households are investigated this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this this abstract was borrowed from another version of this item

quantifying the effects from horizontal mergers comments on the underlying assumptions in our paper published in this issue we measured the effects of the proposed volvo scania merger we first estimated an oligopoly model with product differentiation and then used the parameter estimates to compute the post merger equilibrium and the implied price and welfare changes under various alternative scenarios in section 4 4 of our paper we discussed what we view as the most important sources of concern regarding our empirical analysis in part based on the comments from the experts hired by volvo during the case the hausman leonard hl paper elaborates in more detail on the specific points raised by the experts during the case in this note we respond to these points

should we tax or cap political contributions a lobbying model with policy favors and access abstract this paper develops a model of political contributions in which a politician can either sell policy favors or sell access access allows interest groups to share hard information with the politician in support of their preferred policy here selling access maximizes policy utility while selling policy favors maximizes total contributions imposing a binding contribution limit makes it more likely that the politician sells access which can improve expected constituent welfare however a contribution limit distorts the signals associated with the contributions which tends to result in worse policy alternatively a tax on political contributions can ensure that the politician sells access without distorting his information therefore from the viewpoint of a representative constituent a tax on contributions is strictly preferred to a contribution limit or no reform the politician however may prefer regulation in the form of a contribution limit even when a tax is better for the constituent

implementation with partial provability we extend implementation theory by allowing the social choice function to depend on more than just the preferences of the agents and allowing agents to support their statements with hard evidence we show that a simple condition on evidence is necessary for the implementation of a social choice function f when the preferences of the agents are state independent and sufficient for implementation for any preferences including state dependent with at least three agents if the social planner can perform small monetary transfers beyond those called for by f if transfers can be large f can be implemented in a game with perfect information when there are at least two players under a boundedness assumption for both results transfers only occur out of equilibrium the use of evidence enables implementation which is robust in the sense that the planner needs little information about agents preferences or beliefs and agents need little information about each others preferences our results are robust to evidence forgery at any strictly positive cost

disclosures and asset returns public information in financial markets often arrives through the disclosures of interested parties who have a material interest in the reactions of the market to the new information when the strategic interaction between the sender and the receiver is formalized as a disclosure game with verifiable reports equilibrium prices can be given a simple characterization in terms of the concatenation of binomial pricing trees there are a number of empirical implications the theory predicts that the return variance following a poor disclosed outcome is higher than it would have been if the disclosed outcome were good also when investors are risk averse this leads to negative serial correlation of asset returns other points of contact with the empirical literature are discussed

precautionary portfolio behavior from a life cycle perspective abstract the literature on household asset accumulation draws a sharp distinction between short run precautionary motives to buffer consumption from annual income shocks and long run life cycle considerations under income certainty however estimates of shock persistence imply considerable career uncertainty we study long run precautionary motives for life cycle wealth accumulation and portfolios allowing for uncertain returns incomes and lifespan we separate the effects of various factors on mean and median asset holdings including education risk aversion household heterogeneity bequests impatience variance and serial correlation of income shocks numerical solutions are compared with data from the 1992 survey of consumer finances

antitrust public choice s antitrust legislation and enforcement has over the last few decades been increasingly informed by ever more sophisticated analysis while at the same time evidence has continued to mount that the results of antitrust remedies fall far short of the promises held out under still prevalent nirvana fallacy demsetz in journal of law and economics 12 1 1 22 1969 expectations i draw upon a recent supreme court decision as well as the results of young and shughart s public choice 2010 doi 10 1007 s11127 009 9531 y novel approach to the analysis of antitrust enforcement activities to discuss the extent to which public choice theory is vital in solving the puzzle regarding the unintended effects of antitrust public choices

the random utility hypothesis and inference in demand systems in this paper the authors examine the consequences of adopting the random utility hypothesis as an approach for randomizing a system of demand equations random utility models are appealing since they allow the usual assumption of deterministic utility maximizing behavior by each consumer to coexist with the apparent randomness across individuals that is exhibited by data their results show that the use of random utility models implies that the disturbances of the demand equations may not be homoskedastic but must be functions of prices and or income copyright 1989 by the econometric society

relying on the information of interested parties we investigate the conventional wisdom that competition among interested parties attempting to influence a decisionmaker by providing verifiable information elicits all relevant information we find that if the decisionmaker is strategically sophisticated and well informed about the relevant variables and about the preferences of the interested party or parties competition may be unnecessary to achieve this result if the decisionmaker is unsophisticated or not well informed competition is not generally sufficient if the interested parties interests are sufficiently opposed however or if the decisionmaker is seeking to advance the parties welfare then competition can reduce or even eliminate the decisionmaker s need for prior knowledge about the relevant variables and for strategic sophistication in other settings only the combination of competition among information providers and a sophisticated skepticism is sufficient to allow effective decisionmaking

the effect of borrowing constraints on consumer liabilities this paper explores the effects of liquidity constraints on consumer liabilities while much empirical evidence attests to the importance of liquidity constraints in the u s economy evidence about the effects of borrowing constraints on consumer balance sheets is scarce using the 1983 survey of consumer finances data we estimate desired borrowing for unconstrained households we then evaluate the gap between predicted and observed debt for the sample of liquidity constrained consumers predicted debt is 75 percent higher than actual debt in the liquidity constrained sample thus the effect of removing borrowing constraints has quantitatively important implications for the allocation of debt in the household portfolio the removal of borrowing constraints would raise aggregate household liabilities by 9 percent copyright 1993 by ohio state university press

preponderance of evidence abstract this paper investigates the incentive properties of the standard of proof for a finding of negligence when evidence about injurers behavior is imperfect we show that a more likely than not decision rule provides maximal incentives for potential tort feasors to exert care an injurer is then held liable whenever inadequate care appears more likely than due care and not liable otherwise our analysis provides a deterrence rationale for the exclusionary rules of evidence found in common law and the preponderance of evidence standard of proof

regulating a monopolist with unknown costs we consider the problem of how to regulate a monopolistic firm whose costs are unknown to the regulator the regulator s objective is to maximize a linear social welfare function of the consumers surplus and the firm s profit in the optimal regulatory policy prices and subsidies are designed as functions of the firm s cost report so that expected social welfare is maximized subject to the constraints that the firm has nonnegative profit and has no incentive to misrepresent its costs we explicitly derive the optimal policy and analyze its properties in their classic papers dupuit 2 and hotelling 5 considered pricing policies for a bridge that had a fixed cost of construction and zero marginal cost they demonstrated that the pricing policy that maximizes consumer well being is to set price equal to marginal cost and to provide a subsidy to the supplier equal to the fixed cost so that a firm would be willing to provide the bridge this first best solution is based on a number of informational assumptions first the demand function is assumed to be known to both the regulator and to the firm while the assumption of complete information may be too strong the assumption that information about demand is as available to the regulator as it is to the firm does not seem unnatural a second informational assumption is that the regulator has complete information about the cost of the firm or at least has the same information about cost as does the firm this assumption is unlikely to be met in reality since the firm would be expected to have better information about costs than would the regulator as weitzman has stated an essential feature of the regulatory environment i am trying to describe is uncertainty about the exact specification of each firm s cost function in most cases even the managers and engineers most closely associated with production will be unable to precisely specify beforehand the cheapest way to generate various hypothetical output levels because they are yet removed from the production process the regulators are likely to be vaguer still about a firm s cost function 12 p 684 as this observation suggests it is natural to expect that a firm would have better information regarding its costs than would a regulator the purpose of this paper is to develop an optimal regulatory policy for the case in which the regulator does not know the costs of the firm one strategy that a regulator could use in the absence of full information about costs is to give the firm the title to the total social surplus and to delegate the pricing decision to the firm in pursuing its own interests which would then be to maximize the total social surplus the firm would adopt the same marginal cost pricing strategy that the regulator would have imposed if the regulator had

evidence production in adversarial vs inquisitorial regimes abstract the advantage of the adversarial regime of judicial decision making is the superior information of the parties while the advantage of an idealized inquisitorial regime is its neutrality we model the tradeoff by characterizing the properties of costly estimators used by each regime the adversarial regime uses an extremal estimator that is based on the difference between the most favorable pieces of evidence produced by each party the inquisitorial regime uses the sample mean we find that neither regime dominates the other

non gaussian diversification when size matters abstract classical portfolio theory informs investors that they should have a large number of assets in their portfolios in order to diversify risk we show that the non gaussian features of stock return distribution may not allow for this risk protection in times of crisis moreover we demonstrate empirically that if investors are risk averse and consider higher order moments they have numerous incentives not to diversify their portfolios fully this is caused by the evolution of both large losses and asymmetry of returns when the numbers of assets in a portfolio change