inefficient credit booms this paper studies the welfare properties of competitive equilibria in an economy with financial frictions hit by aggregate shocks in particular it shows that competitive financial contracts can result in excessive borrowing ex ante and excessive volatility ex post even though from a first best perspective the equilibrium always displays under borrowing from a second best point of view excessive borrowing can arise the inefficiency is due to the combination of limited commitment in financial contracts and the fact that asset prices are determined in a spot market this generates a pecuniary externality that is not internalized in private contracts the model provides a framework to evaluate preventive policies which can be used during a credit boom to reduce the expected costs of a financial crisis copyright 2008 wiley blackwell

introducing incentives in the market for live and cadaveric organ donations we evaluate the introduction of monetary incentives in the market for live and cadaveric organ donations we show that monetary incentives would increase the supply of organs for transplant sufficiently to eliminate the very large queues in organ markets and the suffering and deaths of many of those waiting without increasing the total cost of transplant surgery by more than about 12 percent we build on the value of life literature and other parts of economic analysis to estimate the equilibrium cost of live transplants for kidneys and livers we also show that market price for kidneys will be determined by the cost of live donations even though most organs will come from cadavers

marketing mix and brand sales in global markets examining the contingent role of country market characteristics marketing products globally is challenging due to the diverse nature of markets we use market heterogeneity unbranded competition resource and infrastructure availability and sociopolitical governance as country market characteristics that distinguish between developed and emerging countries we investigate their moderating role on the relationship between elements of the marketing mix and brand sales we provide evidence from a hierarchical linear model and a panel data set of brands from 14 emerging and developed markets that account for 62 of the global gdp that country market characteristics moderate the relationship between the complete set of marketing mix elements and brand sales performance asymmetrically while distribution and price have the largest impact in emerging and developed countries respectively product innovation and advertising have significantly larger impacts in emerging markets relative to developed countries these finding highlights the importance of contingency view of marketing strategy in global markets

retail bank deposits as quasi fixed factors of production neoclassical models of the banking firm for example michael klein 1971 treat all deposit liabilities as fully variable factors of production banks then maximize profits minimize liability costs by equating the marginal costs of all liability types during each period the empirical relevance of these models is difficult to establish because binding deposit rate ceilings regulation q force bank competition for many retail deposits into implicit interest channels that are not readily measured it is therefore noteworthy that during two recent periods when deposit rate ceilings were not binding banks paid retail deposit rates considerably in excess of the rate at which they could borrow via large unregulated certificates of deposit such behavior seems inconsistent with the cost minimization prescribed by neoclassical bank models however if retail deposit accounts are interpreted as quasi fixed gary becker 1962 walter oi 1962 donald parsons 1972 sherwin rosen 1968 inputs to the banking firm these important historical observations can be reconciled with bank profit maximization this paper first describes two historical episodes during which the bank retail deposit rate exceeded the negotiable certificate of deposit rate for substantial periods of time while no profit maximizing cost minimizing bank would pay such a rate differential if retail deposit quantities are costlessly variable interpreting retail deposit accounts as quasi fixed inputs to the bank explains the peculiar rate structures a simple two period model of bank liability selection formalizes the analysis i two puzzling historical episodes

environment market share and market power in this paper we develop a process model relating market share to firm profits in particular we specify average price and average cost equations as a function of previous year market share position changes in market share environmental conditions and interactions of environmental conditions with the lagged market position and market share change variables we estimate these equations using pims data after controlling for unobservable factors our results suggest that firms with high market shares derive no extra market power benefits except if they operate in environments with little buyer power instead environmental factors and changes in market share most strongly influence price and cost an analysis of the market share associated with maximal firm profits indicates that for the majority of firms in our sample steadily increasing market share does not always associate with increasing profits giving credence to the proposition that more market share is not always better

the evolution of time preference with aggregate uncertainty we examine the evolutionary foundations of intertemporal preferences when all the risk affecting survival and reproduction is idiosyncratic evolution selects for agents who maximize the discounted sum of expected utility discounting at the sum of the population growth rate and the mortality rate aggregate uncertainty concerning survival rates leads to discount rates that exceed the sum of population growth rate and death rate and can push agents away from exponential discounting

the selection of preferences through imitation the paper presents a model in which a population of agents repeatedly play games against nature the rules of behaviour followed are revised over time through a process of imitation for binary decisions imitation selects rules consistent with a preference relation of the kind proposed by ssb utility theory and regret theory in general this preference relation need not satisfy either independence or transitivity we state conditions on imitation necessary for it to do so for decisions over three or more options the long run tendency is for options that are maximally preferred in terms of ssb preferences to be chosen if no maximally preferred option exists the process of imitation may not converge

on the biological foundation of risk preferences abstract this paper considers a continuous time biological model in which the growth rate of a population is determined by the risk attitude of its individuals we consider choices over lotteries which determine the number of offspring and involve both idiosyncratic and aggregate risks we distinguish between two types of aggregate risk environmental variations and natural disasters environmental variations influence the death and birth rates while natural disasters result in instantaneous drops in population size our main result is a utility representation of the evolutionary optimal behaviour the utility is additively separable in the two types of aggregate risk the term involving environmental variations is a von neumann morgenstern utility which induces the same attitude towards both idiosyncratic and aggregate risk the term involving disasters cannot be interpreted as an expected utility maximization and induces less tolerance towards aggregate risk

controllable factors of new product success a cross national comparison while the new product literature suggests that managerially controllable factors most strongly affect new product success few studies have examined how these factors differ across countries the objectives of this article are 1 to develop a model of managerially controllable factors associated with new product success 2 to directly compare the factors that managers perceive to be associated with new product success in the united states and china and 3 to demonstrate the application of various statistical analyses for increasing the confidence that may be placed in empirical findings and outline methods for assessing whether significant estimation biases exist in cross sectional data our paper should be of interest to new product researchers and international comparative marketing researchers the implications of our results should also be of considerable value and interest to executives faced with the complex task of selecting and managing new product development projects as well as to those firms experiencing international competition to accomplish our objectives we develop a model of managerially controllable factors related to new product success which includes variables related to the organization the new product development process and the product itself the model is tested using data collected on 142 new products launched in the united states and 470 new products launched in china we conduct case studies to examine the appropriateness of the data collection methods to establish the content validity of the concepts and to assess the usefulness of the measures and constructs in a chinese context the model was tested using eqs with covariance matrices as input we tested the measurement model before assessing the structural relationships once the measurement issues were satisfactorily resolved the structural model was tested for each country individually since the results of the individual models for the united states and china were satisfactory we performed a two group simultaneous path analysis in order to test for similarities and differences in the factors of new product success between the united states and china we tested whether or not the path coefficients were invariant across the two countries using a lagrangian multiplier test the challenge for all cross sectional studies is to reject the hypothesis that many of the parameters associated with the dependent variable are biased by omitted firm level effects and other specification errors we examine these possible biases within the structural equations framework by examining the robustness of the parameters with and without the measurement error interactions fixed and an examination of nominological validity for each country in addition since we collected two observations per firm in our chinese sample we also examine whether bias exists due to omitted firm effects by comparing within and between estimates the stability of the within and between estimates also suggests that our findings are robust to omitted firm effects our findings provide important managerial guidelines concerning appropriate managerial actions to take in the new product development process for new product managers first firms are advised to build appropriate new product development resources and expertise in both countries our findings suggest that adequate marketing research sales force distribution advertising and promotional resources and skills are required for proficiently conducting market assessment studies testing products and introducing products furthermore technical resources and skills are positively linked with proficiency in conducting technical activities sufficient r d and engineering resources and skills are related to proficiency in performing technical assessments designing products and manufacturing products second our results reveal that a higher proficiency in marketing and technical activities leads to a higher level of new product success in both countries the level of proficiency of technical activities appears to relate more to the level of new product success than do marketing activities third it is important to collect and assess market and competitive information in order to understand customers needs wants and specifications for the product to know customers price sensitivity to understand customers purchase decisions and to learn about competitors strategies strengths and weaknesses in china product quality is the second most highly correlated factor of new product success therefore firms competing in china should direct their marketing and technical efforts toward developing quality products

the social basis of interdependent preferences abstract most economists are sympathetic to the idea that concerns for relative position are an important aspect of many economic problems there has traditionally been a reluctance to include such concerns primarily because models that included them often allow such a broad range of behavior that there are few if any restrictions on equilibrium behavior and hence such models would have little or no predictive power in this paper we discuss how reduced form models may naturally give rise to utility functions that depend in part on relative standing there are several advantages of modelling concern for relative standing in reduced form utility functions even when there is no similar concern in the deep preferences it provides structure and constraints on the way that relative standing affects utility and further it can yield testable implications about the way that changes in the underlying environment affect the concern for relative standing we discuss the advantages and disadvantages of modelling social concerns in this way and provide examples that illustrate how concerns for relative standing can affect savings investment and labor choice decisions

a biological basis for expected and non expected utility abstract a biological model is developed here to determine the fittest attitude to risk with a fixed environment the type maximizing expected offspring is selected this yields the expected utility theorem when translated into a criterion for evaluating gambles over commodities with a random environment however the type selected is strictly less averse to idiosyncratic risk than to risk which is correlated across all individuals the implied criterion for choice over gambles does not satisfy the expected utility theorem and may induce choice of a gamble which is first order stochastically dominated journal of economic literature classification number d81

decision making under uncertainty and the evolution of interdependent preferences abstract this paper finds support for the evolution of interdependent preferences under natural selection from a perhaps surprising source decision making under uncertainty individuals choose from sets of risky alternatives the lotteries may involve either idiosyncratic risk or aggregate uncertainty or both robson j econ theory 68 1996 397 424 gives the evaluation criterion for lotteries that maximizes reproductive value and shows that it does not satisfy the expected utility theorem cooper and kaplan j theoret biol 94 1982 135 151 have demonstrated that when lotteries are aggregate the optimal decision rule involves randomization this paper reexamines robson s evaluation criterion using it to solve for the optimal amount of randomization the solution is characterized and an interpretation is offered that links maximizing reproductive value to maximizing expected relative offspring it is shown that when agents preferences arise from their own offspring relative to the average within the population a game is constructed out of the choice of lotteries and that the unique nash equilibrium distribution of actions maximizes reproductive value journal of economic literature classification numbers c72 d71 d81

a fairness justification of utilitarianism differences in preferences are important to explain variation in individuals behavior there is however no consensus on how to take these differences into account when evaluating policies while prominent in the economic literature the standard utilitarian criterion is controversial according to some interpersonal comparability of utilities involves value judgments with little objective basis others argue that social justice is primarily about the distribution of commodities assigned to individuals rather than their subjective satisfaction or happiness in this paper we propose and axiomatically characterize a criterion named opportunity equivalent utilitarian that addresses these claims first our criterion ranks social alternatives on the basis of individuals ordinal preferences second it compares individuals based on the fairness of their assignments opportunity equivalent utilitarianism requires society to maximize the sum of specific indices of well being that are cardinal interpersonally comparable and represent each individual s preferences

learning and risk aversion we study how learning shapes behavior towards risk when individuals are not assumed to know or to have beliefs about probability distributions in any period the behavior change induced by learning is assumed to depend on the action chosen and the payoff obtained we characterize learning processes that in expected value increase the probability of choosing the safest actions and provide sufficient conditions for them to converge to the choices of risk averse expected utility maximizers we provide a learning theoretic motivation for long run risk choices such as those in expected utility theory with known payoff distributions

pioneering plus a broad product line strategy higher profits or deeper losses previous research suggests firms can build a market share advantage by preempting later entrants with a broad product line and expanding rapidly into related markets whether such a strategy leads to a pioneering profit advantage relative to followers also depends on its cost effects in this paper we examine when the market share advantage of a pioneering firm with a broad product line strategy translates into a profit advantage by examining the cost effects of this strategy using the profit impact of marketing strategies data and an estimation method that controls for various unobserved factors we find significant differences between different industry settings from these contrasting findings we generate an emerging theoretical framework that we subject to empirical testing we conjecture and empirically verify that creating a broad product line with a versioning strategy creating variety from a standard product in anticipating customer demand does not increase the pioneering cost disadvantage and thus results in a pioneering profit advantage on the other hand with a tailoring strategy creating variety by customizing a product to actual customer demand a broad product line substantially increases the pioneering cost disadvantage thereby making a preemption strategy counterproductive

the impact of economic contractions on the effectiveness of r d and advertising evidence from u s companies spanning three decades the critical role of research and development r d and advertising in the marketing strategy of the firm is well established this paper conceptually and empirically examines why and how much the effectiveness of these two marketing instruments differs between times of economic expansions versus periods of economic contractions and whether these results depend on the cyclicality of the industry in question we consider a key marketing metric market share and a key financial metric firm profit our empirical setting is 1 175 u s firms across a time period spanning over three decades we find that r d and advertising contribute to firm performance but that their effectiveness is not constant across the business cycle increasing advertising share in contractions has a stronger effect on profit and market share than increasing advertising share in expansions likewise investments in r d in contractions lead to higher gains in market share and profit than r d investments in expansions albeit only in subsequent years if in contractions the firm faces tight budget constraints and has to choose between either maintaining r d or advertising our simulation results show that maintaining r d is associated with better company performance we find that advertising effectiveness in general and in contractions in particular is systematically moderated by the degree of cyclicality of the industry in which the firm operates in relatively stable industries advertising effects are small or even nonsignificant and they do not go beyond the year the firm advertises however in highly cyclical industries advertising effects are long lasting its total effect being 50 larger market share and 200 larger profits than in industries of average cyclicality the effect of industry cyclicality on advertising effectiveness is especially pronounced in contractions collectively these findings provide valuable and actionable insights into how firms should respond to contractions in order to grow profits and market share

disentangling pioneering cost advantages and disadvantages existing literature discusses a number of possible pioneering cost advantages and disadvantages in this paper we empirically test three different sources of long term pioneering cost advantage experience curve effects preemption of input factors and preemption of ideal market space and three different sources of pioneering cost disadvantage imitation vintage effects and demand orientation we disentangle these sources by breaking total cost of a business unit into three different components purchasing production and selling general and administrative sg a costs and identifying conditions that intensify or reduce the effect of the proposed source using two samples of business units one for consumer goods and one for industrial goods we find support for five of the six sources of pioneering cost advantage and disadvantage in both samples while the advantage due to preemption of ideal market space is limited to the consumer goods sample the unconditional analysis shows a pioneering purchasing cost advantage but even larger pioneering production and sg a cost disadvantages the complexity of our obtained findings suggests that managers need to think carefully about their particular conditions before making assumptions about the cost and therefore profit implications of a pioneering strategy

competitive pricing behavior in the auto market a structural analysis in a competitive marketplace the effectiveness of any element of the marketing mix is determined not only by its absolute value but also by its relative value with respect to the competition for example the effectiveness of a price cut in increasing demand is critically related to competitors reaction to the price change managers therefore need to know the nature of competitive interactions among firms in this paper we take a theory driven empirical approach to gain a deeper understanding of the competitive pricing behavior in the u s auto market the ability motivation paradigm posits that a firm needs both the ability and the motivation to succeed in implementing a strategy boulding and staelin 1995 we use arguments from the game theoretic literature to understand firm motivation and abilities in different segments of the auto market we then combine these insights from the game theoretic literature and the ability motivation paradigm to develop hypotheses about competition in different segments of the u s auto market to test our hypotheses of competitive behavior we estimate a structural model that disentangles the competition effect from the demand and cost effects on prices the theory of repeated games predicts that firms with a long run profitability objective will try to sustain cooperative pricing behavior as a stable equilibrium when conditions permit for example markets with high concentration and stable market environments are favorable for sustaining cooperative behavior and therefore provide firms with the ability to cooperate the theory of switching costs suggests that in markets in which a firm s current customers tend to be loyal firms have a motivation to compete very aggressively for new customers recognizing the positive benefits of loyalty from the customer base in the long run as consumer loyalty in the market increases the gains from increasing market share by means of aggressive competitive behavior are more than offset by losses in profit margins firms therefore have the motivation to price cooperatively empirically we find aggressive behavior in the minicom pact and subcompact segments cooperative behavior in the compact and midsize segments and bertrand behavior in the full size segment these findings are consistent with our theory based hypotheses about competition in different segments in estimating a structural model of the auto market we address several methodological issues a particular difficulty is the large number of car models in the u s auto market existing studies have inferred competitive behavior only in markets with two to four products they also use relatively simple functional forms of demand to facilitate easy estimation functional forms of demand however impose structure on cross elasticities between products such structure when inappropriate can bias the estimates of competitive interaction we therefore use the random coefficients logit demand model to allow flexibility in cross elasticities we also use recent advances in new empirical industrial organization neio to extend structural estimation of competitive behavior to markets with a large number of products we use the simulation based estimation approach developed by berry et al 1995 to estimate our model a frequent criticism of the neio approach is that its focus on industry specific studies limits the generalizability of its findings in this study we retain the advantages of neio methods but partially address the issue of generalizability by analyzing competitive behavior in multiple segments within the auto industry to see whether there is a consistent pattern that can be explained by theory theoretical modelers can use our results to judge the appropriateness of their models in predicting competitive outcomes for the markets that they analyze a by product of our analysis is that we also get estimates of demand and cost apart from competitive interactions for the market managers can use these estimates to perform what if analysis they can answer questions about what prices to charge when a new product is introduced or when an existing product s characteristics are changed

generalized utilitarianism and harsanyi s impartial observer theorem harsanyi s impartial observer must consider two types of lotteries imaginary identity lotteries accidents of birth that she faces as herself and the real outcome lotteries life chances to be faced by the individuals she imagines becoming if we maintain a distinction between identity and outcome lotteries then harsanyi like axioms yield generalized utilitarianism and allow us to accommodate concerns about different individuals risk attitudes and concerns about fairness requiring an impartial observer to be indifferent as to which individual should face similar risks restricts her social welfare function but still allows her to accommodate fairness requiring an impartial observer to be indifferent between identity and outcome lotteries however forces her to ignore both fairness and different risk attitudes and yields a new axiomatization of harsanyi s utilitarianism

self preservation as a foundation of rational behavior under risk abstract this paper derives an expected utility theorem from the principle of self preservation thus providing a new interpretation of the notion of rationality underlying the von neumann morgenstern theory self preservation is defined as the maximization of the probability of survival in a finite horizon model where in each period the decision maker must choose a risky prospect from a feasible set of such prospects and becomes extinct if his accumulated fortune becomes non positive it is shown that the choice of the optimal strategy may be regarded as an expected utility maximizing behavior and that violations of the independence axiom e g allais paradox imply that decision makers choose a probability of survival smaller than the maximum possible given the set of acts furthermore according to this approach rational attitudes toward risk are also derived from the model

unobservable effects and business performance while unobservable factors such as corporate culture access to scarce resources management skill and luck can be postulated to be principal determinants of business success their effects are all but ignored in studies of business performance this study making use of the pims data base reports empirical evidence indicating that failure to control for unobservable factors influencing profitability both biases and exaggerates the effect of strategic factors indeed the influence of unobservable factors is so pervasive as to invalidate many of the conclusions drawn from studies failing to control for their effects

a look on the cost side market share and the competitive environment in this paper we develop a model relating market share to average costs we start with a theoretical model of the factors that affect the firm s average cost curve partitioning these factors into a measurable firm and competitive environment characteristics and b unobserved factors that are either fixed random or follow a first order autoregressive process we then link this theoretical model to an empirical model in which we specify three average cost equations for the organizational areas of purchasing production and marketing main effects for initial lagged market share position as well as their interactions with factors characterizing the firm s competitive environment represent the variables of key theoretical interest in our equations we estimate these equations using pims data and control for fixed contemporaneous and autoregressive unobservable factors our results suggest that market share can often lead to market power in the form of lower average costs however the firm s operating environment greatly moderates the effect of market share on average cost in particular we find that market share position only leads to lower average costs when the organizational unit operates in a competitive environment that gives it both motivation and ability to realize power from its market share position

what s different about banks abstract negotiable certificates of deposit cd s trade in the capital market in competition with other securities like commercial paper and bankers acceptances if cd s must pay lenders competitive monetary interest the reserve tax on cd s is borne by bank borrowers viability of the tax means there must be something special about bank loans that makes some borrowers willing to pay higher interest rates than those on other securities of equivalent risk moreover there must be something special about banks that prevents other intermediaries from competing to assure that it never pays to finance loans with cd s

customer satisfaction productivity and profitability differences between goods and services there is widespread belief that firms should pursue superiority in both customer satisfaction and productivity however there is reason to believe these two goals are not always compatible if a firm improves productivity by downsizing it may achieve an increase in productivity in the short term but future profitability may be threatened if customer satisfaction is highly dependent on the efforts of personnel if so there are potential tradeoffs between customer satisfaction and productivity for industries as diverse as airlines banking education hotels and restaurants managers in these types of service industries as well as goods industries in which the service component is increasing need to understand whether or not this is the case for example if efforts to improve productivity can actually harm customer satisfaction and vice versa the downsizing of u s and european companies should be viewed with concern it follows that developing a better understanding of how customer satisfaction and productivity relate to one another is of substantial and growing importance especially in light of expected continued growth in services throughout the world economy the objective of this paper is to investigate whether there are conditions under which there are tradeoffs between customer satisfaction and productivity a review of the literature reveals two conflicting viewpoints one school of thought argues that customer satisfaction and productivity are compatible as improvements in customer satisfaction can decrease the time andeffort devoted to handling returns rework warranties and complaint management while at the same time lowering the cost of making future transactions the second argues that increasing customer satisfaction should increase costs as doing so often requires efforts to improve product attributes or overall product design a conceptual framework useful in resolving these contradictory viewpoints is developed the framework serves in turn as a basis for developing a theoretical model relating customer satisfaction and productivity the model predicts that customer satisfaction and productivity are less likely to be compatible when 1 customer satisfaction is relatively more dependent on customization the degree to which the firm s offering is customized to meet heterogeneous customers needs as opposed to standardization the degree to which the firm s offering is reliable standardized and free from deficiencies and 2 when it is difficult costly to provide high levels of both customization and standardization simultaneously to move forward from the model s propositions to the development of testable hypotheses we argue that services are more likely than goods to have the preceding characteristics hence tradeoffs between customer satisfaction and productivity should be more prevalent for services than for goods although this classification is not precise many services are standardizable and many goods have a service component it has the advantage of allowing an initial test of the propositions the empirical work employs a database matching customer based measures of firm performance with traditional measures of business performance such as productivity and return on investment roi the central feature of this database is the set of customer satisfaction indices provided by the swedish customer satisfaction barometer scsb the scsb provides a uniform set of comparable customer based firm performance measures and offers a unique opportunity to test the study s hypotheses the findings indicate that the association between changes in customer satisfaction and changes in productivity is positive for goods but negative for services in addition while both customer satisfaction and productivity are positively associated with roi for goods and services the interaction between the two is positive for goods but significantly less so for services taken together the findings suggest support for the contention that tradeoffs are more likely for services hence simultaneous attempts to increase both customer satisfaction and productivity are likely to be more challenging in such industries of course this does not imply that such firms should not seek improvements in both productivity and customer satisfaction for example appropriate applications of information technology may improve both customer satisfaction and productivity simultaneously the findings should provide motivation for future research concerning the nature of customer satisfaction and productivity as well as appropriate strategy and tactics for each one it is worth emphasizing that this is an issue that is not only important today but certainly will become even more important in the future as the growth of services continues and world markets become increasingly competitive the importance of customer satisfaction will also increase to compete in such a world firms must strike the right balance between their efforts to compete efficiently and their efforts to compete effectively

intergenerational social choice without the pareto principle a concise proof of wilson s theorem for a finite or countable set of individuals is presented a social welfare function satisfying nonimposition and arrow s independence axiom is either null or dictatorial if the set of individuals is infinite then continuity of social preference must be added to the hypothesis in which case the independence axiom alone implies that the social welfare function is either constant or dictatorial

time preference and life cycle consumption with endogenous survival we provide a structural theory of time preference and derive a functional form of intertemporal preferences by postulating that individuals make their life cycle consumption choices as if to maximize expected lifetime this yields a nontime separable expected utility representation where the inverse of the coefficient of intertemporal substitution exceeds the coefficient of relative risk aversion the rate of time preference depends on the inverse of expected remaining lifetime and the effect of age on the productivity of consumption in affecting health the preference formulation is applied in a standard intertemporal consumption model to illustrate the implied life cycle consumption choices

the value of risk measuring the service output of u s commercial banks rather than charging direct fees banks often charge implicitly for their services via interest spreads as a result much of bank output has to be estimated indirectly in contrast to current statistical practice dynamic optimizing models of banks argue that compensation for bearing systematic risk is not part of bank output we apply these models and find that between 1997 and 2007 in the u s national accounts on average bank output is overestimated by 21 percent and gdp is overestimated by 0 3 percent moreover compared with current methods our new estimates imply more plausible estimates of the share of capital in income and the return on fixed capital

a generalized valuation model for fixed rate residential mortgages this paper uses option pricing techniques to rationally price mortgage instruments subject to both default and prepayment risk attention is given to terminations due to purely financial consideration of the mortgage contract itself as well as to personally induced terminations explicit inclusion of default in the mortgage valuation procedure also permits the valuation of insurance against such default qualitatively it is found that default differs significantly in the behavior from either prepayment or nonfinancial termination quantitatively however there is significant substitution between prepayment and default so that the addition of a default feature to the contract has only a modest impact on mortgage values unless there is substantial price volatility in the housing market or a high loan to value ratio copyright 1992 by ohio state university press

the price elasticity of selective demand a meta analysis of econometric models of sales the author describes a meta analysis of econometric studies that estimated the elasticity of selective sales or market share to price the literature review yielded 367 suitable price elasticities

the periodicity of pricing abstract retail pricing data combine multiple decisions e g regular pricing and discounting that are possibly made by multiple decision makers e g retailers and manufacturers for example temporary price reductions high frequency price changes can be used to price discriminate in the short run whereas regular price adjustments low frequency price changes might reflect changes in long term costs or demand time disaggregation cannot disentangle these factors because frequency aggregation exists even when data are analyzed at the lowest possible level of temporal aggregation because little is known about the nature of pricing interactions across various planning cycles this article develops several empirical generalizations about the role of periodicity in pricing using week store stockkeeping unit level price data in 35 grocery categories the authors find that 1 cross brand correlation in prices occurs at multiple planning horizons and the planning horizon of the predominant interacti

the genetics of investment biases abstract for a long list of investment biases including lack of diversification excessive trading and the disposition effect we find that genetic differences explain up to 45 of the remaining variation across individual investors after controlling for observable individual characteristics the evidence is consistent with a view that investment biases are manifestations of innate and evolutionary ancient features of human behavior we find that work experience with finance reduces genetic predispositions to investment biases finally we find that even genetically identical investors who grew up in the same family environment often differ substantially in their investment behaviors due to individual specific experiences or events

real output of bank services what counts is what banks do not what they own the measurement of bank output a difficult and contentious issue has become even more important in the aftermath of the devastating financial crisis of recent years in this paper we argue that models of banks as processors of information and transactions imply a quantity measure of bank service output based on transaction counts instead of balances of loans and deposits compiling new and comparable output measures for the united states and a range of european countries we show that our counts based output series exhibit significantly different growth patterns from those of our balances based output series over the years 1997 to 2009 since the u s official statistics rely on counts while european statistics rely on balances this implies a potentially considerable bias in the estimate of bank output growth in europe vis avis that in the united states

the evolution of attitudes to risk lottery tickets and relative wealth abstract individual attitudes to risk are examined in an evolutionary model males obtain more offspring as a consequence of greater wealth both directly and because this attracts more mates the second effect induces gambling driven by relative wealth and can create pareto inefficiency fair bets involving small losses and large gains are taken if any fair bets at all are taken altogether the model accords with observations concerning bets taken and declined by typical individuals despite settings of widely varying per capita wealth journal of economic literature classification numbers c72 d81

nash equilibrium and the evolution of preferences abstract a population of players is randomly matched to play a normal form game g the payoffs in this game represent the fitness associated with the various outcomes each individual has preferences over the outcomes of the game and chooses an optimal action with respect to those preferences however these preferences need not coincide with the fitness payoffs when evolution selects individuals on the basis of the fitness of the actions they take the distribution of aggregate play must be a nash equilibrium of g weak additional assumptions on the evolutionary process imply perfect equilibrium journal of economic literature classification number c72

the relationship between market characteristics and promotional price elasticities many empirical studies in marketing and economics have estimated brand price elasticities for specific products in markets their results indicate that price elasticities seem to differ across brands product categories retail outlets and regions however there has been very little research which examines the factors associated with these observed differences this paper focuses on the promotional price elasticities of established major brands in stable categories it identifies some characteristics of markets which may be associated with differences in price elasticities for frequently purchased nondurables a cross sectional model of the effect of these market characteristics on price elasticities is developed and estimated utilizing own price elasticity estimates for brands at twelve stores the results indicate market characteristics such as brand market share couponing activity display activity and feature activity explain a substantial amount of the variation in promotional price elasticities

social rewards externalities and stable preferences this paper examines the role of social rewards as a corrective mechanism for activities which generate externalities the focus of this paper is on the circumstances under which social rewards provide effective and feasible incentive mechanism that may replace laws and regulations in particular social mechanism is effective only in a society in which individuals who care about their standing in the society can survive in the long run we show that the nature of economic interaction between matched players influences whether the socially minded individuals survive in the long run and restricts the effectiveness of social rewards however circumstances exist where the socially minded survive even though relative fitness is determined only by economic payoff 1998 elsevier science s a all rights reserved

do irrelevant commodities matter we study the possibility of making social evaluations of allocations independently of individuals preferences over unavailable commodities this is related to the well known problem of performing international comparisons of standard of living across countries with different consumption goods we prove impossibility results which suggest that such evaluations encounter difficulties when the objects of evaluation are allocations of ordinary commodities we show how possibility results can be retrieved when the objects of evaluation are allocations of composite commodities characteristics or human functionings

structural analysis of manufacturer pricing in the presence of a strategic retailer consumer goods manufacturers usually sell their brands to consumers through common independent retailers theoretical research on such channel structures has analyzed the optimal behavior of channel members under alternative assumptions of manufacturer retailer interaction vertical strategic interaction research in empirical industrial organization has focused on analyzing the competitive interactions between manufacturers horizontal strategic interaction decision support systems have made various assumptions about retailer pricing rules e g constant markup category profit maximization the appropriateness of such assumptions about strategic behavior for any specific market however is an empirical question this paper therefore empirically infers 1 the vertical strategic interaction vsi between manufacturers and retailer 2 the horizontal strategic interaction hsi between manufacturers simultaneously with the vsi and 3 the pricing rule used by a retailer the approach is particularly appealing because it can be used with widely available scanner data where there is no information on wholesale prices researchers usually have no access to wholesale prices even manufacturers who have access to their own wholesale prices usually have limited information on competitors wholesale prices in the absence of wholesale prices we derive formulae for wholesale prices using game theoretic solution techniques under the specific assumptions of vertical and horizontal strategic interaction and retailer pricing rules we then embed the formulae for wholesale prices into the estimation equations while our empirical illustration is using scanner data without wholesale prices the model itself can be applied when wholesale prices are available early research on the inference of hsi among manufacturers in setting wholesale prices using scanner data e g kadiyali et al 1996 1999 made the simplifying assumption that retailers charge a constant margin this assumption enabled them to infer wholesale prices and analyze competitive interactions between manufacturers in this paper we show that this model is econometrically identical to a model that measures retail price coordination across brands hence the inferred cooperation among manufacturers could be exaggerated by the coordinated pricing category management done by the retailer we find empirical support for this argument this highlights the need to properly model and infer vsi simultaneously to accurately estimate the hsi when using data at the retail level functional forms of demand have been evaluated in terms of the fit of the model to sales data but recent theoretical research on channels lee and staelin 1997 tyagi 1999 has shown that the functional form has serious implications for strategic behavior such as retail passthrough while the logit and linear model implies equilibrium passthrough of less than 100 lee and staelin call this vertical strategic substitute vss the multiplicative model implies optimal passthrough of greater than 100 vertical strategic complement vsc because passthrough rates on promotions have been found to be below or above 100 chevalier and curhan 1976 armstrong 1991 we empirically test the appropriateness of the logit vss and the multiplicative vsc functional form for the data we perform our analysis in the yogurt and peanut butter categories for the two biggest stores in a local market we found that the vss implications of the logit fit the data better than the multiplicative model we also find that for both categories the best fitting model is one in which 1 the retailer maximizes category profits 2 the vsi is manufacturer stackelberg and 3 manufacturer pricing hsi is tacitly collusive the fact that the retailer maximizes category profits is consistent with theoretical expectations the inference that the vsi is manufacturer stackelberg reflects the institutional reality of the timing of the game retailers set their retail prices after manufacturers set their wholesale prices note that in the stores and product categories that we analyze the two manufacturers own the dominant brands with combined market shares of about 82 in the yogurt market and 65 in the peanut butter market the result is also consistent with a balance of power argument in the literature the finding that manufacturer pricing is tacitly collusive is consistent with the argument that firms involved in long term competition in concentrated markets can achieve tacit collusion managers use decision support systems for promotion planning that routinely make assumptions about vsi hsi and the functional form the results from our analysis are of substantive import in judging the appropriateness of assumptions made in such decision support systems

mean and variance responsive learning decision makers are often described as seeking higher expected payoffs and avoiding higher variance in payoffs we provide some necessary and some sufficient conditions for learning rules that assume the agent has little prior and feedback information about the environment to reflect such preferences we adopt the framework of borgers morales and sarin 2004 econometrica who provide similar results for learning rules that seek higher expected payoffs our analysis reveals that a concern for variance leads to quadratic transformations of payoffs to appear in the learning rule

equally distributed equivalent utility ex post egalitarianism and utilitarianism we provide an axiomatization of expected equally distributed equivalent utility social welfare functions in the context of harsanyi s impartial observer theorem for this family of social welfare functions we show what additional axiom is necessary and sufficient for the observer to exhibit aversion to ex post inequality we also relate this axiomatization to our axiomatization in a companion paper of generalized utilitarian social welfare functions given certain richness assumptions the only social welfare functions that belong to both families are the utilitarian

aggregate risk and the pareto principle abstract in the evaluation of public policies a crucial distinction is between plans that involve purely idiosyncratic risk and those that generate correlated or aggregate risk while natural this distinction is not captured by standard utilitarian aggregators in this paper we revisit harsanyi s 1955 celebrated theory of preferences aggregation and develop a parsimonious generalization of utilitarianism the theory we propose captures sensitivity to aggregate risk in large populations and can be characterized by two simple axioms of preferences aggregation

social welfare functions for economic environments with and without the pareto principle it is shown for the case of private goods economies that every social welfare function satisfying a weak nonimposition condition and the independence of irrelevant alternatives axiom is of one of the following forms it is either null or the class of decisive coalitions is an ultrafilter or the class of anti decisive coalitions is an ultrafilter in the case of a private goods economy with finitely many traders the latter conditions imply the existence of either a dictator or anti dictator by requiring the pareto principle as well it is easily seen that the social welfare function must be dictatorial

let s agree that all dictatorships are equally bad this paper shows that a minimal degree of consideration for other people s well being enables society to agree that one social policy is the best i offer axioms that imply that this best policy maximizes a weighted sum of individual utilities the weight of each individual is the inverse of his or her maximal possible utility from social endowments the suggested policy is not sensitive to the choice of the von neumann morgenstern utilities the key axiom is that individuals agree that giving all the endowments always to one person is as bad as giving them to any other person

rent risk and replication preference adaptation in winner take all markets abstract we study the evolution of an economy where agents who are heterogeneous with respect to risk attitudes can either earn a certain income or enter a risky rent seeking contest we assume that agents behave rationally given their preferences but that the population distribution of preferences evolves over time in response to material payoffs we show that in particular initial distributions with full support converge to stationary states where all types are still present although rents are perfectly dissipated in material terms at a steady state efficiency is greater than if everybody had been risk neutral since risk lovers specialize in rent seeking

financial innovation the bright and the dark sides based on data from 32 countries over the period 1996 2010 this paper is the first to assess the relationship between financial innovation on the one hand and bank growth and fragility as well as economic growth on the other hand we find that different measures of financial innovation capturing both a broad concept and specific innovations are associated with faster bank growth but also higher bank fragility and worse bank performance during the recent crisis these effects are stronger in countries with larger securities markets and more restrictive regulatory frameworks in spite of these seemingly ambiguous findings our evidence points to a positive net effect of financial innovation on economic growth financial innovation is associated with higher growth in countries and industries with better growth opportunities

transitive social choice in economic environments assume a finite society a standard space of allocations of private goods and a domain of profiles of classical economic preferences if social preference is expressed as a continuous preorder then a social welfare function satisfies arrow s independence axiom if and only if it is constant or completely authoritarian an authoritarian rule is one that is either dictatorial or inversely dictatorial copyright 1992 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

success in high technology markets is marketing capability critical we propose a conceptual framework with the resource based view rbv of the firm as its theoretical underpinning to explain interfirm differences in firms profitability in high technology markets in terms of differences in their functional capabilities specifically we suggest that marketing r d and operations capabilities along with interactions among these capabilities are important determinants of relative financial performance within the industry this paper contributes to the rbv literature by proposing the input output perspective to conceptualize the notion of capabilities specifically this approach entails modeling a firm s functional activities viz marketing r d and operations as transformation functions that relate the productive factors resources to its functional objectives if the firm were to deploy these resources most efficiently any underattainment of the functional objective then is attributable to functional inefficiency or equivalently to a lower functional capability of the firm the input output conceptualization of a firm s capabilities is then estimated using the stochastic frontier estimation sfe methodology sfe provides the appropriate econometric technique to empirically estimate the efficient frontier and hence the level of efficiency achieved by the various firms our study contributes to a number of literatures both methodologically and substantively first it contributes both conceptually and methodologically to the rbv literature conceptually our study suggests that firm capabilities can be viewed in an input output framework methodologically the study suggests the use of stochastic frontier estimation to operationalize and estimate firm capabilities this methodology is to the best of our knowledge the first to allow the researcher manager to infer capabilities from archival data substantively our study contributes to the literature on market orientation by suggesting that a stronger market orientation of a firm should be reflected in a higher marketing capability it also adds to the literature on design for manufacturability by explicating the complementarity among the various functional capabilities and offering empirical evidence on their relative importance in influencing a firm s performance finally our study builds on prior literature that has highlighted the importance of marketing r d coordination as important determinants of new product development and success we highlight below some of our main findings 1 a strong base of innovative technologies enhances a firm s sales by favorably influencing consumers expectations about the externality benefits associated with its product this suggests that a past track record of consistent innovation is a credible signal to current and potential customers of the firm s continued excellence in a technologically evolving market given the importance of influencing customers managers need to tailor their marketing activities around the need to inform customers of the technological excellence of their firm thus customers need to be informed of the innovative technologies that the firm possesses and of the future r d initiatives undertaken by it similarly any potential applications of innovative technology developed by the firm and of technologies under development should be emphasized 2 marketing capability has its greatest impact on the quality adjusted innovative output for firms that have a strong technological base in other words firms with a strong r d base are the ones with the most to gain from a strong marketing capability 3 marketing capability strongly influences the width of applicability of innovations i e a firm s marketing capability enhances its ability to generate innovative technologies that have applications across a range of industries this result carries a strong message for managers a strong market orientation is one of the most fertile sources of ideas for innovation thus marketing needs to be involved from the beginning of the innovation process namely right at the stage when technological ideas are being generated 5 the most important determinant of a firm s performance is the interaction of marketing and r d capabilities this supports the assertion that firms in high technology markets need to excel at two things the ability to come up with innovations constantly and the ability to commercialize these innovations into the kinds of products that capture consumer needs and preferences this finding offers further evidence on the importance of coordination between r d and marketing as suggested in the extant marketing literature finally using archival data our methodology can be used to benchmark a firm s capabilities with other firms in the industry along various functional dimensions this would be an important step in making more informed resource allocation decisions thus the firm can spend more money on those capabilities where it most lags the competition or on those capabilities that are shown to have the maximum impact on firm performance

poverty human development and growth an emerging consensus this paper considers several issues relevant to the debate on the extent to which poverty or development progress in general should be measured by income or by a broader set of objectives issues covered here are practical implications of the two approaches for poverty reduction efforts the impact of growth on basic social indicators and how national achievement on social indicators is best measured sri lanka and pakistan countries often cited in this debate are used as examples

identifying generalizable effects of strategic actions on firm performance the case of demand side returns to r d spending this paper provides an approach for assessing generalizable effects of strategic actions on firm performance we identify five key issues that need to be addressed before one can have confidence in the obtained strategic generalization in addition we suggest a methodology for attacking each of these five issues we then illustrate this framework using the example of demand side returns to r d spending we document two empirical generalizations in this research first and foremost we show that demand returns to r d spending depend on whether the firm has ability and motivation to take advantage of the r d investment thus only firms with high ability and motivation leverage the r d investment into monopoly rents in the form of subsequent price increases second we show that the concept of a firm needing both ability and motivation to sustain returns from a strategic action generalizes across strategic actions we make two other conclusions about empirical approaches to strategy research first to pro

arrovian theorems with private alternatives domains and selfish individuals abstract this paper proves that the impossibility theorems of arrow wilson and mas colell and sonnenschein hold if the individual preferences domains are hypersaturating for hypersaturating domains the set of social states has the structure of a cartesian product of sets of private alternatives individuals are selfish and the domain satisfies some further restrictions consumption sets are examples of hypersaturating domains when the individual preferences are continuous convex and monotonic but many other examples make hypersaturating domains meaningful for the analysis of problems involving private alternatives sets incidentally all the theorems hold for the case of divisible public goods

financial consumption and the cost of finance measuring financial efficiency in europe 1950 2007 this paper proposes to assess financial intermediation efficiency in germany france the uk and europe more broadly over the past 60 years i rely on philippon s 2012 methodology which calculates the unit cost of financial intermediation through the ratio of financial consumption measured by financial income to financial output approximated by the sum of outstanding assets intermediated the contribution of this paper is threefold first because financial industry va ignores banks capital income capital gains dividends and interest on securities it is an imperfect measure of the consumption of financial intermediation so long as capital income generates wages and profits to financial intermediaries it is akin to an implicit consumption of financial services using banking income instead of banking va to measure the consumption of banking services i show that the gdp share of finance has increased continuously in germany france the uk and europe as a whole second the unit cost of financial intermediation increased over the past 40 years except in france where overall it stagnated in addition the european unit cost matches the us unit cost calculated by philippon 2012 finally because financial intermediaries deal with nominal stocks and ows and because the unit cost increases during periods of monetary troubles i focus here on nominal rates of interest to explain the evolution of unit cost i show that a rise in nominal rates of interest increases the spread of bank interest so that 1970s and 1980s high unit costs are statistically explained by increases in short term interest rates on the other hand post 1990s high unit cost seems to coincide with the development of new market based activities

can equity be purchased at the expense of efficiency an axiomatic inquiry abstract assume the restricted domain of classical welfare economics the pareto rule ranks x strictly above y if and only if everyone strictly prefers x to y suppose the social welfare function satisfies 1 nonimposition 2 independence of irrelevant alternatives 3 continuity and quasitransitivity of social preference 4 minimal equity there is at least one situation in which at least one social optimum gives each individual a positive amount of at least one commodity then agrees with the pareto rule except perhaps for comparisons in which someone is assigned the zero vector and the pareto rule is at least as decisive as overall

evolution and human nature from an economic perspective on individual decision making human beings have three key characteristics preferences beliefs and rationality beliefs are the probabilities with which people think various outcomes will occur conditional on information that might be available preferences are the rankings over the set of gambles that are based on such beliefs over the outcomes rationality is the extent to which people succeed in choosing optimal actions in the light of their beliefs and preferences and the extent to which their beliefs are appropriately modified by their information economists typically impose only rather weak assumptions on preferences for example preferences are taken to be transitive and sometimes less explicitly exogenous and unchanging stronger assumptions are typically imposed on preferences in specific contexts however for example preferences over time might be represented by an additively separable function with constant rate of discount despite widespread recognition that this case is a special one further attitudes to risk are often represented by the expected utility theorem which rests on assumptions that are strong if also appealing the assumptions made on rationality in particular are usually very strong that is rationality in economic models usually entails the exact optimization of preferences and modification of beliefs in accordance with bayes theorem the economist s basic picture of preferences beliefs and rationality has been subject to challenges from a growing number of empirical anomalies the proposed explanations of these anomalies involve relaxing the assumptions that economists make on these preferences beliefs or rationality for example preferences

the effects of risk preferences in mixed strategy equilibria of 2 2 games abstract we consider the effects of risk preferences in mixed strategy equilibria of 2 2 games provided such equilibria exist we identify sufficient conditions under which the expected payoff in the mixed equilibrium increases or decreases with the degree of risk aversion we find that at least moderate degrees of risk aversion will frequently be beneficial in mixed equilibria

assessing risky social situations this paper reexamines the welfare economics of risk it singles out a class of criteria the expected equally distributed equivalent as the unique class that avoids serious drawbacks of existing approaches such criteria behave like ex post criteria when the final statistical distribution of well being is known ex ante and like ex ante criteria when risk generates no inequality the paper also provides a new result on the tension between inequality aversion and respect of individual ex ante preferences in the vein of harsanyi s aggregation theorem

catastrophe aversion and risk equity in an interdependent world catastrophe aversion and risk equity are important concepts both in risk management theory and practice keeney keeney rl 1980 equity and public risk oper res 28 3 527 534 was the first to formally define these concepts he demonstrated that the two concepts are always in conflict yet his result is based on the assumption that individual risks are independent it has therefore limited relevance for real world catastrophic events we extend keeney s result to dependent risks and derive the conditions under which more equity and more correlation between two risks imply a more catastrophic situation we then generalize some of the results for multiple correlated risks this paper was accepted by manell baucells decision analysis

sustainable pioneering advantage profit implications of market entry order there is strong theoretical and empirical evidence supporting the idea that first to market leads to an enduring market share advantage in sharp contrast to these findings we find that at the business unit level being first to market leads on average to a long termprofit disadvantage this result holds for a sample of consumer goods as well as a sample of industrial goods and leads to questions about the validity of first mover advantage in and of itself as a strategy to achieve superior performance we replicate the typical demand side pioneering advantage but find an evengreater average cost disadvantage which is the source of the pioneering profit disadvantage in an extended analysis we show that first to market leads to aninitial profit advantage which depending on the sample or profit measure lasts for about 12 to 14 years before turning into a disadvantage moreover we show that pioneers differentially benefit from a lack of consumer learning a strong market position and patent protection these three moderating factors together can actually help pioneers achieve a sustainable profit advantage over later entrants finally we find strong support for the theoretical argument that the entry order decision should be treated as endogenous in empirical estimation

beyond arbitrage good deal asset price bounds in incomplete markets one often wants to value a risky payoff by reference to prices of other assets rather than by exploiting full fledged economic models however this approach breaks down if one cannot find a perfect replicating portfolio we impose weak economic restriction to derive usefully tight bounds on asset prices in this situation the bounds assume that investors would want to buy assets with high sharpe ratios good deals as well as pure arbitrage opportunities we show how to calculate the price bounds in one period multiperiod and continuous time contexts we show that the multiperiod problem can be solved recursively as a sequence of one period problems we calculate bounds in option pricing examples including infrequent trading and an option written on a nontraded event and we use the bounds to explore the economic significance of option pricing predictions we find that much variation in s p 500 index option prices over time and across strike prices fits within the bounds

the price concentration relationship in banking the commonly observed positive correlation between market concentration and profitability may be explained by noncompetitive pricing behavior as argued by the structure performance hypothesis or by the greater efficiency of firms with dominant market shares as argued by the efficient structure hypothesis by examining the price concentration relationship instead of the profit concentration relationship this paper tests the structure performance hypothesis in a manner that excludes the efficient structure hypothesis as an alternative explanation of the results the results strongly support the structure performance hypothesis and are robust with respect to model specification measurement of concentration and econometric technique copyright 1989 by mit press