efficient mechanisms for bilateral trading we consider bargaining problems between one buyer and one seller for a single object the seller s valuation and the buyer s valuation for the object are assumed to be independent random variables and each individual s valuation is unknown to the other we characterize the set of allocation mechanisms that are bayesian incentive compatible and individually rational and show the general impossibility of ex post efficient mechanisms without outside subsidies for a wide class of problems we show how to compute mechanisms that maximize expected total gains from trade and mechanisms that can maximize a broker s expected profit journal of economic literature classification number 026

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

mechanism design by an informed principal private values with transferable utility we provide a solution to the informed principal problem in the independent private values setting with monetary transfers the principal s private information creates signaling considerations that may distort the implemented allocation we show that there is no distortion all principal types implement an allocation that is optimal for the principal ex ante before he she learns his her type as an application we consider settings with linear utility for bilateral exchange in which the principal is one of the traders the solution is a combination of a participation fee a buy out option for the principal and a resale stage with posted prices

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

entry and subcontracting in public procurement auctions we empirically study how the interplay between entry and subcontracting choices is affected by the use of different auction formats in public procurement the difference in differences strategy used exploits a data set of auctions for public works run alternately under first price and average bid auctions we find that the use of first price auctions causes a marked decline in both entry and subcontracting we also find that the type of firms entering first price auctions changes with firms becoming more likely to bid jointly with other firms in ad hoc joint ventures data as supplemental material are available at http dx doi org 10 1287 mnsc 2014 2071 this paper was accepted by teck hua ho behavioral economics

riding the bubble with convex incentives we oer a simple portfolio choice based rationale for the documented failure of institutional investors to trade against mispriced securities in a dynamic model where informed and risk averse money managers face convex i e option like incentives we show that the standard mean variance component and hedging demand that make up their portfolio often imply opposite stances against mispricing the rst component represents managers bets against overpriced securities by contrast managers hedge against the risk of forfeiting an end of period bonus payment can over weigh overpriced securities even with respect to the market portfolio this bubble riding component is more likely to drive the managers portfolio as overpricing increases although we do not model the informed managers price impact our analysis suggests that the incentives of sophisticated investors might drive them to exacerbate security mispricing

risk choice under high water marks i solve in closed form for the optimal dynamic risk choice of a fund manager who is compensated with a high water mark contract the optimal risk choice depends on the ratio of the fund s assets under management to its high water mark if the manager s outside option value is low investors termination policy is strict or management fees are high then negative returns induce the manager into derisking otherwise he engages in gambling having the option to walk away increases risk taking though in many cases exercise is never optimal in particular leaving to restart at a proportionally smaller fund is always suboptimal

japan s financial crisis and economic stagnation the recent japanese economic experience has been dismal growth has collapsed deflation has taken hold and the financial system is in shambles we begin our story by documenting the macroeconomic troubles that appear to have triggered the collapse of japan s financial sector we argue however that the macroeconomic factors alone are not likely to explain the full extent of the problems in the japanese financial system we then turn to the sector specific factors that are facing the japanese banks insurance companies and government financial institutions which together constitute roughly three quarters of the financial system finally we provide estimates of the size of the losses that have been accumulated and review the steps necessary to resolve the problems promptly so that the losses stop growing the estimated losses from japan s financial system problems which presumably will be borne by taxpayers eventually are huge even our fairly conservative estimate suggests the full cost to the taxpayers is at least 20 percent of japan s gdp the sheer size of the cost along with the interaction among the related economic problems has made a decisive resolution of the problems politically difficult

equilibrium in sealed high bid auctions there is a voluminous theoretical literature on sealed high bid auctions auctions in which bids are sealed and the high bidder pays his bid see for example vickrey 1961 myerson 1981 riley and samuelson 1981 milgrom and weber 1982 matthews 1983 maskin and riley 1984 holt 1980 cox smith and walker 1988 a critical property on which this literature relies is the existence of equilibrium in which buyers bidding strategies are monotonic in their types this enables the analyst to perform comparative statics as the distribution of types changes and to compare the welfare properties of the high bid auction with those of other auction institutions one case in which the existence of monotonic equilibrium is readily established is that in which buyers types are distributed smoothly independently and symmetrically in this case there exists a symmetric equilibrium one in which all bidders share the same bidding behaviour as a function of their valuations and this bid function is the solution to a first order differential equation

revenue equivalence in asymmetric auctions abstract the revenue equivalence theorem is generalized to the case of asymmetric auctions in which each player s valuation is drawn independently from a common support according to his her distribution function

overcoming adverse selection how public intervention can restore market functioning as illustrated by liquidity support equity injections and asset repurchases in financial crises and by imf credit lines to countries authorities often intervene in orderto revive markets that have dried up or to create newones in suchsituations agents participate only if they receive from the governmental scheme more than in the marketplace while the market outcome depends on who joins the scheme the paper provides a first analysis of market jumpstarting and its two way interaction between mechanism design and participation constraints in the model sellers in need of cash have private information about the value of their legacy asset the absence of buyer confidence forces authorities to intervene to jump start the market we characterize the optimal intervention and draw two main implications first the government should clean up the market through buybacks of the weakest assets and then through some equity injections and leave the agents with the strongest legacy assets to the market in particular authorities should not substitute fully for the market even when they have no comparative disadvantage in acquiring assets or shares thereof second the government creates its own competition by cleaning up the market from its most toxic pieces at the optimal intervention the government always strictly overpays for the legacy asset yet and unlike what would be suggested by coasian profit evasion the existence of a later market imposes no welfare cost while it is cast in a public intervention context the analysis of mechanismdependent reservation utilities also admits important private sector applications

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

resale in second price auctions with costly participation abstract we study sealed bid second price auctions with costly participation and resale each bidder chooses to participate in the auction if her valuation is higher than her optimally chosen participation cutoff if resale is not allowed and the bidder valuations are drawn from a strictly convex distribution function the symmetric equilibrium where all bidders use the same cutoff is less efficient than a class of two cutoff asymmetric equilibria existence of these equilibria without resale is sufficient for existence of similarly constructed two cutoff equilibria with resale moreover the equilibria with resale are more asymmetric and under a sufficient condition more efficient than the corresponding equilibria without resale

collusion via resale the english auction is susceptible to tacit collusion when post auction interbidder resale is allowed we show this by constructing equilibria where with positive probability one bidder wins the auction without any competition and divides the spoils by optimally reselling the good to the other bidders these equilibria interim pareto dominate among bidders the standard value bidding equilibrium without requiring the bidders to make any commitment on bidding behavior or postbidding spoil division

speculation in standard auctions with resale in standard auctions resale creates a role for a speculator a bidder who is commonly known to have no use value for the good on sale we study this issue in environments with symmetric independent private value bidders for second price and english auctions the efficient value bidding equilibrium coexists with a continuum of inefficient equilibria in which the speculator wins the auction and makes positive profits first price and dutch auctions have an essentially unique equilibrium and whether or not the speculator wins the auction and distorts the final allocation depends on the number of bidders the value distribution and the discount factor speculators do not make profits in first price or dutch auctions

the delegated lucas tree we analyze the effects of the observed increased share of delegated capital for trading strategies and equilibrium prices by introducing delegation into a standard lucas exchange economy in equilibrium some investors trade on their own account but others decide to delegate trading to professional fund managers flow performance incentive functions describe how much capital clients provide to funds at each date as a function of past performance convex flow performance relations imply that the average fund outperforms the market in recessions and underperforms in expansions when the share of capital that is delegated is low all funds follow the same strategy however when the equilibrium share of delegated capital is high funds with identical incentives employ heterogeneous trading strategies a group of managers borrows to take on a levered position on the stock thus fund returns are dispersed in the cross section and the outstanding amounts of borrowing and lending increase the relation between the share of delegated capital and the sharpe ratio typically follows an inverse u shaped pattern jel g11 g12 g23 d02 d81 over the past thirty years there has been a gradual but profound change in the way money is invested in financial markets while almost 50 of u s equities were held directly in 1980 by 2007 this proportion decreased to approximately 20 see french 2008 what are the equilibrium implications of this shift in particular how does the increased presence of delegation affect trading strategies and prices to analyze the link between the incentives of financial institutions and asset prices we introduce financial intermediaries into a lucas exchange economy rather than study an optimal contracting problem we rely on empirical regularities inflows and assume a convex relation betweenflows and performance relative to the market as documented for example in chevalier and ellison 1997

delegated bidding and the allocative effect of accounting rules this paper studies the efficiency and distributive effects of three prominent accounting methods in auction settings when bidders incentives are linked to accounting income the purchase price method pp requires the acquirer to book the acquisition at historical cost thereby underestimating the asset value by the amount of the acquirer s surplus in the transaction the exit value method ev is downward biased and forces the acquirer to book an accounting loss on the date of acquisition ev connects otherwise independent valuations inducing a reporting based winner s curse and can even lead to fire sale like values relative to pp ev implies lower asset prices a decrease increase in the surplus of the seller acquirer and an increase in the probability that the asset attains its best use when the market is sufficiently competitive finally i examine an alternative method in which the asset is valued at its perceived value in use vu under this method the acquirer bids more aggressively to in

rent seeking contests with private values and resale this paper studies rent seeking contests with private values and resale possibilities with a stochastic success function the resulting possible inefficiency creates a motive for aftermarket trade players valuations are determined endogenously when there is an opportunity of resale we characterize symmetric equilibria we assume that the winner has full bargaining power but the results extend to other resale mechanisms we show that resale enhances allocative efficiency ex post at the expense of more social resource waste since players compete more aggressively with resale possibilities

selling an asset to a competitor a seller decides whether to allocate an item among two potential buyers the seller and buyer 1 interact ex post in such a way that each of them suffers a negative externality if the other possesses the item we show that the optimal allocation rule favors buyer 2 who does not interact ex post with the seller and in particular bidder 1 may not obtain the good even if his valuation is highest the auction is therefore subject to resale when resale is possible the seller must distort the original auction we show that the mechanism depends crucially on the way resale is organized ex post the seller may decide to always allocate the good to the agent with the highest valuation when rents are fully extracted by an intermediary on the resale market however she may resort to a stochastic mechanism when the winner of the primary auction has full bargaining power in the resale stage

asset prices and institutional investors empirical evidence indicates that trades by institutional investors have sizable effects on asset prices generating phenomena such as index effects asset class effects and others it is difficult to explain such phenomena within standard representative agent asset pricing models in this paper we consider an economy populated by institutional investors alongside standard retail investors institutions care about their performance relative to a certain index our framework is tractable admitting exact closed form expressions and produces the following analytical results we find that institutions optimally tilt their portfolios towards stocks that comprise their benchmark index the resulting price pressure boosts index stocks while leaving nonindex stocks unaffected by demanding a higher fraction of risky stocks than retail investors institutions amplify the index stock volatilities and aggregate stock market volatility and give rise to countercyclical sharpe ratios trades by institutions induce excess correlations among stocks that belong to their benchmark index generating an asset class effect institutions finance their additional purchases of index stocks by taking on leverage a policy prescription that calls for a reduction in leverage while reducing the riskiness of institutional portfolios would also reduce the ability of institutions to tilt their portfolios towards index stocks depressing the index level

a note on merton s optimum consumption and portfolio rules in a continuous time model in the paper optimum consumption and portfolio rules in a continuous time model by r c merton j econ theory 3 1971 373 413 solutions obtained in cases when marginal utility at zero consumption is finite are not feasible while they do satisfy the hamilton jacobi bellman equations they do not represent appropriate value functions because the boundary behavior near zero wealth is not satisfactorily dealt with in this note we specify the boundary behavior and characterize optimal solutions journal of economic literature classification numbers 022 213

budget constraint prices as preference changing parameters of generalized fechner thurstone direct utility functions let v x be any direct utility function characterizing consumer preferences that are reflexive transitive and complete and whose parameters are fixed relative to the usual linear budget constraint p x m here x designates the vector x1 x and is confined to the positive n orthant xi designates quantity of the ith commodity p is the vector p pn of positive commodity prices and m designates total expenditure let x p m designate the system of demand functions derived from v x subject to px m which possess the properties of zero degree homogeneity symmetry and semidefinite negativity let w x 0 designate a direct utility function with a parameter vector 0 dependent on the price vector p that appears in the budget constraint and b that rationalizes the same system of demand functions as v x namely x p m probably many economists who have considered price dependent preferences would conjecture that every such price dependent utility function w x p satisfying a and b is of the rather restricted form

costly search and mutual fund flows this paper studies the flows of funds into and out of equity mutual funds consumers base their fund purchase decisions on prior performance information but do so asymmetrically investing disproportionately more in funds that performed very well the prior period search costs seem to be an important determinant of fund flows high performance appears to be most salient for funds that exert higher marketing effort as measured by higher fees flows are directly related to the size of the fund s complex as well as the current media attention received by the fund which lower consumers search costs

english auctions with resale an experimental study i design and test a simple english auction and two english auctions with resale but with different informational backgrounds all three treatments theoretically have the same equilibrium i find however that the possibility of resale alters behavior significantly in the two treatments with resale subjects deviated from both the nash prediction and the common results about bidding behavior in english auctions subjects tend to overbid when they are certain they can reap the whole surplus in the resale market i employ different models like qre and levels of reasoning and conclude that overbidding can be explained as a rational response to the noisy environment in markets with human participants that is as rational decision making when anticipating others to make errors when the outcome of the resale market is not certain there is significant signaling behavior and auction prices tend to be lower than the nash prediction

security design with status concerns abstract this paper provides a status based explanation for convertible securities an entrepreneur with status concerns inducing risk taking decides how to finance the firm and how to dynamically manage it solving analytically for the optimal security we find that it is substantially similar to a convertible security our model can explain why convertible securities are mainly issued by start ups and small firms as we show that their salient characteristics higher volatility and dynamic flexibility accentuate incentives to issue convertible securities we also provide analytical results relevant to quantifying how status concerns affect credit risk an established factor behind security choice

the social cost of living index abstract household cost of living indexes reflect household preferences analogous indexes for groups of households require a corresponding concept of group preferences in this paper i investigate the social cost of living index a group index based on the bergson samuelson social welfare function i first define the index and examine its properties under the assumption that the investigator constructing it expresses his distributional judgments in an explicit bergson samuelson social welfare function i then examine the maximizing society and the independent society two cases in which the index can be constructed from the information contained in the market demand functions in these two cases a laspeyres index i e the fixed weight index based on the reference consumption pattern is an upper bound on the exact social cost of living index in general however the assumptions required to place bounds on the social cost of living index are much more likely to be satisfied than those required to place analogous bounds on a household s cost of living index

reconsidering carbon permits auction mechanism an efficient dynamic model one of major concerns for china and developing countries is the new international trade rule concerning carbon emissions which one needs to know its suitable mechanism and the possible implication on china s carbon trading market precisely in an emission and trade scheme an important question is whether the auction outcome is efficient since this is closely related with the economic costs of emissions reduction due to the unique features of carbon permits existing auction mechanisms do not seem to be suitable for their distribution inspired by the t tonnement process this paper proposes a new auction mechanism for them for both practical application and theoretical extension the discrete and continuous situations are examined respectively the result shows that the proposed auction converges to pareto optimal equilibria and that without ties the equilibrium is unique for bidders the straightforward bidding strategy is the most preferred one in the sense that the strategy makes them avoid the risk of loss intuitively the auctioneer s utility is increasing in the number of bidders while bidders pay off is increasing in permits to a certain extent the proposed auction mechanism resolves the confliction between efficiency and revenue in the multi item auction theory while it increases people s understanding for carbon emission auction mechanism design

uniqueness of equilibrium in sealed high bid auctions abstract for the case of two buyers we show that equilibrium in the sealed high bid auction is unique when i buyers reservations prices are drawn independently from distributions with finite support and positive mass at the lower endpoint ii buyers have private values and iii buyers preferences are log supermodular for more than two buyers we obtain the same result under the additional assumptions that iv buyers with the same reservation price have the same preferences v buyers are risk neutral or risk averse with non increasing absolute risk aversion and vi the supports of the different buyers distributions of reservation prices have the same upper endpoint

uniqueness of the equilibrium in first price auctions abstract if the value cumulative distribution functions are strictly log concave at the highest lower extremity of their supports a simple geometric argument establishes the uniqueness of the equilibrium of the first price auction in the asymmetric independent private values model

valuation optimal asset allocation and retirement incentives of pension plans we provide a framework in which we link the valuation and asset allocation policies of defined benefits plans with the lifetime marginal productivity schedule of the worker and the pension plan formula in turn we examine the retirement policies that are implied by the primitives of the model and the value of pension obligations our model provides an explicit valuation formula for a stylized defined benefits plan the optimal asset allocation policies consist of the replicating portfolio of the pension liabilities and the growth optimum portfolio independent of the pension liabilities we show that the worker will retire when the ratio of pension benefits to current wages reaches a critical value which depends on the parameters of the pension plan and the discount rate using numerical techniques we analyze the feedback effect of retirement policies on the valuation of plans and on the asset allocation decisions article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

auctions with resale opportunities an experimental study we study first price asymmetric private value auctions with resale opportunities presented in seller s and buyer s markets we offer experimental evidence on bidding behavior prices and resource allocation building upon the hafalir and krishna 2008 model we find that bidders will bid higher in an auction if the resale market is a seller s market than a buyer s market there is a price revenue efficiency trade off established theoretically between these two resale regimes in equilibrium however final efficiency is high irrespective of the resale market structure evidence of bid symmetrization and higher final efficiency is found in the buyer advantaged resale case jel d44 c92

an intertemporal general equilibrium asset pricing model the case of diffusion information this paper provides sufficient conditions for the equilibrium price system and a vector of exogenously specified state variable processes to form a diffusion process in a pure exchange economy the conditions involve smoothness of agents utility functions and certain nice properties of the aggregate endowment process and the dividend processes of traded assets in place of the dynamic programming a martingale representation technique is utilized to characterize equilibrium portfolio policies this technique is useful even when there does not exist a finite dimensional markov structure in the economy and thus the markovian stochastic dynamic programming is not applicable a gents are shown to hold certain hedging mutual funds and the riskless asset in contrast to earlier results the market portfolio does not have a special role in hedging since the markets are dynamically complete when there exists a finite dimensional markov system in the economy the dimension of the hedging demand identified through the markovian dynamic programming may be much larger than that identified by the martingale method copyright 1987 by the econometric society

dynamic asset allocation in a mean variance framework the aim of this article is to analyze the portfolio strategies that are mean variance efficient when continuous rebalancing is allowed between the current date 0 and the horizon t under very general assumptions when a zero coupon bond of maturity t exists the dynamic efficient frontier is a straight line the slope of which is explicitly characterized every dynamic mean variance efficient strategy can be viewed as buy and hold combinations of two funds the zero coupon bond of maturity t and a continuously rebalanced portfolio an appropriate dynamic strategy defining the latter is explicitly derived for two particular price processes and comparisons of the efficient frontiers static versus dynamic are provided in these cases

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

problems in the measurement of consumer cost of living indexes three empirical issues in the use of cost of living indexes are examined a substitution bias b differences across demographic groups and c the importance of the reference indifference curve for true indexes when preferences are nonhomothetic using the estimated parameters of a demand system for food commodities from two microdata cross sections both true parametric and laspeyres price indexes for food are compared across both demographic groups and cross sectional cohorts

rewarding trading skills without inducing gambling this paper develops a model of active portfolio management in which fund managers may secretly gamble in order to manipulate their reputation and attract more funds we show that such trading strategies may expose investors to severe losses and are more likely to occur when fund managers are impatient their trading skills are scalable and generate higher prot per unit of risk we study investment management contracts that deter this behavior if investors are short lived then the manager must leave rents to investors in order to credibly commit not to gamble if investors are long lived contracts that increase but defer expected bonuses after an outstanding performance implement the rstbest our model can explain a number of observed dierences

first price auctions with resale and with outcomes robust to bid disclosure although there exists a pure separating equilibrium of the two bidder first price auction with resale when the bids are kept secret the ratchet effect prevents the existence of such an equilibrium if the bidders are heterogeneous and the bids are fully disclosed nevertheless we construct a behavioral equilibrium under full disclosure that is equivalent to the pure separating equilibrium under no disclosure thus if the bidders follow this equilibrium the choice of the disclosure regime does not affect the final allocation of the item nor the expected payoffs

high water marks high risk appetites convex compensation long horizons and portfolio choice we study the portfolio choice of hedge fund managers who are compensated by high water mark contracts we find that even risk neutral managers do not place unbounded weights on risky assets despite option like contracts instead they place a constant fraction of funds in a mean variance efficient portfolio and the rest in the riskless asset acting as would constant relative risk aversion crra investors this result is a direct consequence of the in de finite horizon of the contract we show that the risk seeking incentives of option like contracts rely on combining finite horizons and convex compensation schemes rather than on convexity alone

efficient methods of measuring welfare change and compensated income in terms of ordinary demand functions a utility maximizing consumer with a completely known system of ordinary demand functions q h p c is considered let p qo and p q be two arbitrary equilibrium situations the problem is to evaluate in which of the situations the utility is higher without knowing the utility function revealed preference theory tells that the ordinary demand functions which are in principle observable contain enough information to solve the problem remaining difficulties are therefore mainly computational we present how the compensated income c i c p qo and the compensated demand h p cl1 are calculated with arbitrary accuracy using only the ordinary demand system our two efficient algorithms also have interesting interpretations in terms of index numbers and consumer surplus measures

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

relative wealth concerns and financial bubbles we present a rational general equilibrium model that highlights the fact that relative wealth concerns can play a role in explaining financial bubbles we consider a finite horizon overlapping generations model in which agents care only about their consumption though the horizon is finite competition over future investment opportunities makes agents utilities dependent on the wealth of their cohort and induces relative wealth concerns agents herd into risky securities and drive down their expected return even though the bubble is likely to burst and lead to a substantial loss agents relative wealth concerns make them afraid to trade against the crowd

group cost of living indexes when households have different consumption patterns whose cost of living should an actual price index represent this issue was first raised by j l nicholson and s j prais in the 1950 s both made essentially the same point official price indexes give each household s consumption pattern an implicit weight proportional to its total expenditures see nicholson p 540 prais calls such an index plutocratic and both nicholson and prais suggest an alternative democratic price index which gives all households equal weight a group cost of living index is an index that measures the impact of price changes on the welfare of a group or population of households to define such an index requires an explicit or implicit concept of the welfare of a group and hence requires interpersonal comparison and distributional judgments since group indexes such as the consumer price index play an important role in our perception of inflation and the formation of macro economic policy and are used to escalate wages and social security benefits they have significant effects on government decisions and economic welfare despite their intellectual interest and practical importance however until recently they have been virtually ignored by index number theorists the theory of the cost of living index cli provides a generally accepted framework for measuring the impact of price changes on the welfare of a particular household this paper extends the cli concept to groups and discusses which questions require group indexes and which do not i begin by introducing some notation and terminology in the context of household clis a household s cli is the ratio of the expenditures required to attain a particular base indifference curve in two price situations suppose there are n goods and s households and denote the preference ordering of the rth household by r r the base indifference curve can be identified by a goods collection xro which lies on it the expenditure function er p xr rr shows the minimum expenditure required to attain the base indifference curve at prices p the cli of the rth household ir pa pb xrorr is the ratio of the minimum expenditure required to attain the base indifference curve at prices pa comparison prices to that required at prices pb reference prices except in very special cases the value of the cli depends on the base indifference curve at which it is evaluated as successively higher base indifference curves are specified one would expect the prices of luxuries to become more important relative to the prices of necessities hence it is convenient to regard the cli as a function of the base indifference curve rather than as a single number corresponding to a particular base thus instead of offering guidance in choosing an appropriate base indifference curve theory suggests that there is no need to choose to construct the exact cli an investigator needs to know the household s preferences lacking this knowledge he rnust fall back on indexes which require less information and which are upper bounds on the exact index the laspeyres index jr papbxrb is the ratio of the cost of purchasing the reference period consumption basket at comparison prices to its cost

a note on aggregation of fechner thurstone direct utility functions abstract this paper demonstrates that exact aggregation of individual to per capita demand functions is achieved when the fechner thurstone functional form is the underlying direct utility function the exact aggregation takes place without the restrictive assumptions that characterize systems of demand functions derived from other functional forms

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

horizontal mergers with synergies cash vs profit share auctions we consider takeover bidding in a cournot oligopoly when firms have private information concerning the synergy effect of merging with a takeover target and bidders can influence rivals beliefs through their bids we compare cash and profit share auctions first and second price supplemented by entry fees since non merged firms benefit from a merger if synergies are low bidders are subject to a positive externality with positive probability nevertheless pooling does not occur unlike cash auctions profit share auctions are not revenue equivalent and the second price profit share auction is more profitable than the other auctions

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

multi object auctions with resale theory and experiment abstract we study multi object auctions in the presence of post auction trade opportunities among bidders who have either single or multi object demand we focus on two formats vickrey auctions where package bidding is possible and simultaneous second price auctions we show that under complementarities the vickrey format has an equilibrium where the objects are allocated efficiently at the auction stage whether resale markets are present or not the simultaneous second price on the other hand leads to inefficiency with or without resale possibility our experimental findings show that the possibility of resale in second price auctions decreases the efficiency rate at the auction stage compared to the no resale case however after resale the efficiency rate in second price is as high as that of vickrey auction without resale outcomes in the experiment preventing resale neither benefits nor hurts auction revenues in a second price format

equilibrium prices in the presence of delegated portfolio management abstract this paper analyzes the asset pricing implications of commonly used portfolio management contracts linking the compensation of fund managers to the excess return of the managed portfolio over a benchmark portfolio the contract parameters the extent of delegation and equilibrium prices are all determined endogenously within the model we consider symmetric fulcrum performance fees distort the allocation of managed portfolios in a way that induces a significant and unambiguous positive effect on the prices of the assets included in the benchmark and a negative effect on the sharpe ratios asymmetric performance fees have more complex effects on equilibrium prices and sharpe ratios with the signs of these effects fluctuating stochastically over time in response to variations in the funds excess performance

do option like incentives induce overvaluation evidence from experimental asset markets abstract one potential reason for bubbles evolving prior to the financial crisis was excessive risk taking stemming from option like incentive schemes in financial institutions by running laboratory asset markets we investigate the impact of option like incentives on price formation and trading behavior the main results are that i we observe significantly higher market prices with option like incentives than linear incentives ii we further find that option like incentives provoke subjects to behave differently and to take more risk than subjects with linear incentives iii we finally show that trading at inflated prices is rational for subjects with option like incentives since it increases their expected payout

auctions with both common value and private value bidders abstract this paper shows the existence of monotone pure strategy equilibrium in auctions with both common value bidders and private value ones in equilibrium the common value bidders bid less aggressively when there are more private value bidders further resale is discussed as an application

on the existence of pure and mixed strategy nash equilibria in discontinuous games a game is better reply secure if for every nonequilibrium strategy x and every payoff vector limit u resulting from strategies approaching x some player i has a strategy yielding a payoff strictly above u i even if the others deviate slightly from x if strategy spaces are compact and convex payoffs are quasiconcave in the owner s strategy and the game is better reply secure then a pure strategy nash equilibrium exists better reply security holds in many economic games it also permits new results on the existence of symmetric and mixed strategy nash equilibria

restricted coasean bargaining we investigate the efficiency of coasean bargaining when restrictions are placed on the set of feasible bargaining outcomes when property rights are costly to defend appropriate we find bargaining restrictions may be pareto superior to unconstrainedvoluntary exchange under cost uncertainty over the harmful activity we show an efficient configuration of restrictions must balance the potential reduction in appropriation costs with the possibility of allocatively inefficient bargaining restrictions for an all pay auction we find conditions where precluding bargaining is always ex ante preferable to unrestricted bargaining for cases where the restrictions are contested we show conditions for the continuing existence of welfare improvements

existence of equilibrium in single and double private value auctions we show existence of equilibria in distributional strategies for a wide class of private value auctions including the first general existence result for double auctions the set of equilibria is invariant to the tie breaking rule the model incorporates multiple unit demands all standard pricing rules reserve prices entry costs and stochastic demand and supply valuations can be correlated and asymmetrically distributed for double auctions we show further that at least one equilibrium involves a positive volume of trade the existence proof establishes new connections among existence techniques for discontinuous bayesian games

optimal asset allocation and risk shifting in money management this article investigates a fund manager s risk taking incentives induced by an increasing and convex relationship of fund flows to relative performance in a dynamic portfolio choice framework we show that the ensuing convexities in the manager s objective give rise to a finite risk shifting range over which she gambles to finish ahead of her benchmark such gambling entails either an increase or a decrease in the volatility of the manager s portfolio depending on her risk tolerance in the latter case the manager reduces her holdings of the risky asset despite its positive risk premium our empirical analysis lends support to the novel predictions of the model

first price auctions with resale abstract we present a simple model of first price auction with two bidders whose valuations are not identically distributed and where resale is possible between the bidders and given an explicit expression for the equilibrium strategies

optimal convergence trade strategies convergence trades exploit temporary mispricing by simultaneously buying relatively underpriced assets and selling short relatively overpriced assets this paper studies optimal convergence trades under both recurring and nonrecurring arbitrage opportunities represented by continuing and stopped cointegrated price processes and considers both fixed and stochastic poisson horizons conventional long short delta neutral strategies are generally suboptimal and it can be optimal to simultaneously go long or short in two mispriced assets optimal portfolio holdings critically depend on whether the risky asset position is liquidated when prices converge our theoretical results are illustrated on pairs of chinese bank shares traded on both the hong kong and china stock exchanges the author 2013 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

all equilibria of the vickrey auction abstract this paper characterizes the set of nash equilibria in the second price sealed bid auction with independent private values and three or more bidders in addition we show that any effective reserve price implies uniqueness

an isomorphism between asset pricing models with and without linear habit formation we show an isomorphism between optimal portfolio selection or competitive equilibrium models with utilities incorporating linear habit formation and corresponding models without habit formation the isomorphism can be used to mechanically transform known solutions not involving habit formation to corresponding solutions with habit formation for example the constantinides 1990 and ingersoll 1992 solutions are mechanically obtained from the familiar merton solutions for the additive utility case without recourse to a bellman equation or first order conditions more generally recent solutions to portfolio selection problems with recursive utility and a stochastic investment opportunity set are readily transformed to novel solutions of corresponding problems with utility that combines recursivity with habit formation the methodology also applies in the context of hindy huang kreps 1992 preferences where our isomorphism shows that the solution obtained by hindy and huang 1993 can be mechanically transformed to dybvig s 1995 solution to the optimal consumption investment problem with consumption ratcheting this article presents a general method for solving asset pricing or portfolio selection models involving linear habit formation of the type studied by sundaresan 1989 constantinides 1990 detemple and zapatero 1991 ingersoll 1992 chapman 1998 and others the basic idea we pursue is that linear habit formation can be thought of as a redefinition of what constitutes consumption to include not only the current consumption rate but also a fictitious possibly negative consumption rate derived from past actual consumption by pricing out this fictitious consumption rate correctly the economy with linear habit formation can be mechanically transformed to an equivalent economy without habit formation this analysis simplifies and unifies existing results but also generates novel solutions for example together with the results of schroder and skiadas 1997 1999 our method produces optimal lifetime consumption and portfolio policies with preferences that combine recursive utility with habit formation under a stochastic

asymmetric auctions with resale an experimental study we study auctions with resale based on hafalir and krishna s 2008 6 model as predicted weak bidders bid more with resale than without so that average auction prices tend to increase when the equilibrium calls for weak types to bid higher than their values with resale they do but not nearly as much as the theory predicts in other treatments outcomes are much closer to the risk neutral nash model s predictions bid distributions for weak and strong types are more similar with resale than without in line with the theory

optimal mechanism design with resale via bargaining abstract in this paper we examine the optimal mechanism design of selling an indivisible object to one regular buyer and one publicly known buyer where inter buyer resale cannot be prohibited the resale market is modeled as a stochastic ultimatum bargaining game between the two buyers we fully characterize an optimal mechanism under general conditions surprisingly in this optimal mechanism the seller never allocates the object to the regular buyer regardless of his bargaining power in the resale market the seller sells only to the publicly known buyer and reveals no additional information to the resale market the possibility of resale causes the seller to sometimes hold back the object which under our setup is never optimal if resale is prohibited we find that the seller s revenue is increasing in the publicly known buyer s bargaining power in the resale market when the publicly known buyer has full bargaining power myerson s optimal revenue is achieved when the publicly known buyer has no bargaining power a conditionally efficient mechanism prevails

continuous time methods in finance a review and an assessment i survey and assess the development of continuous time methods in finance during the last 30 years the subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing term structure theory asset pricing and optimal consumption and portfolio choices during the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance this latter subperiod has seen significant progress in econometric theory computational and estimation methods to test and implement continuous time models capital market frictions and bargaining issues are being increasingly incorporated in continuous time theory the roots of modern continuous time methods in finance can be traced back to the seminal contributions of merton 1969 1971 1973b in the late 1960s and early 1970s merton 1969 pioneered the use of continuous time modeling in financial economics by formulating the intertemporal consumption and portfolio choice problem of an investor in a stochastic dynamic programming setting merton 1973b also showed how such a framework can be used to develop equilibrium asset pricing implications thereby significantly extending the asset pricing theory to richer dynamic settings and expanding the scope of applications of continuous time methods to study problems in financial economics 1 within a span of about 30 years from the publication of merton s inf luential papers continuous time methods have become an integral part of financial economics indeed in certain core areas in finance such as e g asset pricing derivatives valuation term structure theory and portfolio selection continuoustime methods have proved to be the most attractive way to conduct research and gain economic intuition the continuous time approach in these areas has produced models with a rich variety of testable implications the econometric theory for testing continuous time models has made rapid strides in the last decade and has thus kept pace with the impressive progress on the theoretical front one hopes that the actual empirical investigations and estimation using the new procedures will follow suit soon

nontraded asset valuation with portfolio constraints a binomial approach we provide a simple binomial framework to value american style derivatives subject to trading restrictions the optimal investment of liquid wealth is solved simultaneously with the early exercise decision of the nontraded derivative noshort sales constraints on the underlying asset manifest themselves in the form of an implicit dividend yield in the risk neutralized process for the underlying asset one consequence is that american call options may be optimally exercised prior to maturity even when the underlying asset pays no dividends applications to executive stock options eso are presented it is shown that the value of an eso could be substantially lower than that computed using the black scholes model we also analyze nontraded payoffs based on a price that is imperfectly correlated with the price of a traded asset the economics of asset pricing when one or more of the assets in the opportunity set are either subject to trading restrictions or entirely nontraded is a matter of great interest viewed from a practical perspective we have several important examples of such assets that are subject to trading restrictions pensions which represent perhaps the most significant of assets held by individual households are subject to trading restrictions it is typically the case that assets in pensions are not available for immediate consumption borrowing against pension assets is subject to significant direct and indirect costs by way of taxes and early withdrawal penalties human capital is another example housing investment is also illiquid and subject to significant transaction costs together pensions human capital and housing constitute a substantial part of a typical household s assets the significance of such nontraded assets for risk premia has already been noted by bewley 1982 there are other circumstances where lack of unrestricted trading plays an important role executive compensation plans usually take the this article was presented at boston university we would like to thank the editor bernard dumas and two anonymous referees for very helpful comments we also thank nalin kulatilaka and seminar participants for useful suggestions ganlin chang fei guan and carlton osakwe provided valuable research assistance j detemple acknowledges support from the social sciences and humanities research

pairs trading performance of a relative value arbitrage rule we test a wall street investment strategy pairs trading with daily data over 1962 2002 stocks are matched into pairs with minimum distance between normalized historical prices a simple trading rule yields average annualized excess returns of up to 11 for self financing portfolios of pairs the profits typically exceed conservative transaction cost estimates bootstrap results suggest that the pairs effect differs from previously documented reversal profits robustness of the excess returns indicates that pairs trading profits from temporary mispricing of close substitutes we link the profitability to the presence of a common factor in the returns different from conventional risk measures wall street has long been interested in quantitative methods of speculation one popular short term speculation strategy is known as pairs trading the strategy has at least a 20 year history on wall street and is among the proprietary statistical arbitrage tools currently used by hedge funds as well as investment banks the concept of pairs trading is disarmingly simple find two stocks whose prices have moved together historically when the spread between them widens short the winner and buy the loser if history repeats itself prices will converge and the arbi

speculation and demand reduction in english clock auctions with resale many auctions are followed by a resale market which occurs when the winner of the auction resells the item won to one of the participants from the original auction the existence of such transactions may initially appear counter intuitive however this paper will show that active inter bidder resale results from payoff maximizing decisions in the auction that take into account the incentives of a resale opportunity specifically i examine how the existence of an inter bidder resale opportunity impacts bidder behavior in an english clock auction and to what extent altering the bargaining power of the final buyer and reseller in the resale market determines the strategies followed in the initial auction in an attempt to understand the existence of these inter bidder transactions theoretical and behavioral analysis is used to develop hypotheses of speculation bidding above value and demand reduction bidding below value which are directly tested in a controlled experimental setting while value bidding is a dominant strategy in a standard english clock auction without resale when resale is allowed this theoretical claim is weaker demand reduction is observed when the bargaining power is shifted to the final buyer in resale and when the bargaining power is shifted toward the reseller speculation is observed the revenue achieved in the initial auction depends on the behavior observed in the auction regardless of bargaining power revenue is shown to decrease below what would have been earned in an english auction without resale due to demand reduction when the reseller has the bargaining power and speculation is observed this loss in revenue is somewhat mitigated by increased speculation

optimal consumption and portfolio policies when asset prices follow a diffusion process abstract we consider a consumption portfolio problem in continuous time under uncertainty a martingale technique is employed to characterize optimal consumption portfolio policies when there exist nonnegativity constraints on consumption and on final wealth we also provide a way to compute and verify optimal policies our verification theorem for optimal policies involves a linear partial differential equation unlike the nonlinear partial differential equation of dynamic programming the relationship between our approach and dynamic programming is discussed we demonstrate our technique by explicitly computing optimal policies in a series of examples in particular we solve the optimal consumption portfolio problem for hyperbolic absolute risk aversion utility functions when the asset prices follow a geometric brownian motion the optimal policies in this case are no longer linear when nonnegativity constraints on consumption and on final wealth are included by these examples one can see that our approach is much easier than the dynamic programming approach

revenue ranking of first price auctions with resale abstract when the price setter in post auction resale is chosen according to exogenous probabilities hafalir and krishna 2008 2 showed that the first price auction brings more expected revenues than the second price auction with truth bidding bidders we complete their revenue ranking by proving that the first price auction produces higher expected revenues the higher the probability the auction winner sets the resale price

precautionary savings and the permanent income hypothesis this paper derives the explicit solution of a dynamic stochastic optimal consumption problem for infinitely lived agents whose preferences exhibit in the presence of non diversifiable labour income uncertainty a constant elasticity of intertemporal substitution and constant absolute risk aversion the constancy of the elasticity of intertemporal substitution which implies that marginal utility at zero consumption is infinite guarantees that the non negativity constraint on consumption is never binding along the optimal path the assumption of constant absolute risk aversion allows an explicit computation of human wealth and provides a simple representation of the precautionary savings motive

bilateral trading in networks in many markets goods flow from initial producers to final customers travelling through many layers of intermediaries and information is asymmetric we study a dynamic model of bargaining in networks that captures these features we show that the equilibrium price demanded over time is non monotonic but the sequence of transaction prices declines over time with the possible exception of the last period the price dynamic is therefore reminiscent of fire sales and hot potato trading traders who intermediate the object arise endogenously and make a positive profit the profit earning intermediaries are not necessarily traders with many connections for the case of multilayer networks they belong to the path that reaches the maximum number of potential buyers using the minimal number of intermediaries this is not necessarily the path of the network that maximizes the probability of consumption by traders who value the most the object i e welfare

two trees with heterogeneous beliefs spillover effect of disagreement in a model where investors disagree about the fundamentals of two stocks the state price density depends on investor disagreements for both stocks especially the larger stock this implies that disagreement among investors in a large firm has a spillover effect on the pricing of other stocks owned by these investors the pricing effects of investor disagreements crucially depend on the average belief biases empirical findings support the novel model prediction of a disagreement spillover effect and help reconcile some mixed evidence in the literature

aggregate short interest and market valuations we examine some basic data on the evolution of aggregate short interest both during the dot com era and at other times in history total short interest moves in a countercyclical fashion for example short interest in nasdaq stocks actually declines as the nasdaq index approaches its peak moreover this decline does not seem to reflect a substitution away from outright short selling and towards put options as the ratio of put to call volume displays the same countercyclical tendency the evidence suggests that i arbitrageurs are reluctant to bet against aggregate mispricings and ii short selling does not play a particularly helpful role in stabilizing the overall stock market this abstract was borrowed from another version of this item

experimental evidence on the performance of emission trading schemes in the presence of an active secondary market as auction based emission trading schemes ets become more common in addressing climate change it is of interest to study the effects of bargaining power in resale markets on original as well as post resale allowance allocations in terms of prices and efficiency this article provides an experimental study of first price private value asymmetric auctions followed by a double auction resale market opportunity we compare the double auction to other resale regimes with an uneven distribution of market power and contrast initial bids resale prices and efficiency despite the conventional wisdom that full efficiency requires the absence of market power we find that double auction resale markets lead to lower efficiency than the monopsony resale regime the level of efficiency achieved however is close to the highest across mechanisms that have differential bargaining power at the resale stage

incentives and endogenous risk taking a structural view on hedge fund alphas hedge fund managers are subject to several nonlinear incentives performance fee options call equity investors redemption options put and prime broker contracts allowing for forced deleverage put the interaction of these option like incentives affects optimal leverage ex ante depending on the distance of fund value from the high water mark we study how these endogenous effects influence performance measures used in the literature we show that reduced form measures that do not account for these features are subject to economically significant false discovery biases the result is stronger for low quality funds we propose an alternative structural methodology for conducting performance attribution in hedge funds

cost of living indexes and demographic change the consumer price index cpi although not without problems is the most often used mechanism for adjusting contracts for cost of living changes in the us the us bureau of labor statistics lists several problems associated with using the cpi as a cost of living index where the proportion of 2 worker families is increasing population is shifting and work week hours are changing this study shows how to compute cost of living indexes which are inexpensive to update use less restrictive assumptions about consumer preferences do not require statistical estimation and handle the problem of increasing numbers of families where both the husband and wife work this study attempts to how widely in fact the cpi varies with alternative true cost of living varies with alternative true cost of living indexes although in the end this de facto cost of living measure holds up quite well in times of severe price inflation people change their preferences by substitution necessitating a flexible cost of living index that accounts for this fundamental economic behavior

auctions with resale reserve prices and revenues abstract we study auctions with resale and reserve prices we characterize the equilibrium and compare the revenues of the first price auction with that of the second price auction we show that several results change when a reserve price is introduced first the second price auction may yield higher revenues than the first price auction second the strong bidder is more likely to win than the weak bidder

optimality and the english and second price auctions with resale abstract in the presence of resale and under more general assumptions than zheng s 2002 implementation of myerson s 1981 optimal allocation with two bidders is achieved through the second price auction in a special class of asymmetric n bidder models it is achieved through the english auction

bidding to lose auctions with resale a losing bidder can still purchase the prize from the winner after the auction we show why a strong bidder may prefer to drop out of the auction before the price has reached her valuation and acquire the prize in the aftermarket a strong bidder may be in a better bargaining position in the aftermarket if her rival won at a relatively low price so it can be common knowledge that in equilibrium a weak bidder will win the auction and even without uncertainty about relative valuations resale will take place the possibility of reselling to a strong bidder attracts weak bidders to participate in the auction and raises the seller s revenue

auctions with imperfect commitment when the reserve may signal the cost to re auction if bidders are uncertain whether the auctioneer sticks to the announced reserve they respond with strategic non participation speculating that the auctioneer may revoke the reserve however the reserve inadvertently signals the auctioneer s type which drives multiplicity of equilibria eliminating belief systems that violate the intuitive criterion yields a unique equilibrium reserve price equal to the seller s consumption value paradoxically even if bidders initially believe that the auctioneer is bound by his reserve almost with certainty commitment has no value commitment is a shorthand for a high cost to re auction which may reflect a concern for reputation several variations of the model assess the robustness of our results

optimal bid disclosure in patent license auctions under alternative modes of competition abstract the literature on patent license auctions in oligopoly assumed that the auctioneer reveals the winning bid and stressed that this gives firms an incentive to bid high in order to signal an aggressive output strategy in a downstream cournot market game and conversely bid low to signal acquiescent pricing in a bertrand market game the present paper examines the information revealed by publishing the winning or the losing or no bid assuming an oligopoly with differentiated goods we rank disclosure rules and find that it is not optimal for the innovator to disclose the winning bid regardless of the mode of competition