testing informational assumptions in common value bidding models this paper provides an example of a means of linking mathematical theory laboratory experiments and standard empirical work theory by necessity abstracts from the naturally occurring world and experiments designed to test theory must incorporate the same abstractions on the other hand empirical tests are generally performed on naturallyoccurring data which may not reflect those same abstractions given this possible divergence naturally occurring data should be tested for consistency with theoretical assumptions whenever possible on the basis of standard symmetric bidding theory this paper reports on a preliminary version of such a test for off shore oil bidding data

evaluating split estates in oil and gas leasing taking advantage of randomly assigned federal mineral rights this paper establishes the discount that mineral developers place on oil and gas leases with divided ownership results of 53 bimonthly federal oil and gas lease auctions in wyoming between february 1998 and october 2006 are examined bidders discount split estate by 11 to 14 on average but by as much as 24 for more expensive leases impacts of multiple ownerships and additional leasing stipulations are also explored this discount is interpreted as an expectation of transaction costs incurred in obtaining surface access so total costs remain unaffected on average

labor market regulation and the winner s curse i introduction in march 1992 the government of british columbia b c canada introduced the skill development and fair wage policy sdfwp which mandated the payment of fair wages on provincial public construction projects and promulgated the wage scales for construction crafts in 1994 sdfwp was enacted as legislation similar laws have been enacted in england and the united states in the past and as allen s 1983 survey shows their impact is a subject of controversy opponents argue that regulated wages distort the labor market reduce competition and increase construction costs proponents of the law on the other hand not only emphasize its long term positive effects on the living and working conditions of workers training and the consequent productivity increases but also claim that the alleged inflationary effect is counterbalanced by the improved labor and product quality in this paper i focus on another consequence of wage regulation namely its impact on bidding for public construction contracts i propose that the wage regulation will affect the construction market not only by changing the costs and quality of inputs but also through the transformation of the nature of the uncertainty that the contractors face during the bidding process the auction theory predicts that the optimal bid is responsive to the type of uncertainty under the so called common values cv model bidders face some common source of uncertainty regarding the construction cost and the winner is prone to underestimate the true cost rational and experienced bidders avoid this winner s curse by adding a surcharge to their estimated cost as uncertainty assumes a less collective and more private nature however the winner s curse becomes less of a problem and the rational bidder does not need to resort to the additional surcharge as a protection from underbidding the sdfwp may result in such a transformation in the bidding environment by reducing the uncertainty over labor costs that are common to all nonunion contractors elimination of the surcharge in turn may even offset the possibly higher labor cost in this paper i will test indirectly the hypothesis that the sdfwp influenced the bidding environment in b c in this fashion under the working assumption that contractors follow optimal rules in determining bids for this purpose i will use data from 54 public school construction projects tendered between 1989 and 1995 and compare the pre and post sdfwp unit bid prices the paper is organized as follows in section ii i discuss the relevant auction literature and the hypotheses i state the main hypotheses of the paper concerning the sdfwp and bidding behavior in section iii section iv describes the data an empirical model of bid price determination is presented and estimated in sections v vi and vii the final section concludes ii bidding and the winner s curse bidders for public school construction projects in b c submit sealed bids at a specified date and the lowest bidder wins the contract 1 many of the early sealed bid first price optimal bidding models presented in economics civil engineering and operations research literatures follow friedman 1956 according to these models bidders are risk neutral non colluding expected profit maximizers competing over a single project friedman suggests that the probability of being the lowest competitor is equal to the product of the probabilities of underbidding each competitor probability distributions of the competitors bids are to be obtained from the data on previous tenders this approach lays bare critical elements in competitive bidding first the contractor faces a trade off between profitability and the probability of winning the contract the bid must be high enough to yield a positive profit and low enough to win over other bids second superior cost efficiency enables the contractor to change the parameters of this trade off in his or her favor

number of bids number of bidders and bidding behavior in outer continental shelf oil lease auction markets abstract theoretical models of auction bidding markets typically treat number of bids and number of bidders as equivalent measures when joint bidding opportunities exist this assumption will often not hold in cases such as offshore oil auctions joint bidding is an extremely common occurrence our analysis of these auctions suggests that the actual number of bidding participants is more closely related with variables of interest winning bids average bid per acre etc than is the simple number of bids we argue that analyses such as that presented here are important in developing theoretical models that are useful in explaining or predicting actual bidding auction outcomes

the probability of sale and price premiums in withdrawn auctioned properties this paper examines the impact of the auction process of residential properties that whilst unsuccessful at auction sold subsequently the empirical analysis considers both the probability of sale and the premium of the subsequent sale price over the guide price reserve and opening bid the findings highlight that the final achieved sale price is influenced by key price variables revealed both prior to and during the auction itself factors such as auction participation the number of individual bidders and the number of bids are significant in a number of the alternative specifications

competitive bidding under asymmetrical information behavior and performance in gulf of mexico drainage lease sales 1959 1969 in past outer continental shelf oil and gas lease sales winners of drainage tracts have tended to realize a higher economic return than winners of wildcat tracts this paper finds empirical support for the hypothesis that adjacent lessees have an information advantage when bidding for drainage tracts under the cash bonus bidding system this leads to superior economic returns and thus explains the difference in returns between wildcat and drainage leases the paper concludes that this difference and its cause do not pose a policy problem given empirical evidence that the government receives fair market value for the two lease categories combined

exchange rate target zones a survey of the literature this work selectively reviews the literature on exchange rate target zones and their theoretical and empirical methodologies and examines whether they can be used to clarify to what extent this type of exchange rate regime could contribute to greater exchange rate stability we discuss the main contributions of the first and second generations of exchange rate target zone models in an attempt to reconcile the poor empirical performance of the krugman model with the reality of exchange rate target zone regimes this line of research integrates target zones with alternative underlying economic models such as imperfect credibility intra marginal interventions and sticky price models it was thus possible to understand the correlations observed between the exchange rate its fundamentals determinants and the interest rate differential and to explain the fact that the statistical distribution of the exchange rate is hump shaped rather than u shaped this implies that the initial emphasis of target zone models on nonlinearities honeymoon effect smooth pasting and marginal interventions has vanished exchange rate target zones are better described as similar to managed floating regimes with intra marginal interventions with some marginal interventions when the exchange rate reaches the edges of the floating band

note on a conflict of assumptions in bidding models abstract a controversy over the most appropriate model for some bidding situations is examined it is shown that the models are based on four common assumptions and a fifth which depends on the bidding situation

sealed bids sunk costs and the process of competition how do firms recover precontract costs for example suppose 10 firms compete in a sealed bid auction for the right to explore and develop an offshore oil field each spends 500 000 to estimate the value of the field and to prepare its bid suppose this investigation reveals that the tract is worth approximately 20 million if sunk costs do not matter competition dictates that the winner must bid 20 million but if the winner is to recover its prebid costs the maximum offer can be only 19 5 million furthermore long run industry equilibrium considerations suggest that the highest bid will be only 15 million 20 million minus the total bid preparation costs of 5 million if competition forces firms to charge marginal cost why do firms ever invest in resources which become sunk in some industries inframarginal rents can be used to recover these costs however the example above as well as many others involves an all or none deci

structural estimation of the affiliated private value auction model we consider the structural estimation of the affiliated private value apv model in first price sealed bid auctions the model allows for bidders individual efficiencies and opportunity costs while permitting dependence among bidders private values through affiliation we establish the nonparametric identification of the apv model characterize its theoretical restrictions and propose a computationally convenient and consistent two step nonparametric estimation procedure for estimating the joint private value distribution from observed bids using simulated bid data we provide a step by step guide on how to implement our procedure and show the good behavior of our estimator in small samples

delta hedging strategies comparison abstract in this paper we implement dynamic delta hedging strategies based on several option pricing models we analyze different subordinated option pricing models and we examine delta hedging costs using ex post daily prices of s p 500 furthermore we compare the performance of each subordinated model with the black scholes model

dynamic investment and financing under personal taxation this paper examines the effects of capital gains taxation on firms investment and financing decisions we develop a real options model in which the timing of investment the decision to default and the firm s capital structure are endogenously and jointly determined our analysis demonstrates that the asymmetric taxation of capital gains and losses fosters investment by eroding the option value of waiting it also shows that firms controlled by taxable investors employ more equity financing the higher the firm s stock price and the worse the firm s historical performance using a large sample of u s industrial firms that are owned by taxable investors between 1970 and 2008 we present new evidence on corporate investment and financing policies which is supportive of the model s predictions

tax adjusted discount rates this paper develops models for discount rates that are adjusted for the interest tax shields of an infra marginal firm in a general tax equilibrium where there is cross sectional variation in corporate tax rates under the assumption that the firm optimally maintains a predetermined debt ratio a tax adjusted riskless discount rate model is given for valuing certainty equivalents and a tax and risk adjusted discount rate model is given for valuing expected cash flows for the latter case the asset equity debt and tax shield betas are derived and a weighted average cost of capital interpretation is given the tax adjusted capm apt security market lines for expected returns in stock and bond markets both have the same slope but different intercepts a formula is also provided for the present value of the interest tax shield when the firm optimally maintains a predetermined debt level the analysis here also differs from the existing literature in the following respects it allows for cross sectional variation in corporate tax rates and personal tax rates it shows that the market values of risky and riskless interest tax shields differ only to the extent that tax laws provide for nonlinear taxation of gains and losses it also shows that interest tax shields should be discounted at a tax adjusted discount rate that reflects the fact that they accrue to equity investors rather than debt investors continuous time simplifications of the formulas in this paper and the previous literature are also given

target zones and exchange rate dynamics this paper develops a simple model of exchange rate behavior under a target zone regime it shows that the expectation that monetary policy will be adjusted to limit exchange rate variation affects exchange rate behavior even when the exchange rate lies inside the zone and is thus not being defended actively somewhat surprisingly the analysis of target zones turns out to have a strong formal similarity to problems in option pricing and investment under uncertainty

the price effects of increased competition in auction markets bidding theory predicts low er selling winning bids higher buying winning bids as numbers of bidders incre ase alternative versions predict that winning bids fall rise with the second order statistic the maximum order statistic or 1 n the authors test these pre dictions using data on underwriters spreads on tax exempt bonds offshore oil t racts and national forest timber they estimate winning bids using general vari ables for the product and dummies for 1 2 11 bidders in all cases mor e bidders meansignificantly lower selling winning bids the expected maximum order statistic fits better than either the second order statistic or1 n in te n out of twelve cases copyright 1987 by mit press

an empirical analysis of the determinants of high bonus bids for petroleum leases in the u s outer continental shelf ocs this paper shows that neither aggregate measures used to analyze concentrated market and industry structures nor patterns of joint bidding among firms active in the offshore gulf of mexico suggest either a decrease or a deficiency in the competitiveness of the lease sales held by the us minerals management service our empirical results show that the relative change in the mean value of high bonus bids for leases with multiple bids competitive leases is greater than the change in the mean value of single bid leases further the mean value of high bonus bids for deepwater leases is also found to be significantly higher than that of shallow water leases the results also suggest that variation in crude petroleum price index may lead to a higher mean value of the high bids certeris paribus

controlling stochastic pollution events through liability rules some evidence from ocs leasing under the ocs lands act firms are strictly liable for damages from oil spills to the extent that this liability rule causes firms to internalize environmental risks incentives for damage avoidance behavior are provided using data from the 1979 georges bank lease sale we use a robust estimation technique to test the hypothesis that potential environmental costs are reflected in bids for ocs leases the results indicate a substantial response to environmental risks recognizing reduced rents we estimate that total high bids have declined by 20 because of firms perceptions of environmental risks the results suggest that liability rules have considerable potential in controlling stochastic pollution events

informational rents in oil and gas concession auctions in brazil abstract this article aims to estimate the informational rents earned by winning bidders in oil and gas exploration and production auctions in brazil we estimate the distributions of bids and bidders private valuations using a nonparametric structural model and assuming independence and asymmetry between participants petrobras the brazilian state owned petroleum giant and former oil sector monopolist was considered a competitor that was distinct from other competitors thus we investigate a database based on information from all auctions held between 1999 and 2008 the results suggest that petrobras earned significantly higher information rents than other competitors such rents ranged from 15 to 63 depending on the number and type of competitors

the capital gain lock in effect and perfect substitutes abstract this paper analyses the effect of investors accrued capital gains on optimal portfolio composition and equilibrium returns under the assumption that investors are able to re balance with perfect substitute securities no dominance arguments are used to show that pricing differences because of accrued capital gains do not arise among securities which are perfect substitutes these arguments are insufficient however to prevent pricing differences because of accrued capital gains among securities which are not perfect substitutes trading rules are developed which outline the conditions necessary for the realisation of accrued capital gains and the deferral of capital losses these trading rules also provide guidance on which securities investors should sell given their tax basis when re balancing their portfolios

forward rate target zones and exchange rate dynamics abstract a target zone for the forward exchange rate is developed using a log linear monetary model exchange rates are driven by a wiener process a central bank purchases or sells foreign exchange forward to keep the target forward rate in a specified band defending such a target zone does not require regulated wiener process for the central bank s forward exchange intervention can avoid disturbing the money supply a forward rate target zone can stabilize the spot rate against a free float and its stabilizing effects become more significant if the delivery term applying to the target forward rate is shorter

exchange rate dynamics in a multilateral target zone this paper presents a model of exchange rate behaviour in a multilateral target zone the model produces new economic insights beyond the well known bilateral model of krugman 1991 which is obtained as a special case the paper also introduces a new class of stochastic processes in economics namely multidimensional reflected diffusion processes two main features characterize the economics of exchange rates in a multilateral target zone i the restrictions on interventions imposed by cross currency constraints when one country changes its money supply say because its exchange rate with a second country has hit its band all exchange rates involving the currency of that particular country will be affected regardless of their position within their respective bands ii cooperation in sharing the intervention burden in general the exchange rate between any two countries will depend on the fundamentals of third countries in a multilateral target zone this is because if the monetary authorities intervene together a shock in the fundamentals of any country will induce a revision of the expectation of future interventions of other countries the model reverts the counterfactual predictions of the bilateral model that the exchange rate steady state density should be u shaped and that its volatility should be a decreasing function of the distance of the exchange rate to the limits of its band thus accounting for the multilateral feature of real world target zones allows us to reconcile target zone models with the most salient empirical features of exchange rate behaviour

optimal security design how should new securities be designed traditional theories have little to say on this the literature on capital structure and general equilibrium theories with incomplete markets take the securities firms issue as exogenous this paper explicitly incorporates the transaction costs of issuing securities and develops a model where the instruments that are traded are chosen optimally and the economy s market structure is endogenous among other things it is shown that the firm s income stream should be split so that in every state all payoffs are allocated to the security held by the group that values them most this abstract was borrowed from another version of this item

an arbitrage free trilateral target zone model abstract this paper proposes an arbitrage free trilateral model of a credible target zone regime with bands on each bilateral exchange rate the no arbitrage condition reduces the system to only two dimensions any two rates must obey their own boundaries but in addition the free rein for movements is restricted by the band of the redundant rate therefore target zone models defined in bilateral settings do not apply to general systems with a cobweb of bilateral bands such as the european monetary system since the model has no known analytical solution it is estimated by the method of simulated moments

risk returns and values in the presence of differential taxation abstract we show that there exist separate security market lines smls for debt and equity securities in an equilibrium with differential taxation of debt and equity we characterize the conditions under which these smls have the same price of risk with different intercepts and the conditions under which the tax effect of leverage is linear in debt value as in the adjusted present value method we explore the implications of our results for cost of capital calculations how to calculate the cost of capital for debt and equity and how to unlever betas correctly accounting for differential taxation

taxable and tax deferred investing a tax arbitrage approach we analyze an intertemporal portfolio problem with both taxable and tax deferred retirement accounts using a tax arbitrage argument we identify conditions under which the optimal location decision where to place an asset is separable from the allocation decision how much to allocate to each asset investors place highly taxed assets in the tax deferred account to maximize the tax benefit and adjust their taxable portfolios to achieve the optimal risk exposure we show that the two account problem can be reduced to a taxable account only problem the results are robust to capital gains tax deferrals consumption and contribution decisions and stochastic tax rates

an empirical study of an auction with asymmetric information this paper examines federal auctions for drain age leases on the outer continental shelf from 1959 to 1969 these are leases that are adjacent to tracts on which a deposit has been discovered the authors find that the data strongly support the hypotheses that neighbor firms are better informed about the value of a lease than nonneighbor firms that neighbor firms coordinate their bidding decisions and that both types of firms bid strategically in accordance with the bayesian nash equilibrium model for first price sealed bid auctions with asymmetric information

an interpretation of recent research on exchange rate target zones how do exchange rate bands work compared to completely fixed rates between realignments or more precisely what are the dynamics of exchange rates interest rates and central bank interventions within exchange rate bands does the difference between bands and completely fixed exchange rates matter and if so which of the two arrangements is best or more precisely what are the tradeoffs that determine the optimal bandwidth this article will present an interpretation of some selected recent theoretical and empirical research on exchange rate target zones with emphasis on main ideas and results and without technical detail

empirical implications of equilibrium bidding in first price symmetric common value auctions this paper studies federal auctions for wildcat leases on the outer continental shelf from 1954 to 1970 these are leases where bidders privately acquire at some cost noisy but equally informative signals about the amount of oil and gas that may be present we develop tests of rational and equilibrium bidding in a common values model that are implemented using data on bids and ex post values we also use data on tract location and exposr values to test the comparative static prediction that bidders may bid less aggressively in common value auctions when they expect more competition we find that bidders are aware of the winner s curse and their bidding is largely consistent with equilibrium

an intertemporal general equilibrium model of asset prices this paper develops a continuous time general equilibrium model of a simple but complete economy and uses it to examine the behavior of asset prices in this model asset prices and their stochastic properties are determined endogenously one principal result is a partial differential equation which asset prices must satisfy the solution of this equation gives the equilibrium price of any asset in terms of the underlying real variables in the economy in this paper we develop a general equilibrium asset pricing model for use in applied research an important feature of the model is its integration of real and financial markets among other things the model endogenously determines the stochastic process followed by the equilibrium price of any financial asset and shows how this process depends on the underlying real variables the model is fully consistent with rational expectations and maximizing behavior on the part of all agents our framework is general enough to include many of the fundamental forces affecting asset markets yet it is tractable enough to be specialized easily to produce specific testable results furthermore the model can be extended in a number of straightforward ways consequently it is well suited to a wide variety of applications for example in a companion paper cox ingersoll and ross 7 we use the model to develop a theory of the term structure of interest rates many studies have been concerned with various aspects of asset pricing under uncertainty the most relevant to our work are the important papers on intertemporal asset pricing by merton 19 and lucas 16 working in a continuous time framework merton derives a relationship among the equilibrium expected rates of return on assets he shows that when investment opportunities are changing randomly over time this relationship will include effects which have no analogue in a static one period model lucas considers an economy with homogeneous individuals and a single consumption good which is produced by a number of processes the random output of these processes is exogenously determined and perishable assets are defined as claims to all or a part of the output of a process and the equilibrium determines the asset prices our theory draws on some elements of both of these papers like merton we formulate our model in continuous time and make full use of the analytical tractability that this affords the economic structure of our model is somewhat similar to that of lucas however we include both endogenous production and

using tucker s theorem of the alternative to simplify review and expand discrete arbitrage theory abstract for valuing derivatives and other assets in securities and commodities markets arbitrage pricing theory has been a major approach for decades this paper derives fundamental arbitrage pricing results in finite dimensions in a simple unified framework using tucker s theorem of the alternative frictionless results that is perfect market results plus imperfect market results such as those with dividends periodic interest payments transaction costs different interest rates for lending and borrowing shorting costs and constrained short selling are presented while the results are mostly known and appear in various places our contribution is to present them in a coherent and comprehensive fashion with very simple proofs the analysis yields a simple procedure to prove new results and some are presented for cases with imperfect market frictions

arbitrage and martingales with taxation this paper extends the martingale analysis of no arbitrage pricing to worlds with taxation the absence of arbitrage is shown to imply the existence of different shadow prices for income streams that are subject to differing tax treatments for example no arbitrage implies the existence of different martingale measures for capita l gains and for ordinary income when they are differentially taxed andfor item s such as depreciation expenses that influence only after tax cash flows the analysis is applied to several topics in finance including the debt equity decision tax options and the taxation of dividends and pensions copyright 1987 by university of chicago press

term structure multiplicity and clientele in markets with transactions costs and taxes the authors investigate term structure with realistic transactions costs and taxes its properties are derived from a certain no arbitrage condition via duality theory in convex programming transactions costs imply an infinite multiplicity of term structures a simple example with realistic transactions costs shows that this multiplicity can induce a valuation range of over 277 basis points transactions costs also allow equilibrium without short sale restrictions the authors find the minimum transactions costs that prevent arbitrage in addition the exact conditions for weak clientele in which investors will not buy some bonds and may not sell any that they already hold are established most research on the pricing of riskless bonds hereafter bonds uses a noarbitrage model equilibrium pricing is based on the assumption that there is no buy and hold investment strategy that provides riskless arbitrage profit however most of these studies ignore transactions costs 2 the clientele model hereafter ss developed by stephen schaefer 19 adopts a no arbitrage assumption na equivalent to the existence of a valuation operator this operator is a vector of discount factors known as the term structure ss shows that na implies the existence of a tax bracket specific term structure that ensures that the bonds after tax present values do not exceed their prices ss also shows that in markets with spanning positive term structures consistent with na will not exist for some brackets see his example in subsection iva below investors in such brackets would have arbitrage opportunities to resolve this na violation and make equilibrium feasible ss assumes a prohibition on shorting this implies clientele effects in the usual sense i e investors in some brackets hold some but not all bonds there may be however a bracket in which investors hold positive amounts of all bonds this would be a

the winner s curse and bidder competition in acquisitions evidence from failed bank auctions this study examines the effect of bidder competition in acquisitions we use predictions from auction theory to test whether acquirers of failed banks overpay the winner s curse when bidding in fdic sealed bid purchase and assumption p a transactions auctions the empirical results indicate that winning bids tend to increase as the number of competitors increases as predicted by theory we also find that bid levels of all bidders increase with increased competition which is consistent with bidders failing to adjust for the winner s curse in a common value auction setting however additional tests using winning bids only are consistent with both a common value and a private values model so this result should be interpreted with caution the winner s curse hypothesis states that the winner of a sealed bid auction in which the value of the object being competed for is uncertain tends to be the one who most overestimates the true value of the auctioned object as a result auction winners who fail to recognize this possibility are likely to be cursed by having paid more for the object than its true worth this hypothesis has been applied to various situations including bidding on oil and gas leases capen et al 3 and corporate takeovers roll 16 varaiya 19 support for the existence of the winner s curse has been reported primarily from laboratory experiments bazerman and samuelson 1 kagel and levin 12 testing of the winner s curse hypothesis with market data is in its early stages gilley karels and leone s 7 study of bidding for oil leases provides mixed suport brannman klein and weiss 2 examine bidding behavior in a variety of auction markets and interpret some of their results as supporting the winner s curse hypothesis our study examines the effects of bidder competition and the winner s curse hypothesis within the context of fdic auctions of failed banks our study may also have relevance for the broader corporate control literature this literature uniformly indicates that shareholders of acquired firms earn large

existence of equivalent martingale measures in finite dimensional securities markets abstract given the information structure and the number of securities we characterize the set of all price dividend systems for which there exist a dynamic portfolio with strictly positive value through time and a strictly positive probability q such that expressing prices and dividends in units of such portfolio every gain process is a q martingale we also weaken our characterization by showing that the existence of a trading strategy with strictly positive terminal payoffs only is generically sufficient for the existence of an equivalent martingale measure finally an example shows that our results robustely extend the current literature on the topic journal of economic literature classification numbers d52 g10 g12

testing the continuity of individual bid density functions some further results abstract this brief paper analyzes the bidding behavior in ocs oil auctions of six individual bidders using solo bids only and of a consortium bidder over the period 1963 1979 included are bidders that bid over the entire period one that bids for only a short time at the beginning and one that first makes such bids in 1970 our findings strongly support those reported in an earlier paper for five bidders and a brief three auction sample period bidders commonly utilize multiple bids of single dollar values within a given auction the strength of the present results for three of the seven bidders over 30 of the bids made fell into this category further buttresses our conjecture that the use of continuous bid functions is inappropriate for modelling offshore oil lease auctions

alternative bidding systems for leasing offshore oil experimental evidence alternative bidding systems for leasing offshore oil tracts the goal was to encourage participation by small companies by reducing the initial cost associated with the traditional bonus bid system we analyse the results of this unique experiment we find that although one alternative generated more bids in general the number of bids was no higher the winning bids were no lower and participation by small companies who already use joint bids was significantly lower than the traditional system which appears to be superior to these alternatives

optimal nonparametric estimation of first price auctions this paper proposes a general approach and a computationally convenient estimation procedure for the structural analysis of auctioni data considering first price sealed bid auction models within the independent private value paradigm we show that the underlying distribution of bidders private values is identified from observed bids and the number of actual bidders without any parametric assumptions using the theoiy of minimax we establish the best rate of uniform convergence at which the latent density of private values can be estimated nonparametrically from available data we then propose a two step kernel based estimator that converges at the optimal rate

municipal debt and marginal tax rates is there a tax premium in asset prices we study the marginal tax rate incorporated into short term municipal rates using municipal swap market data using an affine model we identify the marginal tax rate and the credit liquidity spread in 1 week tax exempt rates as well as their associated risk premia the marginal tax rate averages 38 0 and is related to stock bond and commodity returns the tax risk premium is negative consistent with the strong countercyclical nature of after tax fixed income cash flows these results demonstrate that tax risk is a systematic asset pricing factor and help resolve the muni bond puzzle

incomplete preferences and equilibrium in contingent markets this paper shows that betting or speculative trading between agents with incomplete preferences is likely to occur if agents have access to convex choice sets this contrasts sharply with endowment economy models where preference incompleteness often hinders betting speculative trading or mutually beneficial insurance arrangements our results imply that decision makers with identical tastes and identical feasible sets will potentially gain from speculative trade for generic status quo allocations we also develop a framework for endogenizing the status quo allocations of decision makers that are treated exogenously in the existing literature finally we provide a tractable differential representation of status quo allocations equilibria and conditions where speculative trade may or may not emerge

a note on capital asset pricing and heterogeneous taxes abstract in this paper we present a stylized model where we show how asset prices i e required expected rates of returns may be characterized in a world with heterogeneous asset taxes within a simple capm like framework we derive an after tax beta equal to the pre tax beta multiplied by a non obvious asset specific tax adjustment we further show in what sense the security market line here can be replaced by a security market fan well known capm relations are obtained as special cases and policy implications are analyzed

hindsight foresight and insight an experimental study of a small market investment game with common and private values we experimentally test an endogenous timing investment model in which sub jects privately observe their cost of investing and a signal correlated with the common investment return subjects overinvest relative to nash we separately consider whether subjects draw inferences in hindsight and use foresight to delay profitable investment and learn from market activity in contrast to nash cursed equilibrium and level k predictions behavior hardly changes across our experimental treatments maximum likelihood estimates are inconsistent with belief based theories we offer an explanation in terms ofboundedly ratio nal rules of thumb based on insights about the game which provides a better fit than quantal response equilibrium jel c72 d82 d83 gil

asymmetry in first price auctions with affiliated private values collusion and heterogeneity across firms may introduce asymmetry in bidding games a major difficulty in asymmetric auctions is that the bayesian nash equilibrium strategies are solutions of an intractable system of differential equations we propose a simple method for estimating asymmetric first price auctions with affiliated private values considering two types of bidders we show that these differential equations can be rewritten using the observed bid distribution we establish the identification of the model characterize its theoretical restrictions and propose a two step non parametric estimation procedure for estimating the private value distributions an empirical analysis of joint bidding in ocs auctions is provided copyright 2003 john wiley sons ltd

tax arbitrage and the existence of equilibrium prices for financial assets in models where both investors and securities are subject to differential taxation there may be no set of prices that rule out infinite gains to trade or tax arbitrage this paper characterizes the joint restrictions on financial asset returns and investors tax schedules that preclude tax arbitrage in the absence of short sale constraints the authors show that if there exists any configuration of marginal tax rates on investors tax schedules that rule out infinite gains to trade then no tax arbitrage prices will exist they also show that the existence of no tax arbitrage prices ensures the existence of equilibrium prices the effects of differential taxation on the equilibrium prices of financial assets have attracted much attention from financial economists in recent years otherwise identical securities that contribute to taxable income to different degrees will in general be valued differently by taxable investors as a result tax considerations have been useful in helping explain the effect of dividend yield on stock returns the effect of coupon levels and term to maturity on bond prices 2 the timing of investors portfolio transactions 3 and the observed capital structures of firms 4 while a rich set of observed behaviors can be better understood by reference to differential taxation there are well known difflculties in dealing with taxes in a general equilibrium setting to clear markets relative prices must reflect the marginal rates of substitution of all agents simultaneously when tax rates differ across investors however this condition can be impossible to achieve to illustrate consider a world of perfect certainty with two assets a tax exempt municipal bond and a taxable government bond to equate marginal rates of substitution the rate of return on the government bond rg must equal that on the municipal rm grossed up by one minus the investor s marginal tax rate ti that is rg rm 1 ti if there are investors in more than one tax bracket this condition will obviously be impossible to satisfy for all of them simultaneously both authors from graduate school of industrial administration carnegie mellon university we wish to thank scott richard steven spear and an anonymous referee for helping us sort through the issues considered here seminar participants at columbia wharton the johnson symposium on asset pricing at the university of wisconsin madison and the 1986 western finance association meeting also provided valuable comments we are also grateful for the financial support provided by the center for public policy research carnegie mellon university all errors are our own responsibility

asymmetry in procurement auctions evidence from snow removal contracts differences in cost efficiency and productivity across firms may introduce asymmetries in procure ment auctions relying on a structural approach this article investigates potential asymmetry among firms bidding for snow removal contracts in montrthe empirical results show that firms located in close proximity have a cost advantage relative to other firms in the most urbanised part of montrbecause of prohibitive equipment storage costs the extent of inefficiency due to asym metry is empirically assessed various policy experiments are performed a bidding preference policy shows that the city could expect to reduce its costs for allocating snow removal contracts when bidders willingness to pay depends in part on observable variables the princi pal s interest is not best served by creating a level auction playing field this article studies procurement auctions for snow removal contracts in montrit investigates the degree to which companies in disadvantageous locations should win even if they do not submit the lowest bid from the submitted bids a novel empirical methodology estimates the extent of cost variation across firms along with its variation within loca tion although the dispersion is substantial the gain from treating bidders unequally is limited when observed individual characteristics affect the firms costs and their bidding strategies all bidders cannot be treated alike these differences in characteristics or asymmetries among bidders may arise from their size as noted by laffont et al 1995 their capacity constraints as in jofre bonet and pesendorfer 2003 or the possession of better information as in hendricks and porter 1988 and hendricks et al 1994

testing target zone models using efficient method of moments the objectives of this article are threefold 1 to test target zone models using more efficient and direct econometric methodology than previous research 2 to identify an implicit band if it exists from observed data and to test target zone models based on the estimated implicit band rather than the stated official band and 3 to examine whether the exchange rate can be modeled as a managed float system with a central parity that lacks a band we find strong evidence that a model with intramarginal intervention and a narrower implicit unofficial band can describe the dynamics of the french franc deutsche mark exchange rate from january 1 1987 july 30 1993

quantitative modelling of the eur chf exchange rate during the target zone regime of september 2011 to january 2015 krugman 1991 s target zone model for exchange rate dynamics has become the reference of a large part of this literature despite its simplicity and elegance empirical evidence has been lacking not least because it is difficult to capture the predicted non linear relationship between the observable exchange rate and the non observable fundamental value this is why we propose a different approach by inverting locally the relation between exchange rate and fundamental value we derive analytical expressions for the conditional volatility and the probability density as a function of the exchange rate this allows us to examine krugman s prediction directly from historical data and furthermore enables us to test the smooth pasting condition which is intimately related to the no arbitrage condition concretely we study the performance of the euro swiss franc exchange rate in the extraordinary period from september 6 2011 to january 15 2015 when the swiss national bank enforced a minimum exchange rate of 1 20 swiss francs per euro we show that the data are well explained by the theory and conclude that krugman s target zone model holds after all but apparently only under extreme and sustained pressure that pushes continuously the exchange rate very close to the boundary of the target zone

simultaneous allocation of bundled goods through auctions assessing the case for joint bidding we study the costs and benefits of allowing joint bidding in multiple simultaneous first price sealed bid auctions for bundled goods with private values joint bidding raises the prospect of higher allocative efficiency but also reduces the number of bidders resulting in an ambiguous net impact on seller revenue the research was carried out using laboratory experiments in which groups of up to six buyers competed for eight bundles of two separable goods each the main results show that in our experimental environment allowing joint bidding increases efficiency by 11 3 and revenue by 9 4 the research has immediate applications to the sale of public forest stands that arbor a mixture of species for this reason we explore how the results are affected by excess supply the presence of dominant firms and the removal of an allocation rule requiring multiple bidders under certain circumstances

joint bidding entry and the price of ocs leases we use a two equation system to estimate the effects of joint bidding on the number of bids and the maximum bid the government received in auctions for offshore continental shelf tracts held between 1979 and 1983 the estimates are corrected for selection bias and simultaneity we find that joint bidding encourages entry in the sense that the number of bids is positively associated with the existence of joint bidding we also find support for the hypothesis that joint bidding increases the high bid with the number of bids held constant we use these results to estimate the cost of a ban on joint bidding for ocs leases

efficient trading strategies in the presence of market frictions we provide a price characterization of efficient contingent claims that is chosen by at least a rational agent in multiperiod economies with market frictions frictions include market incompleteness transaction costs short selling and borrowing costs we characterize the inefficiency cost of a trading strategy its required investment minus the largest amount necessary to obtain the same utility level and we propose a measure of portfolio performance we show that arbitrage bounds cannot be tightened based on efficiency without restricting preferences or endowments we observe common investment strategies becoming inefficient with market frictions and others rationalized by them in this article we characterize efficient contingent claims to future consumption consumption bundles in multiperiod economies with uncertainty taking a wide range of market frictions into account 1 such as dynamic market

put call parity and market frictions abstract we extend the fundamental theorem of finance and the pricing rule representation theorem to the case in which market frictions are taken into account but the put call parity is still assumed to hold in turn we obtain a representation of the pricing rule as a discounted expectation with respect to a nonadditive risk neutral probability

valuation of risky assets in arbitrage free economies with frictions this paper derives a framework for arbitrage models in markets with frictions it generalizes the existence of a valuation operator to such markets as in perfect markets the valuation operator is a linear operator and its existence is implied by the no arbitrage condition in imperfect markets the valuation operator is individual specific and depends on the agent s position in the market the methodology employed in the paper is duality in convex programming

term structure of interest rates and implied market frictions the min max approach it is often assumed that financial markets are frictionless bond markets are illiquid and bond prices are observed with errors the magnitude of these errors leads to violation of no arbitrage conditions and consequently prevents researchers from obtaining an estimate of the term structure ts of interest rates researchers have had to settle for a second best estimate of the ts e g obtained via regression at a cost of an economically unrealistic assumption of symmetric market frictions the true shape of market frictions however is not known and generally is a highly complex issue a no arbitrage based methodology that avoids making detrimental assumptions is developed here it facilitates empirical investigation of the shape of the market frictions and of the ts that are simultaneously imputed from market data assuming efficient market frictions that minimize the maximum net arbitrage the empirical investigation performed in the canadian and u s markets shows that in both markets the frictions are asymmetric and the estimates of the ts produced via regression and our methodology significantly differ

repeated common value auctions with asymmetric bidders abstract this paper considers a first price common value auction with one sided private information among bidders an object is rented each period to the highest bidder without revealing the bids made in previous periods the paper extends single crossing arguments used in static games to show the existence of equilibrium in this repeated auction the model predicts that bidders bid more aggressively in a repeated auction than in a static auction because a higher bid increases the amount of information learned through bidding the aggressive bidding behavior also implies that the per period revenue of the repeated auction is higher than that of the one period counterpart this bidding behavior leads to a theoretical explanation for the winner s curse in repeated auctions in addition the model yields predictions like an increasing wage schedule over time and the institution of a signing bonus that are consistent with labor market observations