Volume 16, Issue 1 -

This paper studies how endogenous currency exchange arises in a two-country, two-currency monetary search model. Although currency exchange is widely observed in the globalized economy, Zhou (1997) is one of the exceptional studies that adopted a search model to generate currency exchange endogenously. Moreover, in her model, currency exchange occurs only in the case where agents rarely consume foreign goods, which is contrary to the well-known fact that international trade increases the number of currency exchanges. We construct a monetary search model that has a feature that increased international trade increases the volume of currency exchange. We develop a two-country model in which each country has two types of agents: local traders who consume only the goods produced in the home country, and international traders who consume only the goods produced in the foreign country. For international traders, the foreign currency gives more opportunity to obtain the foreign goods than the home currency does. Thus, when an international trader holds the home currency, he has an incentive to exchange the home currency for the foreign currency. Unlike Zhou, the model has a feature that currency exchange is more likely to occur when many agents are engaged in international trade.

Do relative concerns on visible consumption give rise to economic distortions? We re-examine the question posited by Arrow and Dasgupta (2009) building upon their general framework but recognizing that relative concerns can only apply to visible goods (e.g., cars, clothing, jewelry) and that households consume both visible and non-visible goods. Contrary to Arrow and Dasgupta (2009), the answer to this question turns to be always affirmative : the competitive equilibrium will always be different than the socially optimal one, since individuals do not take into account the negative externality they exert on others through the consumption of the visible good, while the social planner does. If one invokes separability assumptions, then the steady state competitive equilibrium consumption of non-visible goods will be strictly lower than the socially optimal one.

We examine the relationship between the incidence of workplace deviance (on-the-job crime) and the state of the economy. A worker’s probability of future employment depends on whether she has been deviant as well as on the availability of jobs. Using a two period model we show that the net impact on deviant behavior to changes in unemployment can go either way depending upon the nature of the equilibrium. Two kinds of equilibria are possible. In one, a non-deviant’s probability of being employed increases as expected market conditions improve which lowers the incentive to be a deviant. In contrast, in the other kind of equilibrium, the deviant’s probability of being employed increases when market conditions improve which increases the incentive to be a deviant. In either case, there is a setup cost to deviant behavior and the attractiveness of incurring that increases with an increase in expected probability of future employment which unambiguously increases the incentive to be deviant. In the first kind of equilibrium, the two effects counteract each other, while in the second they reinforce each other. Finally, we characterize conditions under which an increase in optimism, i.e. a reduction in the probability of facing a recession unambiguously increases deviant behavior.

We study strategic uncertainty in an investment coordination game when players have the option to delay acting. Absent the option to delay, the global games literature shows that efficient equilibrium outcomes are possible only when they are also risk dominant. In contrast, we show that when delay is not too costly, strategic uncertainty can encourage delay in such a way that efficient investment occurs whenever it is “worth waiting for.”

A general framework is presented that incorporates dynamics and heterogeneity among both upstream suppliers and downstream producers to mimic the exit strategy of Hirschman (1970) in building vertical relations. An assortative matching develops between producers and suppliers based on their level of efficiency, which leads to an increase in the aggregate industrial productivity but also makes the distribution of firms more dispersed. Further experiments suggest that the nature of outsourcing relations is impacted in certain ways by business cycles and technological advancements.

Allocating risk properly to subunits is crucial for performance evaluation and internal capital allocation of portfolios held by banks, insurance companies, investment funds and other entities subject to financial risk. We show that by using coherent measures of risk it is impossible to allocate risk satisfying simultaneously the natural game theoretical requirements of Core Compatibility and Strong Monotonicity. To obtain the result we characterize the Shapley value on the class of totally balanced games and also on the class of exact games as being the only risk allocation method satisfying Strong Monotonicity, Equal Treatment Property and Efficiency. Moreover, we clarify and interpret the related game theoretical requirements that have appeared in the literature so far and have been applied to risk allocation.

This paper analyzes the interaction between price and inventory decisions in an oligopoly industry and its implications for the dynamics of prices. The work extends existing literature and especially the work of Hall and Rust (2007) to endogenous prices and strategic oligopoly competition. We show that the optimal decision rule is an (S,s)$$(S, s)$$ order policy and prices and inventory are strategic substitutes. Fixed ordering costs generate infrequent orders. Additionally, with strategic competition in prices, (S,s)$$(S, s)$$ inventory behavior together with demand uncertainty generates endogenous cyclical patterns in prices without any exogenous shocks. Hence, the developed model provides a promising framework for explaining dynamics of commodity markets and especially observed autocorrelation in price fluctuations.

This paper develops a dynamic principal-agent model and applies it to understand changes in labor productivity and operational risk. Our analysis demonstrates the importance of matching the terms of the job contract to the technology. Such issues would be especially important in service industries and in the knowledge-based economy where discretionary effort tends to play a greater role. We show that the production technology needs to be characterized by at least two parameters: one parameter which measures output independent of the worker’s effort and a second parameter which measures the effect of the effort. We solve for the Renegotiation-Proof Nash Equilibrium. We show that there can be a tension between increasing expected productivity and controlling costs per worker. Our analysis also adds to the growing interest in “operational risk”, which is associated with human actions. The closed form solutions provided by our model provide a natural way to consider the impact and possibility of this type of risk. Our analysis demonstrates why the effect of a negative event should be considered relative to a concept of normal which is based on an equilibrium, that uncertainty in the external environment enables (but does not cause) operational risk events and that both the equilibrium and the effects vary with the production technology.

We analyze a two-period contest in which agents may become bankrupt at the end of the first period. A bankrupt agent is excluded from the contest in the second period of the game. We investigate the existence of a subgame perfect equilibrium in pure strategies. We distinguish between a borrowing equilibrium in which at least one agent might be bankrupted and a non borrowing equilibrium in which no agent is bankrupted. We prove that the former occurs when the agent taking loans is relatively poor and the future does not matter very much. This action represents the Despair Effect, in which severely handicapped agents take actions that jeopardize their existence in the long run but are currently helpful. We find conditions under which borrowing and non borrowing equilibria overlap and do not overlap. We provide an example in which no equilibrium exists.

We investigate a Stackelberg oligopoly model in which m leaders and N−m$N - m$ followers compete. We find an important welfare effect that relates to anti-monopoly policies when we move from the Cournot model (m=N$m = N$) to the Stackelberg model: Exchanging a small number of Cournot firms for Stackelberg followers always improves welfare under moderate conditions. This contrasts with the welfare effect that can reduce welfare when a small number of Cournot firms are exchanged for Stackelberg leaders. The key result behind this asymmetry is the contrasting limit results in the cases where m converges to N and m converges to 0. We also discuss the optimal number of leaders and the integer constraint for the number of firms.

The weight assigned to public information in Keynesian beauty contests depends on both the precision of signals and the degree of strategic complementarities. This experimental study shows that the response of subjects to changes in signal precision and the degree of strategic complementarities is qualitatively consistent with theoretical predictions, though quantitatively weaker. The weaker response of subjects to changes in the precision of signals, however, mainly drives the weight observed in the experiment, qualifying the role of strategic complementarities and overreaction in experimental beauty contests.

This paper studies the making of risky choices following loss aversion with endogenous reference expectations under the two schemes of state-independent and state-dependent stochastic reference points. Using a tractable, intertemporal choice model, this paper derives analytic solutions to show that, when loss aversion is high, the reference-dependent decision maker saves a markedly larger amount than is predicted by the standard model. When the loss aversion is low (i.e. the individual is loss-tolerant), the overall result is ambiguous, although the decision maker may deviate into consuming more; if he faces a small level of uncertainty relative to the intensity of his loss aversion, he may even do this by borrowing. Given the same loss aversion level, this study determines that, in the presence of positive state-dependence, the state-independent model generates greater deviation than the state-dependent one. Finally, this paper derives a two-period general equilibrium result with two agents who have different attitudes toward loss.

We study how ownership structure and management objectives interact in determining the company size without assuming information constraints or any explicit costs of management. In symmetric agent economies, the optimal company size balances the returns to scale of the production function and the returns to collaboration efficiency. For a general class of payoff functions, we characterize the optimal company size, and we compare the optimal company size across different managerial objectives. We demonstrate the restrictiveness of common assumptions on effort aggregation (e.g., constant elasticity of effort substitution), and we show that common intuition (e.g., that corporate companies are more efficient and therefore will be larger than equal-share partnerships) might not hold in general.

Economists have long known that properly designed markets allocate resources efficiently. However, in many circumstances markets are unfeasible. In this paper, we construct a general model of access which allows us to value different assignments when resources are allocated in the absence of markets. We demonstrate that marginal value schedules are far less useful in allocating access when property rights are unattainable. The criteria for optimal allocation combine information on both the marginal value schedules and the assignments determining the probabilities of access to the resource. Our approach allows us to rank rationing policies in a wide range of real-world, second-best settings.

This paper analyzes cooperative games with externalities generated by aggregative normal form games. We construct the characteristic function of a coalition S for various coalition formation rules and we examine the corresponding cores. We first show that the γ$$\gamma $$-core is non-empty provided each player’s payoff decreases in the sum of all players’ strategies. We generalize this result by showing that if S believes that the outside players form at least l(s)=n−s−(s−1)$$l(s) = n - s - (s - 1)$$ coalitions, then S has no incentive to deviate from the grand coalition and the corresponding core is non-empty (where n is the number of players in the game and s the number of members of S ). We finally consider the class of linear aggregative games (Martimort and Stole 2010). In this case, if S believes that the outsiders form at least lˆ(s)=ns−1$$\widehat l(s) = {n \over s} - 1$$ coalitions [where lˆ(s)≤l(s)$$\widehat l(s) \le l(s)$$] a core non-emptiness result holds again.

We explore the question of whether personality traits as measured by standard psychological tests are significant explanators of behavior in an entry game. The experimental data and psychological test results come from classroom experiments designed to teach the concepts of short and long run equilibrium in a competitive market. These experiments were conducted in 42 classroom sessions, each with about 35 students.