Knowledge that Transforms

We study the strategic equilibria of a negotiation game where potential buyers are affected by identity-dependent, negative externalities. The unique equilibrium of long, finitely repeated generic games can either display delay--where a transaction can take place only in several stages before the deadline--or, in spite of the random element in the game, a well-defined buyer exists that obtains the object with probability close to one.

Core allocations may be defined for infinite horizon capital accumulation models. If agents cannot trust each other in the sense of Gale, then agents may renege on their commitments; their decisions appear time inconsistent. A core allocation is a recursive core allocation provided no coalition can improve upon its consumption stream at any time given its accumulation of assets up to that period. We show for every allocation of consumption in the initial core, one can find a distribution of capital stocks among the agents where no coalition of agents will break the initial core contract at any date. It follows that if the proper distribution of the streams of capital is achieved, then the allocation in the core is also in the recursive core. The latter therefore forges a link between the distribution of wealth (capital), the problem of trust, and time consistent intertemporal contracts

We apply nonparametric regression models to estimation of demand curves of the type most often used in applied research.From the demand curve estimators we derive estimates of exact consumers surplus and deadweight loss, that are the most widely used welfare and economic efficiency measures in areas of economics such as public finance.We also develop tests of the symmetry and downward sloping properties of compensated demand.We work out asymptotic normal sampling theory for kernel and series nonparametric estimators, as well as for the parametric case.The paper includes an application to gasoline demand.Empirical questions of interest here are the shape of the demand curve and the average magnitude of welfare loss from a tax on gasoline.In this application we compare parametric and nonparametric estimates of the demand curve, calculate exact and approximate measures of consumers surplus and deadweight loss, and give standard error estimates.We also analyze the sensitivity of the welfare measures to components of nonparametric regression estimators such as the number of terms in a series approximation.

[Sufficient conditions for Nash equilibrium in an n-person game are given in terms of what the players know and believe--about the game, and about each other's rationality, actions, knowledge, and beliefs. Mixed strategies are treated not as conscious randomizations, but as conjectures, on the part of other players, as to what a player will do. Common knowledge plays a smaller role in characterizing Nash equilibrium than had been supposed. When n = 2, mutual knowledge of the payoff functions, of rationality, and of the conjectures implies that the conjectures form a Nash equilibrium. When n ≥ 3 and there is a common prior, mutual knowledge of the payoff functions and of rationality, and common knowledge of the conjectures, imply that the conjectures form a Nash equilibrium. Examples show the results to be tight.]

ABSTRACT When homogeneous or closely‐linked securities trade in multiple markets, it is often of interest to determine where price discovery (the incorporation of new information) occurs. This article suggests an econometric approach based on an implicit unobservable efficient price common to all markets. The information share associated with a particular market is defined as the proportional contribution of that market's innovations to the innovation in the common efficient price. Applied to quotes for the thirty Dow stocks, the technique suggests that the preponderance of the price discovery takes place at the New York Stock Exchange (NYSE) (a median 92.7 percent information share).

ABSTRACT We provide an empirical examination of the determinants of corporate debt maturity. Our evidence offers strong support for the contracting‐cost hypothesis. Firms that have few growth options, are large, or are regulated have more long‐term debt in their capital structure. We find little evidence that firms use the maturity structure of their debt to signal information to the market. The evidence is consistent, however, with the hypothesis that firms with larger information asymmetries issue more short‐term debt. We find no evidence that taxes affect debt maturity.

ABSTRACT This article provides a new methodology for pricing and hedging derivative securities involving credit risk. Two types of credit risks are considered. The first is where the asset underlying the derivative security may default. The second is where the writer of the derivative security may default. We apply the foreign currency analogy of Jarrow and Turnbull (1991) to decompose the dollar payoff from a risky security into a certain payoff and a “spot exchange rate.” Arbitrage‐free valuation techniques are then employed. This methodology can be applied to corporate debt and over the counter derivatives, such as swaps and caps.

ABSTRACT This paper examines the structure of staged venture capital investments when agency and monitoring costs exist. Expected agency costs increase as assets become less tangible, growth options increase, and asset specificity rises. Data from a random sample of 794 venture capital‐backed firms support the predictions. Venture capitalists concentrate investments in early stage and high technology companies where informational asymmetries are highest. Decreases in industry ratios of tangible assets to total assets, higher market‐to‐book ratios, and greater R&D intensities lead to more frequent monitoring. Venture capitalists periodically gather information and maintain the option to discontinue funding projects with little probability of going public.

ABSTRACT We propose a measure of capital market integration arising from a conditional regime‐switching model. Our measure allows us to describe expected returns in countries that are segmented from world capital markets in one part of the sample and become integrated later in the sample. We find that a number of emerging markets exhibit time‐varying integration. Some markets appear more integrated than one might expect based on prior knowledge of investment restrictions. Other markets appear segmented even though foreigners have relatively free access to their capital markets. While there is a perception that world capital markets have become more integrated, our country‐specific investigation suggests that this is not always the case.