Knowledge that Transforms

Journal Article When is Inducing Self-Selection Suboptimal for a Monopolist? Get access Stephen W. Salant Stephen W. Salant University of Michigan Search for other works by this author on: Oxford Academic Google Scholar The Quarterly Journal of Economics, Volume 104, Issue 2, May 1989, Pages 391–397, https://doi.org/10.2307/2937854 Published: 01 May 1989

Insider traders and other speculators with private information are able to appropriate some part of the returns to corporate investments made at the expense of other shareholders. As a result, insider trading tends to discourage corporate investment and reduce the efficiency of corporate behavior. In the context of a theoretical model, measures that provide some indication of the sources and extent of the investment reduction are derived. I.

A specific bargaining game is studied, motivated by the speech-making, billproposing, and bill-vetoing observed in legislative processes. The game has two players, a chooser and a proposer, with the preferences of the chooser not known to the proposer. The chooser starts the game by talking. Then the proposer proposes an outcome, which the chooser accepts or vetoes. Only two kinds of perfect equilibria exist. In the more interesting kind the chooser tells the proposer which of two sets contains his type. Two proposals are possibly elicited, a compromise proposal and the proposer's favorite proposal. Ironically, only the compromise proposal is ever vetoed.

In the economic modeling of bargaining, outside options have often been naively treated by taking them as the disagreement payoffs in an application of the Nash bargaining solution. The paper contrasts this method of predicting outcomes with that obtained from an analysis of optimal strategic behavior in a natural game-theoretic model of the bargaining process. The strategic analysis predicts that the outside options will be irrelevant to the final deal unless a bargainer would then go elsewhere. An experiment is reported which indicates that this prediction performs well in comparison with the conventional predictor.

Dilip Mookherjee, Ivan Png; Optimal Auditing, Insurance, and Redistribution*, The Quarterly Journal of Economics, Volume 104, Issue 2, 1 May 1989, Pages 39

If information is costly to collect and implement, then it is efficient for trades by informed investors to occur at prices sufficiently different from full-information prices to compensate them for the cost of becoming informed. This notion is tested by evaluating investment performance in the mutual fund industry over a 20-year period. The study finds evidence that is consistent with optimal trading in efficient markets. Risk-adjusted returns in the mutual fund industry, net of fees and expenses, are comparable to returns available in index funds; and portfolio turnover and management fees are unrelated to fund performance.

Since the depth and liquidity of a market depend on the entry decisions of all potential participants, each trader assesses them according to conjectures about entry by others. If trade is equally costly across markets, this externality leads to the concentration of trade on one market. If not, it can produce multiple conjectural equilibria, some where trade concentrates on one market and others where large traders resort to a separate market or to search for a trading partner. While fragmentation is welfare-reducing in the two-market case, no such ranking is possible if it involves off-exchange search.

When world trade is costly, a country can profitably industrialize only if its domestic markets are large enough. In such a country, for increasing returns technologies to break even, sales must be high enough to cover fixed setup costs. We suggest two conditions conducive to industrialization. First, a leading sector, such as agriculture or exports, must grow and provide the source of autonomous demand for manufactures. Second, income generated by this leading sector must be broadly enough distributed that it materializes as demand for a broad range of domestic manufactures. These conditions have been important in several historical growth episodes.

A common finding is that the forward discount is a biased predictor of future exchange rate changes. We use survey data on exchange rate expectations to decompose the bias into portions attributable to the risk premium and expectational errors. None of the bias in our sample reflects the risk premium. We also reject the claim that the risk premium is more variable than expected depreciation. Investors would do better if they reduced fractionally the magnitude of expected depreciation. This is the same result that many authors have found with forward market data, but now it cannot be attributed to risk.

A competitive industry has established home firms, and foreign firms with entry and exit costs. The real exchange rate follows a Brownian motion. Industry equilibrium is determined using methods of option pricing. Entry requires the operating profit to exceed the interest on the entry cost, and similarly for exit. The middle band of rates without entry or exit yields hysteresis; it is found to be very wide for plausible parameter values. The exchange rate pass-through to domestic prices is found to be close to one in the phases where foreign firms enter or exit, and near zero otherwise.