Equity market liberalizations are like IPOs, but they are IPOs of a country's stock market rather than of individual firms. Both are endogenous events whose benefits are limited by poor investor protection, agency costs, and information asymmetries. As for stock prices following an IPO, there are legitimate concerns about the efficiency in the period following the liberalization of the stock market returns of countries that liberalize their equity markets. Equity markets of liberalizing countries experience extremely strong performance immediately after the liberalization, but then go through a period of poor performance. This pattern of stock returns is more dramatic for countries with poorer financial development before the liberalization.
The Carrot or the Stick: Rewards, Punishments, and Cooperation by James Andreoni, William Harbaugh and Lise Vesterlund. Published in volume 93, issue 3, pages 893-902 of American Economic Review, June 2003
Standard incentive theory models provide a rich framework for studying informational problems but assume that contracts can be perfectly enforced. This paper studies the design of self-enforced relational contracts. I show that optimal contracts often can take a simple stationary form, but that self-enforcement restricts promised compensation and affects incentive provision. With hidden information, it may be optimal for an agent to supply the same inefficient effort regardless of cost conditions. With moral hazard, optimal contracts involve just two levels of compensation. This is true even if performance measures are subjective, in which case optimal contracts terminate following poor performance.
Collusive Practices in Repeated English Auctions: Experimental Evidence on Bidding Rings by Owen R. Phillips, Dale J. Menkhaus and Kalyn T. Coatney. Published in volume 93, issue 3, pages 965-979 of American Economic Review, June 2003
The use of modern microeconomics in policy is illustrated by the markets for spectrum, electricity, greenhouse-gas reductions, defense procurement, and Treasury bills. Further examples are antitrust divestiture rules, market-based redistribution, fishery conservation, and privatization. The limits of the use of theory are also discussed, by reference to China's economy-wide reforms. Lessons on the policy use of theory are drawn.
This paper synthesizes findings from an ongoing research program on learning in signaling games. The present paper focuses on cross-game learning- the ability of subjects to take what has been learned in one game and generalize it to related games- an issue that has been ignored in most of the learning literature. We begin by laying out the basic experimental design and recapitulating early results characterizing the learning process. We then report results from an initial experiment in which we find a surprising degree of positive cross-game learning, contrary to the predictions of commonly employed learning models and to the findings of cognitive psychologists. We next explore two features of the environment that help to explain when and why this positive transfer occurs. First, we examine the effects of abstract versus meaningful context, an issue that has been largely ignored by economists out of the belief that behavior is largely dictated by the deep mathematical structure of a game. In contrast, results from cognitive psychology suggest that behavior may well be sensitive to context employed. Our results show that the use of meaningful context serves as a catalyst for positive transfer. Second, we explore how play by two-person teams differs from play by individuals. The psychology literature is quite pessimistic about the ability of teams to beat a “truth wins ” standard based on performance of individuals. But teams easily surpass this norm in our cross-game experiment. We use the dialogues between team members to gain insight into how this transfer occurs, gaining direct confirmation for hypotheses generated by econometric analysis of earlier data. I. The Experimental Environment: Our experiments are based on a simplified version of Paul Milgrom and John Roberts ' (1982) entry limit pricing game. The game proceeds as follows: (1) Monopolists (Ms) observe their cost level- high (MH) or low (ML) cost- realized according to equal probabilities that are common knowledge. (2) Ms choose a quantity (output) whose payoff is contingent on the entrant’s (Es) response (see Table 1). (3) E sees this output, but not M’s type, and either enters or stays out. The asymmetric information, in conjunction with the fact that it is profitable to enter against MHs, but not against MLs, provides an incentive for strategic play (limit pricing).
"3rd of tha Month": Do Social Security Recipients Smooth Consumption Between Checks? by Melvin Stephens Jr.. Published in volume 93, issue 1, pages 406-422 of American Economic Review, March 2003
Presents an empirical analysis of the risk properties of human capital returns. Discussion on measures of human capital returns; Description of the mean-variance spanning methodology; Information on real human capital returns and U.S. equity index return for 1964 to 1996.
Governments use ‘green’ regulatory threat as an instrument to induce ‘voluntary’ pollution abatement by firms. If threats suffice to induce adequate reductions in emissions, they may save considerable implementation and monitoring costs. However, green regulatory threat can only induce emission reductions when firms find the threat credible and do not free-ride on other firms’ abatement effort. The effect of regulatory threat can be backed out from the data by conditioning abatement effort on firm characteristics.1 Theory suggests a measure of environmental exposure that combines a firm’s (1) composition and toxicity of emissions; (2) its size and pollution intensity; and (3) its location that determines the size of the population at risk. Furthermore, firms’ abatement effort is conditioned on whether they meet participation and incentive constraints determined by their unabated pollution intensity and unit abatement cost. Then firms’ position relative to other firms—their rung on the abatement ladder—determines their participation in abatement activity.