Empirical evidence shows that most exchange rate volatility at short to medium horizons is related to order flow and not to macroeconomic variables. We introduce symmetric information dispersion about future macroeconomic fundamentals in a dynamic rational expectations model in order to explain these stylized facts. Consistent with the evidence, the model implies that (a) observed fundamentals account for little of exchange rate volatility in the short to medium run, (b) over long horizons, the exchange rate is closely related to observed fundamentals, (c) exchange rate changes are a weak predictor of future fundamentals, and (d) the exchange rate is closely related to order flow.
A major component of the Mutual Fund scandals of 2003 was the allegation that certain investors were allowed to engage in the late trading of mutual fund shares. Under the forward pricing rule, trades in U.S.-based open-ended mutual funds are required to be priced at the next net asset value per share (NAV) calculated after an order is received. 1 For funds that calculate NAVs once per day at 4 PM Eastern time (the vast majority), orders received before 4 PM should be priced at the NAV calculated on the day of the trade while trades received after 4 PM should instead be priced at the next-day net asset value. 2 Late trading occurs when investors place trades after 4 PM but still receive the 4 PM price. Late traders can use information revealed after 4 PM to guide their trades: buying fund shares when their current value is greater than NAV and selling when the reverse is true. Doing so allows them to earn expected abnormal returns at the expense of the fund’s long-term shareholders. 3
The directed cognition model assumes that agents use partially myopic option-value calculations to select their next cognitive operation. The current paper tests this model by studying information acquisition in two experiments. In the first experiment, information acquisition has an explicit financial cost. In the second experiment, information acquisition is costly because time is scarce. The directed cognition model successfully predicts aggregate information acquisition patterns in these experiments. When the directed cognition model and the fully rational model make demonstrably different predictions, the directed cognition model better matches the laboratory evidence.
This article proposes a new dynamic design for auctioning multiple heterogeneous commodities. An auctioneer wishes to allocate K types of commodities among n bidders. The auctioneer announces a vector of current prices, bidders report quantities demanded at these prices, and the auctioneer adjusts the prices. Units are credited to bidders at the current prices as their opponents' demands decline, and the process continues until every commodity market clears. Bidders, rather than being assumed to behave as price-takers, are permitted to strategically exercise their market power. Nevertheless, the proposed auction yields Walrasian equilibrium prices and, as from a Vickrey-Clarke-Groves mechanism, an efficient allocation.
Are consumers sufficiently self-interested and self-reliant so that privatized markets deliver the efficiency and welfare gains they promise? Why are consumers uncomfortable in markets, and in some case sufficiently opposed to market solutions to prevent their implementation? What can be done to prepare consumers so that they function satisfactorily in markets, and understand the advantages of market-based resource allocation? This paper examines the foundations of consumer behavior and attitudes in markets, and proposes a program of scientific research to determine how consumers cope in privatized markets, and the implications for market design of the limits of self-reliance.
In India, the relationship between government investment and private investment is a controversial issue. Economic theory suggests that government investment, financed by borrowing, reduces the loanable funds available for private investment, driving up interest rates, and reducing the level of private investment. If, as Keynesians argue, the positive impact of increased government investment outweighs the negative impact of reduced private investment then economic growth will increase. In the case of India, government investment would add to the momentum of India’s growth. In the opposite case which is often termed ‘full crowding out’, the negative impact of reduced private investment completely cancels the positive impact of increased government investment, and economic growth will remain unstimulated. The resources consumed by the government would have been more effective in the hands of the private sector. For India, this would mean that too much government investment is obstructing the path of India’s economic growth. This paper investigates and finds evidence of crowding out in India over the past thirty-five years through the analysis of movements of government investment, private investment, and gross domestic product (GDP) in a structural vector autoregression (SVAR) model. The majority of the empirical crowding out literature concentrates on the United States and other OECD countries. Evans
The Multitask Theory of State Enterprise Reform: Empirical Evidence from China by Chong-En Bai, Jiangyong Lu and Zhigang Tao. Published in volume 96, issue 2, pages 353-357 of American Economic Review, May 2006
Automobile manufacturers frequently use promotions involving cash incentives. While payments are nominally directed to either customers or dealers, the ultimate beneficiary of the promotion depends on the outcome of price negotiation. We use program evaluation methods to compare the incidence of these two types of promotions. Customers obtain 70 to 90 percent of a customer rebate, but only 30 to 40 percent of a dealer discount promotion, a $500 difference for a typical promotion. Our leading hypothesis is that pass-through rates differ because of information asymmetries: customer rebates are well-publicized to customers, while dealer discount promotions are not.
Author(s): Shapiro, Carl | Abstract: Keywords: patents, innovation, oligopolyJEL codes: L13, O31.ABSTRACT: Many inventions, great and small, are discovered independently at roughly the same time by two or more individuals or organizations. Famous examples include the light bulb (Edison and Swan), the telephone (Bell and Gray), and the integrated circuit (Kilby and Noyce). Such independent invention is common for minor technological improvements. How should property rights to an invention be defined and awarded in such cases?Patent law has struggled with this question for many years. The basic rule in the U.S. is that the patent is awarded to the first firm to invent; later independent inventors come up empty-handed.However, this basic system can create some peculiar results.Suppose that Firm A achieves an invention and files for a patent. Slightly later, but before the invention is made public, Firm B independently discovers the same invention. Firm A receives the patent and can even prevent Firm B from practicing its own invention. In legal terms, a party accused of patent infringement cannot defend itself by showing that it discovered the same invention independently. Would such an independent invention defense be desirable?Alternatively, suppose that Firm A achieves an invention, but decides not to file for a patent, perhaps because Firm A does not believe this invention is sufficiently novel and non-obvious to be patentable. Instead, Firm A uses the invention internally in its own operations as a trade secret. Later, Firm B independently discovers the same invention and files for a patent. Under current U.S. patent law, Firm B is awarded the patent because Firm A kept its invention secret.