This paper reconciles the two explanations of a financial crisis, the self-fulfilling prophecy and the fundamental causes, in an empirically-relevant framework, by explicitly modeling the costly voluntary acquisition of information about fundamentals in a variant of Diamond and Dybvig [Diamond, D., Dybvig, P., 1983. Bank runs, deposit insurance, and liquidity. Journal of Political Economy 91, 401–419]. The model exhibits strategic complementarity in information acquisition. In the “partial run” equilibrium investors engage in costly evaluation of projects, so that banks with lower-return projects fail. There also exist the classic “full-run” and “no-run” equilibria in which there is no project evaluation. Investors’ coordination on a specific equilibrium is triggered by a self-fulfilling prophecy. So, financial crises are seen as both fundamentals-based and self-fulfilling prophecies-based phenomena.

This note revisits the proof of the steady-state growth theorem, first given by Uzawa in 1961.We provide a clear statement of the theorem, discuss intuition for why it holds, and present a new, elegant proof due to Schlicht (2006).

We show that the consolidation of orders is important for producing efficient prices, especially during times of high liquidity demand. The NYSE's centralized opening call market performs better than Nasdaq's decentralized opening process on typical trading days. The NYSE is much better than Nasdaq on witching days when index arbitrage activity subjects S&P 500 stocks to large, predictable, and mostly informationlessorder flow around quarterly futures contract expirations. Nasdaq opening price efficiency improves to NYSE levels once Nasdaq initiates a consolidated opening call in November 2004, but prices on the decentralized Nasdaq remain less efficient at other times of day.

This paper investigates the remarkable extremes of growth experiences within countries and the changes that occur across growth transitions. We find two main results. First, virtually all but the very richest countries experience both growth miracles and failures over substantial periods. Second, growth accelerations and collapses are asymmetric phenomena. Collapses typically feature reduced investment amidst increasing price instability, whereas growth takeoffs are primarily associated with large expansions in international trade. The results show that even very poor countries regularly grow rapidly, but sustaining growth is difficult and may pose a very different set of challenges than starting it. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

In this paper we theoretically and empirically examine the interaction between hedging, financing, and investment decisions. A simple equilibrium model with costly financial distress suggests that as firms become more efficient at risky investments vis a vis low risk investments, they will borrow less, invest more in risky assets, and hedge more. The model also predicts a positive relationship between hedging and leverage – a result consistent with debt capacity arguments. We test the model empirically using a simultaneous equations framework to investigate the determinants of firm-level hedging, financing and investing decisions. The results strongly support the hypothesis that the hedging, financing and investment decisions are jointly determined. In addition, we find strong support for the central hypothesis that firms more efficient investing in risky technologies more aggressively hedge and use less debt financing in order to maximize their comparative advantage.

We construct a long daily panel of short sales using proprietary NYSE order data. From 2000 to 2004, shorting accounts for more than 12.9% of NYSE volume, suggesting that shorting constraints are not widespread. As a group, these short sellers are well informed. Heavily shorted stocks underperform lightly shorted stocks by a risk‐adjusted average of 1.16% over the following 20 trading days (15.6% annualized). Institutional nonprogram short sales are the most informative; stocks heavily shorted by institutions underperform by 1.43% the next month (19.6% annualized). The results indicate that, on average, short sellers are important contributors to efficient stock prices.

We report 28 new experiment sessions consisting of up to three experience levels to examine the robustness of learning and “error” elimination among participants in a laboratory asset market and its effect on price bubbles. Our answer to the title question is: “yes.” We impose a large increase in liquidity and dividend uncertainty to shock the environment of experienced subjects who have converged to equilibrium, and this treatment rekindles a bubble. However, in replications of that same challenging environment across three experience levels, we discover that the environment yields a rare residual tendency to bubble even in the third experience session. Therefore, a caveat must be placed on the effect of twice-experienced subjects in asset markets: in order for price bubbles to be extinguished, the environment in which the participants engage in exchange must be stationary and bounded by a range of parameters. Experience, including possible “error” elimination, is not robust to major new environment changes in determining the characteristics of a price bubble.

For most firms, the information technology (IT) budget represents a major element in the overall firm budget, and IT budget decisions often have significant operational and strategic impacts on the business processes in the firm’s value chain. In this paper we use a large unique data set to examine the extent to which IT budgets are affected by environmental, organizational, and technological circumstances. We find that our cross-sectional model explains substantial variance in IT budgets, which indicates that contingent environmental, organizational, and technological factors affect managers’ budget decisions. We then examine the extent to which these IT budget levels are related to future firm performance, measured using both broad financial accounting measures, such as operating profit margins and return on assets, and market returns. We find that IT budget levels are positively associated with subsequent firm performance and shareholder returns. We further suggest that IT’s aggregate effect on performance is a weighted average of two very different components: (1) context-driven IT budget levels, which reflect the effects of environmental, organization, and technological factors and the IT budgets resulting from them, and (2) idiosyncratic IT budget levels, which reflect the effect of any marginal firm-specific IT budget expenditures after controlling for these contextual factors. Both components are positively associated with performance, indicating that the specified contextual factors provide an incomplete explanation of firms’ value-relevant IT expenditures. The current study contributes to the accounting information systems and management accounting literatures by assessing the causes and consequences of IT budgets.

This laboratory experiment explores the extent to which impersonal exchange emerges from personal exchange with opportunities for long-distance trade. We design a three-commodity production and exchange economy in which agents in three geographically separated villages must develop multilateral exchange networks to import a good only available abroad. For treatments, we induce two distinct institutional histories to investigate how past experience with property rights affects the evolution of specialization and exchange. We find that a history of unenforced property rights hinders our subjects' ability to develop the requisite personal social arrangements to support specialization and effectively exploit impersonal long-distance trade.