Knowledge that Transforms

This paper studies the role and implications of price advertising when shopping trips are costly to consumers. The authors present a model where consumers search sequentially and where stores advertise the price. Their model has a unique equilibrium exhibiting price dispersion. The model generates predictions about the shape of the price distribution and firms' advertising behavior. Also when the initial advertising costs are precisely zero, entry drives the equilibrium to the perfectly competitive outcome; while otherwise entry drives prices higher. Finally, when advertising costs shrink, prices become competitive; however, when search costs shrink, prices remain bounded above marginal production costs. Copyright 1993 by The Econometric Society.

The author shows how a group of individuals can learn to play a coordination game without any common knowledge and with only a small amount of rationality. The game is repeated many times by different players. Each player chooses an optimal reply based on incomplete information about what other players have done in the past. Occasionally they make mistakes. When the likelihood of mistakes is very small, typically one coordination equilibrium will be played almost all of the time over the long run. This stochastically stable equilibrium can be computed analytically using a general theorem the author proves on perturbed Markov processes.

This paper provides a simulated moments estimator (SME) of the parameters of dynamic models in which the state vector follows a time-homogeneous Markov process. Conditions are provided for both weak and strong consistency as well as asymptotic normality. Various tradeoff's among the regularity conditions underlying the large sample properties of the SME are discussed in the context of an asset pricing model.

A global game is an incomplete information game where the actual payoffstructure is determined by a rairdom draw from a given class of games and where each player makes a noisy observation of the selected game.For 2 x 2 games, it is shown that equilibrium play in a global game with vanishing noise forces the players to conform to Harsanyi and Selten's risk dominance criterion.When the uncertainty is one-dimensional, the result may be obtained by repeated elimination of dominated strategies in the global game."1'his pxper is a combinat.ion,and a subatantial generalization, of Carlxson (19R9) and Carlason and Van Damme (1989).Some basic ideas on global games and their telation to risk dominance originate from a note, written by Cadseon in 1985.The suthora thank R.einhard Selten, Lars-Gunnar Svensson, Jdrgen Weibull and various seminar audiences Cor helpful comments.The conatructive criticiam of several referees considerably improved the paper's quality.

Three theorems state conditions sufficient for the inessentiality of equilibrium in a pure exchange, sequence economy. The agents have uncommon priors, state-contingent utility functions, and asymmetric information in every trading period, and they trade different sets of event-contingent claims in different periods. The theorems provide alternative interpretations of the concept of market completeness, reveal two fundamentally different ways to obtain inessentiality, and shed light on the conditions permitting speculation and the role of price-contingent trading. None of the theorems requires ex ante Pareto optimality or the absence of arbitrage opportunities. Copyright 1993 by The Econometric Society.

ABSTRACT Since 1973 technological, political, regulatory, and economic forces have been changing the worldwide economy in a fashion comparable to the changes experienced during the nineteenth century Industrial Revolution. As in the nineteenth century, we are experiencing declining costs, increasing average (but decreasing marginal) productivity of labor, reduced growth rates of labor income, excess capacity, and the requirement for downsizing and exit. The last two decades indicate corporate internal control systems have failed to deal effectively with these changes, especially slow growth and the requirement for exit. The next several decades pose a major challenge for Western firms and political systems as these forces continue to work their way through the worldwide economy.

This paper documents that strategies which buy stocks that have performed well in the past and sell stocks that have performed poorly in the past generate significant positive returns over 3-to 12-month holding periods. We find that the profitability of these strategies are not due to their systematic risk or to delayed stock price reactions to common factors. However, part of the abnormal returns generated in the first year after portfolio formation dissipates in the following two years. A similar pattern of returns around the earnings announcements of past winners and losers is also documented.

We find support for a negative relation between conditional expected monthly return and conditional variance of monthly return, using a GARCH-M model modified by allowing (1) seasonal patterns in volatility, (2) positive and negative innovations to returns having different impacts on conditional volatility, and (3) nominal interest rates to predict conditional variance. Using the modified GARCH-M model, we also show that monthly conditional volatility may not be as persistent as was thought. Positive unanticipated returns appear to result in a downward revision of the conditional volatility whereas negative unanticipated returns result in an upward revision of conditional volatility.

ABSTRACT This paper develops a general framework for analyzing corporate risk management policies. We begin by observing that if external sources of finance are more costly to corporations than internally generated funds, there will typically be a benefit to hedging: hedging adds value to the extent that it helps ensure that a corporation has sufficient internal funds available to take advantage of attractive investment opportunities. We then argue that this simple observation has wide ranging implications for the design of risk management strategies. We delineate how these strategies should depend on such factors as shocks to investment and financing opportunities. We also discuss exchange rate hedging strategies for multinationals, as well as strategies involving “nonlinear” instruments like options.