A repricing occurs when the issuing firm resets the strike price of an employee stock option (ESO). ESO repricings occur most frequently following a significant decline in the underlying stock price. Typically, the strike price is reset to the new stock price. We develop a new model for valuing ESOs with a repricing feature. Our valuation model is developed within a utility-maximizing framework that accounts for potentially multiple repricings, employee risk aversion, employee non-option wealth, the non-tradeability of ESOs, and the early exercise feature of ESOs. Simulations suggest that these factors can significantly affect ESO value.

Experimental data have consistently shown diversity in beliefs as well as in actions among experimental subjects. This paper presents and compares alternative behavioral econometric models for the characterization of player heterogeneity, both between and within subpopulations of players. In particular, two econometric models of diversity within sub-populations of players are investigated, one using a model of computational errors and the other allowing for diversity in prior beliefs around a modal prior for the subpopulation.

Creating Modern Art: The Changing Careers of Painters in France from Impressionism to Cubism by David W. Galenson and Bruce A. Weinberg. Published in volume 91, issue 4, pages 1063-1071 of American Economic Review, September 2001

ABSTRACT This paper directly tests the hypothesis that upstairs intermediation lowers adverse selection cost. We find upstairs market makers effectively screen out information‐motivated orders and execute large liquidity‐motivated orders at a lower cost than the downstairs market. Upstairs markets do not cannibalize or free ride off the downstairs market. In one‐quarter of the trades, the upstairs market offers price improvement over the limit orders available in the consolidated limit order book. Trades are more likely to be executed upstairs at times when liquidity is lower in the downstairs market.

Assessing the impact of new technologies on health care costs is an important research area. This paper evaluates two technologies used to treat coronary artery disease. We estimate two separate stochastic frontier models—one for balloon angioplasty patients and one for cardiac bypass surgery patient—using data taken from detailed chart and cost files of a large urban hospital. Cost estimates for the two technologies are purged of inefficiency so that forecasts of the cost consequences of technology shift can be based on ‘best-practice’ production techniques. Learning behavior, physician effects, and patient clinical characteristics are also taken into account. We find that there are potential cost savings associated with making angioplasty a more perfect substitute for bypass surgery, as well as current inefficiency in production.

This project tests for the effect of social status in a laboratory experimental market. We consider a special “box design” market in which a vertical overlap in supply and demand ensure that there are multiple equilibrium prices. We manipulate the relative social status of our subjects by awarding high status to a subset of the group based on one of two procedures. In the first, a subject's score on a trivia quiz determines his or her status; in another, subjects are assigned randomly to a higher-status or lower-status group. In both treatments we find that average prices are higher in markets where higher-status sellers face lowerstatus buyers, and lower when buyers have higher status than sellers. Across all sessions, the higher-status side of the market captures a greater share of the surplus, earning significantly more than their lower-status counterparts.

Banks perform valuable activities on either side of their balance sheets. On the asset side, they make loans to difficult, illiquid borrowers. On the liability side, they provide liquidity on demand to depositors. But there seems to be a fundamental incompatibility between the two activities: the demands for liquidity by depositors may arrive at an inconvenient time and force the fire-sale liquidation of illiquid assets. Furthermore, because depositors are served in sequence, the prospect of fire sales may precipitate self-fulfilling runs that further jeopardize bank activities. Is this an aberration, stemming from historical accident, and enshrined by deposit insurance? Or is there logic, hitherto unnoticed, for the bank’s choice of activities? Our recent work suggests that the answer to the latter question is yes. In order to describe why a bank’s fragile capital structure allows it to create liquidity and to explain why bank loans are illiquid, we present a simple example based on Diamond and Rajan (2001a).

Intertemporal Depletion of Resource Sites by Spatially Distributed Users by Gerard Gaudet, Michel Moreaux and Stephen W. Salant. Published in volume 91, issue 4, pages 1149-1159 of American Economic Review, September 2001

Loans are illiquid when a lender needs relationship-specific skills to collect them. Consequently, if the relationship lender needs funds before the loan matures, she may demand to liquidate early, or require a return premium, when she lends directly. Borrowers also risk losing funding. The costs of illiquidity are avoided if the relationship lender is a bank with a fragile capital structure, subject to runs. Fragility commits banks to creating liquidity, enabling depositors to withdraw when needed, while buffering borrowers from depositors' liquidity needs. Stabilization policies, such as capital requirements, narrow banking, and suspension of convertibility, may reduce liquidity creation.