For how long to tie your hands? Stable relationships in an unstable environment

The Kreps–Wilson–Milgrom–Roberts framework is one of the most renowned ways of modeling reputation-building. Once the number of repetitions of the game is considered as a choice variable, such a framework can fruitfully be employed to study the optimal length of the commitment to a relationship. We analyze a model where a principal plays with an agent a finitely repeated trust game, characterize the optimal length of the relationship between principal and agent when the principal’s preferences on the agent’s type stochastically change over time and show that a commitment to a stable relationship may be optimal (even) in very unstable environments.      

Model-Based Decision Support in Manufacturing and Service Networks

In this paper, we sketch some of the challenges that should be addressed in future research efforts for model-based decision support in manufacturing and service networks. This includes integration issues, taking into account the autonomy of the decision-making entities in face of information asymmetry, the modeling of preferences of the decision makers, efficiently determining robust solutions, i.e. solutions that are insensitive with respect to changes in the problem data, and a reduction of the time needed for model building and usage. The problem solution cycle includes problem analysis, the design of appropriate algorithms and their performance assessment. We are interested in a prototypical integration of the proposed methods within application systems, which can be followed up with field tests of the extended application systems. We argue that the described research agenda requires the interdisciplinary collaboration of business and information systems engineering researchers with colleagues from management science, computer science, and operations research. In addition, we present some exemplifying, illustrative examples of relevant research results.     

R&D AND ECONOMIC GROWTH IN A CASH‐IN‐ADVANCE ECONOMY

R&D investment has well‐known liquidity problems, with potentially important consequences. In this study, we analyze the effects of monetary policy on economic growth and social welfare in a Schumpeterian growth model with cash‐in‐advance (CIA) constraints on R&D investment, consumption, and manufacturing. Our main results can be summarized as follows. Under the CIA constraints on R&D and consumption (the CIA constraint on manufacturing), an increase in the nominal interest rate decreases (increases) R&D and economic growth. We also analyze the optimality of Friedman rule and find that Friedman rule can be suboptimal due to a unique feature of the Schumpeterian model.     

Financial instruments with sports betting components: Marketing gimmick or a domain for behavioral finance?

We examine theoretically and experimentally a certain class of new financial instruments which are designed as lotteries on the outcome of prominent sports events like the Soccer World Cup 2006. From a theoretical point of view, sports betting products may be superior to a fixed rate investment because of heterogeneous expectations, risk-loving behavior of investors or additional non-monetary utility components. In comparison to the direct placement of bets at bookmakers’, sports betting products may be preferable in cases of hedonic framing. Our experimental section, however, reveals the limited practical relevance of these theoretical arguments for “average” decision makers. Despite this, financial instruments with sports betting components offer a certain profit potential due to the diversity of preferences across individuals. Summarizing, the issuance of sports betting products may actually be mainly driven by marketing aspects, nevertheless sports betting products may be considered to be “viable” niche products with low cost of capital for banks.     

Automated Integration of Enterprise Accounting Models Throughout the Systems Development Life Cycle

This paper summarizes and projects research in the field of automated software engineering as that work has been applied to the domain of accounting-centered enterprise models. In particular, we review the basic concepts and goals of the REA (Resource–Event–Agent) accounting model and speculate on its past, present, and future use as an embedded domain theory of enterprise economic activity within computer-aided systems engineering (CASE) tools. The REA CASE tools reviewed here include ones like REAVIEWS, CREASY, and REAtool that have already been built plus others like REACH, FREACC, and REAVERSE that have been specified only in theory. The entire systems development life cycle is used as a discussion vehicle to treat these tools and projected future work in an integrated way.     

Systemic liquidity contagion in the European interbank market

Systemic liquidity risk, defined by the International Monetary Fund as “the risk of simultaneous liquidity difficulties at multiple financial institutions,” is a key topic in financial stability studies and macroprudential policy-making. In this context, the complex web of interconnections of the interbank market plays the crucial role of allowing funding liquidity shortages to propagate between financial institutions. Here, we introduce a simple yet effective model of the interbank market in which liquidity shortages propagate through an epidemic-like contagion mechanism on the network of interbank loans. The model is defined by using aggregate balance sheet information of European banks, and it exploits country and bank-specific risk features to account for the heterogeneity of financial institutions. Moreover, in order to obtain the European-wide topology of the interbank network, we define a block reconstruction method based on the exchange flows between the various countries. We show that the proposed contagion model is able to estimate systemic liquidity risk across different years and countries. Results suggest that our effective contagion approach can be successfully used as a viable alternative to more realistic but complicated models, which not only require more specific balance sheet variables with high time resolution but also need assumptions on how banks respond to liquidity shocks.

     

Creativity over time and space

Creativity is often highly concentrated in time and space, and across different domains. What explains the formation and decay of clusters of creativity? We match data on notable individuals born in Europe between the eleventh and the nineteenth centuries with historical city data. The production and attraction of creative talent is associated with city institutions that protected economic and political freedoms and promoted local autonomy. Instead, indicators of local economic conditions such as city size and real wages, do not predict creative clusters. We also show that famous creatives are spatially concentrated and clustered across disciplines, that their spatial mobility has remained stable over the centuries, and that creative clusters are persistent but less than population.