Farsighted network formation

This paper studies a model of dynamic network formation when individuals are farsighted: players evaluate the desirability of a “current” move in terms of its consequences on the entire discounted stream of payoffs. We define a concept of equilibrium which takes into account farsighted behavior of agents and allows for limited cooperation amongst agents. We show that an equilibrium process of network formation exists. We also show that there are valuation structures in which no equilibrium strategy profile can sustain efficient networks. We then provide sufficient conditions under which the equilibrium process will yield efficient outcomes.     

Endogeneity in quantile regression models: A control function approach

This paper considers a linear triangular simultaneous equations model with conditional quantile restrictions. The paper adjusts for endogeneity by adopting a control function approach and presents a simple two-step estimator that exploits the partially linear structure of the model. The first step consists of estimation of the residuals of the reduced-form equation for the endogenous explanatory variable. The second step is series estimation of the primary equation with the reduced-form residual included nonparametrically as an additional explanatory variable. This paper imposes no functional form restrictions on the stochastic relationship between the reduced-form residual and the disturbance term in the primary equation conditional on observable explanatory variables. The paper presents regularity conditions for consistency and asymptotic normality of the two-step estimator. In addition, the paper provides some discussions on related estimation methods in the literature.     

THE RELATIONSHIP BETWEEN THE BLACK MARKET AND OFFICIAL EXCHANGE RATES: AN EXAMINATION OF LONG-RUN DYNAMICS IN INDIA

This study is the first to use Johansen's cointegration approach for India in the analysis of the long‐term dynamics between the black and official exchange rates for the period 1953–1993. The study also estimates the long‐run elasticity of the official rate with respect to the black market rate. As monthly data over 40 years are used, and a more robust methodology is employed, the results are likely to be more reliable as compared with the earlier work on India. The results of our study suggest that while there is a long‐term relationship between the two rates, the direction of causality is from the black rate to the official exchange rate. This is plausible in the Indian context where policy has generally lagged behind events in the black market. The hypothesis of a constant black market premium is rejected, implying that there is a mismatch between the percentage change in the official exchange rate and the percentage change in the black market rate.     

The contracting value of tainted reports in cost reduction settings

While cost accounting is a well-developed discipline with a rich institutional past, it is criticized for being manipulable. This criticism is due, in part, to the existence of multiple, yet equally accepted cost allocation procedures or cost estimation techniques. Employing a principal-agent model, cost accounting is modeled as a menu of alternative methods which, conditional on agent effort, produce noisy, unbiased and independently distributed (i.e., equally defensible) measures from which a single realization is selected ex post as the report used to contract with the agent. Assuming that the report does not indicate which method produced it, the report modeled is “tainted” in that the lowest (most favorable to the agent) outcome is reported, where the “amount” of tainting corresponds to the menu's size. The paper identifies bright-line conditions where the principal's expected net payoff is independent of the amount of tainting, demonstrating that tainting does not necessarily affect the report's incentive value.     

Stochastic stability in networks with decay

This paper considers a stylized model of network formation in which relations among agents are subject to frictions, as described in Bala and Goyal [A non cooperative model of network formation, Econometrica 68 (2000) 1181-1231]. We analyze the process of network formation in a dynamic framework where self-interested individuals can form or delete links and, occasionally, make mistakes. Then, using stochastic stability, we identify the network structures to which the formation process will converge.     

Do exporters have anything to learn from foreign multinationals?

International technology diffusion through FDI has been examined mainly at macro or industry level whereas micro studies have been concerned mostly with spillovers. Using recent data on the UK manufacturing firms, this paper uncovers evidence that acquisition FDI is an important channel of direct technology transfer from foreign multinationals to domestic exporters. This finding accords with the prediction of the internalisation theory of FDI which postulates that multinational firms transfer a range of intangible proprietary assets to their affiliates.     

Herding in delegated portfolio management: When is comparative performance information desirable?

We address the issue of investors’ asset allocation decisions when portfolio management is delegated to an agent. Contrary to predictions from traditional financial theory, it is shown that investors may not induce their manager to allocate funds to the asset with the highest return. Instead they may herd in their asset allocation decision and induce trade in a particular asset, because another manager is trading in it and despite the presence of a more profitable alternative. Doing so allows investors to write an efficiency-improving relative-performance contract. On the other hand, herding leads investors to design wage contracts strategically, resulting in more aggressive and thus less profitable trade in equilibrium. We show that herding occurs, when the cost of information is high, information precision is low and when managers are sufficiently risk averse. Moreover, when investors can decide whether or not to disclose information about their manager's performance, they will not do so.     

Returns of Small Growth Stocks: An Empirical Analysis

I investigate the mean reversion tendency of small growth stocks. Using a carefully articulated research design employing established and empirically tested principles, my findings should support or refute the anecdotal evidence that small growth stocks make superior investments. The primary motivation for the study springs from the documented differential preference among investors for value and growth stocks. Despite evidence that value stocks tend to outperform growth stocks, investors retain strong interest in growth stocks. Yet in examining the performance of Business Week’s (BW), smaller capitalization companies (called “Hot Growth Companies”) with respect to the overall financial market, Bauman et al. [2002] found positive excess returns in the pre-publication period but negative excess returns in the post-publication period. A limitation of their study is that their analyses relied on only three criteria: sales, BW rank and return on capital, which do not represent completely a firm’s financial health. I replicate Bauman et al.’s study but use a more robust and representative variable set to test the mean reversal hypothesis — Forbes’ financial criteria — and I focus on six variables. In the current study, I look at 4,200 companies listed in Forbes from 1980 to 2000. The results of the expanded study substantiate Bauman et al.’s [2002] study showing that there are positive excess returns in the pre-publication period, but negative excess returns in the post-publication period. An expanded future study will look at five additional variables to see if they make a significant difference on the effects of the returns of small growth stocks.     

THE JOINT ARRIVAL AND DEPARTURE PROCESS FOR THE M/M/l QUEUE

We consider the M/M/1-queue and derive an explicit expression for the joint distribution of the number of arrivals and the number of departures in [0, t), given the number of customers initially present. The derivation is almost purely combinatorial, it avoids the use of generating functions, and immediately yields a simple probabilistic interpretation of the result.