Interest group politics in a federation

The optimal degree of decentralization depends on the importance of inter-state externalities of local policies. We show that inter-state externalities are determined by the spatial distribution of interest groups within the country. Interest groups who have multi-state scope internalize inter-state externalities to a larger extent than the lobbyists with interests within a single state. We use variation in the geographic boundaries of politically-powerful industrial interests to estimate the effect of inter-state externalities on firm performance. Using firm-level panel data from a peripheralized federation, Russia in 1996–2003, we show that, controlling for firm fixed effects, the performance of firms substantially improves with an increase in the number of neighboring regions under influence of multi-regional business groups compared to the number influenced by local business groups. Our findings have implications for the literatures on federalism and on international trade as trade restrictions are a common source of inter-state externalities.     

Exit problems in regime-switching models

This paper provides a general framework for pricing of perpetual American and real options in regime-switching Lévy models. In each state of the Markov chain, which determines switches from one Lévy process to another, the payoff stream is a monotone function of the Lévy process labeled by the state. This allows for additional switching within each state of the Markov chain (payoffs can be different in different regions of the real line). The pricing procedure is efficient even if the number of states is large provided the transition rates are not very large w.r.t. the riskless rates. The payoffs and riskless rates may depend on a state. Special cases are stochastic volatility models and models with stochastic interest rate; both must be modeled as finite-state Markov chains. As an application, we solve exit problems for a price-taking firm, and study the dependence of the exit threshold on the interest rate uncertainty.     

Are there permanent valuation gains to overseas listing?

This paper tests whether foreign equity listings are associatedwith permanent valuation gains and examines how market and firmcharacteristics influence any valuation effects. Using a globalsample of 1,676 listings placed in 25 countries, we find thatmuch of the valuation gains to overseas listings are not permanent.The transitory nature of valuation gains holds for both averageUS listings and average first-time firm listings. We find littleevidence of a permanent effect on returns for firms that listabroad, even for firms’ listings in markets that are moreliquid, provide better legal protection, or have a larger shareholderbase.     

On Microfoundations of the Dual Theory of Choice

We show that Yaari's dual theory of choice under risk may be derived as an indirect utility when a risk-neutral agent faces financial imperfections. We consider an agent that maximizes expected discounted cash flows under a bid-ask spread in the credit market. It turns out that the agent evaluates lotteries as if she were maximizing Yaari's dual utility function. We also generalize the dual theory of choice for unbounded lotteries.     

Screening when some agents are nonstrategic: does a monopoly need to exclude?

We characterize the optimal screening mechanism for a monopolist facing consumers with privately known demands, some of whom have limited abilities to misrepresent their preferences. We show that consumers with better abilities to misrepresent information benefit from the presence of consumers who lack such abilities. Whenever the fraction of the latter group is positive, there is no exclusion: the firm supplies a positive quantity of the good to all consumers whose valuations exceed marginal cost of production. Our analysis is motivated by the evidence indicating that some individuals have limited ability to misrepresent themselves and imitate others.     

Spurious Regressions in Financial Economics?

Even though stock returns are not highly autocorrelated, there is a spurious regression bias in predictive regressions for stock returns related to the classic studies of Yule (1926) and Granger and Newbold (1974) . Data mining for predictor variables interacts with spurious regression bias. The two effects reinforce each other, because more highly persistent series are more likely to be found significant in the search for predictor variables. Our simulations suggest that many of the regressions in the literature, based on individual predictor variables, may be spurious.     

Consistency conditions for affine term structure models

Sufficient conditions for the application of the Feynman-Kac formula for option pricing for wide classes of affine term structure models in the jump-diffusion case are derived by generalizing earlier results for bond pricing in the pure-diffusion case The author is grateful to Mikhail Chernov and Darrel Duffie for useful discussions and suggestions.