Hormone beef, chlorinated chicken and international trade

We study international trade in innovative goods subject to uncertain consumer health effects. Such goods are often at the center of international trade disputes. We show that an interesting form of protectionism may arise because of scientific uncertainty. A free-riding effect is identified, implying more conservative behavior by countries. We also study the role of producers (lobbies) in providing valuable information, finding that the innovative lobby has an advantage in providing information as compared with the lobby producing the ‘traditional’ good. Moreover, lobbies disclose more information when the health effects are long lasting.     

Search and endogenous concentration of liquidity in asset markets

We develop a search-based model of asset trading, in which investors of different horizons can invest in two assets with identical payoffs. The asset markets are partially segmented: buyers can search for only one asset, but can decide which one. We show the existence of a “clientele’’ equilibrium where all short-horizon investors search for the same asset. This asset has more buyers and sellers, lower search times, and trades at a higher price relative to its identical-payoff counterpart. The clientele equilibrium dominates the one where all investor types split equally across assets, implying that the concentration of liquidity is socially desirable.     

Recreational versus professional bettors: Performance differences and efficiency implications

Using a novel dataset, which allows comparisons across heterogeneous sub-groups of pari-mutuel bettors, we demonstrate significant behaviour and performance distinctions between recreational and professional investors. Professionals’ ability to earn abnormal returns on short odds horses in high volume markets challenges the existing empirical consensus, which offers very limited evidence of betting market inefficiency. The results offer important lessons for betting operators and regulators and highlight the potential for similar avenues of investigation in other speculative markets.     

Efficient allocations under ambiguity

Important implications of the expected utility hypothesis and risk aversion are that if agents have the same probability belief, then consumption plans in every efficient allocation of resources under uncertainty are comonotone with the aggregate endowment, and if their beliefs are concordant, then the consumption plans are measurable with respect to the aggregate endowment. We study these two properties of efficient allocations for models of preferences that exhibit ambiguity aversion using the concept of conditional beliefs, which we introduce in this paper. We provide characterizations of such conditional beliefs for the standard models of preferences used in applications.     

Cognitive abilities and portfolio choice

We study the relation between cognitive abilities and stockholding using the recent Survey of Health, Ageing and Retirement in Europe (SHARE), which has detailed data on wealth and portfolio composition of individuals aged 50+ in 11 European countries and three indicators of cognitive abilities: mathematical, verbal fluency, and recall skills. We find that the propensity to invest in stocks is strongly associated with cognitive abilities, for both direct stock market participation and indirect participation through mutual funds and retirement accounts. Since the decision to invest in less information-intensive assets (such as bonds) is less strongly related to cognitive abilities, we conclude that the association between cognitive abilities and stockholding is driven by information constraints, rather than by features of preferences or psychological traits.     

Strategic interaction in undeveloped credit markets

This paper studies the strategic interaction between informal and formal lenders in undeveloped credit markets. In a model with adverse selection, loan seniority, market power, and differences in the cost of lending, it is shown that under general conditions a co-funding equilibrium will be a Nash outcome of the game. We demonstrate that a collateral requirement in connection with formal loans always generates a new co-funding equilibrium in which both lenders earn higher profits. A government subsidy to the formal lender may have the opposite effect. We relate our results to existing empirical evidence and the emerging discussion of how to best ensure financial viability and outreach of microfinance institutions.     

Asymmetric group loans,non-assortative matching and adverse selection

This paper shows that an asymmetric group debt contract, where one borrower co-signs for another, but not vice versa, leads to heterogeneous matching. The analysis suggests that micro finance organizations can achieve the first best by offering asymmetric group contracts.     

Adverse selection in credit markets and regressive profit taxation

In many countries, taxes on businesses are less progressive than labor income taxes. This paper provides a justification for this pattern based on adverse selection that entrepreneurs face in credit markets. Individuals choose between becoming entrepreneurs or workers and differ in their skill in both of these occupations. I find that endogenous cross-subsidization in the credit market equilibrium results in excessive (insufficient) entry of low-skilled (high-skilled) agents into entrepreneurship. This gives rise to a corrective role for differential taxation of entrepreneurial profits and labor income. In particular, a profit tax that is regressive relative to taxes on labor income restores the efficient occupational choice.     

Monitoring a common agent: Implications for financial contracting

Multiple principals want to obtain income from a privately informed agent and design their contracts non-cooperatively. The degree of coordination between principals shapes the contracts and affects the amount of monitoring. Equity-like contracts and excessive monitoring emerge when principals coordinate or verify each other's monitoring efforts. When this is not possible, free riding weakens monitoring incentives, so that flat payments, debt-like contracts, and very low levels of monitoring appear. Free riding may be so strong to induce even less monitoring than if the principals cooperated with each other; that is, non-cooperative monitoring does not necessarily lead to excessive monitoring.     

A new measurement method of investor overconfidence

We present an alternative measurement method of investor overconfidence, using unique survey data on stock market predictions of investors. We apply the Parkinson estimate based on extreme bounds around the stock forecast to deduce investor confidence. The results support overconfidence.     

Confronting the risk of asset loss: What role do livestock transfers in northern Kenya play?

In many low-income, high-risk environments households participate in informal risk sharing institutions involving inter-household transfers. This study focuses on: asset transfers and asset risk; the influence of past behavior on access to transfers; and wealth-differentiated transfer behavior. Panel data on livestock transfers in northern Kenya are analyzed. Three explanations of livestock transfers are investigated: ex post insurance; ex ante precautionary savings; and redistribution. Findings indicate that livestock transfers are of limited effectiveness in addressing asset risk and avoiding poverty. The findings have implications for both research on risk sharing institutions and for the design of development policies in pastoral areas.     

The signaling power of trade protection

This paper proposes an empirical analysis to provide new insight into the trade diversion effects of antidumping (AD) policy. Trade diversion is the shift in trade from named countries in an AD investigation to non-named countries. Previous studies have concluded that AD action causes a considerable drop in exports from named countries, however the extent to which trade is diverted to non-named countries is still an open debate. This paper examines to see whether AD action on named countries can have signaling effects on non-named countries. To examine the trade effects on non-named countries, a time series data at an 8-digit product level is constructed for all cases initiated between 1997 and 2003 in the European Union. The paper provides evidence that antidumping policy has signaling effects on non-named imports.     

Monetary Policy Shocks and Heterogeneous Finance Decisions: A Model of Hidden Effort Choice and Financial Intermediation

Abstract. The paper investigates how monetary policy shocks influence the composition of firms' external finance given that firms are heterogeneous. Heterogeneity stems from differences in the availability of internal funds and in the monitoring costs associated with bank finance. These costs are determined by the intensity of the lending relationship. By using a delegated monitoring approach it is found that bank loans serve as a substitute for internal funds if the lending relationship is sufficiently close. Moreover, banks with strong credit ties to their customers are not only able to protect borrowers from liquidity constraints following a monetary tightening but are even able to extend their business lending.     

Global factor trade with differentiated factor prices and factor intensities

Abstract .  Relaxing the assumption of internationally identical factor intensity techniques in the HOV model creates two challenges. First, computing actual factor intensity techniques of different countries requires detailed input-output tables and factor usage data, which are not always available. Second, determinants of the factor intensity technique differences across countries need to be identified. This paper explores the role of relative factor price differences in the determination of factor intensity technique differences across countries and proposes an inferring method that infers factor intensity techniques of different countries based on relative factor price differences. The HOV model is then modified accordingly.     

Information aggregation in financial markets with career concerns

What are the equilibrium features of a dynamic financial market in which traders care about their reputation for ability? We modify a standard sequential trading model to include traders with career concerns. We show that this market cannot be informationally efficient: there is no equilibrium in which prices converge to the true value, even after an infinite sequence of trades. We characterize the most revealing equilibrium of this game and show that an increase in the strength of the traders' reputational concerns has a negative effect on the extent of information that can be revealed in equilibrium but a positive effect on market liquidity.     

Risk-sharing and crises. Global games of regime change with endogenous wealth

I add heterogeneous agents and risk-sharing opportunities to a global game of regime change. The novel insight is that when there is a risk-sharing motive, fundamentals drive not only individual behavior, but also select which individuals are more relevant for the likelihood of a crisis because of endogenous shifts in wealth. If attacking is relatively safe, attack behavior in the global game and trade in state-contingent assets feed back into each other. This feedback implies that multiple equilibria may exist even if signal noise becomes arbitrarily small. In addition, heterogeneity in risk-aversion within the population amplifies the influence of the state of the economy on the probability of a crisis.     

Terrorism risk concern in Europe

Motivated by the Bayesian framework, we explore terrorism risk perception differences across European countries. Perception variation is explained by the long-term terrorism countries face, while the cyclical part of terrorism does not seem to play any role.     

Front-running dynamics

We integrate a monopolist dual trader into a dynamic model of speculation. In static settings, [J.-C. Rochet, J.-L. Vila, Insider trading without normality, Rev. Econ. Stud. 61 (1994), 131-152] establish an irrelevance result—expected equilibrium outcomes are the same whether the monopolist speculator sees liquidity trade or not; and Roell [Dual-capacity trading and market quality, J. Finan. Intermediation (1990), 105-124] shows that with multiple speculators, dual trading benefits liquidity traders. In dynamic settings, these results are reversed: a front-running speculator exploits knowledge of future liquidity trade, extracting greater profits by smoothing profit extraction intertemporally. Front running introduces positive serial correlation to order flow. Accordingly, market makers discount past order flow in prices, but prices retain the martingale property.     

Risk aversion and allocation to long-term bonds

As risk aversion approaches infinity, the portfolio of an investor with utility over consumption at time T is shown to converge to the portfolio consisting entirely of a bond maturing at time T. Previous work on bond allocation requires a specific model for equities, the term structure, and the investor's utility function. In contrast, the only substantive assumption required for the analysis in this paper is that markets are complete. The result, which holds regardless of the underlying investment opportunities and the utility function, formalizes the “preferred habitat” intuition of Modigliani and Sutch (Amer. Econom. Rev. 56 (1966) 178).