On the genesis of multinational foreign affiliate networks

Multinational enterprises (MNEs) develop their networks of foreign affiliates gradually over time. Instead of exploring all profitable opportunities immediately, they first establish themselves in their home countries and then enter new markets stepwise. We argue that this behavior is driven by uncertainty concerning a firm's success in new markets. After entry, the firm collects information which is used to update its beliefs about its performance in a market. As conditions in different markets are correlated, the information gathered in one of them can also be used to update beliefs elsewhere – with the degree of correlation depending on issues such as the geographical or cultural distance between markets. This correlated learning may render it optimal to enter markets sequentially – investment in market A is only followed by entry in market B if the firm was sufficiently successful in A. The prediction that firms start their expansion in markets that are closer to their home base and then proceed step by step is supported by our empirical analysis, which features the universe of foreign affiliates held by German multinationals. Based on a rich set of benchmark estimates and sensitivity checks, we identify correlated learning across markets beyond alternative explanations as a key driver of gradualism in the genesis of MNEs' foreign affiliate networks.     

Rational expectations and monopolistic trades

We argue that the use of rational expectations in monopolistic markets, as typically done, is overly restrictive because the rationale of this approach is not met in those markets. In a model that encompasses a general equilibrium framework, we consider a monopolist (a producer) with subjective beliefs that endogenously hedges against fluctuations in input prices in a complete market. We introduce a notion of entropy of beliefs, and we characterize long-run optimal rational investments with this entropy. For irrational beliefs, we show that long-run profits are a decreasing function of this entropy. However, long-run profits always remain positive as long as the entropy remains finite despite the Market Selection Hypothesis that would predict long-run 0-profit.     

Market crashes,speculation and learning in financial markets

A natural conjecture is that if agents’ beliefs are almost correct then equilibrium prices should be close to rational expectations prices. Sandroni (J Econ Theory 82:1–18, 1998) gives a counterexample in an economy with sunspots and complete markets. We extend Sandroni’s result by showing that the conjecture is generically true for economies with complete markets. We consider a standard General Equilibrium model with large but finite horizon and complete markets. We show that, for almost every such economy, if conditional beliefs eventually become correct along a path of events then equilibrium prices of assets traded along this path converge to rational expectations equilibria in the sup-norm. Moreover, we establish that, generically, there exist along any such path local diffeomorphisms between individual beliefs and equilibrium prices. I would like to thank C. Ewerhart and A. Kirman for their comments, as well as the seminar participants at the University of Minho, the General Equilibrium Workshop 2005 in Zurich, and the 15th Asian General Equilibrium Conference 2007 in Singapore. An anonymous referee also provided very valuable comments.     

Between a rock and a soft place: Ecological and feminist economics in policy debates

The field of ecological economics includes both economic analysis on the one hand, and discussions of normative values and visions for society, on the other. Using feminist insights into cultural beliefs about the relative “hardness” and “softness” of these two sides, this essay discusses how ecological economists can use this unique “between” space in order to better inform policy. The current crisis of global climate change, it is argued, requires that economists move beyond modeling and measurement, while ecological thinkers need to re-examine beliefs about markets and profit.     

Collective Choice and Control Rights in Firms

Recent writers have asserted that firms controlled by workers are rare because workers have diverse preferences over firm policies, while investors all support wealth maximization. However, the source of the asymmetry between capital and labor remains unclear. We resolve this puzzle by arguing that because financial capital is exceptionally mobile, capital markets induce unanimity. The lower mobility of human capital implies that labor markets are monopolistically competitive and hence that unanimity cannot be expected in labor‐managed firms. Moreover, such firms are vulnerable to takeover by investors, while capital‐managed firms are substantially less vulnerable to takeover by workers.     

Excessive Volatility is Also a Feature of Individual Level Forecasts

The excessive volatility of prices in financial markets is one of the most pressing puzzles in social science. It has led many to question economic theory, which attributes beneficial effects to markets in the allocation of risks and the aggregation of information. In exploring its causes, we investigated to what extent excessive volatility can be observed at the individual level. Economists claim that securities prices are forecasts of future outcomes. Here, we report on a simple experiment in which participants were rewarded to make the most accurate possible forecast of a canonical financial time series. We discovered excessive volatility in individual-level forecasts, paralleling the finding at the market level. Assuming that participants updated their beliefs based on reinforcement learning, we show that excess volatility emerged because of a combination of three factors. First, we found that submitted forecasts were noisy perturbations of participants’ revealed beliefs. Second, beliefs were updated using a prediction error based on submitted forecast rather than revealed past beliefs. Third, in updating beliefs, participants maladaptively decreased learning speed with prediction risk. Our results reveal formerly undocumented features in individual-level forecasting that may be critical to understand the inherent instability of financial markets and inform regulatory policy.     

Asset Prices and Trading Volume in a Beauty Contest

Speculators buy an asset hoping to sell it later to investors with higher private valuations. If agents are uncertain about the distribution of private valuations and about the beliefs of others about this distribution, a beauty contest with an infinite hierarchy of beliefs arises. Under Harsanyi's assumption of a common prior the infinite beliefs hierarchy is readily solved using Bayes' law. This paper shows that common knowledge of the "beliefs formation rule," mapping the private valuation of each gent into his first-order belief, also simplifies the beliefs hierarchy while allowing for disagreement among agents. We analyse the resulting speculation in a stylized asset market. Several statistics, computed only from readily observable quote, return and volume data, are evaluated in terms of their power to discriminate between genuine disagreement and the Harsanyian case. Only statistics that relate volume and volatility, or volume and changes in best offers, have the necessary discriminatory power.     

基于投资者异质性信念的证券定价模型——对我国股票市场价格的实证检验

投资者异质性信念的相互作用影响着证券价格,证券市场上的各种证券需求与供给关系,往往表现为投资者各种不同信念的对抗和交融。本文以悲观信念（看多）和乐观信念（看空）之间的相互作用为例,研究了异质性信念对资产均衡定价的影响,并以我国股票市场的机构投资者信念为对象进行了实证检验,得出我国股票市场投资者信念与证券价格相互作用的结论。本文的建议是在投资过程中,准确分析市场中投资者的异质性信念结构,尤其是资金雄厚的机构投资者的信念结构至关重要。     

Asset-based Reserve Requirements: Some Reservations

Abstract

Thomas Palley's (2004) paper ‘Asset-based reserve requirements: reasserting domestic monetary control in an era of financial innovation and instability’ has radical implications for monetary policy and the operations of central banks in the money markets. This comment argues that Palley's proposal may be impractical today because it overlooks banks' holding of excessive reserves (or claims on such reserves), and because reserves allocated for particular kinds of business cannot be isolated in bank balance sheets or markets. In particular, once differential reserves are imposed on particular kinds of business, banks may respond to changes in reserve requirements by varying their assets in less predictable ways than the scheme suggests. A central bank's willingness to use differential reserve requirements will be inhibited by the current policy doctrine that emphasises control of a stable money market rate of interest. In any case, it is doubtful if interest rates or reserve requirements could have the specific targeted effects that Palley's model suggests.     

Mean-variance analysis in temporary equilibrium

In this paper we take the first few steps towards a new theory of portfolio choice in the spirit of conventional mean-variance analysis but without strong assumptions on preferences or the distributions for returns. In this model agents form beliefs about returns based on conjectures about finitely many moments. In temporary equilibrium all current markets clear and conjectures about moments are correct. We prove the existence of a steady-state sequence of temporary equilibria and identify conditions on the structure of beliefs that ensure that the steady-state temporary equilibrium beliefs are in some sense accurate and closely approximate rational expectations.     

Demand for ISO 14001 adoption in the global supply chain: An empirical analysis focusing on environmentally conscious markets

This paper analyzes the environmental preferences and pressures of customers in environmentally conscious markets influencing the number of adoptions of ISO 14001—the international standard certified by the International Organization for Standardization (ISO) concerning an Environmental Management System (EMS)—in a country. Customers in different countries have different priorities and ideas with regard to the environment and its management, and therefore it is possible that environmental preferences and pressures of customers in environmentally conscious markets are greater, although many earlier studies suggest that foreign customers generally form a significant stakeholder group encouraging the adoption of ISO 14001. A random-effects Tobit estimation using a sample of 155 countries over eight years supports the view that the environmental preferences and pressures of customers in environmentally conscious markets (including Finland, Japan, Germany and Denmark) are more likely to encourage domestic along with foreign suppliers to adopt ISO 14001. As it is easier for firms in environmentally conscious markets to adopt ISO 14001 because of their better economic performance, they have already adopted certification and consequently require their domestic and foreign suppliers to do likewise in the global supply chain. For this reason, suppliers wishing to access environmentally conscious markets can obtain an advantage with ISO 14001 certification.     

On the Tobin Tax

Abstract

This paper clarifies why a transaction tax, such as the Tobin Tax, can stabilize financial markets. In markets that are already fairly deep, relatively small changes in trading volume are unlikely to have any impact (positive or negative) on volatility. Thus, a Tobin Tax can potentially have a stabilizing effect on international currency markets not because it reduces the excessive volume of transactions of speculators, but because it can slow down the speed with which market traders react to changes in prices of currencies. Moreover, it can lower their elasticity of future price expectations with respect to current price changes, which also has a stabilizing effect. Thus, to the extent that a Tobin Tax causes traders in financial markets to delay their decisions, a few ‘grains of sand in the wheels of international finance’ can indeed be stabilizing. Whether or not that is sufficient to prevent speculative attacks on currencies is a different matter.     

On the use of labels in credence goods markets

We analyze credence goods markets in the case of two firms. Consumers know that the quality of the good varies but do not know which firm is of high quality. First, we show that the high quality producer may be unable to monopolize the market, or even to survive in some cases, in situations where it is efficient and trusted by all consumers. Second, although a label restoring full information improves welfare, it may also reduce both firms’ profits by intensifying competition. Since even the high quality producer may not wish to label its product, in such cases the label must be mandatory. Third, an imperfect label which moves everybody’s beliefs closer to the truth without restoring full information may produce adverse results on market structure and welfare, either by increasing or by reducing the variance of beliefs.      

Team reasoning theory: an experimental analysis of common reason to believe and social distance

The aim of this paper is to study the role of the “common reason to believe” (Sugden in Philos Explor 16:165–181, 2003) and the reduction of social distance within the theory of team reasoning. The analysis draws on data collected through a Traveler’s Dilemma experiment. To study the role of the common reason to believe, players’ beliefs in their counterparts’ choices are elicited, and the correlation between the endorsement of team reasoning and beliefs is considered. The relation between social distance and team reasoning is analyzed by introducing a meeting between the two players after the game. We show that the common reason to believe appropriately explains the internal logic of team reasoning and that a reduction of social distance does not produce any statistically significant effect on the probability that team reasoning will be used.     

Belief heterogeneity and survival in incomplete markets

In complete markets economies (Sandroni in Econometrica 68:1303–1341, 2000), or in economies with Pareto optimal outcomes (Blume and Easley in Econometrica 74:926–966, 2006), the market selection hypothesis holds, as long as traders have identical discount factors. Traders who survive must have beliefs that merge with the truth. We show that in incomplete markets, regardless of traders’ discount factors, the market selects for a range of beliefs, at least some of which do not merge with the truth. We also show that impatient traders with incorrect beliefs can survive and that these incorrect beliefs impact prices. These beliefs may be chosen so that they are far from the truth.     

Killing the Goose That May Have Laid the Golden Egg: Only the Data Know Whether Sabotage Pays

A lively debate has developed concerning the incentive for a price-regulated input monopolist to engage in non-price discrimination if it vertically integrates into downstream markets. This paper identifies the key industry characteristics that determine whether such discrimination is likely, and studies both theoretically and numerically the tradeoffs among three important characteristics in the simplest extant model. The incentive to discriminate is theoretically ambiguous, but data for the US telecommunications industry indicate that discrimination is likely in the absence of policy-induced countervailing incentives. Countervailing policies include direct penalties for discriminatory behavior, forcing vertical autonomy, and fostering upstream competition.     

Consumption dynamics in general equilibrium: A characterisation when markets are incomplete

We introduce a methodology for analysing infinite horizon economies with two agents, one good, and incomplete markets. We provide an example in which an agent's equilibrium consumption is zero eventually with probability one even if she has correct beliefs and is marginally more patient. We then prove the following general result: if markets are effectively incomplete forever then on any equilibrium path on which some agent's consumption is bounded away from zero eventually, the other agent's consumption is zero eventually—so either some agent vanishes, in that she consumes zero eventually, or the consumption of both agents is arbitrarily close to zero infinitely often. Later we show that (a) for most economies in which individual endowments are finite state time homogeneous Markov processes, the consumption of an agent who has a uniformly positive endowment cannot converge to zero and (b) the possibility that an agent vanishes is a robust outcome since for a wide class of economies with incomplete markets, there are equilibria in which an agent's consumption is zero eventually with probability one even though she has correct beliefs as in the example. In sharp contrast to the results in the case studied by Sandroni (2000) [29] and Blume and Easley (2006) [8] where markets are complete, our results show that when markets are incomplete not only can the more patient agent (or the one with more accurate beliefs) be eliminated but there are situations in which neither agent is eliminated.     

Does Financial Sector Development Augment Cross-Border Capital Flows?

ABSTRACT

The sharp increase in volatility of capital flows in recent years has resulted in many countries altering the regulations governing the flow of foreign capital only to find such changes having a limited impact. We postulate that one reason for the limited effectiveness of such changes in regulations is the level of financial sector development in the country. As a country enhances its level of financial sector development, it also develops more and more sophisticated financial instruments. The more advanced the domestic financial instruments are, and the deeper is the integration of the domestic financial markets with the world markets, the greater is the likelihood of developing strategies to bypass capital account management measures. In this paper, we use various empirical techniques to identify the impact of financial sector development on capital flows, after accounting for regulatory regime. The empirical results indicate that there is a threshold effect in the financial sector development capital flow relationship. In particular, financial sector development augments greater integration with global capital flows only above a threshold level. Below the threshold level we find financial development reduces the extent of integration with global capital markets.     

Savings and default

We develop a model in which individuals compete for a fixed pool of prizes by investing effort in a contest. Individuals belong to two separate and identifiable groups. We say that the contest is discriminatory if a lower share of prizes is reserved for one group than for the other. We show that it can be difficult for an observer to detect the presence or absence of discrimination in the contest, as both regimes can be observationally equivalent. In particular, one group’s belief that it is allocated a lower share of prizes than the other group can be consistent with observed data even if no such group quotas actually exist. Conversely, the belief that the contest does not discriminate can be consistent with data when, in fact, discrimination exists. Incorrect beliefs will therefore not be revised, as the contest generates no evidence to the contrary.     

A general equilibrium pricing model with speculation,quantity risk,price risk and foreign exchange risk

This paper develops a general equilibrium model where prices and foreign exchange rates are endogenous and based upon more fundamental determinants. Speculative behavior leading to position taking in claims on foreign risky commodities is explained. It is shown that in a multicurrency environment with less than complete markets and sequential trading opportunities, heterogenous expectations instigate this behavior; speculation occurs only when news (new information) is anticipated to emerge which can lead to a revision in prices and foreign exchange rates. However, it is contended that although foreign exchange risk and price risk do exist in such a market, they are results of the underlying and inescapable quantity risk. Furthermore, in well functioning markets, the risk that emanates from position taking in state contingent claims on foreign commodities and which influences final consumption is quantity risk. The distinction drawn between the three types of risks and the hierarchy established among the three markets with which these risks are associated has implications for international financial management, especially as it pertains to multinational corporations' foreign exchange exposure management.