DOES NEAR‐RATIONALITY MATTER IN FIRST‐ORDER APPROXIMATE SOLUTIONS? A PERTURBATION APPROACH

This paper studies first‐order approximate solutions to near‐rational dynamic equilibrium models. Under near‐rationality, agents' subjective beliefs are distorted away from rational expectations via a change of measure process which fulfills some regularity conditions. In most applications, the beliefs distortion process is also directly observed by (a subset of) the decision‐makers – e.g., ambiguity‐averse households or policy‐makers with a concern for robustness – and therefore included into their optimization problems. We investigate conditions for existence and local uniqueness of solutions under endogenous distortions, as well as the relation with their rational expectations counterparts. We show that linearly perturbed solutions may well be affected by the presence of distorted beliefs, depending on the underlying model economy. In particular, while directly affecting first‐order decision rules, near‐rationality may also induce failure of the certainty equivalence principle. Moreover, the martingale representation of distorted beliefs might prove non‐unique, pointing to a subtle form of equilibrium indeterminacy.     

On the Use of the Moving Average Trading Rule to Test for Weak Form Efficiency in Capital Markets

The examination for the possible existence of predictive power in the moving average trading rule has been used extensively to test the hypothesis of weak form market efficiency in capital markets. This work focuses mainly on the study of the variation of the moving average (MA) trading rule performance as a function of the length of the longer MA. Empirical analysis of daily data from NYSE and the Athens Stock Exchange reveal high variability of the performance of the MA trading rule as a function of the MA length and on some occasions the series of successive trading rule total returns is non‐stationary. These findings have direct implications in weak form market efficiency testing. Indeed, given this high variability of the performance of the MA trading rule, by just finding out that trading rules with some specific combinations of MA lengths can or cannot beat the market, as is the case in most of the published work thus far, is not enough evidence for or against the existence of weak form market efficiency. Results also show that on average in about three out of four cases trading rule signals are false, a fact that leaves a lot of space for improved trading rule performance if trading rule signals are combined with other information (e.g. filters, or volume of trade). Finally, some evidence of enhanced trading rule performance for the shorter MA lengths was found. This enhanced performance is partly attributed to the higher probability that a trading rule signal is not a whipsaw, as well as to the larger number of days out‐of‐the‐market which are associated with shorter MA lengths.     

Interlinkage and Generous Tit‐for‐Tat Strategy

We investigate an infinitely‐repeated prisoners' dilemma with imperfect monitoring and consider the possibility that the interlinkage of the players' distinct activities enhances implicit collusion. We show a necessary and sufficient condition for the existence of a generous tit‐for‐tat Nash equilibrium. Such an equilibrium, if it exists, is unique. This equilibrium achieves approximate efficiency when monitoring is almost perfect, where the discount factors are fixed.     

On Mergers and Agglomeration

We formulate a model of mergers and acquisitions assuming a monopolistic competitive industry that exhibits agglomeration economies. We provide the conditions for the existence of a non‐trivial Nash equilibrium in the acquisition market at which the most productive firm acquires a range of less‐productive firms. Most importantly, we show that domestic merger and acquisition activities are international trade promotionary. We also show that such types of mergers and acquisition will improve the competitive position of foreign firms leading to an increase in their market share. In addition, domestic mergers and acquisitions will increase the number of imported varieties.     

To Trade Or Not To Trade: Economies With A Variable Number Of Tradeables*

We present a general equilibrium model that encompasses the endogenous selection and shadow‐pricing of a set of tradeable commodities, with home‐based and social production activities. In the model, a market system is a set of costly social institutions which embody the trade and production technologies available in the economy. Our equilibrium concept describes the pricing of market institutions, thus pricing the tradeability of a commodity. We obtain the existence and the decentralization of Pareto‐efficient allocations. We discuss an example regarding the transition of a guild‐based economy into a market‐based economy.     

Strategic noise traders and liquidity pressure with a physically deliverable futures contract

Do physically deliverable futures contracts induce liquidity pressure in the underlying spot market? The answer is believed to be no since the asset is delivered sometimes after the expiration of the contract so that the futures trader's payoff does not clearly depend on the price of the underlying stock at expiration. We construct a rational expectations equilibrium model in which a strategic uninformed trader induces liquidity pressure in the underlying spot market at the expiration of a physically deliverable futures contract. Liquidity pressure is the result of a pure informational advantage: if it is known that futures traders hedge their position in the spot market then a strategic trader with no information about the fundamental value of the underlying has an incentive to create noise in the futures market in order to gain information on the composition of the spot order flow at future auctions. We show that informed traders benefit from this form of strategic noise and that the efficiency of the prices remains unaffected.     

Simple Reputation Systems*

We develop a model of simple “reputation systems” that monitor and publish information about the behavior of sellers in a search market with asymmetric information. The reputations created influence the equilibrium search patterns of buyers and thus provide for market‐based “punishment” of bad behavior. We show that a reputation system that rewards honesty can enhance welfare by allowing good sellers to truthfully signal their type. However, the same system can be prone to strategic manipulation by sellers who always have low‐quality products. In that case, we show that an alternative system which assigns reputations based on product quality rather than honesty can be superior.     

Second degree price discrimination and natural monopoly

This paper considers the efficiency of a contestable natural monopoly if consumers are heterogeneous and the monopolist can differentiate prices imperfectly. The paper shows that a “no‐distortion‐at‐the‐top” result, which is standard in models with restricted entry, may also appear in a contestable market. Depending on cost and demand structures, first best efficiency can also be a sustainable equilibrium. However, due to the existence of a continuum of equilibria, first best efficiency is not guaranteed. Most notably, even a stable “distortion‐at‐the‐top” result is possible.     

COMPETITIVE PRICING AND EFFICIENCY IN SEARCH EQUILIBRIUM*

We consolidate and generalize some results on price determination and efficiency in search equilibrium. Extending models by Rubinstein and Wolinsky and by Gale, heterogeneous buyers and sellers meet according to a general matching technology and prices are determined by a general bargaining condition. When the discount rate r and search costs converge to 0, we show that prices in all exchanges are the same and equal the competitive, market clearing, price. Given positive search costs, efficiency obtains iff bargaining satisfies Hosios' condition and r=0. When prices are set by third‐party market makers, however, we show that search equilibrium is necessarily efficient.     

Information acquisition and welfare effect in a model of competitive financial markets

We analyze welfare effect of information acquisition for a model of competitive financial markets with diverse information and rational expectations. We show that in the fully revealing rational expectations equilibrium, each agent’s gain from trade in ex ante utility decreases as more agents become informed. An implication of the result is that market efficiency and ex ante Pareto optimality are not compatible in competitive financial markets with diverse information and rational expectations. Our result can be viewed as complementary to the Grossman paradox, which shows that market efficiency and individuals’ incentives to acquire information are not compatible. This paper is the first step in a projected exploration of welfare effect of information acquisition in models with diverse information.     

Asset market equilibrium with short-selling and differential information

We introduce differential information in the asset market model studied by Cheng J Math Econ 20(1):137–152,1991, Dana and Le Van J Math Econ 25(3):263–280,1996 and Le Van and Truong Xuan J Math Econ 36(3): 241–254, 2001. We prove an equilibrium existence result assuming that the economy’s information structure satisfies the conditional independence property. If private information is not publicly verifiable, agents have incentives to misreport their types and therefore contracts may not be executed in the second period. We also show that under the conditional independence property equilibrium contracts are always executable.     

A GAME THEORETIC FOUNDATION OF COMPETITIVE EQUILIBRIA WITH ADVERSE SELECTION

We construct an extensive form game that captures competitive markets with adverse selection. It allows firms to offer any finite set of contracts, so that cross‐subsidization is not ruled out. Moreover, firms can withdraw from the market after initial contract offers have been observed. We show that a subgame perfect equilibrium always exists. In fact, when withdrawal is costless, the set of equilibrium outcomes may correspond to the entire set of feasible contracts. We then focus on robust equilibria that continue to exist for small withdrawal costs. We show that the Miyazaki–Wilson contracts are the unique robust equilibrium outcome.     

Informative advertising by heterogeneous firms

This paper introduces a model to analyze the role of the cost of information dissemination in large markets where firms have varying degrees of intrinsic efficiency reflected in their marginal costs. Firms enter a market and discover how efficient they are. Those firms with high enough efficiency stay, others exit. Remaining firms then compete to attract consumers by disseminating information about their existence and their prices using a common advertising technology. The properties of the model’s equilibrium are analyzed. The model is then used to study the effect of the cost of information dissemination on the competitiveness of the market and key industry aggregates, such as price distribution and the distribution of firm value.     

Insider trading with public and shared information

We study the impact of public information and shared information on traders' trading behavior in the context of Kyle's (1985) speculative market. We suppose that there are four types of traders in our model: one insider, M outsiders, liquidity traders, and market makers. We explicitly describe the unique linear Nash equilibrium and find that public information harms the insider but benefits the outsiders and noise traders. Also, the market is more efficient because of the existence of public information.     

Limit orders,asymmetric information,and the formation of asset prices with a computerized specialist

We analyze the existence of equilibrium in an asset market under asymmetric information. Price formation is modeled as a bilateral sealed bid auction where uninformed and informed traders submit limit orders to a computerized specialist. The computerized specialist is programmed to sell to the highest bidder and buy from the seller asking the lowest price. We show that this mechanism — which is designed to model the Globex and RAES trading institutions used in Chicago, London, New York, Paris, and Germany — yields an equilibrium in which the bid-ask spread is endogenously random and the passive specialist earns nonnegative profits.     

A THEORY OF WAGES AND LABOR DEMAND WITH INTRA‐FIRM BARGAINING AND MATCHING FRICTIONS*

This article provides a model of labor market equilibrium with search and within‐firm strategic bargaining. We yield explicit closed form solutions with heterogeneous labor inputs and capital. The solution exhibits overemployment. We show that higher relative bargaining power for some groups of workers may lead to overemployment relative to other groups, with such other groups being underemployed instead if they have a lower relative bargaining power. Similarly, the hold‐up problem between capitalists and employees does not necessarily lead to underinvestment in physical capital.     

Informed manipulation

In asymmetric information models of financial markets, prices imperfectly reveal the private information held by traders. Informed insiders thus have an incentive not only to trade less aggressively but also to manipulate the market by trading in the wrong direction and undertaking short-term losses, thereby increasing the noise in the trading process. In this paper we show that when the market faces uncertainty about the existence of the insider in the market and when there is a large number of trading periods before all private information is revealed, long-lived informed traders will manipulate in every equilibrium.     

网购市场鱼龙混杂现象的经济学解释：基于二维不对称信息的视角

网络购物市场存在商品鱼龙混杂的典型现象：高价格的商品不一定高质量，低价格的商品也不一定低质量，表现出明显的信息不对称特征。文章基于网络购物市场所存在的两个维度不对称信息的特征事实，即厂商在产品质量与产品生产成本两个方面拥有私有信息，通过构建二维不对称信息的分析框架，从市场均衡的视角首次解释了上述现象的经济机理。分析表明，由于二维不对称信息的存在，消费者和厂商决策的互动过程使得市场上产品价格与质量不再具有单调递增关系，从而网络购物市场可能出现鱼龙混杂的市场均衡，文章证明了这一均衡在合理的条件下是存在的。文章通过比较静态分析考察了市场环境的变化如何影响商品质量的价格信号显示效率以及消费者购买行为，并考察了网络购物行业商家披露信息、消费者对于商家的反馈评分机制和保证退货等手段对于消除商品鱼龙混杂现象的有效性，为进一步规范发展我国网络购物行业提供了参考。     

Public Sector Rationing and Private Sector Selection

We study the interaction between nonprice public rationing and prices in the private market. Under a limited budget, the public supplier uses a rationing policy. A private firm may supply the good to those consumers who are rationed by the public system. Consumers have different amounts of wealth, and costs of providing the good to them vary. We consider two regimes. First, the public supplier observes consumers’ wealth information; second, the public supplier observes both wealth and cost information. The public supplier chooses a rationing policy, and, simultaneously, the private firm, observing only cost but not wealth information, chooses a pricing policy. In the first regime, there is a continuum of equilibria. The Pareto dominant equilibrium is a means‐test equilibrium: poor consumers are supplied while rich consumers are rationed. Prices in the private market increase with the budget. In the second regime, there is a unique equilibrium. This exhibits a cost‐effectiveness rationing rule; consumers are supplied if and only if their cost–benefit ratios are low. Prices in the private market do not change with the budget. Equilibrium consumer utility is higher in the cost‐effectiveness equilibrium than the means‐test equilibrium.     

Non-monotoniticies and the all-pay auction tie-breaking rule

Discontinuous games, such as auctions, may require special tie-breaking rules to guarantee equilibrium existence. The best results available ensure equilibrium existence only in mixed strategy with endogenously defined tie-breaking rules and communication of private information. We show that an all-pay auction tie-breaking rule is sufficient for the existence of pure strategy equilibrium in a class of auctions. The rule is explicitly defined and does not require communication of private information. We also characterize when special tie-breaking rules are really needed.