Effect of credible quality investment with Bertrand and Cournot competition

We show how credible revelation and ability to commit to quality choice effect equilibrium qualities and welfare when product market is either Bertrand or Cournot competition. We show that results depend on the type of competition but not generally on the cost of quality function. We show that with Bertrand competition, the equilibrium qualities are lower with credible commitment. Competition is moderated and producer surplus is higher and consumer surplus lower. With Cournot competition, higher quality will be better but lower quality will be worse with credible commitment. Consumer surplus is always greater with credible commitment and if cost does not increase too quickly with quality, producer surplus will also increase. Thus credible commitment is a collusive device with Bertrand competition but it can improve social welfare with Cournot competition. Received: February 8, 2000; revised version: February 14, 2002 RID="*" ID="*" The idea of this paper originated in the weekly workshops of Mordecai Kurz at Stanford. I am forever in debted to Mordecai and fellow students – Luis Cabral, Peter DeMarzo, John Hillas, Michihiro Kandori, Steve Langois, Patrick McAllister, Steve Sharpe, Peter Streufert, Steve Turnbull and Gyu-Ho Wang – for their criticism and encouragement. I also benefited from comments from Yi-Heng Chen, Jin-Li Hu, Kala Krishna, Jinji Naoto, Thomas J. Prusa, and Shyh-Fang Ueng at various later stages of this work. Last but not least, I am grateful for the detailed comments of the referee.     

Generalizations of Ho–Lee’s binomial interest rate model I: from one- to multi-factor

In this paper a multi-factor generalization of Ho–Lee model is proposed. In sharp contrast to the classical Ho–Lee, this generalization allows for those movements other than parallel shifts, while it still is described by a recombining tree, and is a process with stationary independent increments to be compatible with principal component analysis. Based on the model, generalizations of duration-based hedging are proposed. A continuous-time limit of the model is also discussed. This research was supported by Open Research Center Project for Private Universities: matching fund subsidy from MEXT, 2004–2008 and also by Grants-in-Aids for Scientific Research (No. 18540146) from the Japan Society for Promotion of Sciences.     

How Does the Largest Shareholder Affect Dividends?

Focusing on the legal protection of minority shareholders in Japan, which suggests that manager‐owned firms are better governed than corporation‐owned firms, this study presents a new test of two dividend models: the substitute model and the outcome model. In support of the latter, I find that manager‐owned firms pay higher dividends than corporation‐owned firms. The paper also examines the association between ownership by the largest shareholder and dividend payments. I find an inverted U‐shaped relationship for manager‐owned firms and a U‐shaped relationship for corporation‐owned firms between them. These results can be explained by the benefits and drawbacks of concentrated ownership.     

Conditions for short-run stability of a small open economy under flexible exchange rates

Short-run stability of a small open economy under flexible exchange rate regimes is shown to involve joint conditions on the rates of the growth of the public debt and of the current account surplus.     

On patterns of dynamic interdependence in a two-country world under flexible exchange rates

A two-country general equilibrium model of the world, where the interest-rate parity and the purchasing power parity conditions hold, is used to demonstrate how the two economies become interdependent through expectational mechanisms, and the government budgets being not in balance.     

Dynamics of quote and deal prices in the foreign exchange market

We empirically investigate price fluctuations of yen-dollar exchange rate using the high-frequency data recorded in the electronic broking system for seven-year period. The distribution of quote price changes has symmetric fat-tails approximated by a power law; however, that of deal price is asymmetrical. The autocorrelation function and diffusion of price changes indicate that quote price exhibits anti-correlation feature in short time scale, whereas deal price is essentially uncorrelated. The bid-ask spread shows power-law distribution and long range temporal correlations similar to that observed in absoute price changes.      

Explaining Foreign Holdings of Asia's Debt Securities: The Feldstein–Horioka Paradox Revisited*

In this paper, we find that home bias is still present in all economies and regions, especially in the case of short‐term debt securities, but that there are substantial variations among economies and regions in the strength of home bias, with the eurozone economies, the USA and developing Asia showing relatively weak home bias and advanced Asia, especially Japan, showing relatively strong home bias. We then examine trends over time in foreign holdings of debt securities and find that capital has been flowing from the USA and the eurozone economies to both advanced Asia (especially Japan) and developing Asia, and that foreign holdings of debt securities have been increasing in advanced as well as developing Asia but for different reasons. The main reason in the case of advanced Asia (especially Japan) appears to be higher risk‐adjusted returns, whereas the main reason in the case of developing Asia appears to be the growth of debt securities markets combined with relatively weak home bias and (in the case of short‐term securities) lower exchange rate volatility. Finally, we find that since the global financial crisis, foreign holdings of debt securities have declined (i.e. that home bias has strengthened) in all economies and regions except developing Asia, where they have increased (except for a temporary decline in 2008) but where their share is still much lower than the optimal share warranted by the capital asset pricing market model.