Informational leverage: the problem of noise traders

The literature suggests that security design can be used to manipulate the information content of securities prices [what is referred to as the “informational leverage effect” in Boot and Thakor (J Finance 48, 1349–1378, 1993)]. The informational leverage effect arises in this literature in a market microstructure environment in which noise trade is exogenous, which is a fairly standard assumption dating back to the framework developed in Grossman and Stiglitz (Am Econ Rev 70, 393–408, 1980). This assumption is relaxed in our paper, and we show that the informational effects described in the related literature become less clear cut when noise trading activity is endogenous. We find that the intensity and direction of these effects depends crucially on the parameters describing the modeling environment. The elegant point of the informational leverage literature is that these effects arise largely independently of such parameters, but with endogenous noise trading that is no longer true. This literature may, therefore, lead to too strong conclusions being drawn about the relationship between information revelation and security design. We are very grateful for the helpful comments made by an anonymous referee.     

Effective Luxury-Brand Advertising: The ES–IF Matching (Entity–Symbolic Versus Incremental–Functional) Model

This study draws on the psychological tenets of implicit self-theories, which differentiate between individuals with entity versus incremental orientations, to deepen our understanding about how consumers evaluate luxury-brand advertising appeals. Our findings show that entity theorist consumers are more attracted to the symbolic value appeals of luxury brands, whereas incremental theorists are more attracted to functional value appeals. Furthermore, we show how consumers' implicit self-theories can be purposively primed by managers with the textual elements of a luxury-brand advertising message to increase its effectiveness, which provides useful implications for designing and executing effective luxury advertising.     

Would Excess Capacity in Public Firms Be Socially Optimal?

We analyse oligopolistic interactions between a welfare-maximizing public firm and a profit-maximizing private firm in a repeated game. We find that the public firm can hold excess capacity as a strategic punishment device to sustain a subgame perfect equilibrium which is welfare-superior to the static Nash equilibrium. Basically, potential punishment from the public firm in the dynamic game can make the self-interested private firm behave in the public interest. Furthermore, if capacity is endogenous, public excess capacity can occur in a welfare efficient equilibrium when the cost of public capacity investment is higher than that of private investment.     

Endogenously Asynchronous Entries into an Uncertain Industry

We model and analyze a priori symmetric duopoly where supply quantity adjustment is slow and time-consuming. The state of demand is ex ante uncertain, and becomes observable a certain time period after at least one firm's entry. We characterize those conditions under which sequential entries can be endogenously chosen either as an asymmetric pure-strategy equilibrium or as a consequence of a symmetric mixed-strategy equilibrium. Also, in the limit where information revelation is infinitely fast (i.e., the time period it requires becomes infinitesimally short), the expected waiting time until the first entry does not necessarily become proportionately short, whilst the time interval between the leader's entry and the follower's entry does become infinitesimally short. This suggests that chronologically nearly simultaneous entry should not necessarily be interpreted as counterevidence against leader-follower relations. In addition to equilibrium comparative statics, we also analyze some of the welfare issues associated with strategic timing of entry.     

Signaling in Takeover Auctions with Flexible Reserve Price

This paper develops a model of takeover auctions with a two‐step information acquisition process. It shows that the threat of extra information acquisition allows the existence of the signaling jump‐bidding equilibrium even when the seller is able to change its reserve price on the basis of the bidding history. The paper shows that although a higher cost of the secondary information leads to a higher expected price, the precision of the preliminary information has an ambiguous effect on the target's expected profit and that such an effect depends on the number of potential acquirers. Copyright © 2014 John Wiley & Sons, Ltd.     

Endogenous technological change,income distribution,and unemployment with inter-class conflict

This paper presents a Kaleckian growth model that incorporates endogenous technological change. The model endogenously determines the rate of capacity utilization, the rate of economic growth, income distribution, and the employment rate in addition to technological change. The paper shows that whether or not an increase in the relative bargaining power of workers raises the long-run equilibrium unemployment rate depends on which regime is realized in the long-run equilibrium. If, for example, the long-run equilibrium corresponds to the wage-led growth regime, a rise in the relative bargaining power of workers leads to a decline in the unemployment rate. This result is never obtained from the mainstream NAIRU model.     

Consistent price systems and arbitrage opportunities of?the?second kind in models with transaction costs

In contrast with the classical models of frictionless financial markets, market models with proportional transaction costs, even satisfying usual no-arbitrage properties, may admit arbitrage opportunities of the second kind. This means that there are self-financing portfolios with initial endowments lying outside the solvency region but ending inside. Such a phenomenon was discovered by M. Rásonyi in the discrete-time framework. In this note, we consider a rather abstract continuous-time setting and prove necessary and sufficient conditions for a property which we call no free lunch of the second kind, NFL2. We provide a number of equivalent conditions elucidating, in particular, the financial meaning of the property B which appeared as an indispensable “technical” hypothesis in previous papers on hedging (superreplication) of contingent claims under transaction costs. We show that it is equivalent to another condition on the “richness” of the set of consistent price systems, close to the condition PCE introduced by Rásonyi. In the last section, we deduce the Rásonyi theorem from our general result by using specific features of discrete-time models.     

Accounting and the formation of share market prices over time: a mathematical institutional economic analysis through simulation and experiment

This article develops a heterogeneous agents-based model to examine the emergent dynamic properties of share market price formation over time, with a view on financial market stability under alternative accounting regimes. In the model, individual heterogeneous investors interact with each other and with institutional devices which are an accounting system (related to the business firm) and a price system (related to the Share Exchange). These interactions provide mechanisms for transmission through which firm-specific (accounting signal) and market-driven (aggregate price) factors can act. A baseline simulation analysis assesses the financial market stability under three alternative accounting designs, namely two kinds of historical cost accounting regime and one kind of fair-value (mark-to-market) accounting regime. The former prove to better stabilize the financial system in terms of market volatility and exuberance in perfectly balanced conditions between speculative and fundamentalist beliefs and intentions. An evolutionary analysis is then developed by varying the relative degree of speculative attitudes between the two sides of the market. Historical cost accounting regimes further prove to make the financial system more resilient to speculative waves occurring at inter-individual level. Baseline findings are further corroborated through experimental analysis in twelve artificial financial systems. This mathematical institutional economic analysis has general implications for both designing accounting systems aimed at enhancing financial market stability and preventing procyclicality, and the study of accounting information process in the formation of share market prices over time.