Recursive utility with unbounded aggregators

A new framework is presented for the study of the existence and uniqueness of solutions to the Koopmans’ equation in the unbounded case, that is based on the contraction mapping approach. In the bounded below case with bounded consumption streams, uniqueness of the solution in the whole class of weak-star continuous utility functions is obtained. When the aggregator is unbounded below and/or consumption streams are unbounded, existence of a weak-star continuous solution is shown, and a simple criterium to check the sufficient conditions for existence is provided. Juan Pablo Rincón-Zapatero and Carlos Rodríguez-Palmero gratefully acknowledge financial support by the Ministerio de Educación y Ciencia and FEDER funds under Research Projects MTM2005-06534 and SEJ2005-08709/ECON, respectively, and by Consejería de Educación de la Junta de Castilla y León under Research Projects VA99/04 and VA017B05, respectively. This paper has substantially benefited from the comments of an anonymous referee. Particular and special thanks are due to Robert Becker for his very helpful comments and valuable suggestions.     

On the impact of leverage constraints on asset prices and trading volume

Abstract. Researchers have used stylized facts on asset prices and trading volume in stock markets (in particular, the mean reversion of asset returns and the correlations between trading volume, price changes and price levels) to support theories where agents are not rational expected utility maximizers. This paper shows that this empirical evidence is in fact consistent with a standard infinite horizon – perfect information – expected utility economy where some agents face leverage constraints similar to those found in todays financial markets. In addition, and in sharp contrast to the theories above, we explain some qualitative differences that are observed in the price-volume relation on stock and on futures markets. We consider a continuous-time economy where agents maximize the integral of their discounted utility from consumption under both budget and leverage constraints. Building on the work by Vila and Zariphopoulou (1997), we find a closed form solution, up to a negative constant, for the equilibrium prices and demands in the region of the state space where the constraint is non-binding. We show that, at the equilibrium, stock holdings volatility as well as its ratio to stock price volatility are increasing functions of the stock price and interpret this finding in terms of the price-volume relation. We would like to thank the editor and two anonimous referees for valuable substantive comments. Our gratitude also to Franklin Allen, Kerry Back, Domenico Cuoco, Xavier Freixas, Sanford Grossman, Michel Habib, Lutz Hendricks, Richard Kihlstrom, Fernando Restoy, Mary Thomson, Jean-Luc Vila, participants to seminars at Birkbeck College, Carnegie-Mellon, Columbia, ESSEC, HEC, IAE, INSEAD, London Business School, London School of Economics, McGill, Michigan, National University of Singapore, Pompeu Fabra, North Carolina, Washington-St-Louis, Wharton, the Jornadas de Economía Financiera BBV, and the Meetings of the Society for Economic Dynamics and Control and the American Finance Association. Special thanks are due to Süleyman Basak for his enthusiastic support and many helpful suggestions. The usual disclaimer applies. We gratefully acknowledge the support of the BBV and Caja de Madrid Foundations and CREF (both authors) and of the Spanish Ministry of Education under DGICYT grant no. PB93-0388 (first author).     

Learning by doing,spillovers and shakeouts

This paper studies industry evolution driven by non strategic learning by doing and spillovers. We characterize a dynamic process of cost and output changes and its effect on welfare and industry profits. The paper gives conditions for shakeouts to occur and analyzes the key factors affecting these conditions. Since shakeouts could lead to a long-run social loss due to higher market concentration, there is a role for a government to play in limiting unnecessary shakeouts. The most effective way to do so is to enhance spillovers.JEL Classification: L11, L13, O31Correspondence to: Michael TroegeWe would like to thank Hans Mewis, Christophe Moussu and an anonymous referee for valuable comments and suggestions. We also benefited from comments of seminar participants at WZB, Humboldt University, Northwestern University and the EEA/ESEM 1999 meetings. Part of the research was carried out while Michael Tröge was visiting Northwestern University. Financial support by the German Research Council (DFG) is gratefully acknowledged.     

Voting in assemblies of shareholders and incomplete markets

Summary. An economy with two dates is considered, one state at the first date and a finite number of states at the last date. Shareholders determine production plans by voting - one share, one vote - and at -majority stable stock market equilibria, alternative production plans are supported by at most percent of the shareholders. It is shown that a -majority stable stock market equilibrium exists if where S is the number of states at the last date and J is the number of firms. Moreover, an example shows that -majority stable stock market equilibria need not exist for smaller s.Received: 23 December 2002, Revised: 14 June 2004, JEL Classification Numbers: D21, D52, D71, G39. Correspondence to: Hervé CrésThe authors are grateful to an anonymous referee for helpful comments and suggestions. Financial support from the Danish Research Councils and hospitality of HEC is gratefully acknowledged by Mich Tvede and support from Fondation HEC is gratefully acknowledged by Hervé Crés.     

Component efficient solutions in line-graph games with applications

Recently, applications of cooperative game theory to economic allocation problems have gained popularity. We investigate a class of cooperative games that generalizes some economic applications with a similar structure. These are the so-called line-graph games being cooperative TU-games in which the players are linearly ordered. Examples of situations that can be modeled like this are sequencing situations and water distribution problems. We define four properties with respect to deleting edges that each selects a unique component efficient solution on the class of line-graph games. We interpret these solutions and properties in terms of dividend distributions, and apply them to economic situations. This research has been done while the third author was visiting Tinbergen Institute at the Free University, Amsterdam. The research is part of the Research Programme “Strategic and Cooperative Decision Making” at the Department of Econometrics. Financial support from the Netherlands Organization for Scientific Research (NWO) in the framework of the Russian-Dutch programme for scientific cooperation, is gratefully acknowledged. The third author also appreciates partial financial support from the Russian Leading Scientific Schools Fund (grant 80.2003.6) and Russian Humanitarian Scientific Fund (grant 02-02-00189a). We thank three anonymous referees for their valuable comments.     

Art as an investment: Short and long-term comovements in major painting markets

This paper examines the short and long-term price linkages among major art and equity markets over the period 1976–2001. The art markets examined are Contemporary Masters, French Impressionists, Modern European, 19^th Century European, Old Masters, Surrealists, 20^th Century English and Modern US paintings. A global equity index (with dividends and capitalisation changes) is also included. Multivariate cointegration procedures, Granger non-causality tests, level VAR and generalised variance decomposition analyses based on error-correction and vector autoregressive models are conducted to analyse short and long-run relationships among these markets. The results indicate that there is a stationary long-run relationship and significant short and long run causal linkages between the various painting markets and between the equity market and painting markets. However, in terms of the percentage of variance explained most painting markets are relatively isolated, and other painting markets are generally more important than the equity market in explaining the variance that is not caused by innovations in the market itself. This suggests that opportunities for portfolio diversification in art works alone and in conjunction with equity markets exist, though in common with the literature in this area the study finds that the returns on paintings are much lower and the risks much higher than in conventional financial markets.The authors would like to thank delegates to the 14th Australasian Finance and Banking Conference, University of New South Wales, seminar participants at the Queensland University of Technology and Massey University, Masaki Katsuura, and two anonymous referees for helpful comments on earlier versions of this paper. The financial assistance of a Queensland University of Technology, Faculty of Business Research Initiative Grant is also gratefully acknowledged.     

External cooperation and entrepreneurial orientation in industrial clusters

ABSTRACT

The aim of this paper is to examine the relationship between external cooperation and entrepreneurial orientation (EO). This relationship is explored in cluster environment, wherein entrepreneurial organizations compete and cooperate simultaneously to pursue opportunities. The following hypothesis is tested: External cooperation is positively correlated with entrepreneurial orientation. The hypothesis is tested with a correlation analysis on a sample of 77 small-sized enterprises operating in the Malopolska region in Poland, wherein several clusters are active. Additionally, the regression analysis is conducted to examine the associations between inter-organizational cooperation and EO dimensions. The findings confirm that external cooperation is positively correlated with EO. This observation is confronted with a pro-competitive approach that is a constitutional element of the entrepreneurship concept. Moreover, the findings show that the correlation between external cooperation and a firm’s performance is stronger than between some other EO dimensions and performance. Additionally, the findings show the important role of relationships between organizations and their clients. In the paper, several remarks for development of the theory are discussed, including the need for incorporating inter-organizational cooperation into a set of entrepreneurial traits and reflecting it in entrepreneurial orientation scales. The findings confirm the importance of that direction of theory development that focuses on inter-organizational collaboration in the context of entrepreneurship.     

Incomplete regulation, market competition and collusion

Regulators often do not regulate all firms competing in a given sector. Due to product substitutability, unregulated competitors have incentives to bribe regulated firms to have them overstate their costs and produce less, thereby softening competition. The best collusion-proof contract entails distortions both for inefficient and efficient regulated firms (distortion ‘at the top’). But a contract inducing active collusion may do better by allowing the regulator to ‘team up’ with the regulated firm to indirectly tax its competitor. The best such contract is characterized. It is such that the unregulated firm pays the regulated one to have it truthfully reveals its inefficiency. We finally compare those contracts.     

Prescribed conditional interaction structure models with application to the analysis of mobility tables

The present paper considers some new models for the analysis of multidimensional contigency tables. Although the theoretical background used here appeared already in Haberman (1974), prescribed conditional interaction (PCIN) models were introduced by Rudas (1987) and their mathematical properties were worked out by Leimer and Rudas (1988). These models are defined by prescribing the values of certain conditional interactions in the contingency table. Conditional interaction is defined here as the logarithm of an appropriately defined conditional odds ratio. This conditional odds ratio is a conditional version of a generalization of the well known odds ratio of a 2×2 table and that of the three factor interaction term of a 2×2×2 table and applies to any number of dimensions and any number of categories of the variables. The well known log-linear (LL) models are special PCIN models. Estimated frequencies under PCIN models and tests of fit can be computed using existing statistical software (e.g. BMDP). The paper describes the class of PCIN models and compares it to the class of association models of Goodman (1981). As LL models are widely used in the analysis of social mobility tables, application of more general PCIN models is illustrated.