BEHAVIOR IN GROUP CONTESTS: A REVIEW OF EXPERIMENTAL RESEARCH

Group contests are ubiquitous. Some examples include warfare between countries, competition between political parties, team‐incentives within firms, and rent‐seeking. In order to succeed, members of the same group have incentives to cooperate with each other by expending effort. However, since effort is costly, each member also has an incentive to abstain from expending any effort and instead free ride on the efforts of other members. Contest theory predicts that the intensity of competition between groups and the amount of free riding within groups depend on the group size, sharing rule, group impact function, contest success function, and heterogeneity of players. We review experimental studies testing these theoretical predictions. Most studies find significant over‐expenditure of effort relative to the theory and significant heterogeneity of behavior within and between groups. Also, most studies find support for the comparative statics predictions of the theory (with the exception of the “group size paradox”). Finally, studies show that there are effective mechanisms that can promote within‐group cooperation and conflict resolution mechanisms that can de‐escalate and potentially eliminate between‐group conflict.     

How do managerial techniques evolve over time? The distortion of “facilitation” in healthcare service improvement

When applied to solving real-world problems in the public sector, managerial techniques are likely to evolve over time in response to the context of their implementation. The temporal dynamics of this evolution and its underlying processes, however, remain under-researched. To address this gap, we present a qualitative longitudinal case study of a UK-based knowledge mobilization programme utilizing “facilitation” as a service improvement approach. We describe the processes underpinning the distortion of facilitation over time and argue that an uncritical and uncontrolled adaptation of managerial techniques may mask the unsustainable nature of the resulting improvement outcomes captured by conventional performance measurement.     

Statement of the Financial Economists Roundtable: Bank Capital as a Substitute for Prudential Regulation

The Financial CHOICE Act recently passed by the House proposes to create an “off‐ramp” that would allow banks to escape burdensome prudential regulation if the ratio of their equity capital to their total assets is 10% or more. The Financial Economists Roundtable supports this idea as a means of reducing regulatory costs, but believes some additional safeguards are needed. A capital ratio of 10% may not be high enough to discourage banks from excessive risk taking. A solution is to have two capital requirements for banks choosing the off‐ramp: one absolute (as proposed in the act) and one risk‐based. The FER believes that many banks will prefer this regime to the current burdensome prudential regulation, especially if regulators simplify the setting of risk weights and make them more rule‐based. Regulators setting minimum capital requirements should consider not only a bank’s stand‐alone risk, but also the systemic risk posed by banks, as well as the tendency of accounting measures of income and assets to overstate the economic value of banks’ equity capital. The Financial Choice Act would also eliminate useful elements of ongoing supervision and regulation, not all of which can be addressed by higher capital alone. Furthermore, to facilitate regulatory learning about risks, off‐ramped banks should continue to report the data that regulators use for stress tests, even if they are no longer subjected to the discipline of stress tests. Finally, the act is viewed as too permissive in its treatment of off‐ramped banks that get into trouble. To prevent gaming of regulation, FERC recommends that off‐ramped banks that subsequently fall below the minimum requirements should be required to raise new capital immediately.     

Media,sentiment and market performance in the long run

This paper investigates the impact of media pessimism on financial market returns and volatility in the long run. We hypothesize that media sentiment translates into investor sentiment. Based on the underreaction and overreaction hypotheses [Barberis, N., A. Shleifer, and R. Vishny. 1998. “A Model of Investor Sentiment.” Journal of Empirical Economics 49 (3): 307–343], we suggest that media pessimism has an effect on market performance after a lag of several months. We construct a monthly media pessimism indicator by taking the ratio of the number of newspaper articles that contain predetermined negative words to the number of newspaper articles that contain predetermined positive words in the headline and in the lead paragraph. Our results indicate that media pessimism is associated with negative (positive) market returns 14–17 (24–25) months in advance and positive market volatilities 1–20 months in advance. Our results are statistically and economically significant. We find evidence for Granger causality of media pessimism on market performance. Our media pessimism indicator possesses additional predictive power for the Baker and Wurgler [2006. “Investor Sentiment and the Cross-section of Stock Returns.” Journal of Finance 61 (4): 1645–1680] investor sentiment index and the Chicago Board Options Exchange Market Volatility Index.     

The Spillover Effect of Euro Area on Central and Southeastern European Economies: A Global VAR Approach

We use the global vector autoregression model to examine macroeconomic spillovers within the European Union over the period 2000-2014. We investigate how shocks originating in the euro area affect output and prices in the rest of Europe. We examine four different policy relevant shock scenarios: (i) increase in the euro area interest rate; (ii) increase in the euro area industrial production; (iii) decrease in the euro area consumer prices and (iv) decrease in global oil prices. In general, we find that these shocks have an effect of same (and expected) sign but of different size across the European Union. Our results suggest that the response of Central European countries to the euro area shocks is almost as strong as the response of the euro area countries itself. On the other hand, our results indicate that South East Europe is somewhat less sensitive to the euro area shocks and oil price shocks.     

Buyer power and mutual dependency in a model of negotiations

We study bilateral bargaining between several buyers and sellers in a framework that allows both sides, in case of a bilateral disagreement, flexibility to adjust trade with each of their other trading partners and receive the gross benefit generated by each adjustment. A larger buyer pays a higher per‐unit price when buyers' bargaining power in bilateral negotiations is sufficiently low, and a lower price otherwise. An analogous result holds for sellers. These predictions, and the implications of different technologies, are explained by the fact that size is a source of mutual dependency and not an unequivocal source of power.     

Reliability and relevance of fair values: private equity investments and investee fundamentals

Review of Accounting Studies - We directly test the reliability and relevance of investee fair values reported by listed private equity funds (LPEs). In our setting, disaggregated fair value...     

Market power,price discrimination,and allocative efficiency in intermediate‐goods markets

We consider a monopolistic supplier's optimal choice of two‐part tariff contracts when downstream firms are asymmetric. We find that the optimal discriminatory contracts amplify differences in downstream firms' competitiveness. Firms that are larger—either because they are more efficient or because they sell a superior product—obtain a lower wholesale price than their rivals. This increases allocative efficiency by favoring the more productive firms. In contrast, we show that a ban on price discrimination reduces allocative efficiency and can lead to higher wholesale prices for all firms. As a result, consumer surplus, industry profits, and welfare are lower.     

Credit cycles and macro fundamentals

We use an intensity-based framework to study the relation between macroeconomic fundamentals and cycles in defaults and rating activity. Using Standard and Poor's U.S. corporate rating transition and default data over the period 1980–2005, we directly estimate the default and rating cycle from micro data. We relate this cycle to the business cycle, bank lending conditions, and financial market variables. In line with earlier studies, the macro variables appear to explain part of the default cycle. However, we strongly reject the correct dynamic specification of these models. The problem is solved by adding an unobserved dynamic component to the model, which can be interpreted as an omitted systematic credit risk factor. By accounting for this latent factor, many of the observed macro variables loose their significance. There are a few exceptions, but the economic impact of the observed macro variables for credit risk remains low. We also show that systematic credit risk factors differ over transition types, with risk factors for downgrades being noticeably different from those for upgrades. We conclude that portfolio credit risk models based only on observable systematic risk factors omit one of the strongest determinants of credit risk at the portfolio level. This has obvious consequences for current modeling and risk management practices.     

Market‐share contracts as facilitating practices

This article investigates how the use of contracts that condition discounts on the share a supplier receives of a retailer's total purchases (market‐share contracts) may affect market outcomes. The case of a dominant supplier that distributes its product through retailers that also sell substitute products is considered. It is found that when the supplier's contracts can only depend on how much a retailer purchases of its product (own‐supplier contracts), intra‐ and interbrand competition cannot simultaneously be dampened. However, competition on all goods can simultaneously be dampened when market‐share contracts are feasible. Compared to own‐supplier contracts, the use of market‐share contracts increases the dominant supplier's profit and, if demand is linear, lowers consumer surplus and welfare.