On the possibility of efficient bilateral trade

I study a sequential process in which different pairs of traders bargain over the terms of trade of an indivisible good. I consider bothone-sided andtwo-sided offers based bargaining at the stage-game level. The sequential process is modelled as an infinite stage-game of incomplete information and the paper studies the efficiency properties of its equilibria. It is shown: With one-sided offers, all equilibria are long-run ex post efficient; with two-sided offers, examples of equilibria are constructed with widely varying efficiency properties. This paper is based on Chapter 1 of my Ph.D thesis.     

Corporate Social Responsibility as a Signalling Device for Foreign Direct Investment

A rise in CSR (corporate social responsibility) has accompanied rise in foreign direct investment (FDI) to developing countries in the 1990s. CSR may be serving a signalling function when the entering firm is of an unknown type. Although countries are now competing keenly to attract foreign firms, even so, excessive tax or excess transfers by firms can still cause a Prisoner’s Dilemma structure to the payoffs resulting in an inefficient Nash equilibrium. CSR allows the accommodating firm to reveal its type, making cooperation the equilibrium outcome. The game differs from standard models since signalling changes the payoffs. A unique separating equilibrium exists where only the accommodating firms signal. But, under certain parameter values, a pooling equilibrium where all firms signal, becomes possible. A number of results are derived including the size of CSR expenditure required as a fraction of profits. An example demonstrates their relevance in practical situations.     

A Simulation Approach to Dynamic Portfolio Choice with an Application to Learning About Return Predictability

We present a simulation-based method for solving discrete-timeportfolio choice problems involving non-standard preferences,a large number of assets with arbitrary return distribution,and, most importantly, a large number of state variables withpotentially path-dependent or non-stationary dynamics. The methodis flexible enough to accommodate intermediate consumption,portfolio constraints, parameter and model uncertainty, andlearning. We first establish the properties of the method forthe portfolio choice between a stock index and cash when thestock returns are either iid or predictable by the dividendyield. We then explore the problem of an investor who takesinto account the predictability of returns but is uncertainabout the parameters of the data generating process. The investorchooses the portfolio anticipating that future data realizationswill contain useful information to learn about the true parametervalues.     

Empirical cross-sectional asset pricing: a survey

I review the state of empirical asset pricing devoted to understanding cross-sectional differences in average rates of return. Both methodologies and empirical evidence are surveyed. Tremendous progress has been made in understanding return patterns. At the same time, there is a need to synthesize the huge amount of collected evidence.     

A corporate bond innovation of the 90s: The clawback provision in high-yield debt

This paper examines a recent financial innovation in corporate bond contracts, referred to as the clawback provision. A clawback provision in debt contracts gives the issuer an option to redeem a specified fraction of the bond issue within a specified period at a predetermined price and with funds that must come from a subsequent equity offering. We argue that issuers use clawback provisions to mitigate the wealth losses that would otherwise occur when new equity is offered. Consistent with the hypotheses, the evidence shows that bond offerings are more likely to include a clawback provision if their issuers are private, have more intangible assets, have fewer liquid assets, and are unregulated. We also estimate the price of clawback provisions and find that yield spreads on bonds with clawback provisions are a median of 86 basis points higher relative to what they otherwise would be.     

Network formation and social coordination

This paper develops a simple model to examine the interaction between partner choice and individual behavior in games of coordination. An important ingredient of our approach is the way we model partner choice: we suppose that a player can establish ties with other players by unilaterally investing in costly pairwise links. In this context, individual efforts to balance the costs and benefits of links are shown to lead to a unique equilibrium interaction architecture. The dynamics of network formation, however, has powerful effects on individual behavior: if costs of forming links are below a certain threshold then players coordinate on the risk-dominant action, while if costs are above this threshold then they coordinate on the efficient action. These findings are robust to modifications in the link formation process, different specifications of link formation costs, alternative models of mutations as well as the possibility of interaction among indirectly connected players.     

THE INVESTMENT OPPORTUNITY SET AND ITS PROXY VARIABLES

We use a real options approach to evaluate the performance of several proxy variables for a firm's investment opportunity set. The results show that, on a relative scale, the market‐to‐book assets ratio has the highest information content with respect to investment opportunities. Although both the market‐to‐book equity and the earnings–price ratios are related to investment opportunities, they do not contain information that is not already contained in the market‐to‐book assets ratio. Consistent with this finding, a common factor constructed from several proxy variables does not improve the performance of the market‐to‐book assets ratio.     

Improving inventory management in the retail store: The effectiveness of RFID tagging across product categories

While there is a growing body of evidence that Radio Frequency Identification (RFID) tagging can be effective in improving inventory management in the retail store, retailers have little guidance on best practices for implementation. One important unresolved issue is whether tagging is equally effective across different product categories, and if there is a way to predict which categories are better candidates for deployment. We conduct a field experiment comparing the improvement in inventory record accuracy before and after implementing RFID-enabled adjustments to the inventory management system. We find evidence that the effectiveness of RFID tagging is not homogenous for all products. Reductions in the percentage of stockouts ranged from 21% to 36%, depending on category. Categories that are most likely to see a decrease in stockouts, thanks to RFID, have a greater turnover, greater sales volume, greater product variety, lower item cost, and greater inventory density. We draw inferences for retail supply chains which are considering how best to allocate their resources in the most effective manner.     

Computing optimal rebalance frequency for log-optimal portfolios in linear time

The pure form of log-optimal investment strategies are often considered to be impractical due to the inherent need for continuous rebalancing. It is however possible to improve investor log utility by adopting a discrete-time periodic rebalancing strategy. Under the assumptions of geometric Brownian motion for assets and approximate log-normality for a sum of log-normal random variables, we find that the optimum rebalance frequency is a piecewise continuous function of investment horizon. One can construct this rebalance strategy function, called the optimal rebalance frequency function, up to a specified investment horizon given a limited trajectory of the expected log of portfolio growth when the initial portfolio is never rebalanced. We develop the analytical framework to compute the optimal rebalance strategy in linear time, a significant improvement from the previously proposed search-based quadratic time algorithm.