Do People Always Pay Less Than They Say? Testbed Laboratory Experiments with IV and HG Values

Hypothetical bias is a long‐standing issue in stated preference and contingent valuation studies—people tend to overstate their preferences when they do not experience the real monetary consequences of their decision. This view, however, has been challenged by recent evidence based on the elicitation of induced values (IV) in the lab and homegrown (HG) demand function from different countries. This paper uses an experimental design to assess the extent and relevance of hypothetical bias in demand elicitation exercises for both induced (IV) and homegrown (HG) values. For testbed purpose, we use a classic second‐price auction to elicit preferences. Comparing the demand curve we elicit in both, hypothetical bias unambiguously (i) vanishes in an IV, private good context and (ii) persists in HG values elicitation context. This suggests hypothetical bias in preference elicitation appears to be driven by “preference formation” rather than “preference elicitation.” In addition, companion treatments highlight two sources of the discrepancy observed in the HG setting: the hypothetical context leads bidders to underestimate the constraints imposed by their budget limitations, whereas the real context creates pressure leading them to bid “zero” to opt out from the elicitation mechanism. As a result, there is a need for a demand elicitation procedure that helps subjects take the valuation exercise sincerely, but without putting extra pressure on them.     

OPTIMAL AUCTIONS WHEN A SELLER IS BOUND TO SELL TO COLLUSIVE BIDDERS*

I consider optimal auctions for a seller who is bound to sell a single item to one of two potential buyers, organized in a ‘well‐coordinated’ cartel. I show that, even though the seller cannot deter collusion, he can optimally accommodate it by employing a simple mechanism which imposes an inefficient allocation on the bidders unless they pay a sufficiently high amount to avoid it.     

Ethiopia's Coffee Sector: A Bitter or Better Future?

Coffee, Ethiopia's largest export crop, is the backbone of the Ethiopian economy. The Ethiopian coffee sector is highly dependent on international prices and affected by the structure and workings of the world coffee market. In this context, this paper seeks to identify what can be done in Ethiopia to improve the performance of the sector so as to yield benefits for the government and the estimated 15 million people dependent on coffee in the country. The paper argues that despite a limited room for manoeuvre, Ethiopia has not yet fully exploited its position as the producer of some of the best coffees in the world. A number of competitive advantages may still be seized if quality and consistency are guaranteed. In order to maximize this potential, and on the basis of a critical analysis of government policies and donor interventions in the sector, a number of recommendations are made.     

Do Hedge Fund Managers Misreport Returns? Evidence from the Pooled Distribution

We find a significant discontinuity in the pooled distribution of monthly hedge fund returns: The number of small gains far exceeds the number of small losses. The discontinuity is present in live and defunct funds, and funds of all ages, suggesting that it is not caused by database biases. The discontinuity is absent in the 3 months culminating in an audit, suggesting it is not attributable to skillful loss avoidance. The discontinuity disappears when using bimonthly returns, indicating a reversal in fund performance following small gains. This result suggests that the discontinuity is caused at least in part by temporarily overstated returns.     

Endogenously Weighted Voting

We define Endogenously Weighted Plurality Voting (EWPV) as the voting rule that, each individual being allowed to cast exactly one vote, selects the individual(s) who obtain(s) the greatest number of indirect votes. Endogenously Weighted Approval Voting (EWAV) selects the individual(s) who obtain(s) the greatest number of indirect votes when each individual can cast as many votes as he wants. In both cases, each individual can vote for any other individual, i.e., the set of candidates is the set of voters. In this study, we give necessary and sufficient axioms for EWPV and EWAV. We also propose a simple model where EWAV is more efficient than the traditional Approval Voting.     

Financial Crises as a Phenomenon of Multiple Equilibria and How to Select among Them

When equilibrium is indeterminate (i.e., not unique), applied theory often obtains uniqueness either via ad hoc sunspots or via global games. This paper highlights the relative merits of a third selection mechanism—best-response dynamics (BRD)—in the context of various financial crisis frameworks. For example, in the context of a bank run, selection via BRD is preferred (to ad hoc sunspots) because it provides an explicit coordination narrative and (to global games) because it accounts for the fact that depositors realistically may decide to join or leave a bank's queue upon observing its length.     

Financial Shocks and Corporate Investment in Emerging Markets

We examine how cross-firm and cross-country heterogeneity shapes the responses of corporate investment in emerging markets to changes in U.S. monetary policy and financial-market volatility, the latter proxying for uncertainty. We find that in response to increases in U.S monetary policy rates or financial-market volatility, financially weaker firms reduce investment by more than financially strong firms. We also show that firms with stronger balance sheets delay investment voluntarily when faced with higher uncertainty. Finally, we find that stronger macroeconomic fundamentals (lower public debt or higher international reserves) help to buffer corporate investment from increases in U.S. monetary policy rates.     

Money,Bargaining, and Risk Sharing

We investigate the dual role of money as a self‐insurance device and a means of payment when perfect risk sharing is not possible, and when the two roles of money are disentangled. We use a variant of Lagos–Wright (2005) where agents face a risk in the centralized market (CM): in the decentralized market (DM) money’s main role is as a means of payment, while in the CM it is as a self‐insurance device. We show that state‐contingent inflation rates can improve agents’ ability to self‐insure in the CM, thereby improving the terms of trade in the DM. We then characterize the optimal monetary policy.     

Hedge Fund Risk Dynamics: Implications for Performance Appraisal

Accurate appraisal of hedge fund performance must recognize the freedom with which managers shift asset classes, strategies, and leverage in response to changing market conditions and arbitrage opportunities. The standard measure of performance is the abnormal return defined by a hedge fund's exposure to risk factors. If exposures are assumed constant when, in fact, they vary through time, estimated abnormal returns may be incorrect. We employ an optimal changepoint regression that allows risk exposures to shift, and illustrate the impact on performance appraisal using a sample of live and dead funds during the period January 1994 through December 2005.     

Are Progressive Income Taxes Stabilizing?

We assess the stabilizing effect of progressive income taxes in a monetary economy with constant returns to scale. It is shown that tax progressivity reduces, in parameter space, the likelihood of local indeterminacy, sunspots and cycles. However, considering plausibly low levels of tax progressivity does not ensure saddle‐point stability and preserves as robust the occurrence of sunspot equilibria and endogenous cycles. It turns out that increasing progressivity, through its impact on after‐tax income, makes labor supply more inelastic. However, even when large, tax progressivity does not neutralize the effects of expected inflation on current labor supply which may lead to expectation‐driven business fluctuations.