To trust or not to trust smart consumer products: a literature review of trust-building factors

Management Review Quarterly - Numerous “smart” consumer products are already available on the market, and the diversity of such smart products is expected to increase considerably in...     

A myopic adjustment process leading to best-reply matching

We analyze a myopic strategy adjustment process in strategic-form games. It is shown that the steady states of the continuous time limit, which is constructed assuming frequent play and slow adjustment of strategies, are exactly the best-reply matching equilibria, as discussed by Droste, Kosfeld, and Voorneveld (2000. Mimeo, Tilburg University). In a best-reply matching equilibrium every player ‘matches’ the probability of playing a pure strategy to the probability that this pure strategy is a best reply to the pure-strategy profile played by his opponents. We derive stability results for the steady states of the continuous time limit in 2×2 bimatrix games and coordination games. Analyzing the asymptotic behavior of the stochastic adjustment process in discrete time shows convergence to minimal curb sets of the game. Moreover, absorbing states of the process correspond to best-reply matching equilibria of the game.     

Freie (grenzüberschreitende) Radikale in Münster Siegfried J. Schmidt: 60

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Auswirkungen einer Lohnsteuerzerlegung nach Arbeitsort im Länderfinanzausgleich

In Germany the payroll tax revenue owed to the federal states is distributed exclusively according to the taxpayer’s residence. Many finance experts have long called for this revenue to be distributed at least partially based on the location where the work was done. Model calculations to estimate the financial consequences of such a redesign of the payroll tax distribution should be a useful contribution to the current negotiations on the reorganisation of federal-state financial relations in Germany.     

Competition,cooperation, and corporate culture

Cooperation between workers can be of substantial value to a firm, yet its level often varies substantially between firms. We show that these differences can unfold in a competitive labor market if workers have heterogeneous social preferences and preferences are private information. In our model, workers differ in their willingness to cooperate voluntarily. We show that there always exists a separating equilibrium in which workers self‐select into firms that differ in their monetary incentives as well as their level of worker cooperation. Our model highlights the role of sorting and worker heterogeneity in the emergence of heterogeneous corporate cultures. It also provides a new explanation for the coexistence of nonprofit and for‐profit firms.

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Jörg Tropp

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Optimal investments in volatility

Volatility has evolved as an attractive new asset class of its own. The most common instruments for trading volatility are variance swaps. Mean returns of DAX and ESX variance swaps over the time period of 1995 to 2004 are strongly negative, and only part of the negative premium can be explained by the negative correlation of variance swap returns with stock market indices. We analyze the implications of this observation for optimal portfolio composition. Mean-variance efficient portfolios are characterized by sizable short positions in variance swaps. Typically, the stock index is also sold short to achieve a better portfolio diversification. To capture heterogeneous preferences for higher moments, we use a variant of the polynomial goal programming method. We assume that investors strive for a high Sharpe ratio, high skewness, and low kurtosis. Our analysis reveals that it is often not possible to achieve a balanced tradeoff between Sharpe ratio and skewness. Investors are advised to hold the extreme portfolios (Sharpe ratio driven, skewness driven, or kurtosis driven) and avoid the middle ground. This “all-or-nothing” characteristic is reflected in jumps of asset weights when certain thresholds of preference parameters are crossed. These empirical findings can explain why many investors are so reluctant to implement option-based short-selling strategies.

An examination of market efficiency around hurricanes

Hurricane Andrew produced more than $21.5 billion in property damage in Florida and Louisiana. Hurricane Hugo caused about $7 billion in damage in North and South Carolina. Although both hurricanes were large, the magnitudes of their destruction and the geographic concentrations of their paths were markedly different. This study finds that Hugo and Andrew produced substantially different market reactions on property and casualty (P&C) firms. The industry was generally unaffected by Hugo, regardless of whether or not firms had exposure in the Carolinas. Andrew, on the other hand, generated a significant negative impact on firms with exposure in Florida or Louisiana. Other firms were not effected by Andrew. These observations indicate that the market demonstrated an ability to discriminate by the magnitude of hurricane and by P&C firms based on their degree of loss exposure.