An experimental study of strategic information transmission

Summary We examine strategic information transmission in an experiment. Senders are privately informed about a state. They send messages to Receivers, who choose actions resulting in payoffs to Senders and Receivers. The payoffs depend on the action and the state. We vary the degree to which the Receivers' and the Senders' preferences diverge. We examine the relationship between the Senders' messages and the true state as well as that between actions and the true state and contrast the ability of different equilibrium message sets to explain the data.When preferences are closely aligned Senders disclose more. We assess two comparative statics: (i) as preferences diverge, state and action are less frequently matched, and (ii) messages tend to become less informative as preferences diverge. The first result is weakly confirmed for adjacent treatments but is considerably stronger when non-adjacent treatments are compared. We find that as preferences diverge messages become less informative. While the ex-ante Pareto-optimal Bayesian Nash Equilibrium does not explain our conditions, the equilibrium message sets supported by the data are similar to the ex-ante Pareto Optimal message sets.We would like to thank seminar participants at the Economic Science Association meetings, the University of Iowa, the University of Minnesota, Northwestern University and the Society for the Advancement of Economic Theory meetings for their comments. We would like to thank Beth Allen, Joyce Berg, Robert Forsythe, Yong-Gwan Kim, Antonio Merlo, Leonard Mirman, In-Uck Park, Charles Plott, Jennifer Reinganum and an anonymous referee for their suggestions. Financial support from the Accounting Research Center at the University of Minnesota is also acknowledge.     

The Asymptotic Optimality of Residual Income Maximization

Residual income subtracts from operating income an interest charge for invested capital. Residual income can be calculated each period from current accounting information, unlike discounted cash flow (DCF), which requires the knowledge of future cash flows. This paper provides a normative justification for residual-income maximization by showing that if investment decisions are made myopically each period to maximize residual income, the resulting path asymptotically maximizes discounted cash flow. Thus, under the assumptions of the model, residual-income maximization is a heuristic that leads to the long-run DCF-optimum.     

Relations Between Stock Returns and Fundamental Variables: Evidence from a Segmented Market

This study examines relations between stock returns and potential explanatory factors in Korea, an important and segmented emerging market. Our results show that Korean stock returns in general and returns on stocks listed in Section 1 in particular are significantly positively related to book-to-market, sales-price, and debt-equity ratios, but not significantly related to market value of equity. Returns on stocks listed in Section 2 are, however, negatively related to market value of equity and not significantly related to the other three variables. Among the variables investigated by us, book-to-market ratio has the greatest explanatory power for stock returns and it indicates superior returns for value stocks. Our findings strengthen the international evidence of the role of book-to-market ratio in explaining stock returns by demonstrating its significance even in the segmented Korean market.     

Mutual adaptation in buyer-supplier relationships

In buyer-supplier relationships, effective partnerships require mutual adaptation to execute strategies effectively. Using LISREL, we test a model of relational exchange factors that includes dependence, joint action and trust and their influence on the mutual adaptation of supplier and buyer firms in the U.S. automotive industry. The results of the study indicate that both economic and social dimensions of the relationship impact mutual adaptation, but that these two are not necessarily complementary. Specifically, supplier adaptation is negatively impacted by trust between supplier and buyer, but positively impacted by dependence and joint action. Buyer adaptation, on the other hand, is positively impacted by trust between the two, joint action and the adaptation undertaken by the supplier. The negative relationship between trust and supplier adaptation may be symptomatic of deeper issues in the U.S. automotive industry that should merit concern.     

A simple example of complex dynamics

Summary. A discrete tatonnement process is analysed within the context of a two-person, two-good exchange economy where each person has a Cobb-Douglas utility function. This process is shown to exhibit period doubling bifurcation, topological and ergodic chaos. Received: June 22, 1998; revised version: July 15, 1998     

Real effects of separating investment and operating cash flows

This paper investigates the rationale for the measurement of a firm's periodic performance through the accounting classification of its cash outflows into operating cash flow and investment. We show that when the accounting system does not attempt to measure periodic performance and reports only aggregate cash flow, equilibrium capital market prices are such that there is a perverse informational cost to investment over and above the real cost of investment. This induces distortions in the firms' equilibrium investment. We show that other sources of information, consisting of forecasts of future returns to investment play a vital counterbalancing role when the accounting system is inadequate in this way. An accounting signal that provides noisy information on periodic performance decreases the informational cost to investment and moves the economy closer to first best.The first author wishes to acknowledge financial support from McKnight Foundation and the Accounting Research Center, University of Minnesota. An earlier version of the paper was titled Capitalization vs. Expensing: Effects on Investment.     

Estimating Health Demand for an Aging Population: A Flexible and Robust Bayesian Joint Model

We analyse two frequently used measures of the demand for health—hospital visits and out‐of‐pocket health care expenditure—which have been analysed separately in the existing literature. Given that these two measures of health demand are highly likely to be closely correlated, we propose a framework to jointly model hospital visits and out‐of‐pocket medical expenditure, which allows for the presence of nonlinear effects of covariates using splines to capture the effects of aging on health demand. The findings from our empirical analysis of the US Health and Retirement Survey indicate that the demand for health varies with age. © 2015 The Authors. Journal of Applied Econometrics published by John Wiley & Sons Ltd.