Preemption in a real option game with a first mover advantage and player-specific uncertainty

In this paper a two-player real option game with a first-mover advantage is analyzed, where payoffs are driven by a player-specific stochastic state variable. It is shown that there exists an equilibrium which has qualitatively different properties from those in standard real option games driven by common stochastic shocks. The properties of the equilibrium are four-fold: (i) preemption does not necessarily occur, (ii) if preemption takes place, the rent-equalization property holds, (iii) for almost all sample paths it is clear ex-ante which player invests first, and (iv) it is possible that both players invest simultaneously, even if that is not optimal. It is argued from simulations that real option games with a common one-dimensional shock do not provide a good approximation for games with player-specific uncertainty, even if these are highly correlated.     

A computational study on general equilibrium pricing of derivative securities

This paper analyses the accuracy of replicating portfolio methods in predicting asset prices. In a two-period, general equilibrium model with incomplete financial markets and heterogeneous agents, a computational study is conducted under various distributional assumptions. The focus is on the price of a call option on an underlying risky asset. There is evidence that the value of the (approximate) replicating portfolio is a good approximation for the general equilibrium price for CRRA preferences, but not for CARA preferences. Furthermore, there is strong evidence that the introduction of the call option reduces market incompleteness, but that the price of the underlying asset is unchanged. There is, however, inconclusive evidence on the welfare effects of the option. The author thanks Dolf Talman, Andrew Somerville, an anonymous referee, and an Associate Editor for helpful comments. Research funding from the Irish Research Council for the Humanities and Social Sciences is gratefully acknowledged.     

Irreversible investment and discounting: an arbitrage pricing approach

This paper presents a unified approach to valuing investment projects under uncertainty, based on stochastic discount factors, by linking optimal stopping theory to the no-arbitrage principle in asset pricing. An investment threshold for the case where the discount factor and the project’s cash-flow both follow a geometric Brownian motion is derived. Comparative statics of the investment trigger are obtained adding to and clarifying on the uncertainty–investment debate. Finally, two different ways to obtain discount factors are illustrated: spanning assets and representative agent analysis. The link between the characteristics of these different approaches and the optimal investment policy is clarified.     

Migrant Networks and the Spread of Information

Diaspora networks provide information to future migrants, which affects their success in the host country. While the existing literature explains the effect of networks on the outcomes of migrants through the size of the migrant community, we show that the quality of the network is an equally important determinant. We argue that networks that are more integrated in the society of the host country can provide more accurate information to future migrants about job prospects. In a decision model with imperfect signalling, we show that migrants with access to a better network are more likely to make the right decision, that is, they migrate only if they gain. We test these predictions empirically using data on recent Mexican migrants to the United States. To instrument for the quality of networks, we exploit the settlement of immigrants who came during the Bracero program in the 1950s. The results are consistent with the model predictions, providing evidence that connections to a better integrated network lead to better outcomes after migration.     

Strategic Interaction in the Dutch Market for Consumer Magazines

Information goods such as newspapers and magazines have a number of distinct economic characteristics such as a high fixed cost – low marginal (variable) cost structure and the possibility to subsidize content through selling advertising space. We develop a simple one-shot duopoly model that analyses strategic interaction in a market with such features. We focus on the firms best responses and test the theoretical predictions of the model empirically by panel regression techniques using a balanced panel data set of 60 Dutch consumer magazines over the period 1991–1998. Our 3SLS estimation results confirm the prediction of our model that the Dutch market for consumer magazines is characterized by strategic complementarity between magazine and ad prices.     

Analysis of barriers in the transition toward sustainable mobility in the Netherlands

The transition toward a sustainable transportation system in the Netherlands takes place in the context of the Dutch “Transition management policy framework”. We study four technological routes that the “Platform Sustainable Mobility” has selected for this goal: (1) hybridization of vehicles, (2) liquid biofuels, (3) natural gas as a transportation fuel and (4) hydrogen as a transportation fuel. These technological routes all envision large-scale changes in vehicle propulsion technology and fuel infrastructure. Furthermore, they compete for the scarce resources available to invest in new (fuel) infrastructures, which implicates that these ‘transition paths’ are also interdependent at the level of the mobility system. The main outcome of the analysis is the identification of barriers that are currently blocking the transition toward sustainable mobility. Barriers are classified as being related to (1) technology and vehicle development, (2) the availability of (fuel) infrastructures, and (3) elements of the institutional infrastructure. The transition management framework currently misses guidelines for coping with (competing) technologies that each require large infrastructural investments. We further argue that avoiding undesired lock-ins and creating a beneficial institutional context for sustainable mobility cannot be pursued at the transition path level. Therefore, we recommend that a more systemic approach should be taken to the transition to sustainable mobility, in which the interdependencies between the transition paths are critically assessed and in which the possibilities to legitimize sustainable mobility as a whole should be used.     

Tax Loss Carryovers in a Competitive Environment*

The fact that incumbent firms can immediately deduct research and development (R&D) investments from taxable income is generally believed to give them a strategic advantage over new firms that cannot deduct the investment cost, but instead generate a net operating tax loss carryover. Using an analytical model, we show that this conventional wisdom need not hold in a competitive environment. We examine operating and investment decisions in a duopolistic industry in which an initial investment in R&D yields an immediate tax benefit for one firm, but creates a net operating loss carryover for the other firm. If both firms invest in R&D, the firm with the net operating loss carryover makes more aggressive capital investment decisions following successful R&D. This may deter the incumbent firm from investing in R&D despite the lower aftertax costs of this investment. Changing the tax loss carryover rules would thus not only affects start‐up or loss firms, but would also affect the investment decisions of profitable firms in the same industry.     

Who Benefits from Inconsistent Multinational Tax Transfer‐Pricing Rules?*

This paper uses a strategic tax compliance model to examine taxpayer reporting and tax authority audit strategies in an international setting with two tax authorities. The setting features both information asymmetry between the taxpayer and the tax authorities and inconsistent tax transfer‐pricing rules. The latter creates the possibility of each country trying to tax the same income. We study the effect of the probability of transfer‐price rule inconsistency on the strategies and payoffs of the taxpayer and the tax authorities. We find that an increase in the probability of transfer‐price rule inconsistency induces more aggressive auditing by governments. It therefore deters taxpayers from shifting income to the country with the lower tax rate in situations in which the transfer‐pricing rules are consistent, and can either increase or decrease the income reported to the low‐tax‐rate country in cases in which the transfer‐pricing rules are inconsistent. We find that an increase in transfer‐price rule inconsistency could either increase or decrease the taxpayer's expected tax liability and could either increase or decrease the deadweight loss from auditing. Our results call into question the conventional wisdom that the prospect of double taxation due to transfer‐price rule inconsistency increases a firm's expected tax liability and governments' expected audit costs.     

Housing investment in the Netherlands

Employing Dutch market data over the period 1977:1–1994:4, estimates of two housing equations are obtained. The first equation is based on an underlying model in which profit-maximising building firms do not face adjustment costs when altering their output schedule. The second model distinguishes between short-run and long-run elasticities of supply, where firms face adjustment costs. Although the formulation of the equations can be regarded as representing the underlying long-term relationships, employing the Johansen procedure does not produce economically meaningful results. Using instrumental variables, the first model yields a supply elasticity of the order of 1.6 and the second model produces a short-run elasticity of 2.3 and a long-run elasticity of 6. Comparison of these estimates with those obtained by Topel and Rosen (Topel, R. and Rosen, S., 1988. Housing investment in the United States J. Pol. Econ. 96 (4), 718–740) in the US shows that investment seems to be more sensitive to price changes in the Netherlands than in the US.