We identify a consumer bias with regard to different sources of debt-financing. Less salient debt may generate psychological benefits. This should be weighed against the possible economic costs of a suboptimal capital structure, but low levels of financial literacy make it unlikely that all households perceive the full economic costs. As a result there is a bias in favour of less salient debt. In a market with limited scope for arbitrage this consumer bias is likely to generate inefficiencies. We examine such a market in both theory and practice. The predictions of our model are given strong support by market data.
When goods are substitutes, the Vickrey auction produces efficient, core outcomes that yield competitive seller revenues. In contrast, with complements, the Vickrey outcome, while efficient, is not necessarily in the core and revenue can be very low. Non-core outcomes may be perceived as unfair since there are bidders willing to pay more than the winners' payments. Moreover, non-core outcomes render the auction vulnerable to defections as the seller can attract better offers afterwards. To avoid instabilities of this type, Day and Raghavan (2007) and Day and Milgrom (2007) have suggested to adapt the Vickrey pricing rule. For a simple environmentnwith private information, we show that the resulting auction format yields lower than Vickrey revenues and inefficient outcomes that are on average further from thencore than Vickrey outcomes. More generally, we prove that the Vickrey auction is the unique core-selecting auction. Hence, when the Vickrey outcome is not in the core, no Bayesian incentive-compatible core-selecting auction exists. Our results further imply that the competitive equilibrium cannot be implemented when goodsnare not substitutes. Moreover, even with substitutes, the competitive equilibrium can only be implemented when it coincides with the Vickrey outcome.
Digital video recorder proliferation and new commercial audience metrics are making television networks’ revenues more sensitive to audience losses from advertising. There is currently limited understanding of how traditional advertising and product placement affectntelevision audiences. We estimate a random coefficients logit model of viewing demand for television programs, wherein time given to advertising and product placement plays a role akinnto the “price” of consuming a program. Our data include audience, advertising, and program characteristics from more than 10,000 network-hours of prime-time broadcast television from 2004 to 2007. We find that the median effect of a 10% rise in advertising time is a 15% reduction in audience size. We find evidence that creative strategy and product category are importantndeterminants of viewer response to advertising. When we control for program episode quality,nwe find that product placement time decreases viewer utility. In sum, our results imply thatnnetworks should give price discounts to those advertisers whose ads are most likely to retain viewers’ interest throughout the commercial break.
When agents are liquidity constrained, two options exist — sell assets or borrow. We compare the allocations arising in two economies: in one, agents can sell government bonds (outside bonds) and in the other they can borrow (issue inside bonds). All transactions are voluntary,nimplying no taxation or forced redemption of private debt. We show that any allocation in the economy with inside bonds can be replicated in the economy with outside bonds but that the converse is not true. However, the optimal policy in each economy makes the allocations equivalent.
We study the long-run relation between money, measured by inflation or interest rates, and unemployment. We first document in the data a positive relation between these variables at low frequencies. We then develop a framework where unemployment and money are both modeled using microfoundations based on search and bargaining theory, providing a unified theory for analyzing labor and goods markets. The calibrated model shows that money can account for a sizable fraction of trends in unemployment. We argue it matters, qualitativelynand quantitatively, whether one uses monetary theory based on search and bargaining, or an alternative ad hoc specification.
Many countries simultaneously suffer from high rates of inflation, low growth rates of per capita income and poorly developed financial sectors. In this paper, we integrate a microfounded model of money and finance into a model of endogenous growth to examine the effects of inflation and financial development. A novel feature of the model is that the market for innovation goods is decentralized. Financial intermediaries arise endogenously to provide liquid funds to the innovation sector.nWe calibrate the model to address two quantitative issues. One is the effects of annexogenous improvement in the productivity of the financial sector on welfare and perncapita growth. The other is the effects of inflation on welfare and growth. Consistent with the data but in contrast to previous work, reducing inflation generates largengains in the growth rate of per capita income as well as in welfare. Relative to reducing inflation, improving the efficiency of the financial market increases growth and welfare by much smaller amounts.
This paper reports results from social learning experiments where subjects choose between two options and each subject has a small chance of being perfectly informed about which option is correct. In treatment 'sequence', subjects observe the entire sequence of predecessors' choices while in treatment 'no-sequence' they only observe the number of times each option has been chosen. The theoretical predictions are that subjects follow their immediate predecessors in treatment sequence and follow the minority in treatment no-sequence (Callander and Hörner, 2009). The former prediction is borne out in the data, but subjects tend to follow the majority in treatment no-sequence. We observe substantial heterogeneity in levels of strategic thinking, as predicted by level-k and Cognitive Hierarchy. While these models reproduce some features of our data, their fit is poor because of the assumed best-response behavior. Allowing for some degree of 'trembling' improves the fit significantly, especially if subjects are aware that others tremble, as in logit-QRE. The 'noisy introspection' model proposed by Goeree and Holt (2004), which combines different levels of thinking with error-prone behavior, best describes the data.
We study the effects of deliberation on collective decisions. In a series of experiments, we vary groups' preference distributions (between common and conflicting interests) and the institutions by which decisions are reached (simple majority, two-thirds majority, and unanimity). When deliberation is prohibited, different institutions generate significantly different outcomes, tracking the theoretical comparative statics. Deliberation, however, significantly diminishes institutional differences and uniformly improves efficiency. Furthermore, communication protocols exhibit an array of stable attributes: messages are public, consistently reveal private information, provide a good predictor for ultimate group choices, and follow particular (endogenous)nsequencing.
Selten and Chmura (American Economic Review, June 2008, 98(3), 938-966) recently reported experimental laboratory results for 2 x 2 games with unique mixed-strategy equilibria used to compare Nash equilibrium with four other stationary concepts: quantal response equilibrium, action-sampling equilibrium, payoff-sampling equilibrium, and impulse balance equilibrium. They conclude that impulse balance equilibrium performs best, and, in particular, significantly outperforms quantal response equilibrium. We reanalyze their data and correct some errors. The reanalysis shows that Nash clearly fits worst but the four other concepts perform about equally well. It is surprising that four models, which are so conceptually different, are so close in accuracy, and following Selten and Chmura's suggestion, we report new analysis of previous experiments on 2 x 2 games with unique mixed-strategy equilibria. These additional tests show the importance of the loss aversion that is hardwired into impulse balance equilibrium: when the other non-Nash stationary concepts are augmented with loss aversion they outperform impulse balance equilibrium.
Environmental markets have several institutional features that provide a new context for the use of auctions and that have not been studied previously. This paper reports on laboratory experiments testing three auction forms — uniform and discriminatory price sealed-bid auctions and an ascending clock auction. We test the ability of subjects to tacitly or explicitly collude in order to maximize profits. Our main result is that the discriminatory and uniform price auctions produce greater revenues than the clock auction, both with and without explicit communication. The clock appears to facilitate successful collusion, both because of its sequential structure and because it allows bidders to focus on one dimension of cooperation (quantity) rather than two (price and quantity).
