Speculation creates an adverse selection cost for utility traders, who will choose not to trade i... more Speculation creates an adverse selection cost for utility traders, who will choose not to trade if this cost exceeds the benefits of using the asset market. However, if they do not participate, the market collapses, since private information alone is not sufficient to create a motive for trade. Therefore, there is a limit to the amount of speculative transactions that a given market can support. We compare this limit in decentralized versus centralized market regimes, finding that the centralized regime is more prone to speculation than the decentralized one: the transaction fees charged by an intermediary diminish the individual return to information, so that for a fixed value of trading, more speculative transactions can be supported. The analysis also suggests a reason for the existence of intermediaries in financial markets.
Over the past two decades, an enormous amount of work has been done to improve the Expected Utili... more Over the past two decades, an enormous amount of work has been done to improve the Expected Utility model. Two areas have attracted major attention: the possibility of describing unforeseen contingencies and the need to accommodate the kind of behavior referred to in Ellsbergs paradox. This article critically assesses the Expected Utility model and its interpretations, as well as the basic principles underlying the referred extensions, with an emphasis on their applications. JEL: D01, D81, D83
Ordinarily labor market equilibrium implies that the marginal worker is indifferent to employment... more Ordinarily labor market equilibrium implies that the marginal worker is indifferent to employment, and that the employer is indifferent between equally productive employees. When the marginal worker is indifferent to employment, employer preferences do not matter. If, however, the marginal worker strictly prefers to be employed, the employer can give favors, and may wish to do so even at some cost to efficient production. Not only may inefficient workers be employed, but also the employer will employ too many workers. We refer to this as the brother-in law effect.
If you experience problems downloading a file, check if you have the proper application to view i... more If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. ...
Ordinarily labor market equilibrium implies that the marginal worker is indifferent to employment... more Ordinarily labor market equilibrium implies that the marginal worker is indifferent to employment, and that the employer is indifferent between equally productive employees. When the marginal worker is indifferent to employment, employer preferences do not matter. If, however, the marginal worker strictly prefers to be employed, the employer can give favors, and may wish to do so even at some cost to efficient production. Not only may inefficient workers be employed, but also the employer will employ too many workers. We refer to this as the brother-in law effect.
Este trabajo compara modelos de inestabilidad financiera de naturaleza estadística y basados en l... more Este trabajo compara modelos de inestabilidad financiera de naturaleza estadística y basados en la teoría de opciones, para el conjunto de sociedades anónimas abiertas chilenas. Los modelos estadísticos tienen un ajuste adecuado, aunque la peculiar historia de las quiebras en el período considerado, a saber, su aglomeración al inicio, pone en duda su utilidad como herramienta predictiva. En el segundo caso, en cambio, el promedio de probabilidades de quiebra muestra una alta correlación con indicadores de riesgo bancarios, y los precede hasta en tres trimestres. En suma, este primer esfuerzo de medición es de un éxito moderado, pero señala una serie de caminos cuya exploración aparece promisoria.
The literature on the evolution of impatience, focusing on one-person decision problems, finds th... more The literature on the evolution of impatience, focusing on one-person decision problems, finds that evolutionary forces favor the more patient individuals. This paper shows that in the context of a game, this is not necessarily the case. In particular, it offers a twopopulation example where evolutionary forces favor impatience in one group while favoring patience in the other. Moreover, not only evolution but also efficiency may prefer impatient individuals. In our example, it is efficient for one population to evolve impatience and for the other to develop patience. Yet, evolutionary forces move the wrong populations. 1 We thank Fernando Vega-Redondo, Ramon Marimon and participants at the EUI Microeconomics working group for helpful comments. We are grateful to NSF grant SES-03-14713 for financial support.
Abstract: Ordinarily labor market equilibrium implies that the marginal worker is indifferent to ... more Abstract: Ordinarily labor market equilibrium implies that the marginal worker is indifferent to employment, and that the employer is indifferent between equally productive employees. When the marginal worker is indifferent to employment, employer preferences do not matter. If, however, the marginal worker strictly prefers to be employed, the employer can give favors, and may wish to do so even at some cost to efficient production. Not only may inefficient workers be employed, but the employer may also choose to employ too many workers. We refer to this as the brother-in law effect. When the brother-in-law effect is due to unionization, employment of brothers-inlaw leads to increased employment -under some circumstances leading even to over employment relative to the workforce that would be employed without unionization. If the employment effect is strong -because brothers-in-law are relatively good workersnepotism improves efficiency. If the employment effect is weak -including in principalagent models where there are informational rents -nepotism is inefficient.
Risk-averse individuals wish that assets concentrate their payoffs in states of high marginal val... more Risk-averse individuals wish that assets concentrate their payoffs in states of high marginal value (that is, highly likely or low endowment states). An asset or portfolio may fail to do so, by having payoffs uncorrelated to its owner needs or, even worse, by having them inversely related. The latter, which we call tier 1 illiquidity, is shown to occur in non-Walrasian markets (where a trade involves bargaining) and in incomplete Walrasian markets where optimal trading strategies are non trivial. In both cases, the high valuation of the trader biases the equilibrium price against him.
This article aims at furthering our understanding of the "participation puzzle" -the fact that mo... more This article aims at furthering our understanding of the "participation puzzle" -the fact that most households do not hold stocks, despite the diversification gains and the significant risk-premium gain it would involve. In particular, it advances one idea:
It is usually thought that network externalities, which are inherent to liquidity, make it desira... more It is usually thought that network externalities, which are inherent to liquidity, make it desirable to concentrate transactions in one stock exchange. This paper shows that when the value of liquidity stems from the ability of potentially reach as many traders as possible, the market is integrated when every broker meets every other broker in at least one exchange. Thus, fragmentation is not about trades being executed in di¤erent exchanges but of connectedness among brokers.
y especialmente los de Cristián Echeverría. Agradezco también el invaluable apoyo de Dieter Lineb... more y especialmente los de Cristián Echeverría. Agradezco también el invaluable apoyo de Dieter Lineberg. Todos los errores son de mi exclusiva responsabilidad.
This essay discusses the status of Financial Economics as a discipline in the face of the current... more This essay discusses the status of Financial Economics as a discipline in the face of the current global crisis. Contrary to some criticisms that have been levied, it defends the thesis that the discipline has not irresponsibly abused the rational man-rational markets paradigm, thereby causing a general unawareness of the dangers conceiled in the real estate bubble. JEL: G12, G14, G01
co también el invaluable apoyo de Dieter Lineberg. Todos los errores son de la exclusiva responsa... more co también el invaluable apoyo de Dieter Lineberg. Todos los errores son de la exclusiva responsabilidad del autor.
This essay discusses the status of Financial Economics as a discipline in the face of the current... more This essay discusses the status of Financial Economics as a discipline in the face of the current global crisis. Contrary to some criticisms that have been levied, it defends the thesis that the discipline has not irresponsibly abused the rational man-rat
Speculation creates an adverse selection cost for utility traders, who will choose not to trade i... more Speculation creates an adverse selection cost for utility traders, who will choose not to trade if this cost exceeds the benefits of using the asset market. However, if they do not participate, the market collapses, since private information alone is not sufficient to create a motive for trade. Therefore, there is a limit to the amount of speculative transactions that a given market can support. We compare this limit in decentralized versus centralized market regimes, finding that the centralized regime is more prone to speculation than the decentralized one: the transaction fees charged by an intermediary diminish the individual return to information, so that for a fixed value of trading, more speculative transactions can be supported. The analysis also suggests a reason for the existence of intermediaries in financial markets.
Over the past two decades, an enormous amount of work has been done to improve the Expected Utili... more Over the past two decades, an enormous amount of work has been done to improve the Expected Utility model. Two areas have attracted major attention: the possibility of describing unforeseen contingencies and the need to accommodate the kind of behavior referred to in Ellsbergs paradox. This article critically assesses the Expected Utility model and its interpretations, as well as the basic principles underlying the referred extensions, with an emphasis on their applications. JEL: D01, D81, D83
Ordinarily labor market equilibrium implies that the marginal worker is indifferent to employment... more Ordinarily labor market equilibrium implies that the marginal worker is indifferent to employment, and that the employer is indifferent between equally productive employees. When the marginal worker is indifferent to employment, employer preferences do not matter. If, however, the marginal worker strictly prefers to be employed, the employer can give favors, and may wish to do so even at some cost to efficient production. Not only may inefficient workers be employed, but also the employer will employ too many workers. We refer to this as the brother-in law effect.
If you experience problems downloading a file, check if you have the proper application to view i... more If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. ...
Ordinarily labor market equilibrium implies that the marginal worker is indifferent to employment... more Ordinarily labor market equilibrium implies that the marginal worker is indifferent to employment, and that the employer is indifferent between equally productive employees. When the marginal worker is indifferent to employment, employer preferences do not matter. If, however, the marginal worker strictly prefers to be employed, the employer can give favors, and may wish to do so even at some cost to efficient production. Not only may inefficient workers be employed, but also the employer will employ too many workers. We refer to this as the brother-in law effect.
Este trabajo compara modelos de inestabilidad financiera de naturaleza estadística y basados en l... more Este trabajo compara modelos de inestabilidad financiera de naturaleza estadística y basados en la teoría de opciones, para el conjunto de sociedades anónimas abiertas chilenas. Los modelos estadísticos tienen un ajuste adecuado, aunque la peculiar historia de las quiebras en el período considerado, a saber, su aglomeración al inicio, pone en duda su utilidad como herramienta predictiva. En el segundo caso, en cambio, el promedio de probabilidades de quiebra muestra una alta correlación con indicadores de riesgo bancarios, y los precede hasta en tres trimestres. En suma, este primer esfuerzo de medición es de un éxito moderado, pero señala una serie de caminos cuya exploración aparece promisoria.
The literature on the evolution of impatience, focusing on one-person decision problems, finds th... more The literature on the evolution of impatience, focusing on one-person decision problems, finds that evolutionary forces favor the more patient individuals. This paper shows that in the context of a game, this is not necessarily the case. In particular, it offers a twopopulation example where evolutionary forces favor impatience in one group while favoring patience in the other. Moreover, not only evolution but also efficiency may prefer impatient individuals. In our example, it is efficient for one population to evolve impatience and for the other to develop patience. Yet, evolutionary forces move the wrong populations. 1 We thank Fernando Vega-Redondo, Ramon Marimon and participants at the EUI Microeconomics working group for helpful comments. We are grateful to NSF grant SES-03-14713 for financial support.
Abstract: Ordinarily labor market equilibrium implies that the marginal worker is indifferent to ... more Abstract: Ordinarily labor market equilibrium implies that the marginal worker is indifferent to employment, and that the employer is indifferent between equally productive employees. When the marginal worker is indifferent to employment, employer preferences do not matter. If, however, the marginal worker strictly prefers to be employed, the employer can give favors, and may wish to do so even at some cost to efficient production. Not only may inefficient workers be employed, but the employer may also choose to employ too many workers. We refer to this as the brother-in law effect. When the brother-in-law effect is due to unionization, employment of brothers-inlaw leads to increased employment -under some circumstances leading even to over employment relative to the workforce that would be employed without unionization. If the employment effect is strong -because brothers-in-law are relatively good workersnepotism improves efficiency. If the employment effect is weak -including in principalagent models where there are informational rents -nepotism is inefficient.
Risk-averse individuals wish that assets concentrate their payoffs in states of high marginal val... more Risk-averse individuals wish that assets concentrate their payoffs in states of high marginal value (that is, highly likely or low endowment states). An asset or portfolio may fail to do so, by having payoffs uncorrelated to its owner needs or, even worse, by having them inversely related. The latter, which we call tier 1 illiquidity, is shown to occur in non-Walrasian markets (where a trade involves bargaining) and in incomplete Walrasian markets where optimal trading strategies are non trivial. In both cases, the high valuation of the trader biases the equilibrium price against him.
This article aims at furthering our understanding of the "participation puzzle" -the fact that mo... more This article aims at furthering our understanding of the "participation puzzle" -the fact that most households do not hold stocks, despite the diversification gains and the significant risk-premium gain it would involve. In particular, it advances one idea:
It is usually thought that network externalities, which are inherent to liquidity, make it desira... more It is usually thought that network externalities, which are inherent to liquidity, make it desirable to concentrate transactions in one stock exchange. This paper shows that when the value of liquidity stems from the ability of potentially reach as many traders as possible, the market is integrated when every broker meets every other broker in at least one exchange. Thus, fragmentation is not about trades being executed in di¤erent exchanges but of connectedness among brokers.
y especialmente los de Cristián Echeverría. Agradezco también el invaluable apoyo de Dieter Lineb... more y especialmente los de Cristián Echeverría. Agradezco también el invaluable apoyo de Dieter Lineberg. Todos los errores son de mi exclusiva responsabilidad.
This essay discusses the status of Financial Economics as a discipline in the face of the current... more This essay discusses the status of Financial Economics as a discipline in the face of the current global crisis. Contrary to some criticisms that have been levied, it defends the thesis that the discipline has not irresponsibly abused the rational man-rational markets paradigm, thereby causing a general unawareness of the dangers conceiled in the real estate bubble. JEL: G12, G14, G01
co también el invaluable apoyo de Dieter Lineberg. Todos los errores son de la exclusiva responsa... more co también el invaluable apoyo de Dieter Lineberg. Todos los errores son de la exclusiva responsabilidad del autor.
This essay discusses the status of Financial Economics as a discipline in the face of the current... more This essay discusses the status of Financial Economics as a discipline in the face of the current global crisis. Contrary to some criticisms that have been levied, it defends the thesis that the discipline has not irresponsibly abused the rational man-rat
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