... Aliprantis, KJ Arrow, PJ Hammond, F. Kubler, H.-M. Wu, and NC Yannelis Foreword to the Sympos... more ... Aliprantis, KJ Arrow, PJ Hammond, F. Kubler, H.-M. Wu, and NC Yannelis Foreword to the Symposium in Honor of Mordecai Kurz 1 ... of contracts in differential information economies 323 LM Ausubel and P. Cramton Vickrey auctions with reserve pricing 355 B. Allen Incentives in ...
In this paper we study the role of convertible securities in the financing of start-up enterprise... more In this paper we study the role of convertible securities in the financing of start-up enterprises when the entrepreneurs are better informed than the venture capitalists (VCs). We demonstrate that for a well-designed contract the conversion ratio of the securities can be used as a signaling device to overcome the problem of information asymmetry. If the variability of the return is sufficiently large, the entrepreneurs will find it desirable to rely on convertible securities with the conversion ratio revealing part of his information, that is, a separating equilibrium will arise. Such an equilibrium has the advantage of avoiding the incentive constraints that appear in the other pooling equilibrium, in which the privately held information is not revealed. We show that the time-lag of decisions between investment and conversion will also benefit the VCs, with the extra return as the time value. In addition, we study the impact of introducing technical shares with which the entrepreneurs are awarded equity shares without investment outlays. We compare the different financing devices with convertible securities and explain why convertible securities have become the most commonly used financial instrument for start-up enterprises.Venture capitalists, Entrepreneurs, Convertible securities, Signaling
In this paper we assess the quality of Chinese invention patents and study the impacts of patent ... more In this paper we assess the quality of Chinese invention patents and study the impacts of patent subsidy programs implemented by each provincial region. We compile a comprehensive set of quality indicators to show that the technological and economic quality of Chinese patents did not decline with the recent jump of Chinese patents. Based on Chinese provincial panel data from 1995 to 2010, we find that the effect of patent subsidy policies on the technological quality of patents was significantly positive. However, the effect of patent subsidy policies on the economic quality of Chinese patents was insignificant. Our results also show that the effect of patent subsidy policies on the technological quality of Chinese patents depends on the growth rate of well-established or experienced innovators in patenting, rather than the growth rate of entrants or marginal innovators, suggesting that much more attention should be paid to the experienced innovators instead of marginal innovators i...
Why were financial institutions so reliant on short-term borrowing before the great recession, th... more Why were financial institutions so reliant on short-term borrowing before the great recession, thereby exposing themselves to a significant amount of rollover risk? Why did the market of short-term lending collapse after the recession began? This paper provides a general framework to discuss the optimal debt maturity structure with information asymmetry. We show that good firms are willing to borrow in the short term because the extra information released to outside creditors in the rollover stage could help to distinguish them from the bad firms, and thus lower the cost of refinancing. We construct the unique pooling equilibrium with an optimal mix of short-term and long-term debt, in which the good firms maximize their profits and bad firms find it profitable to mimic the good firms. We argue that when the quality of firms’ assets starts to deteriorate (the share of good firms is diminishing) and creditors become more prudential, firms will first incur more short-term debts in ord...
This paper studies a general equilibrium model of stock, bond and option markets, where heterogen... more This paper studies a general equilibrium model of stock, bond and option markets, where heterogeneous agents both trade on the basis of binomial pricing models, but believe differently in the possible stock prices and the probabilities to reach them. We find that when agents' beliefs differ only in the probabilities of reaching future stock prices, the introduction of options does not change the current prices of bonds and stocks and the options are redundant; on the other hand, when agents have different beliefs in the possible future prices of stocks, even when a market is already complete with options, trading options is no longer redundant and may change the stock and bond prices. Furthermore, the strike price is relevant in the sense that only by introducing options with strike prices in a specific range could the subjective expected utilities for all agents be improved.
In this paper we study a general equilibrium model of stock, bond and option markets, where agent... more In this paper we study a general equilibrium model of stock, bond and option markets, where agents trade on the basis of binomial pricing models, but have heterogeneous beliefs about the possible stock prices and the probabilities to reach them. We find that when agents have different beliefs in the possible future prices of stocks, even when a market is already complete without options, trading options is no longer redundant and may change the stock and bond prices. Furthermore, the strike price is relevant in the sense that only by introducing options with strike prices in a specific range could the subjective expected utilities for all agents be improved. In addition, with options in the market, prices are solely determined in order to satisfy the no-arbitrage conditions from all agents' perspectives, and when there are more agents with heterogeneous beliefs in the market, equilibrium prices usually do not exist.
ABSTRACT The purpose of this study is to propose a transfer pricing mechanism from the viewpoint ... more ABSTRACT The purpose of this study is to propose a transfer pricing mechanism from the viewpoint of the allocation of organizational decision-making authority in the context of one principal and two agents. This paper provides necessary conditions for the optimal organizational form accompanied by the allocation of decision authorities on the transfer price and quantity to be transferred. The main results show that, when necessary, the principal always allocates the authority to the agent with more valuable private information (greater divisional production cost). The degree of decentralization is negatively associated with the importance of the private information. The principal will choose decentralization when the production costs of two departments are relatively small. When the production costs are sufficiently high, the principal will choose partial delegation. However, centralization is rarely the best organizational form due to the additional constraint of one transfer price in the one-principal-two-agents model. Moreover, without the decision authority over the transfer price may better serve the interest of the principal and agents.
We study endogenous uncertainty stemming from the introduction of new financial assets, so as to ... more We study endogenous uncertainty stemming from the introduction of new financial assets, so as to evaluate the risks as well as the welfare gains of financial innovation. The introduction of financial assets to hedge individual risk can lead to the risk of default, which is a collective risk. The possibility of default represents endogenous uncertainty, since it depends on economic variables. A proper allocation of risk in the face of new states of endogenous uncertainty requires the introduction of a large number of additional new securities, without which the market is incomplete. We prove the existence of a general equilibrium with default, in which the agents recontract trading positions and prices in the states of default (Theorem 1). We establish the existence of an open set of general equilibrium economies, called complex economies, in which the pattern of trade is highly interconnected so that default by one agent leads to default by an overwhelming majority of all other indi...
Abstract As China aimed to transform her growth into an innovation-driven model, we study the imp... more Abstract As China aimed to transform her growth into an innovation-driven model, we study the impact of China's effort to promote technology inventions. By linking to Google Patents, we compile a comprehensive set of patent quality indicators. Based on Chinese provincial panel data from 1995 to 2010, we find that the effect of the implemented patent subsidy policies on quantity, as well as various quality metrics of patents, was significantly positive. Moreover, the explanation power of subsidy policies on both patent quantity and quality diminished as time goes by. We also find that the effect of these policies depended on the growth rate of experienced innovators rather than entrants. Since the implemented policies we study in this paper were designed to focus on subsidizing expenses incurred during the patenting process, our results show that the provided partial funding led the way for improving China's patent quality.
The Journal of Law, Economics, and Organization, 1994
... Thus if the ruler is truly upright, honest officials will be commissioned and villainous pers... more ... Thus if the ruler is truly upright, honest officials will be commissioned and villainous persons will hide themselves; but if the ruler is not upright, the wicked will get on in the world and loyal subjects will withdraw into retirement. ...
... Aliprantis, KJ Arrow, PJ Hammond, F. Kubler, H.-M. Wu, and NC Yannelis Foreword to the Sympos... more ... Aliprantis, KJ Arrow, PJ Hammond, F. Kubler, H.-M. Wu, and NC Yannelis Foreword to the Symposium in Honor of Mordecai Kurz 1 ... of contracts in differential information economies 323 LM Ausubel and P. Cramton Vickrey auctions with reserve pricing 355 B. Allen Incentives in ...
In this paper we study the role of convertible securities in the financing of start-up enterprise... more In this paper we study the role of convertible securities in the financing of start-up enterprises when the entrepreneurs are better informed than the venture capitalists (VCs). We demonstrate that for a well-designed contract the conversion ratio of the securities can be used as a signaling device to overcome the problem of information asymmetry. If the variability of the return is sufficiently large, the entrepreneurs will find it desirable to rely on convertible securities with the conversion ratio revealing part of his information, that is, a separating equilibrium will arise. Such an equilibrium has the advantage of avoiding the incentive constraints that appear in the other pooling equilibrium, in which the privately held information is not revealed. We show that the time-lag of decisions between investment and conversion will also benefit the VCs, with the extra return as the time value. In addition, we study the impact of introducing technical shares with which the entrepreneurs are awarded equity shares without investment outlays. We compare the different financing devices with convertible securities and explain why convertible securities have become the most commonly used financial instrument for start-up enterprises.Venture capitalists, Entrepreneurs, Convertible securities, Signaling
In this paper we assess the quality of Chinese invention patents and study the impacts of patent ... more In this paper we assess the quality of Chinese invention patents and study the impacts of patent subsidy programs implemented by each provincial region. We compile a comprehensive set of quality indicators to show that the technological and economic quality of Chinese patents did not decline with the recent jump of Chinese patents. Based on Chinese provincial panel data from 1995 to 2010, we find that the effect of patent subsidy policies on the technological quality of patents was significantly positive. However, the effect of patent subsidy policies on the economic quality of Chinese patents was insignificant. Our results also show that the effect of patent subsidy policies on the technological quality of Chinese patents depends on the growth rate of well-established or experienced innovators in patenting, rather than the growth rate of entrants or marginal innovators, suggesting that much more attention should be paid to the experienced innovators instead of marginal innovators i...
Why were financial institutions so reliant on short-term borrowing before the great recession, th... more Why were financial institutions so reliant on short-term borrowing before the great recession, thereby exposing themselves to a significant amount of rollover risk? Why did the market of short-term lending collapse after the recession began? This paper provides a general framework to discuss the optimal debt maturity structure with information asymmetry. We show that good firms are willing to borrow in the short term because the extra information released to outside creditors in the rollover stage could help to distinguish them from the bad firms, and thus lower the cost of refinancing. We construct the unique pooling equilibrium with an optimal mix of short-term and long-term debt, in which the good firms maximize their profits and bad firms find it profitable to mimic the good firms. We argue that when the quality of firms’ assets starts to deteriorate (the share of good firms is diminishing) and creditors become more prudential, firms will first incur more short-term debts in ord...
This paper studies a general equilibrium model of stock, bond and option markets, where heterogen... more This paper studies a general equilibrium model of stock, bond and option markets, where heterogeneous agents both trade on the basis of binomial pricing models, but believe differently in the possible stock prices and the probabilities to reach them. We find that when agents' beliefs differ only in the probabilities of reaching future stock prices, the introduction of options does not change the current prices of bonds and stocks and the options are redundant; on the other hand, when agents have different beliefs in the possible future prices of stocks, even when a market is already complete with options, trading options is no longer redundant and may change the stock and bond prices. Furthermore, the strike price is relevant in the sense that only by introducing options with strike prices in a specific range could the subjective expected utilities for all agents be improved.
In this paper we study a general equilibrium model of stock, bond and option markets, where agent... more In this paper we study a general equilibrium model of stock, bond and option markets, where agents trade on the basis of binomial pricing models, but have heterogeneous beliefs about the possible stock prices and the probabilities to reach them. We find that when agents have different beliefs in the possible future prices of stocks, even when a market is already complete without options, trading options is no longer redundant and may change the stock and bond prices. Furthermore, the strike price is relevant in the sense that only by introducing options with strike prices in a specific range could the subjective expected utilities for all agents be improved. In addition, with options in the market, prices are solely determined in order to satisfy the no-arbitrage conditions from all agents' perspectives, and when there are more agents with heterogeneous beliefs in the market, equilibrium prices usually do not exist.
ABSTRACT The purpose of this study is to propose a transfer pricing mechanism from the viewpoint ... more ABSTRACT The purpose of this study is to propose a transfer pricing mechanism from the viewpoint of the allocation of organizational decision-making authority in the context of one principal and two agents. This paper provides necessary conditions for the optimal organizational form accompanied by the allocation of decision authorities on the transfer price and quantity to be transferred. The main results show that, when necessary, the principal always allocates the authority to the agent with more valuable private information (greater divisional production cost). The degree of decentralization is negatively associated with the importance of the private information. The principal will choose decentralization when the production costs of two departments are relatively small. When the production costs are sufficiently high, the principal will choose partial delegation. However, centralization is rarely the best organizational form due to the additional constraint of one transfer price in the one-principal-two-agents model. Moreover, without the decision authority over the transfer price may better serve the interest of the principal and agents.
We study endogenous uncertainty stemming from the introduction of new financial assets, so as to ... more We study endogenous uncertainty stemming from the introduction of new financial assets, so as to evaluate the risks as well as the welfare gains of financial innovation. The introduction of financial assets to hedge individual risk can lead to the risk of default, which is a collective risk. The possibility of default represents endogenous uncertainty, since it depends on economic variables. A proper allocation of risk in the face of new states of endogenous uncertainty requires the introduction of a large number of additional new securities, without which the market is incomplete. We prove the existence of a general equilibrium with default, in which the agents recontract trading positions and prices in the states of default (Theorem 1). We establish the existence of an open set of general equilibrium economies, called complex economies, in which the pattern of trade is highly interconnected so that default by one agent leads to default by an overwhelming majority of all other indi...
Abstract As China aimed to transform her growth into an innovation-driven model, we study the imp... more Abstract As China aimed to transform her growth into an innovation-driven model, we study the impact of China's effort to promote technology inventions. By linking to Google Patents, we compile a comprehensive set of patent quality indicators. Based on Chinese provincial panel data from 1995 to 2010, we find that the effect of the implemented patent subsidy policies on quantity, as well as various quality metrics of patents, was significantly positive. Moreover, the explanation power of subsidy policies on both patent quantity and quality diminished as time goes by. We also find that the effect of these policies depended on the growth rate of experienced innovators rather than entrants. Since the implemented policies we study in this paper were designed to focus on subsidizing expenses incurred during the patenting process, our results show that the provided partial funding led the way for improving China's patent quality.
The Journal of Law, Economics, and Organization, 1994
... Thus if the ruler is truly upright, honest officials will be commissioned and villainous pers... more ... Thus if the ruler is truly upright, honest officials will be commissioned and villainous persons will hide themselves; but if the ruler is not upright, the wicked will get on in the world and loyal subjects will withdraw into retirement. ...
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