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In this paper I investigate whether firms' physical investments react to the speculative over-pricing of their securities. I introduce investment considerations in an infinite horizon continuous time model with short sale constraints... more
In this paper I investigate whether firms' physical investments react to the speculative over-pricing of their securities. I introduce investment considerations in an infinite horizon continuous time model with short sale constraints and heterogeneous beliefs along the lines of Scheinkman and Xiong (2003). I obtain closed form solutions for all quantities involved. I show that market based q and investment are increased, even though such investment is not warranted on the basis of long run value maximization. Moreover, I show that investment amplifies the effects of speculation on prices through an increase in the value of "growth" options. In the empirical section of the paper, I use a simple episode to test the hypothesis that investment reacts to over-pricing. With publicly available data on short sales during the 1920's, I examine both the price reaction and the investment behavior of a number of companies that were introduced into the "loan crowd" du...
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Research Interests: Finance, Economics, Microeconomics, Corporate Governance, Economic Theory, and 15 moreRisk, Applied Economics, Assignment, Moral Hazard, Risk Aversion, Executive Compensation, Financial Studies, Incentive, Incentives, Finance and Financial Management, Firm Size, Cross Section, Assortative Matching, Market equilibrium, and Finance and Investment Banking
Research Interests: Finance, Economics, Microeconomics, Economic Theory, Applied Economics, and 15 moreMoral Hazard, Executive Compensation, Calibration, Financial Studies, Incentive, Incentives, Finance and Financial Management, Firm Size, Production Function, Multiple model, Agency Problem, Firm Value, Market equilibrium, Rent extraction, and Finance and Investment Banking
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We investigate the hypothesis that macroeconomic fluctuations are primitively the results of many microeconomic shocks. We define fundamental volatility as the volatility that would arise from an economy made entirely of idiosyncratic... more
We investigate the hypothesis that macroeconomic fluctuations are primitively the results of many microeconomic shocks. We define fundamental volatility as the volatility that would arise from an economy made entirely of idiosyncratic sectoral or firm-level shocks. Fundamental volatility accounts for the swings in macroeconomic volatility in the major world economies in the past half-century. It accounts for the “great moderation” and its undoing. The initial great moderation is due to a decreasing share of manufacturing between 1975 and 1985. The recent rise of macroeconomic volatility is chiefly due to the growth of the financial sector. (JEL E23, E32, E44)
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Research Interests: Physics, Economics, Econometrics, Market Microstructure, Neural Network, and 12 moreQuantitative Finance, Mathematical Sciences, Power Law, Price impact, STOCK EXCHANGE, Empirical evidence, Stock Price, Empirical Analysis, London Stock Exchange, Power Law Distribution, Functional Form, and Trade flows
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Some consumers fail to observe shrouded product attributes when they buy a new product. For example, an account holder may not know their bank's fee schedule. Firms will choose high shrouded fees and compete to attract consumers with... more
Some consumers fail to observe shrouded product attributes when they buy a new product. For example, an account holder may not know their bank's fee schedule. Firms will choose high shrouded fees and compete to attract consumers with loss-leader base goods: eg, banks will offer free gifts for opening an account and then snare naive consumers with high fees for bouncing a check. Sophisticated consumers take the free gifts and avoid the shrouded fees. Under weak conditions, firms will not be able to profitably attract ...
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This Appendix contains the instructions for the experiment described in the paper, and two questionnaires administered after the experiment. ... *Gabaix: Department of Economics, MIT, and NBER, Cambridge, MA 02142, xgabaix@mit.edu.... more
This Appendix contains the instructions for the experiment described in the paper, and two questionnaires administered after the experiment. ... *Gabaix: Department of Economics, MIT, and NBER, Cambridge, MA 02142, xgabaix@mit.edu. Laibson: Department of Economics, Harvard University, and NBER, Cambridge MA 02138, dlaibson@harvard.edu. ... Latest Stop Time (40 minutes from start time): ... Experimental Code Number: (must match code number on questionnaire) ... You will be asked to analyze 12 different games in the next 40 minutes. ...
Most US households have accumulated significant assets by retirement, but these assets are often accompanied by significant liabilities. Including net home equity, households with a head age 65-74 had a median net worth of $239,400 in... more
Most US households have accumulated significant assets by retirement, but these assets are often accompanied by significant liabilities. Including net home equity, households with a head age 65-74 had a median net worth of $239,400 in 2007, according to the Survey of Consumer Finances (SCF). 1 At the same time, the SCF reports that 48 percent had debt secured by a residential property, 26 percent had installment loans, and 37 percent carried credit card balances from month to month. Overall, about twothirds of these households ...
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For a host of issues, it is important to know whether competition lowers markups. Progress on this question has been hampered by analytical intractability. Only special cases have been amenable to analysis. To shed light on the general... more
For a host of issues, it is important to know whether competition lowers markups. Progress on this question has been hampered by analytical intractability. Only special cases have been amenable to analysis. To shed light on the general case, we use results from extreme value theory and characterize markups in the leading model of competition with random utility, the Perloff-Salop (1985) model. We show that markups are asymptotically proportional to (nF'[FL1 (1− nL1)]) L1, where n is the number of competing firms, and F is ...
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We use extreme value theory (EVT) to derive a tractable, general formula relating markups to the level of competition in a variety of random-utility models. When the number of firms is large, markups are proportional to 1/(nF/[F-1 (1−... more
We use extreme value theory (EVT) to derive a tractable, general formula relating markups to the level of competition in a variety of random-utility models. When the number of firms is large, markups are proportional to 1/(nF/[F-1 (1− 1/n)]), where F is the distribution function for the noise in random utility, and n is the number of firms. This formula implies that competition with large n leads to the same (uniformly scaled) markup in all the classes of random-utility models that we study. This implies that the crucial element for their ...
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We show that in ten different contexts—three kinds of credit card fee payments, credit card interest payments, interest rates on credit cards, mortgages, auto loans, home equity loans and credit lines, and small business credit cards—the... more
We show that in ten different contexts—three kinds of credit card fee payments, credit card interest payments, interest rates on credit cards, mortgages, auto loans, home equity loans and credit lines, and small business credit cards—the young and the old pay more fees and face higher interest rates than the middle-aged. These results are not explained by commonly observed risk characteristics. We hypothesize that this may be a consequence of the interaction between experience and cognitive decline. The young ...