Title: Lie groups of partial differential equations and their application to the multidimensional... more Title: Lie groups of partial differential equations and their application to the multidimensional screening problems Date:
In this paper I described group theoretic methods that can be used for analyzing the boundary pro... more In this paper I described group theoretic methods that can be used for analyzing the boundary problems, which arise when the Hamiltonian method is applied to solve the relaxed problem for the multidimensional screening problem. This technique can provide some useful insights into the structure of solutions and some times may help to arrive at particular solutions.
This paper studies the effects of risk aversion on nonlinear pricing. It first develops a model o... more This paper studies the effects of risk aversion on nonlinear pricing. It first develops a model of risk-averse principal, based on Mussa and Rosen (1978), and finds the equilibrium allocation increases as the principal becomes more risk averse and approaches the efficient level if the principal is sufficiently risk averse. Then the model is extended to allow for random participation. It is found that allocation moves towards the efficient level as the monopolistic principal becomes more risk averse. For duopoly, costbased two-part tariff is optimal in full participation equilibrium and the fixed fee component monotonically decreaases and converges to zero when the coefficient of absolute risk-aversion of the principals tends to infinity.
We extend Armstrong's [2] result on exclusion in multi-dimensional screening models in two key wa... more We extend Armstrong's [2] result on exclusion in multi-dimensional screening models in two key ways, providing support for the view that this result is generic and applicable to many different markets. First, we relax the strong technical assumptions he imposed on preferences and consumer types. Second, we extend the result beyond the monopolistic market structure to generalized oligopoly settings with entry. We also analyze applications to several quite different settings: credit markets, the automobile industry, research grants, the regulation of a monopolist with unknown demand and cost functions, and involuntary unemployment in the labor market.
In this paper we study the role of contract limitations on the performance of Islamic banks, in c... more In this paper we study the role of contract limitations on the performance of Islamic banks, in contrast to the role of asset limitations, invoked by Derigs and Marzban [1] to explain why Sharia'a-compliant strategies result in much lower portfolio performance than do the conventional strategies. Their results were, however, challenged in recent empirical paper by Walkshäusl and Lobe [2], who argued asset limitation even sometimes, is beneficial. The reason may be that they prevent excessive risk taking by the managers. Contract limitations provide a more nuanced explanation of performance of Islamic banks, and can explain why Islamic indexes seem to underperform in emergent, rather than developed markets, as documented by Walkshäusl and Lobe [3].
We extend Armstrong’s (1996) result on exclusion in multi-dimensional screening models in two key... more We extend Armstrong’s (1996) result on exclusion in multi-dimensional screening models in two key ways, providing support for the view that this result is quite generic and applicable to many different markets. First, we relax the strong technical assumptions he imposed on preferences and consumer types. Second, we extend the result beyond the monopolistic market structure to generalized oligopoly settings with entry. We also analyse applications to several quite different settings: credit markets, automobile industry, research grants, the regulation of a monopolist with unknown demand and cost functions, and involuntary unemployment in the labor market.
Market makers bear enormous uncertainty of the values of their portfolios and their attitude towa... more Market makers bear enormous uncertainty of the values of their portfolios and their attitude towards risk should not be completely ignored. In this article, we analyse a quote-driven market of a risky financial asset, where a risk-averse market maker supplies liquidity to traders. We characterise the equilibrium of the market for trading based on liquidity demand/diverse opinions on the value of the risky asset or based on information asymmetry. We find that risk aversion of the market maker is likely to increase the non-participation range of traders and the bid-ask spread.
This paper develops a theoretical framework for analyzing incentive schemes under bounded rationa... more This paper develops a theoretical framework for analyzing incentive schemes under bounded rationality. It starts from a standard principal-agent model and then superimposes an assumption of boundedly rational behavior on the part of the agent. Boundedly rational behavior is modeled as an explicit optimization procedure, which combines gradient dynamics with imitation and experimentation. The results predict the underprovision of optimal incentives and deviation from a standard sufficient statistics result from the agency literature. It also allows us to address the question of creating the optimal incentives in a multicultural environment.
In this paper I revisit the Mussa and Rosen (1978) model. However, unlike Mussa and Rosen, I assu... more In this paper I revisit the Mussa and Rosen (1978) model. However, unlike Mussa and Rosen, I assume that there is a positive mass of the consumers of the highest possible type. I call them snobs. I prove that snobs consumers are served efficiently and the product line decreases in the mass of the serious consumers. Moreover, if the mass of the serious consumers is more than some critical level then they are the only consumers who are served at equilibrium.
In this paper, I consider a problem of multi-dimensional screening in the case when the number of... more In this paper, I consider a problem of multi-dimensional screening in the case when the number of consumer's characteristics, m, differs from n, the number of goods produced by a monopolist. I show that, in the case when n > m, the qualitative features of solution are similar to those obtained by Rochet and Chone (1998) for the case n = m. When the monopolist has too few instruments (n < m), new qualitative features arise. In particular, there are distortions in the outward direction at the top, discontinuity in the bundle of goods consumed on the lower boundary of participation region, and full separation of types is impossible over any open subset of type space.
Journal of International Financial Markets, Institutions and Money, 2014
In their recent paper Derigs and Marzban (2009) argued that Sharia'a-compliant strategies result ... more In their recent paper Derigs and Marzban (2009) argued that Sharia'a-compliant strategies result in much lower portfolio performance than the conventional strategies. The main reason for their argument is of Sharia'a-compliance limits on the set of admissible investments. However, in the world of imperfect financial markets such a limitation may also have some beneficial consequences. We therefore, assume that a net disadvantage caused by such limitations is relatively small, but is magnified by equilibrium hiring strategies, which match Islamic banks with employees who have a lower average level of human capital.
Two kinds of theories of the boundedly rational behavior are possible. Static theories focus on s... more Two kinds of theories of the boundedly rational behavior are possible. Static theories focus on stationary behavior and do not include any explicit mechanism for temporal change. Dynamic theories, on the other hand, explicitly model the fine-grain adjustments made by the subjects in response to their recent experiences. The main contribution of this paper is to argue that the restrictions usually imposed on the distribution of choices in the static approach are generically not supported by an explicit adjustment mechanism.
Casual empiricism suggests higher quality is associated with greater variety. However, recent the... more Casual empiricism suggests higher quality is associated with greater variety. However, recent theoretical and empirical research has either not considered this link, or has been unable to establish unambiguous predictions about the relationship between quality and variety. In this paper we develop a simple model which predicts that for low qualities variety should be positively correlated with quality and we establish conditions under which variety will either increase or decrease with quality at higher quality levels. The monopolist uses variety to increase the profitability of price discrimination across product lines of different qualities, by increasing the likelihood consumers choose high price products among products yielding the same utility. We show that the number of varieties offered by the monopolist is greater than the social optimum. The predictions of the model are supported by an analysis of the market for cars. A wide range of car manufacturers are found to offer a hump-shaped distribution of varieties.
In this paper we revisit the first price and the second price sealed-bid auctions, but, unlike th... more In this paper we revisit the first price and the second price sealed-bid auctions, but, unlike the standard model, we assume that bidding is conducted by an expert on behalf of the client, and that the client does not completely trust the expert's qualifications. In particular, if the client does not win the auction, but could have won it by submitting a bid below her valuation or won but feels she could have paid less for the object, the client asks the expert to justify the strategy. The objective of this paper is to incorporate the concern for the justifiability into the expert's objective function. We show that under some assumptions about the justification process the requirement of justifiability increases the optimal bid in the first price sealed-bid auction, while bidding the client's true value remains the optimal strategy in the second price auction sealed-bid auction. Hence, the first price auction may raise more revenue than the second price auction and thus it will be preferred by the seller. Both auctions allocate the good to the client with the highest valuation. However, the second price sealed-bid auction is more efficient, since the experts do not incur costs from the failure to justify their strategies.
In this paper we consider a model were a risk-neutral principal devices a contract for a risk neu... more In this paper we consider a model were a risk-neutral principal devices a contract for a risk neutral agent, who can exert effort along different dimensions. On the top of that the agent possesses multidimensional private information about her cost of effort. We show that as long as effort is multidimensional, moral hazard usually leads to additional welfare loss comparatively to pure adverse selection situation even if both parties are risk neutral and private information of the agent is not correlated with the production technology.
The objective of this paper is to discuss the circumstances under which the practice of high-perf... more The objective of this paper is to discuss the circumstances under which the practice of high-performance work systems centered on employment security, selective hiring and self-managed teams is justi…ed. We use Blume and Durlauf (2001) model of socioeconomic behavior to study the performance of such an organization and compare the results with a more traditional incentive theory. Keywords and Phrases: statistical model of socioeconomic behavior, theory of the …rm, high performance work systems. JEL Classi…cation Numbers: D23
Title: Lie groups of partial differential equations and their application to the multidimensional... more Title: Lie groups of partial differential equations and their application to the multidimensional screening problems Date:
In this paper I described group theoretic methods that can be used for analyzing the boundary pro... more In this paper I described group theoretic methods that can be used for analyzing the boundary problems, which arise when the Hamiltonian method is applied to solve the relaxed problem for the multidimensional screening problem. This technique can provide some useful insights into the structure of solutions and some times may help to arrive at particular solutions.
This paper studies the effects of risk aversion on nonlinear pricing. It first develops a model o... more This paper studies the effects of risk aversion on nonlinear pricing. It first develops a model of risk-averse principal, based on Mussa and Rosen (1978), and finds the equilibrium allocation increases as the principal becomes more risk averse and approaches the efficient level if the principal is sufficiently risk averse. Then the model is extended to allow for random participation. It is found that allocation moves towards the efficient level as the monopolistic principal becomes more risk averse. For duopoly, costbased two-part tariff is optimal in full participation equilibrium and the fixed fee component monotonically decreaases and converges to zero when the coefficient of absolute risk-aversion of the principals tends to infinity.
We extend Armstrong's [2] result on exclusion in multi-dimensional screening models in two key wa... more We extend Armstrong's [2] result on exclusion in multi-dimensional screening models in two key ways, providing support for the view that this result is generic and applicable to many different markets. First, we relax the strong technical assumptions he imposed on preferences and consumer types. Second, we extend the result beyond the monopolistic market structure to generalized oligopoly settings with entry. We also analyze applications to several quite different settings: credit markets, the automobile industry, research grants, the regulation of a monopolist with unknown demand and cost functions, and involuntary unemployment in the labor market.
In this paper we study the role of contract limitations on the performance of Islamic banks, in c... more In this paper we study the role of contract limitations on the performance of Islamic banks, in contrast to the role of asset limitations, invoked by Derigs and Marzban [1] to explain why Sharia'a-compliant strategies result in much lower portfolio performance than do the conventional strategies. Their results were, however, challenged in recent empirical paper by Walkshäusl and Lobe [2], who argued asset limitation even sometimes, is beneficial. The reason may be that they prevent excessive risk taking by the managers. Contract limitations provide a more nuanced explanation of performance of Islamic banks, and can explain why Islamic indexes seem to underperform in emergent, rather than developed markets, as documented by Walkshäusl and Lobe [3].
We extend Armstrong’s (1996) result on exclusion in multi-dimensional screening models in two key... more We extend Armstrong’s (1996) result on exclusion in multi-dimensional screening models in two key ways, providing support for the view that this result is quite generic and applicable to many different markets. First, we relax the strong technical assumptions he imposed on preferences and consumer types. Second, we extend the result beyond the monopolistic market structure to generalized oligopoly settings with entry. We also analyse applications to several quite different settings: credit markets, automobile industry, research grants, the regulation of a monopolist with unknown demand and cost functions, and involuntary unemployment in the labor market.
Market makers bear enormous uncertainty of the values of their portfolios and their attitude towa... more Market makers bear enormous uncertainty of the values of their portfolios and their attitude towards risk should not be completely ignored. In this article, we analyse a quote-driven market of a risky financial asset, where a risk-averse market maker supplies liquidity to traders. We characterise the equilibrium of the market for trading based on liquidity demand/diverse opinions on the value of the risky asset or based on information asymmetry. We find that risk aversion of the market maker is likely to increase the non-participation range of traders and the bid-ask spread.
This paper develops a theoretical framework for analyzing incentive schemes under bounded rationa... more This paper develops a theoretical framework for analyzing incentive schemes under bounded rationality. It starts from a standard principal-agent model and then superimposes an assumption of boundedly rational behavior on the part of the agent. Boundedly rational behavior is modeled as an explicit optimization procedure, which combines gradient dynamics with imitation and experimentation. The results predict the underprovision of optimal incentives and deviation from a standard sufficient statistics result from the agency literature. It also allows us to address the question of creating the optimal incentives in a multicultural environment.
In this paper I revisit the Mussa and Rosen (1978) model. However, unlike Mussa and Rosen, I assu... more In this paper I revisit the Mussa and Rosen (1978) model. However, unlike Mussa and Rosen, I assume that there is a positive mass of the consumers of the highest possible type. I call them snobs. I prove that snobs consumers are served efficiently and the product line decreases in the mass of the serious consumers. Moreover, if the mass of the serious consumers is more than some critical level then they are the only consumers who are served at equilibrium.
In this paper, I consider a problem of multi-dimensional screening in the case when the number of... more In this paper, I consider a problem of multi-dimensional screening in the case when the number of consumer's characteristics, m, differs from n, the number of goods produced by a monopolist. I show that, in the case when n > m, the qualitative features of solution are similar to those obtained by Rochet and Chone (1998) for the case n = m. When the monopolist has too few instruments (n < m), new qualitative features arise. In particular, there are distortions in the outward direction at the top, discontinuity in the bundle of goods consumed on the lower boundary of participation region, and full separation of types is impossible over any open subset of type space.
Journal of International Financial Markets, Institutions and Money, 2014
In their recent paper Derigs and Marzban (2009) argued that Sharia'a-compliant strategies result ... more In their recent paper Derigs and Marzban (2009) argued that Sharia'a-compliant strategies result in much lower portfolio performance than the conventional strategies. The main reason for their argument is of Sharia'a-compliance limits on the set of admissible investments. However, in the world of imperfect financial markets such a limitation may also have some beneficial consequences. We therefore, assume that a net disadvantage caused by such limitations is relatively small, but is magnified by equilibrium hiring strategies, which match Islamic banks with employees who have a lower average level of human capital.
Two kinds of theories of the boundedly rational behavior are possible. Static theories focus on s... more Two kinds of theories of the boundedly rational behavior are possible. Static theories focus on stationary behavior and do not include any explicit mechanism for temporal change. Dynamic theories, on the other hand, explicitly model the fine-grain adjustments made by the subjects in response to their recent experiences. The main contribution of this paper is to argue that the restrictions usually imposed on the distribution of choices in the static approach are generically not supported by an explicit adjustment mechanism.
Casual empiricism suggests higher quality is associated with greater variety. However, recent the... more Casual empiricism suggests higher quality is associated with greater variety. However, recent theoretical and empirical research has either not considered this link, or has been unable to establish unambiguous predictions about the relationship between quality and variety. In this paper we develop a simple model which predicts that for low qualities variety should be positively correlated with quality and we establish conditions under which variety will either increase or decrease with quality at higher quality levels. The monopolist uses variety to increase the profitability of price discrimination across product lines of different qualities, by increasing the likelihood consumers choose high price products among products yielding the same utility. We show that the number of varieties offered by the monopolist is greater than the social optimum. The predictions of the model are supported by an analysis of the market for cars. A wide range of car manufacturers are found to offer a hump-shaped distribution of varieties.
In this paper we revisit the first price and the second price sealed-bid auctions, but, unlike th... more In this paper we revisit the first price and the second price sealed-bid auctions, but, unlike the standard model, we assume that bidding is conducted by an expert on behalf of the client, and that the client does not completely trust the expert's qualifications. In particular, if the client does not win the auction, but could have won it by submitting a bid below her valuation or won but feels she could have paid less for the object, the client asks the expert to justify the strategy. The objective of this paper is to incorporate the concern for the justifiability into the expert's objective function. We show that under some assumptions about the justification process the requirement of justifiability increases the optimal bid in the first price sealed-bid auction, while bidding the client's true value remains the optimal strategy in the second price auction sealed-bid auction. Hence, the first price auction may raise more revenue than the second price auction and thus it will be preferred by the seller. Both auctions allocate the good to the client with the highest valuation. However, the second price sealed-bid auction is more efficient, since the experts do not incur costs from the failure to justify their strategies.
In this paper we consider a model were a risk-neutral principal devices a contract for a risk neu... more In this paper we consider a model were a risk-neutral principal devices a contract for a risk neutral agent, who can exert effort along different dimensions. On the top of that the agent possesses multidimensional private information about her cost of effort. We show that as long as effort is multidimensional, moral hazard usually leads to additional welfare loss comparatively to pure adverse selection situation even if both parties are risk neutral and private information of the agent is not correlated with the production technology.
The objective of this paper is to discuss the circumstances under which the practice of high-perf... more The objective of this paper is to discuss the circumstances under which the practice of high-performance work systems centered on employment security, selective hiring and self-managed teams is justi…ed. We use Blume and Durlauf (2001) model of socioeconomic behavior to study the performance of such an organization and compare the results with a more traditional incentive theory. Keywords and Phrases: statistical model of socioeconomic behavior, theory of the …rm, high performance work systems. JEL Classi…cation Numbers: D23
Uploads
Papers by Suren Basov