We consider the strategic timing of information releases in a dynamic disclosure model. Because i... more We consider the strategic timing of information releases in a dynamic disclosure model. Because investors don't know whether or when the firm is informed, the firm will not necessarily disclose immediately. We show that bad market news can trigger the immediate release of information by firms. Conversely, good market news slows the release of information by firms. Thus, our model generates clustering of negative announcements. Surprisingly, this result holds only when firms can preemptively disclose their own information prior to the arrival of external information. These results have implications for conditional variance and skewness of stock returns.
We present a simple yet fully rational general equilibrium model that highlights the fact that re... more We present a simple yet fully rational general equilibrium model that highlights the fact that relative wealth concerns can play a role in explaining the presence and dynamics of financial "bubbles." Because our model has a finite horizon, our explanation for the existence of bubbles is distinct from typical models of bubbles.
We consider the strategic timing of information releases in a dynamic disclosure model. Because i... more We consider the strategic timing of information releases in a dynamic disclosure model. Because investors don't know whether or when the firm is informed, the firm will not necessarily disclose immediately. We show that bad market news can trigger the immediate release of information by firms. Conversely, good market news slows the release of information by firms. Thus, our model generates clustering of negative announcements. Surprisingly, this result holds only when firms can preemptively disclose their own information prior to the arrival of external information. These results have implications for conditional variance and skewness of stock returns.
We present a simple yet fully rational general equilibrium model that highlights the fact that re... more We present a simple yet fully rational general equilibrium model that highlights the fact that relative wealth concerns can play a role in explaining the presence and dynamics of financial "bubbles." Because our model has a finite horizon, our explanation for the existence of bubbles is distinct from typical models of bubbles.
Within a rational general equilibrium model in which agents care only about personal consumption,... more Within a rational general equilibrium model in which agents care only about personal consumption, we consider a setting in which, due to borrowing constraints, individuals endowed with local resources underparticipate in financial markets. As a result, investors compete for local resources through their portfolio choices. Even with complete financial markets and no aggregate risk, agents may herd into risky portfolios. This yields a Pareto-dominated outcome as agents introduce "community" risk unrelated to fundamentals. Moreover, if some agents are behaviorally biased, or cannot completely diversify their holdings, rational agents may choose more extreme portfolios and amplify the effect.
... University of California, Los Angeles, London Business School, and Centre for Economic Policy... more ... University of California, Los Angeles, London Business School, and Centre for Economic Policy Research; kjell.nyborg@anderson.ucla.edu. ... Stanford-Berkeley workshop (2001), and the 2002 AFA meeting in Washington, DC We would also like to thank Yael Hochberg and ...
In this paper, we propose an explanation for biases in portfolio choice. We show that if individu... more In this paper, we propose an explanation for biases in portfolio choice. We show that if individuals compete for local resources within their community, their utility depends on their own wealth as well as aggregate community wealth. This leads to an externality in portfolio choice. If investors are sufficiently risk averse, then individual investors will bias their portfolio choice in the direction of the aggregate portfolio choice of the community. As a result, we show that even with complete financial markets and no aggregate risk, in all stable equilibria agents hold undiversified portfolios. Moreover, if a component of community income is tied to the output of local firms, the unique equilibrium is one in which portfolio are biased towards local firms as well. In addition, we show that equilibrium Sharpe ratios can be much higher than in standard models. We conclude with a number of policy implications.
We examine the role of allocation rules in determining the set of equilib- rium prices in uniform... more We examine the role of allocation rules in determining the set of equilib- rium prices in uniform price auctions. Beginning with Wilson (1979), the theoretical literature has argued that these auctions are subject to possible low equilibrium prices. In this paper we show that this is due to the way the asset is being divided. We focus on allocation rules that specify the way the asset is divided in cases of excess demand. This may have a dramatic effect on the set of equilibrium prices. In particular, we show that the allocation rule used in practice has a negative effect on equilibrium prices. * Graduate School of Business, Stanford University, Stanford, CA 94305, email: ikremer@stanford.edu. ** London Business School, Regent’s Park, London NW1 4SA, UK; and CEPR. email: knyborg@london.edu We have benefited from comments by Jennifer Reinganum, the editor, two anonymous referees, Asher Wolinsky, Michael Whinston, Peter DeMarzo, Ulf Axelson and seminar participants at the Hebrew Unive...
ABSTRACT We investigate why new, high-risk technologies can attract excessive and often unprofita... more ABSTRACT We investigate why new, high-risk technologies can attract excessive and often unprofitable investment. We develop an equilibrium model in which rational, risk-averse agents overinvest in a risky technology, possibly to the point that its expected return is negative. Overinvestment results from relative wealth concerns which arise endogenously from the imperfect tradability of future endowments. Competition over future consumption leads to an indirect utility for wealth with “keeping up with the Joneses” properties that can induce herding. Because overinvestment increases with the risk of the technology, our model can explain why new, risky technological innovations may promote investment bubbles.
This paper examines the process of price formation in the presence of asymmetric information. We ... more This paper examines the process of price formation in the presence of asymmetric information. We examine auctions in which a common value good is auctioned to a large number of bidders. We provide a simple char- acterization of the limiting distribution of prices that enables us to examine different mechanisms under various information structures. 1I ntroduction A key question in information economics and finance is whether prices ag- gregate information in a competitive environment. That is, when agents are endowed with private information, does competition lead in the limit to prices which would occur if all information were public?. This paper examines the asymptotic properties of prices in common value auctions when the number of bidders becomes large. The main idea in this paper is to separate the issue of information ag- gregation from the issue of revenue efficiency. We also distinguish between the amount of information prices contain, and the degree to which prices approximate the asset's value. Using this approach we get a simple char- acterization of the limiting distribution of prices. We are not only able to answer whether prices converge to the asset's value, but also get an explicit form for the limiting distribution. Prices converge to the expected value of the asset conditional on the information possessed by what we call the "pivotal bidder." This provides insights on how the auction format and the information structure influence the limiting behavior of prices. It shows that the limiting distribution of prices can be derived from the statistical properties of certain order statistics. This lets us abstract from the specific equilibrium bidding strategies. For example, we show that while the first and second price auction have different equilibrium strategies they share a similar limiting distribution of prices. These auctions yield different limiting distributions from auctions such as the English auction or kn auction. Our
We show that an asymptotic envy-freeness condition is necessary for a form of robust approximate ... more We show that an asymptotic envy-freeness condition is necessary for a form of robust approximate implementation in large economies. In settings where allocations are excludable, asymptotic envy-freeness is also su¢ cient for implementation, while in non-excludable settings it is not su¢ cient.
We analyze competitive pressures in a sequence of auctions with a growing number of bidders, in a... more We analyze competitive pressures in a sequence of auctions with a growing number of bidders, in a model that includes private and common valuations as special cases. We show that the key determinant of bidders' surplus (and implicitly auction revenue) is how the goods are distributed. In any setting and sequence of auctions where the allocation of good(s) is concentrated among a shrinking proportion of the population, the winning bidders enjoy no surplus in the limit. If instead the good(s) are allocated in a dispersed manner so that a non-vanishing proportion of the bidders obtain objects, then in any of a wide class of auctions bidders enjoy a surplus that is bounded away from zero. Moreover, under dispersed allocations, the format of the auction matters. If bidders have constant marginal utilities for objects up to some limit, then uniform price auctions lead to higher revenue than discriminatory auctions. If agents have decreasing marginal utilities for objects, then uniform price auctions are asymptotically efficient, while discriminatory auctions are asymptotically inefficient. Finally, we show that in some cases where dispersed allocations are efficient, revenue may increase by bundling goods at the expense of efficiency.
We examine the relevance of an auction format in a competitive environment by comparing uniform a... more We examine the relevance of an auction format in a competitive environment by comparing uniform and discriminatory price auctions with many bidders in a private values setting. We show that if the number of objects for sale is small relative to the number of bidders, then all equilibria of both auctions are approximately efficient and lead to approximately the same
We show that an asymptotic envy-freeness condition is necessary for a form of robust approximate ... more We show that an asymptotic envy-freeness condition is necessary for a form of robust approximate implementation in large economies. In settings where allocations are excludable, asymptotic envy-freeness is also su¢ cient for implementation, while in non-excludable settings it is not su¢ cient.
We examine a seller auctioning off a set of objects to a large number of bidders, and restrict at... more We examine a seller auctioning off a set of objects to a large number of bidders, and restrict attention to auctions that are self-enforcing in that bidders do not want to walk away from the mechanism after they see the price that they must pay. We show that the seller's ability to extract the full possible revenue depends on whether the efficient allocation is concentrated among a few bidders or is dispersed so that a non-negligible fraction of bidders obtain objects. If it is concentrated then any sequence of mechanisms that achieve the efficient allocation (and there are many) asymptotically extracts the full surplus, and so it is in the seller's interest to efficiently allocate objects. In contrast, when the efficient allocation is dispersed then no sequence of mechanisms asymptotically extracts the full surplus. Moreover, in the dispersed case the seller may benefit by inefficiently bundling objects for sale.
We analyze bidding behavior in large discriminatory price auctions where the number of objects is... more We analyze bidding behavior in large discriminatory price auctions where the number of objects is a non-trivial proportion of the number of bidders. Bidders observe private signals that are affiliated with the common value. We show that the average price in the auction is biased downward from the expected value of the objects, even in the competitive limit. In particular,
In this paper we are concerned with randomized two-party communication complexity as defined by Y... more In this paper we are concerned with randomized two-party communication complexity as defined by Yao (1979): Alice holds an input x, Bob holds an input y, and they wish to compute a given function f(x, y), to which end they communicate with each other via a randomized protocol. ...
We present several results regarding randomized one-round communication complexity. These include... more We present several results regarding randomized one-round communication complexity. These include a connection to the VC dimension, a study of the problem of computing the inner product of two real valued vectors, and a relation between \simultaneous" protocols and one-round protocols. 0
We consider the strategic timing of information releases in a dynamic disclosure model. Because i... more We consider the strategic timing of information releases in a dynamic disclosure model. Because investors don't know whether or when the firm is informed, the firm will not necessarily disclose immediately. We show that bad market news can trigger the immediate release of information by firms. Conversely, good market news slows the release of information by firms. Thus, our model generates clustering of negative announcements. Surprisingly, this result holds only when firms can preemptively disclose their own information prior to the arrival of external information. These results have implications for conditional variance and skewness of stock returns.
We present a simple yet fully rational general equilibrium model that highlights the fact that re... more We present a simple yet fully rational general equilibrium model that highlights the fact that relative wealth concerns can play a role in explaining the presence and dynamics of financial "bubbles." Because our model has a finite horizon, our explanation for the existence of bubbles is distinct from typical models of bubbles.
We consider the strategic timing of information releases in a dynamic disclosure model. Because i... more We consider the strategic timing of information releases in a dynamic disclosure model. Because investors don't know whether or when the firm is informed, the firm will not necessarily disclose immediately. We show that bad market news can trigger the immediate release of information by firms. Conversely, good market news slows the release of information by firms. Thus, our model generates clustering of negative announcements. Surprisingly, this result holds only when firms can preemptively disclose their own information prior to the arrival of external information. These results have implications for conditional variance and skewness of stock returns.
We present a simple yet fully rational general equilibrium model that highlights the fact that re... more We present a simple yet fully rational general equilibrium model that highlights the fact that relative wealth concerns can play a role in explaining the presence and dynamics of financial "bubbles." Because our model has a finite horizon, our explanation for the existence of bubbles is distinct from typical models of bubbles.
Within a rational general equilibrium model in which agents care only about personal consumption,... more Within a rational general equilibrium model in which agents care only about personal consumption, we consider a setting in which, due to borrowing constraints, individuals endowed with local resources underparticipate in financial markets. As a result, investors compete for local resources through their portfolio choices. Even with complete financial markets and no aggregate risk, agents may herd into risky portfolios. This yields a Pareto-dominated outcome as agents introduce "community" risk unrelated to fundamentals. Moreover, if some agents are behaviorally biased, or cannot completely diversify their holdings, rational agents may choose more extreme portfolios and amplify the effect.
... University of California, Los Angeles, London Business School, and Centre for Economic Policy... more ... University of California, Los Angeles, London Business School, and Centre for Economic Policy Research; kjell.nyborg@anderson.ucla.edu. ... Stanford-Berkeley workshop (2001), and the 2002 AFA meeting in Washington, DC We would also like to thank Yael Hochberg and ...
In this paper, we propose an explanation for biases in portfolio choice. We show that if individu... more In this paper, we propose an explanation for biases in portfolio choice. We show that if individuals compete for local resources within their community, their utility depends on their own wealth as well as aggregate community wealth. This leads to an externality in portfolio choice. If investors are sufficiently risk averse, then individual investors will bias their portfolio choice in the direction of the aggregate portfolio choice of the community. As a result, we show that even with complete financial markets and no aggregate risk, in all stable equilibria agents hold undiversified portfolios. Moreover, if a component of community income is tied to the output of local firms, the unique equilibrium is one in which portfolio are biased towards local firms as well. In addition, we show that equilibrium Sharpe ratios can be much higher than in standard models. We conclude with a number of policy implications.
We examine the role of allocation rules in determining the set of equilib- rium prices in uniform... more We examine the role of allocation rules in determining the set of equilib- rium prices in uniform price auctions. Beginning with Wilson (1979), the theoretical literature has argued that these auctions are subject to possible low equilibrium prices. In this paper we show that this is due to the way the asset is being divided. We focus on allocation rules that specify the way the asset is divided in cases of excess demand. This may have a dramatic effect on the set of equilibrium prices. In particular, we show that the allocation rule used in practice has a negative effect on equilibrium prices. * Graduate School of Business, Stanford University, Stanford, CA 94305, email: ikremer@stanford.edu. ** London Business School, Regent’s Park, London NW1 4SA, UK; and CEPR. email: knyborg@london.edu We have benefited from comments by Jennifer Reinganum, the editor, two anonymous referees, Asher Wolinsky, Michael Whinston, Peter DeMarzo, Ulf Axelson and seminar participants at the Hebrew Unive...
ABSTRACT We investigate why new, high-risk technologies can attract excessive and often unprofita... more ABSTRACT We investigate why new, high-risk technologies can attract excessive and often unprofitable investment. We develop an equilibrium model in which rational, risk-averse agents overinvest in a risky technology, possibly to the point that its expected return is negative. Overinvestment results from relative wealth concerns which arise endogenously from the imperfect tradability of future endowments. Competition over future consumption leads to an indirect utility for wealth with “keeping up with the Joneses” properties that can induce herding. Because overinvestment increases with the risk of the technology, our model can explain why new, risky technological innovations may promote investment bubbles.
This paper examines the process of price formation in the presence of asymmetric information. We ... more This paper examines the process of price formation in the presence of asymmetric information. We examine auctions in which a common value good is auctioned to a large number of bidders. We provide a simple char- acterization of the limiting distribution of prices that enables us to examine different mechanisms under various information structures. 1I ntroduction A key question in information economics and finance is whether prices ag- gregate information in a competitive environment. That is, when agents are endowed with private information, does competition lead in the limit to prices which would occur if all information were public?. This paper examines the asymptotic properties of prices in common value auctions when the number of bidders becomes large. The main idea in this paper is to separate the issue of information ag- gregation from the issue of revenue efficiency. We also distinguish between the amount of information prices contain, and the degree to which prices approximate the asset's value. Using this approach we get a simple char- acterization of the limiting distribution of prices. We are not only able to answer whether prices converge to the asset's value, but also get an explicit form for the limiting distribution. Prices converge to the expected value of the asset conditional on the information possessed by what we call the "pivotal bidder." This provides insights on how the auction format and the information structure influence the limiting behavior of prices. It shows that the limiting distribution of prices can be derived from the statistical properties of certain order statistics. This lets us abstract from the specific equilibrium bidding strategies. For example, we show that while the first and second price auction have different equilibrium strategies they share a similar limiting distribution of prices. These auctions yield different limiting distributions from auctions such as the English auction or kn auction. Our
We show that an asymptotic envy-freeness condition is necessary for a form of robust approximate ... more We show that an asymptotic envy-freeness condition is necessary for a form of robust approximate implementation in large economies. In settings where allocations are excludable, asymptotic envy-freeness is also su¢ cient for implementation, while in non-excludable settings it is not su¢ cient.
We analyze competitive pressures in a sequence of auctions with a growing number of bidders, in a... more We analyze competitive pressures in a sequence of auctions with a growing number of bidders, in a model that includes private and common valuations as special cases. We show that the key determinant of bidders' surplus (and implicitly auction revenue) is how the goods are distributed. In any setting and sequence of auctions where the allocation of good(s) is concentrated among a shrinking proportion of the population, the winning bidders enjoy no surplus in the limit. If instead the good(s) are allocated in a dispersed manner so that a non-vanishing proportion of the bidders obtain objects, then in any of a wide class of auctions bidders enjoy a surplus that is bounded away from zero. Moreover, under dispersed allocations, the format of the auction matters. If bidders have constant marginal utilities for objects up to some limit, then uniform price auctions lead to higher revenue than discriminatory auctions. If agents have decreasing marginal utilities for objects, then uniform price auctions are asymptotically efficient, while discriminatory auctions are asymptotically inefficient. Finally, we show that in some cases where dispersed allocations are efficient, revenue may increase by bundling goods at the expense of efficiency.
We examine the relevance of an auction format in a competitive environment by comparing uniform a... more We examine the relevance of an auction format in a competitive environment by comparing uniform and discriminatory price auctions with many bidders in a private values setting. We show that if the number of objects for sale is small relative to the number of bidders, then all equilibria of both auctions are approximately efficient and lead to approximately the same
We show that an asymptotic envy-freeness condition is necessary for a form of robust approximate ... more We show that an asymptotic envy-freeness condition is necessary for a form of robust approximate implementation in large economies. In settings where allocations are excludable, asymptotic envy-freeness is also su¢ cient for implementation, while in non-excludable settings it is not su¢ cient.
We examine a seller auctioning off a set of objects to a large number of bidders, and restrict at... more We examine a seller auctioning off a set of objects to a large number of bidders, and restrict attention to auctions that are self-enforcing in that bidders do not want to walk away from the mechanism after they see the price that they must pay. We show that the seller's ability to extract the full possible revenue depends on whether the efficient allocation is concentrated among a few bidders or is dispersed so that a non-negligible fraction of bidders obtain objects. If it is concentrated then any sequence of mechanisms that achieve the efficient allocation (and there are many) asymptotically extracts the full surplus, and so it is in the seller's interest to efficiently allocate objects. In contrast, when the efficient allocation is dispersed then no sequence of mechanisms asymptotically extracts the full surplus. Moreover, in the dispersed case the seller may benefit by inefficiently bundling objects for sale.
We analyze bidding behavior in large discriminatory price auctions where the number of objects is... more We analyze bidding behavior in large discriminatory price auctions where the number of objects is a non-trivial proportion of the number of bidders. Bidders observe private signals that are affiliated with the common value. We show that the average price in the auction is biased downward from the expected value of the objects, even in the competitive limit. In particular,
In this paper we are concerned with randomized two-party communication complexity as defined by Y... more In this paper we are concerned with randomized two-party communication complexity as defined by Yao (1979): Alice holds an input x, Bob holds an input y, and they wish to compute a given function f(x, y), to which end they communicate with each other via a randomized protocol. ...
We present several results regarding randomized one-round communication complexity. These include... more We present several results regarding randomized one-round communication complexity. These include a connection to the VC dimension, a study of the problem of computing the inner product of two real valued vectors, and a relation between \simultaneous" protocols and one-round protocols. 0
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Papers by Ilan Kremer