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ESMT Working Paper

Contracts as a barrier to entry in markets with non-pivotal buyers

ESMT Working Paper No. 15-02 (R1)
Published in American Economic Review,
107 (7): 2041–71.
Özlem Bedre-Defolie, Gary Biglaiser (2016)
Subject(s)
Economics, politics and business environment
Considering markets with non-pivotal buyers we analyze the anti-competitive effects of breakup fees used by an incumbent facing a more efficient entrant in the future. Buyers differ in their intrinsic switching costs. Breakup fees are profitably used to foreclose entry, regardless of the entrant’s efficiency advantage or level of switching costs. Banning breakup fees is beneficial to consumers and enhances the total welfare unless the entrant’s efficiency is close to the incumbent’s. Inefficient foreclosure arises not because of rent shifting from the entrant, but because the incumbent uses the long-term contract to manipulate consumers’ expected surplus from not signing it.

 

View all ESMT Working Papers in the ESMT Working Paper Series here. ESMT Working Papers are also available via SSRN, RePEc, EconStor, and the German National Library (DNB).

Pages
38
ISSN (Print)
1866–3494
ESMT Working Paper

Taking ‘some' of the mimicry out of the adoption process: Quality management and strategic substitution

ESMT Working Paper No. 16-05
Joseph A. Clougherty, Michał Grajek, Oz Shy (2016)
Subject(s)
Economics, politics and business environment
Keyword(s)
Adoption, quality management, standards, mimicry, contagion
Operations management scholarship has focused on reference-group adoption positively influencing focal-facility adoption; i.e., positive imitation parameters manifest due to the presence of mimicry and contagion. We instead argue that the incentive to adopt a quality-management system can be inversely related to reference-group diffusion. Our theoretical model formalizes the potential for strategic substitution and negative imitation parameters to be applicable in quality-management adoption. We compile a dataset of 2,895 facility-level observations that allows for three different industry-level reference groups; i.e., domestic industry, domestic exporters and foreign exporters. When undertaking probit estimations that do not account for appropriate fixed effects, we find positive imitation parameters which support the presence of mimicry and contagion. Yet when accounting for fixed effects, the imitation parameters turn negative in line with the presence of strategic substitution. Furthermore, the negative influence of reference-group adoption on focal-facility adoption is robust across the three reference groups.

 

View all ESMT Working Papers in the ESMT Working Paper Series here. ESMT Working Papers are also available via SSRN, RePEc, EconStor, and the German National Library (DNB).

Pages
37
ISSN (Print)
1866–3494
Working Paper

Collateral, central bank repos, and systemic arbitrage

Swiss Finance Institute Research Paper No. 16-66
Jörg Rocholl, Falko Fecht, Kjell G. Nyborg, Jiri Woschitz (2016)
Subject(s)
Economics, politics and business environment
Keyword(s)
Collateral, repo, systemic arbitrage, central bank, collateral policy, banks, liquidity, interbank market, financial stability, financial fragmentation
JEL Code(s)
G12, G21, E42, E51, E52, E58
Central banks are under increased scrutiny because of the rapid growth in, and composition of, their balance sheets. Therefore, understanding the processes that shape these balance sheets and their consequences is crucial. We contribute by studying an extensive dataset of banks’ liquidity uptake and pledged collateral in central bank repos. We document systemic arbitrage whereby banks funnel credit risk and low-quality collateral to the central bank. Weaker banks use lower quality collateral to demand disproportionately larger amounts of central bank money (liquidity). This holds both before and after the financial crisis and may contribute to financial fragility and fragmentation.
Pages
58
Working Paper

Loan officer incentives and the limits of hard information

AFA 2013 San Diego Meetings Paper
Tobias Berg, Manju Puri, Jörg Rocholl (2016)
Subject(s)
Finance, accounting and corporate governance
Keyword(s)
Consumer loans, loan officer incentives, hard information, information manipulation
JEL Code(s)
G21
Banks have been subject to a wave of investigations regarding fraudulent behavior. Much of the discussion centers on manipulation of hard information by employees down the line, who missell mortgages due to flawed debt-to-income ratios or manipulate LIBOR and FX rates. Despite these prominent cases, little is known in the academic literature as to whether and how manipulation of hard information is affected by incentives of these employees, and if anything there is increasing reliance on quantitative, hard information based models for regulating banks. In this paper, we fill this gap by analyzing almost a quarter million of retail loan applications. We show that loan officer incentives significantly skew ratings even in settings where ratings are computed using hard information only. These incentives have a first-order effect on bank profitability. Our results suggest that ratings are subject to the Lucas critique: Incentives influence the hard information reported by loan officers and thus change the link between hard information and default probabilities.
Pages
53
Working Paper

Manfred F. R. Kets de Vries: Playing the Morosophe

INSEAD Working Paper No. 2016/73/EFE
Elizabeth Florent-Treacy, Konstantin Korotov, Caroline Rook (2016)
Subject(s)
Human resources management/organizational behavior
Keyword(s)
Biography, psychodynamic approach, management science, clinical paradigm, universal motivational drivers, leadership development, group coaching, legacy
The full text of the working paper is available at SSRN.
Pages
35
ESMT Working Paper

Are level 3 fair values reflected in firm value? Evidence from European banks

ESMT Working Paper No. 16-03
Katja Kisseleva, Daniela Lorenz (2016)
Subject(s)
Finance, accounting and corporate governance
Keyword(s)
Fair value, financial instruments, value relevance, banks
JEL Code(s)
M41, N20
This paper investigates whether, and if so, to what extent, Level 3 fair values disclosed by European banks provide useful information to investors and are reflected in firm value changes. Using a unique sample of 416 hand-collected firm-year observations from European banks reporting under IFRS, in contrast to previous research conducted in the US, we find no overall evidence that changes in Level 3 fair values are associated with changes in firm value. However, the value relevance of Level 3 fair values depends on the category assigned to financial instruments. Level 3 fair values that are held for trading are reflected in firm value. Further analyses suggest that this effect is driven predominantly by banks that operate in market-based economies and hire audit firms with deep industry expertise
At the author's request the PDF file of this working paper was removed. Please contact the authors for further information.

 

View all ESMT Working Papers in the ESMT Working Paper Series here. ESMT Working Papers are also available via SSRN, RePEc, EconStor, and the German National Library (DNB).

Pages
58
ISSN (Print)
1866–3494
Working Paper

Impact of school feeding on cognitive skills: Evidence from India's midday meal scheme

CESifo Working Paper Series No. 5994
Tanika Chakraborty, Rajshri Jayaraman (2016)
Subject(s)
Economics, politics and business environment
Keyword(s)
School feeding, learning, midday meal, primary school education
JEL Code(s)
I210, I250, O120
Working Paper

Institutional investors and corporate political activism

European Corporate Governance Institute (ECGI) - Finance Working Paper No. 470
Jörg Rocholl, Lei Zicheng, Rui A. Albuquerque, Chendi Zhang (2016)
Subject(s)
Economics, politics and business environment; Finance, accounting and corporate governance
Keyword(s)
Institutional Investors, Political Activism, Political Contributions, Political Connections, Citizens United
JEL Code(s)
G14, G30
The landmark decision by the U.S. Supreme Court on Citizens United v. Federal Election Commission asserts for the first time that corporations benefit from First Amendment protection regarding freedom of speech in the form of independent political expenditures, thus creating a new avenue for political activism. This paper studies how corporations adjusted their political activism in response to this ruling. The paper presents evidence consistent with the hypothesis that institutional investors, in particular public pension funds, have a preference for not using the new avenue for political activism, a preference not shared by other investors.
Pages
57
ESMT Working Paper

Design for reusability and product reuse under radical innovation

ESMT Working Paper No. 16-02
Tamer Boyaci, Vedat Verter, Michael R. Galbreth (2016)
Subject(s)
Product and operations management
Keyword(s)
Reusability, reuse, innovation, Markov decision process
Many industries, including consumer electronics and telecommunications equipment, are characterized with
short product life-cycles, constant technological innovations, rapid product introductions, and fast obsolescence. Firms in such industries need to make frequent design changes to incorporate innovations, and the
effort to keep up with the rate of technological change often leaves little room for the consideration of product
reuse. In this paper, we study the design for reusability and product reuse decisions in the presence of both
a known rate of incremental innovations and a stochastic rate of radical innovations over time. We formulate
this problem as a Markov Decision Process. Our steady-state results confirm the conventional wisdom that a
higher probability of radical innovations would lead to reductions in the firm's investments in reusability as
well as the amount of reuse the firm ends up doing. Interestingly, the design for reusability decreases much
more slowly than the actual reuse. We identify some specific scenarios, however, where there is no tradeoff
between the possibility of radical innovations and the firms reusability and reuse decisions. Based on over
425,000 problem instances generated over the entire range of model parameters, we also provide insights
into the negative impact of radical innovations on firm profits, but show that the environmental impact of
increased radical innovation is not necessarily negative. Our results also have several implications for policy
makers seeking to encourage reuse.

 


View all ESMT Working Papers in the ESMT Working Paper Series here. ESMT Working Papers are also available via SSRN, RePEc, EconStor, and the German National Library (DNB).

Pages
36
ISSN (Print)
1866–3494
ESMT Working Paper

LeChatelier-Samuelson principle in games and pass-through of shocks

ESMT Working Paper No. 15-03 (R1)
Published in Journal of Economic Theory, 168 (3): 44–54.
Alexei Alexandrov, Özlem Bedre-Defolie (2016)
Subject(s)
Economics, politics and business environment
Keyword(s)
LeChatelier-Samuelson principle, cost passthrough, multiproduct firms
The LeChatelier-Samuelson principle states that as a reaction to a shock, an agent's short-run adjustment of an action is smaller than the long-run adjustment of that action when the other related actions can also be adjusted. We extend the principle to strategic environments and define long run as an adjustment that also includes other players adjusting their strategies. We show that the principle holds for both idiosyncratic shocks (affecting only one player's action directly) and common shocks in supermodular games, only for idiosyncratic shocks in submodular games if the players' payoffs depend only on their own strategies and the sum of the rivals' strategies (for example, homogeneous Cournot oligopoly), and only for idiosyncratic shocks in other games of strategic substitutes or heterogeneity satisfying Morishima Conditions. We argue that the principle might also explain the empirical findings of overshifting of cost and unit tax by multiproduct firms.

 

View all ESMT Working Papers in the ESMT Working Paper Series here. ESMT Working Papers are also available via SSRN, RePEc, EconStor, and the German National Library (DNB).

Pages
46
ISSN (Print)
1866–3494