BUBBLES IN PRICES OF EXHAUSTIBLE RESOURCES

Aside from the equilibrium that Hotelling (1931) displayed, his model of non-renewable resources also contains a continuum of bubble equilibria. In all the equilibria the price of the resource rises at the rate of interest. In a bubble equilibrium, however, the consumption of the resource peters out, and a positive fraction of the original stock continues to be traded forever. And that may well be happening in the market for high-end Bordeaux wines.wine, exhaustible resource, bubble, Research Methods/ Statistical Methods, Resource /Energy Economics and Policy,

Bubbles in Prices of Exhaustible Resources

Aside from the equilibrium that Hotelling (1931) displayed, his model of non-renewable resources also contains a continuum of bubble equilibria. In all the equilibria the price of the resource rises at the rate of interest. In a bubble equilibrium, however, the consumption of the resource peters out, and a positive fraction of the original stock continues to trade forever. And that may well be happening in the market for high-end Bordeaux wines.

Mechanisms for Repeated Trade

How does feasibility of efficient repeated trade depend on the features of the environment such as persistence of values, private information about their evolution, or trading frequency? We derive a necessary and sufficient condition for efficient, unsubsidized, and voluntary trade, which implies that efficient contracting requires sufficient congruence of expectations. This translates to bounds on persistence of values and on private information about their evolution, and distinguishes increasing patience from more frequent interaction; the latter need not facilitate efficiency even when the former does. We also discuss second-best mechanisms and extend the characterization to general dynamic collective choice problems

Monopoly Pricing in a Vertical Market with Demand Uncertainty

We study a vertical market with an upsteam supplier and multiple downstream retailers. Demand uncertainty falls to the supplier who acts first and sets a uniform wholesale price before the retailers observe the realized demand and engage in retail competition. Our focus is on the supplier's optimal pricing decision. We express the price elasticity of expected demand in terms of the mean residual demand (MRD) function of the demand distribution. This allows for a closed form characterization of the points of unitary elasticity that maximize the supplier's profits and the derivation of a mild unimodality condition for the supplier's objective function that generalizes the widely used increasing generalized failure rate (IGFR) condition. A direct implication is that optimal prices between different markets can be ordered if the markets can be stochastically ordered according to their MRD functions or equivalently to their elasticities. Based on this, we apply the theory of stochastic orders to study the response of the supplier's optimal price to various features of the demand distribution. Our findings challenge previously established economic insights about the effects of market size, demand transformations and demand variability on wholesale prices and indicate that the conclusions largely depend on the exact notion that will be employed. We then turn to measure market performance and derive a distribution free and tight bound on the probability of no trade between the supplier and the retailers. If trade takes place, our findings indicate that ovarall performance depends on the interplay between demand uncertainty and level of retail competition

Regular type distributions in mechanism design and ρ\rho -concavity

Some of the best-known results in mechanism design depend critically on Myerson's (Math Oper Res 6:58-73, 1981) regularity condition. For example, the second-price auction with reserve price is revenue maximizing only if the type distribution is regular. This paper offers two main findings. First, a new interpretation of regularity is developed—similar to that of a monotone hazard rate—in terms of being the next to fail. Second, using expanded concepts of concavity, a tight sufficient condition is obtained for a density to define a regular distribution. New examples of regular distributions are identified. Applications are discusse

A Theory of Firm Decline

We study the problem of an investor that buys an equity stake in an entrepreneurial venture, under the assumption that the former cannot monitor the latter’s operations. The dynamics implied by the optimal incentive scheme is rich and quite different from that induced by other models of repeated moral hazard. In particular, our framework generates a rationale for firm decline. As young firms accumulate capital, the claims of both investor (outside equity) and entrepreneur (inside equity) increase. At some juncture, however, even as the latter keeps on growing, invested capital and firm value start declining and so does the value of outside equity. The reason is that incentive provision is costlier the wealthier the entrepreneur (the greater is inside equity). In turn, this leads to a decline in the constrained–efficient level of effort and therefore to a drop in the return to investment.Principal Agent, Moral Hazard, Hidden Action, Incentives, Survival, Firm Dynamics