Probing the quark-gluon interaction with hadrons

We present a unified picture of mesons and baryons in the Dyson-Schwinger/Bethe-Salpeter approach, wherein the quark-gluon and quark-(anti)quark interaction follow from a systematic truncation of the QCD effective action and includes all its tensor structures. The masses of some of the ground state mesons and baryons are found to be in reasonable agreement with the expectations of a `quark-core calculation', suggesting a partial insensitivity to the details of the quark-gluon interaction. However, discrepancies remain in the meson sector, and for excited baryons, that suggest higher order corrections are relevant and should be investigated following the methods outlined herein.Comment: 6 pages, 5 figures, 3 tables. Version to appear in PL

Profitable Innovation Without Patent Protection: The Case of Derivatives.

Investment banks find it profitable to invest in the development of innovative derivative securities even without being able to preclude early competition from other investment banks using patents. To explain this, we assume that the developer can learn from the first issues of the innovative financial product and is able to become the expert issuer by the time imitation enters the market. We show how this becomes an informational first-mover advantage that turns innovators into the market leader. It is this advantage, and not the typical temporary monopoly position awarded to a patent holder, that provides the incentive to pay the development costs. In the aftermath, the innovator ends up with the largest share of the underwriting market and makes positive profits. Our model’s predictions are consistent with many stylized facts of financial innovations by investment banks.Financial innovation; first-mover advantages; asymmetric information; learning-by-doing

Developer's Expertise and the Dynamics of Financial Innovation: Theory and Evidence

We study product innovation and imitation in the market of corporate underwriting with a dynamic model where client switching costs and the bankers' expertise in deal structuring characterize the life cycle of a security. While the clientele loyalty allows positive rent extraction, the superior expertise can account for the documented market leadership of the innovator. As expertise on product structuring is acquired by imitators, the innovator's market share advantage decreases. Also, the speed of entry by imitators increases for later generation products. Our predictions are consistent with well documented evidence on the market share leadership of innovators. We also present new evidence from equity-linked and derivative corporate products that supports the dynamic predictions of our learning model.Innovation and imitation, first-mover advantages, learning

The Welfare Implications of Non-Patentable Financial Innovations

Investment Banks invest in R&D to design innovative securities even when imitation is possible, i.e., when innovations cannot be patented. We show how a financial institution can profit from the development of financial products even if they are unpatentable. For certain types of financial products innovating investment banks have an information advantage over imitators. This information advantage makes them better competitors and market leaders. The mere possibility of costless imitation drives innovators’ profits down, but still keeps them positive. The absence of patents allows part of the surplus generated by the innovation to be allocated to investors. The extent of surplus sharing depends on the degree of asymmetry in the information owned by imitators and innovators and on the total number of innovators. The larger this asymmetry, the higher the innovator’s profits and the lower the investor’s surplus. With more than one innovator all the surplus goes to investors.Financial innovation, imperfect imitation, patents

Biased Social Learning

This paper examines social learning when only one of the two types of decisions is observable. Because agents arrive randomly over time, and only those who invest are observed, later agents face a more complicated inference problem than in the standard model, as the absence of investment might reflect either a choice not to invest, or a lack of arrivals. We show that, as in the standard model, learning is complete if and only if signals are unbounded. If signals are bounded, cascades may occur, and whether they are more or less likely than in the standard model depends on a property of the signal distribution. If the hazard ratio of the distributions increases in the signal, it is more likely that no one invests in the standard model than in this one, and welfare is higher. Conclusions are reversed if the hazard ratio is decreasing. The monotonicity of the hazard ratio is the condition that guarantees the presence or absence of informational cascades in the standard herding model.Informational herds, Cascades, Selection bias

Market Participation, Information and Volatility

We analyze how the entry of less informed participants in a market for a risky asset affects the volatility of the price of the asset. In an endogenous participation model, we show that in equilibrium the new market entrants are less informed than the rest of the participants. We study how volatility depends on market participation and on the level of information of the participants. The condition that guarantees that new market participation leads to increased asset price volatility, is that all investors are sufficiently risk-averse. In the increasing volatility case, a higher volatility is associated with a higher welfare for the new entrants.endogenous participation, volatility, information heterogeneity