Entrepreneurial Finance and the Flat-World Hypothesis: Evidence from Crowd-Funding Entrepreneurs in the Arts

We examine the geography of early stage entrepreneurial finance in the context of an internet marketplace for funding new musical artist-entrepreneurs. A large body of research documents that investors in early-stage projects are disproportionately co-located with the entrepreneur. Theory predicts this will be particularly true of artist-entrepreneurs with preliminary-stage projects, difficult-to-contract-for effort, difficult-to-observe creativity, negligible tangible assets, and limited reputations. At the same time, however, observers of the spatial effects of the internet and related technologies report that many economic activities have become much less geographically dependent. At an aggregate level, the internet marketplace we examine does indeed demonstrate a spatial transformation of the entrepreneurial finance process: the average distance between investors and artist-entrepreneurs is 4,831 km. However, geography still matters; investors are disproportionately likely to be local and, conditional on investing, local investors invest more. This apparent role for proximity is strongest before entrepreneurs visibly accumulate capital. Within a single round of financing, local investors are more likely to engage earlier in the funding cycle. However, this difference in the timing of investment is almost entirely explained by a particular type of investor, whom we characterize as 'family, friends, and fans.' We conjecture that these individuals, who are disproportionately co-located with the entrepreneur, have offline information about the entrepreneur and therefore derive less new information from observing the aggregate financing raised. We speculate that the path-dependent role of this offline network in conveying information to the online community limits the 'flat world' potential of these communication technologies

Nonperturbative corrections to moments of the decay B -> X_s l^+ l^-

We study nonperturbative corrections to the inclusive rare decay B -> X_s l^+ l^- by performing an operator product expansion (OPE) to O(1/m_b^3). The values of the matrix elements entering at this order are unknown and introduce uncertainties into physical quantities. We study uncertainties introduced into the partially integrated rate, moments of the hadronic spectrum, as well as the forward-backward asymmetry. We find that for large dilepton invariant mass q^2 > M_{\psi'}^2 these uncertainties are large. We also assess the possibility of extracting the HQET parameters \lambda_1 and \bar{\Lambda} using data from this process.Comment: 24 pages, revtex, 4 figures, added an appendix with details, results unchange

FORWARD RATE VOLATILITIES, SWAP RATE VOLATILITIES, AND THE IMPLEMENTATION OF THE LIBOR MARKET MODEL

This paper presents a number of new ideas concerned with the implementation of the LIBOR market model and its extensions. It develops and tests an analytic approximation for calculating the volatilities used by the market to price European swap options from the volatilities used to price interest rate caps. The approximation is very accurate for the range of market parameters normally encountered and enables swap option volatility skews to be implied from cap volatility skews. It also allows the LIBOR market model to be calibrated to broker quotes on caps and European swap options so that other interest rate derivatives can be valued

VALUING CREDIT DEFAULT SWAPS I: NO COUNTERPARTY DEFAULT RISK

This paper provides a methodology for valuing credit default swaps when the payoff is contingent on default by a single reference entity and there is no counterparty default risk. The paper tests the sensitivity of credit default swap valuations to assumptions about the expected recovery rate. It also tests whether approximate no-arbitrage arguments give accurate valuations and provides an example of the application of the methodology to real data. In a companion paper entitled Valuing Credit Default Swaps II: Modeling Default Correlation, the analysis is extended to cover situations where the payoff is contingent on default by multiple reference entities and situations where there is counterparty default risk

The General Hull-White Model and Super Calibration

Term structure models are widely used to price interest-rate derivatives such as swaps and bonds with embedded options. This paper describes how a general one-factor model of the short-rate can be implemented as a recombining trinomial tree and calibrated to market prices of actively traded instruments such as caps and swap options. The general model encompasses most popular one-factor Markov models as special cases. The implementation and the calibration procedures are sufficiently general that they can select the functional form of the model that best fits the market prices. This allows the model to fit the prices of in- and out-ofthe- money options when there is a volatility skew. It also allows the model to work well very low interest-rate economies such as Japan where other models often fail

Software Exclusivity and the Scope of Indirect Network Effects in the U.S. Home Video Game Market

This paper investigates the scope of indirect network effects in the home video game industry. We argue that the increasing prevalence of non-exclusive software gives rise to indirect network effects that exist between users of competing and incompatible hardware platforms. This is because software non-exclusivity, like hardware compatibility, allows a software firm to sell to a market broader than a single platform's installed base, leading to a dependence of any particular platform's software on all firms' installed bases. We look for evidence of these market-wide network effects by estimating a model of hardware demand and software supply. Our software supply equation allows the supply of games for a particular platform to depend not only on the installed base of that platform, but also on the installed base of competing platforms. Our results indicate the presence of both a platform-specific network effect and -in recent years- a cross-platform (or generation-wide) network effect. Our finding that the scope of indirect network effects in this industry has widened suggests one reason that this market, which is often cited as a canonical example of one with strong indirect network effects, is no longer dominated by a single platform

Search Engine Advertising: Pricing Ads to Context

Each search term put into a search engine produces a separate set of results. Correspondingly, each of the sets of ads displayed alongside the results is priced using a separate auction. We investigate how bids for these context-based ads depends on the difficulty of making a match. This contrasts with the existing literature that focuses on the effect of match quality. We examine advertising prices paid by lawyers for 139 Google search terms in 195 locations. Other things being equal, the fewer searches there are on a term, the higher the price. To identify a causal relationship between match-difficulty and prices paid, we exploit a natural experiment in 'ambulance-chaser' regulations across states. When lawyers cannot contact a client by mail and matching becomes more difficult, the relative price per ad click is $0.93 higher. We check the robustness of this result by performing a falsification test using a different ambulance-chaser regulation. Our results suggest that prices are higher for context-based ads when the difficulty of both online and off-line matching increases. This highlights that a major reason why search advertising is profitable is because its use of context can monetize the 'long tail' by reducing friction in the matching process