Social Learning with Payoff Complementarities

We incorporate strategic complementarities into a multi-agent sequential choice model with observable actions and private information. In this framework agents are concerned with learning from predecessors, signalling to successors, and coordinating their actions with those of others. Coordination problems have hitherto been studied using static coordination games which do not allow for learning behavior. Social learning has been examined using games of sequential action under uncertainty, but in the absence of strategic complementarities (herding models). Our model captures the strategic behavior of static coordination games, the social learning aspect of herding models, and the signalling behavior missing from both of these classes of models in one unified framework. In sequential action problems with incomplete information, agents exhibit herd behavior if later decision makers assign too little importance to their private information, choosing instead to imitate their predecessors. In our setting we demonstrate that agents may exhibit either strong herd behavior (complete imitation) or weak herd behavior (overoptimism) and characterize the informational requirements for these distinct outcomes. We also characterize the informational requirements to ensure the possibility of coordination upon a risky but socially optimal action in a game with finite but unboundedly large numbers of players.

The Wall Street Walk when Blockholders Compete for Flows

Publicly traded corporations are a¤ected by a core agency problem: managers pay the full cost of e¤ort in running the corporations but shareholders enjoy most of the bene?ts. When ownership is dispersed individual shareholders have little incentive to monitor managers and little ability to in?uence them. Holders of equity blocks (?blockholders?) are a natural solu- tion to this problem. Because they own many shares they have both the incentive to monitor and the ability to in?uence management. Several well-known papers (e.g. Grossman and Hart (1980), Shleifer and Vishny (1986), Admati, P?eiderer, and Zechner (1994) and Kahn and Winton (1998)) have shown that blockholders can increase ?rm value through monitoring and activism. Activism can take the form of bringing forth shareholder proposals, proxy voting against management, informal negotiations with management, jawboning etc. These activities are collectively referred to as the use of ?voice?by blockholders.

Financial equilibrium with career concerns

What are the equilibrium features of a financial market where a sizeable proportion of traders face reputational concerns? This question is central to our understanding of financial markets, which are increasingly dominated by institutional investors. We construct a model of delegated portfolio management that captures key features of the US mutual fund industry and embed it in an asset pricing framework. We thus provide a formal model of financial equilibrium with career concerned agents. Fund managers differ in their ability to understand market fundamentals, and in every period investors choose a fund. In equilibrium, the presence of career concerns induces uninformed fund managers to churn , i.e., to engage in trading even when they face a negative expected return. Churners act as noise traders and enhance the level of trading volume. The equilibrium relationship between fund return and net fund flows displays a skewed shape that is consistent with stylized facts. The robustness of our core results is probed from several angles.Career concerns, financial equilibrium, trade volume

Efficient Dynamic Coordination with Individual Learning

We study how the presence of multiple participation opportunities coupled with individual learning about payoff affects the ability of agents to coordinate efficiently in global coordination games. Two players face the option to invest irreversibly in a project in one of many rounds. The project succeeds if some underlying state variable theta is positive and both players invest, possibly asynchronously. In each round they receive informative private signals about theta, and asymptotically learn the true value of theta. Players choose in each period whether to invest or to wait for more precise information about theta. We show that with sufficiently many rounds, both players invest with arbitrarily high probability whenever investment is socially efficient, and delays in investment disappear when signals are precise. This result stands in sharp contrast to the usual static global game outcome in which players coordinate on the risk-dominant action. We provide a foundation for these results in terms of higher order beliefs.

Delegation chains

We ask why we observe multiple layers of decision-making in fund management with investors, sponsors, fund managers, and consultants, even if additional decision-makers are costly and do not contribute to superior performance. In our model, an investor hires a wealth manager ("sponsor"), who can delegate asset allocation decisions to a fund manager with investing abilities inferior to her own. Delegation results in lower performance but may be chosen because it reduces the sponsor's reputational risk: Offloading decisions to fund managers creates an additional decision-maker who may be responsible for inferior performance and garbles inferences about the sponsor's ability. We characterize when excessive delegation arises and the properties of delegation chains

Regionality Revisited: An Examination of the Direction of Spread of Currency Crisis

What determines the direction of spread of currency crises? We examine data on waves of currency crises in 1992, 1994, 1997, and 1998 to evaluate several hypotheses on the determinants of contagion. We simultaneously consider trade competition, financial links, and institutional similarity to the "ground-zero" country as potential drivers of contagion. To overcome data limitations and account for model uncertainty, we utilize Bayesian methodologies hitherto unused in the empirical literature on contagion. In particular, we use the Bayesian averaging of binary models which allows us to take into account the uncertainty regarding the appropriate set of regressors. We find that institutional similarity to the ground-zero country plays an important role in determining the direction of contagion in all the emerging market currency crises in our dataset. We thus provide persuasive evidence in favour of the "wake up call" hypothesis for financial contagion. Trade and financial links may also play a role in determining the direction of contagion, but their importance varies amongst the crisis periods.Financial contagion, exchange rate, institutions, Bayesian model averaging

Activist funds, leverage, and procyclicality

We develop a dual-layered agency model to study blockholder monitoring by activist funds that compete for investor flow. Competition for flow affects the manner in which activist hedge funds govern as blockholders. In particular, funds inflate short-term performance by increasing payouts financed by (net) leverage, which discourages value-creating interventions in economic downturns due to debt overhang. Our theory links together the observed procyclicality of activist block formation with the documented effect of such funds on the leverage of their target companies. The model also generates new testable implications and reconciles seemingly contradictory empirical evidence regarding hedge fund activism