Nash Equilibrium with Lower Probabilities

We generalize the concept of Nash equilibrium in mixed strategies for strategic form games to allow for ambiguity in the players' expectations. In contrast to other contributions, we model ambiguity by means of so-called lower probability measures or belief functions, which makes it possible to distinguish between a player's assessment of ambiguity and his attitude towards ambiguity. We also generalize the concept of trembling hand perfect equilibrium. Finally, we demonstrate that for certain attitudes towards ambiguity it is possible to explain cooperation in the one-shot Prisoner's Dilemma in a way that is in accordance with some recent experimental findings.     

A causal proportional hazards estimator under homogeneous or heterogeneous selection in an IV setting

Lifetime Data Analysis - In this paper we present a framework to do estimation in a structural Cox model when there may be unobserved confounding. The model is phrased in terms of a selection bias...     

Table of Contents Volume 7 2003

Volume Contents

Table of Contents Volume 7 2003     

The ambivalent effect of complexity on firm performance: A study of the global service provider industry

Prior literature is ambivalent about whether organizational complexity has positive or negative effects on firm performance. Using rich data on global service providers, we explore this ambivalence by disentangling performance consequences of different types of organizational complexity. We show that complexity arising from the coordination of different services and operations negatively influences profit margins through increased coordination costs, whereas complexity coming from the sophistication of particular services may positively influence margins through informational advantages. We also investigate the moderating effects of process commoditization and client-specific investments. Our findings point to critical performance dilemmas facing global service providers in a highly competitive industry, and they help better differentiate performance effects of complexity at different organizational levels.     

Goodness of fit tests for estimating equations based on pseudo-observations

Lifetime Data Analysis - We study regression models for mean value parameters in survival analysis based on pseudo-observations. Such parameters include the survival probability and the cumulative...     

The Relational Antecedents of Interpersonal Helping: ‘Quantity’, ‘Quality’ or Both?

Having a large network of colleagues means having several opportunities to help those colleagues, as well as a higher chance of receiving requests for help from them. Employees with large networks are therefore expected to help more in the workplace than those with small networks. However, large networks are also associated with cognitive costs, which may reduce the focal employee's ability to both recognize the need for help and engage in helping behaviours. For these reasons, the authors assert an inverted U‐shaped relation between the size of an ego's social network and engagement in helping behaviour. However, high‐quality relationships imply higher mutual understanding between the actors, and hence lower cognitive costs. In turn, the position (and threshold) of the curve between network size and interpersonal helping should be influenced by the quality of the relationship between the provider and the beneficiaries of help. Analysis of employee‐level, single‐firm data supports these ideas, providing preliminary evidence that quality of relationship compensates for the difficulties that may arise from having large social networks.     

Durable consumption,saving and retirement

Durables yield services through life but are also a store of value and both features may have important implications for savings and retirement decisions. Durables also affect bequests and thus induce intergenerational transfers. We show that allowing explicitly for durables has important implications for retirement decisions and responses to various changes in the environment. An improvement in the possibility of freeing housing capital makes the old retire earlier (income effect) while the young plan to retire later since they increase housing demand and reduce financial savings. Considering welfare in stationary equilibrium, we find that a reduction in wealth locking-in in durables is not necessarily welfare improving due to the effects on bequests. From a social welfare perspective, individuals tend to choose too much financial savings, too little durable acquisition and too early retirement.     

Expected utility with lower probabilities

An uncertain and not just risky situation may be modeled using so-called belief functions assigning lower probabilities to subsets of outcomes. In this article we extend the von Neumann-Morgenstern expected utility theory from probability measures to belief functions. We use this theory to characterize uncertainty neutrality and different degrees of uncertainty aversion.We are grateful to Birgit Grodal, Salvatore Modica, David Schmeidler, and an anonymous referee for comments, help, and encouragement. Financial support from the Danish Social Sciences Research Council is acknowledged.     

Parametric Inference and Dynamic State Recovery From Option Panels

We develop a new parametric estimation procedure for option panels observed with error. We exploit asymptotic approximations assuming an ever increasing set of option prices in the moneyness (cross‐sectional) dimension, but with a fixed time span. We develop consistent estimators for the parameters and the dynamic realization of the state vector governing the option price dynamics. The estimators converge stably to a mixed‐Gaussian law and we develop feasible estimators for the limiting variance. We also provide semiparametric tests for the option price dynamics based on the distance between the spot volatility extracted from the options and one constructed nonparametrically from high‐frequency data on the underlying asset. Furthermore, we develop new tests for the day‐by‐day model fit over specific regions of the volatility surface and for the stability of the risk‐neutral dynamics over time. A comprehensive Monte Carlo study indicates that the inference procedures work well in empirically realistic settings. In an empirical application to S&P 500 index options, guided by the new diagnostic tests, we extend existing asset pricing models by allowing for a flexible dynamic relation between volatility and priced jump tail risk. Importantly, we document that the priced jump tail risk typically responds in a more pronounced and persistent manner than volatility to large negative market shocks.