Frederic P. Sterbenz

Free riding and uncertainty

This paper examines the effects of uncertainty on pure public good provision and free-riding behavior. Two models are presented. In the first, Nash behavior is assumed and uncertainty is with respect to the contributions of the rest of the community. For the second model, non-Nash behavior is assumed and uncertainty concerns the nonzero response that a representative individuals optimizing choice will cause in the community. Propositions provide sufficient conditions for increased risk to worsen free-riding behavior in the two models. For Nash behavior, we also give the sufficient condition for increased risk to ameliorate free-riding behavior. The effects of group size on free riding are also explored for uncertain responses by the community.

Sharpe and Treynor Ratios on Treasury Bonds

We challenge asset pricing theory with numerous stylized facts regarding risk and return on U.S. Treasury securities. Most striking is our finding that reward/risk ratios vary inversely with maturity and are incredibly high for short-term bills. Apparently investors would do much better engaging in highly leveraged investments in bills instead of purchasing long-maturity bonds or common stocks. Simulations of estimated three-factor affine term structure models do not replicate the high ratios of reward to risk for bills. Other results include business cycle patterns in risk premiums, volatility, and the reward to volatility that vary with maturity.

Learning, Preemption, and the Degree of Rivalry

We examine a model in which all firms receive common signals as to the uncertain profitability of an investment whose actual payoffs are split only among those who develop the project earliest. The benefit from preempting rivals yields an equilibrium reduction in the amount of learning and earlier development as the number or rivals increases. The set of equilibria shrinks as the number of rivals gets large, and in the limit only the competitive outcome occurs.

The Impact on Interest Rates of Unemployment Announcements and Their Revisions

The announced changes in monthly employment reports and in weekly new unemployment claim reports are based on new levels and on revisions to previous levels. We analyze the effect on interest rates of surprises to these two separate components of the changes. We find that for weekly reports the effect on interest rates of the new level is greater than the effect of the revisions. For monthly employment reports, the two components’ effects have similar strength.

Externalities, pigouvian corrections, and risk attitudes☆

Abstract We examine the influence of risk attitudes on the provision of an externality and on the proper size of Pigouvian correction when the externality is a random variable whose distribution is affected by an observable externality-generating activity. An intervening technology relates changes in this observable activity to the probability distribution of the relevant externality. Unlike the now-standard result in the theory of the firm involving the influence of risk attitudes on output levels, we cannot conclude that increases in risk aversion will lead necessarily to a reduction in the level of the externality. Our results are applied to a wide range of market failures.