Mark Bagnoli

Courtship as a Waiting Game

In most times and places, women on average marry older men. We propose a partial explanation for this difference and for why it is diminishing. In a society in which the economic roles of males are more varied than the roles of females, the relative desirability of females as marriage partners may become evident at an earlier age than is the case for males. We study an equilibrium model in which the males who regard their prospects as unusually good choose to wait until their economic success is revealed before choosing a bride. In equilibrium, the most desirable young females choose successful older males. Young males who believe that time will not treat them kindly will offer to marry at a young age. Although they are aware that young males available for marriage are no bargain, the less desirable young females will be offered no better option than the lottery presented by marrying a young male. We show the existence of equilibrium for models of this type and explore the properties of equilibrium.

Durable-Goods Monopoly with Discrete Demand

We analyze a dynamic game between consumers and the sole seller of a durable good. Unlike previous analyses, we assume that there exists a finite collection of buyers rather than a continuum. None of the main conclusions of the literature on durable-goods monopoly survives this change in assumption. Coases conjecture that a durable-goods monopolist cannot earn supracompetitive profits in the continuous-time limit, Bulows proposition that renting a durable is always more profitable than selling it, and Stokeys proposition that precommitting to a time path of prices is always optimal are all false when the set of buyers is finite. Thus the assumption of a continuum of consumers--so innocuous and useful a simplification in other contexts--has proved misleading in the context of durable-goods monopoly.

Voluntary provision of public goods: The multiple unit case☆

Abstract This paper reports the results of a series of experiments designed to test the predictions of a model of voluntary provision of public goods through private contributions. The particular voluntary contribution game implements the core in successively undominated perfect equilibria, but the behavioral question is whether the agents adopt strategies which support this refinement to the Nash equilibrium. The experimental evidence suggests that they do not: core allocations do not consistently occur in the laboratory markets.

Stock Price Manipulation Through Takeover Bids

The announcement of a takeover bid causes significant increases in the targets stock price, but the possibility that a bid is motivated to cause this increase so that the bidder can sell his holdings has not been studied. We show that stock price manipulation lowers the prebid stock price. Furthermore, if there is little takeover activity, manipulation increases takeover bids and prevents some efficient takeovers. In this case, stockholders prefer to ban it. However, if there is a high level of takeover activity, serious bidders are better off and social surplus is increased by the possibility of manipulation. In this case, stockholders may oppose a ban.

Oligopoly, Disclosure and Earnings Management

We examine how biased financial reports (managed earnings) affect how firms compete in the product market and how product market competition affects incentives to bias reported earnings. We find that Cournot competitors bias their financial reports so as to create the impression that their costs of production are lower than they actually are. This bias leads to lower total production, a higher price and each competitor earning greater product market profits. These results obtain even though no firm is fooled by its rivals disclosure. We also find that the magnitude of the bias (the amount of earnings management) is larger when firms compete in more profitable product markets but smaller when they can extract more information about their rivals costs from their own. When the costs of misreporting are asymmetric, the lower cost firm engages in more earnings management than its rival, and it produces more and earns greater profits than it would in a full-information environment. Our analysis also offers new, testable implications for the relationship between earnings management, reported and actual earnings and industry structure.

Around-the-Clock Media Coverage and the Timing of Earnings Announcements

We reexamine the descriptive ability of the conventional wisdom that earnings announcements made after trading and on Friday are dominated by bad news in light of the 24/7 media coverage and other technological changes of the 1990’s. We find that the change in media coverage has facilitated a significant change in earnings announcement times: only 27% of earnings announcements are now made during trading as opposed to 67% in prior research. However, our finding of continued dominance of bad news in Friday announcements in particular strongly suggests that the conventional wisdom is not solely the result of managers’ desire to take advantage of limited media coverage. Instead, managers appear to be taking advantage of other aspects of investors’ behavior, such as their anticipating negative Friday announcements earlier in the week, and the relatively quiet (in terms of trading) weekend period to manage stock price responses to their companies’ financial news.

Financial Reporting and Supplemental Voluntary Disclosures

A standard result in the voluntary disclosure literature is that when the managers private information is a signal correlated with the firms liquidation value, mandatory disclosures substitute for voluntary disclosures. In this paper, we assume that the managers private information complements the mandatory disclosure and show that the content and likelihood of a voluntary disclosure depend on whether the mandatory reports contain good or bad news. This different information asymmetry produces new, testable implications regarding the probability of and market reaction to voluntary disclosures. We also show that changes in mandatory disclosure regulations can have unintended consequences due to their effects on the managers willingness to voluntarily provide supplemental disclosures.

The Effect of Relative Performance Evaluation on Earnings Management: A Game-theoretic Approach

Because investors and creditors often compare the financial statements of similar or competing firms when deciding how to allocate their funds, it is likely that a firms financial well-being depends on how well it performs relative to its rivals. In this paper, we consider the problem of earnings management as a noncooperative game among several firms, in which each firm seeks a comparison advantage through its financial statement numbers. Our model indicates that firms may exaggerate their earnings in a world driven by multi-firm comparisons simply because they expect other firms to do so. Thus, very little may be needed for earnings management to emerge in the Nash equilibrium. Our results hold under the following conditions. First, investors and creditors are not able to unravel the earnings management, thus ensuring that some information asymmetry remains. Second, investors and creditors make interfirm comparisons when assessing firm value. Third, firms care about their own fundamental value as well as the markets perception about firm value. We also show that the equilibrium amount of earnings management depends on the characteristics of the earnings management technique itself and on the proportion of stockholders who are long-term investors in the firm.

Private Provision of Public Goods Can Be Efficient

Economists have long believed that private provision of public goods will be inefficient, though recently some have argued that altruism may mitigate the inefficiencies. Without altruism, agents contribute to the point where marginal cost equals their private marginal benefits. With altruism, they contribute more and hence are closer to the point where marginal cost and total marginal benefits are equated. In an earlier paper (Bagnoli and Lipman, 1989), we showed that private provision need not be inefficient. In a very natural model of private provision without altruism, we showed that the set of (undominated perfect) equilibrium outcomes is identical to the core. Here we consider the effect of altruism on private provision. Altruism essentially creates more public goods because the well-being of others becomes a public good. We show that our model of private provision still has efficient equilibria under a wide variety of circumstances. Interestingly, the equilibria may be inefficient when agents are concerned about the effect of private provision on the distribution of wealth. Intuitively, the game we consider is a very powerful instrument for efficient private provision, but must be supported by other instruments if the set of public goods is expanded too far.

On the Existence of Linear Equilibria in Models of Market Making

We derive necessary and sufficient conditions for a linear equilibriumin three types of competitive market making models: Kyle type models (when market makers only observe aggregate net order flow), Glosten–Milgrom and Easley–O’Hara type models (when market makers observe and trade one order at a time), and call markets models (individual order models when market makers observe a number of orders before pricing and executing any of them). We study two cases: when privately informed (strategic) traders are symmetrically informed and when they have differential information. We derive necessary and sufficient conditions on the distributions of the randomvariables for a linear equilibrium. We also explore those features of the equilibrium that depend on linearity as opposed to the particular distributional assumptions and we provide a large number of examples of linear equilibria for each of the models.