Minwook Kang

Comparative advantage and strategic specialization

This paper shows that a strong comparative advantage is necessary for free trade and specialization in a 2 A— 2 symmetric Ricardian model to be achieved in a Nash equilibrium. Governments strategically control labor distribution across industries, and representative agents maximize Cobb–Douglas utilities. A Nash equilibrium with complete specialization is achieved if and only if relative productivity exceeds a key value of 3, which is considered a very large number based on previous empirical studies. This paper also introduces a two†stage game where each government chooses labor distribution first and then tariffs. In this two†stage game, complete specialization is never achieved for any relative productivity level. Finally, by generalizing the Cobb–Douglas model into constant elasticity of substitution (CES) preferences, I show that if immiserizing growth effects exist, complete specialization could not be achieved for any level of relative productivity.

Curbing Managerial Myopia: The Role of Managerial Overconfidence in Owner-Managed Firms and Professionally Managed Firms

We develop and test a model in which managerial overconfidence offsets the underinvestment problem arising from managerial myopia. Using a three-period investment model in which we capture managerial myopia by hyperbolic discounting, we show that both overconfident owner-managers and professional managers who have myopic preferences can enhance firm value (up to a point) by increasing investment. This value-enhancing role of overconfidence is more evident for professional managers than for owner-managers. The results from simulation and empirical analyses support the model’s predictions. Thus, while managers’ cognitive biases, when considered separately, negatively impact firm performance, they can be beneficial when considered jointly.

Investment and Firm Value Under High Economic Uncertainty: The Beneficial Effect of Overconfident CEOs

In this paper we investigate whether managerial overconfidence benefits shareholders when economic uncertainty is high. Consistent with managerial overconfidence mitigating the underinvestment problems exacerbated by high economic uncertainty, we find that during periods of import tariff cuts and the global financial crisis, investment and firm value are higher for firms managed by overconfident CEOs than for those managed by non-overconfident CEOs. Moreover, overconfident firms’ M&A announcements are associated with more positive abnormal returns when market uncertainty as measured by the CBOE Volatility Index is higher, and overconfident firms are more likely to undertake value-increasing M&A deals.

Winners and Losers from Price-Level Volatility: Money Taxation and Information Frictions

We analyze an economy with taxes and transfers denominated in dollars and an information friction. It is the information friction that allows for volatility in equilibrium prices and allocations. When the price level is expected to be stable, the competitive equilibrium allocation is Pareto optimal. When the price level is volatile, it is not Pareto optimal, but the stable equilibrium allocations do not necessarily dominate the volatile ones. There can be winners and losers from volatility. We identify winners and losers and describe the effect on them of increases in volatility. Our analysis is an application of the weak axiom of revealed preference in the tax-adjusted Edgeworth box.

Risk Neutrality Regions

An Expected Utility maximizer can be risk neutral over a set of nondegenerate multivariate distributions even though her NM (von Neumann Morgenstern) index is not linear. We provide necessary and sufficient conditions for an individual with a concave NM utility to exhibit risk neutral behavior and characterize the regions of the choice space over which risk neutrality is exhibited. The least concave decomposition of the NM index introduced by Debreu (1976) plays an important role in our analysis as do the notions of minimum concavity points and minimum concavity directions. For the special case where one choice variable is certain, the analysis of risk neutrality requires modification of the Debreu decomposition. The existence of risk neutrality regions is shown to have important implications for the classic consumption–savings and representative agent equilibrium asset pricing models.