Thomas Gehrig

An Information Based Explanation of the Domestic Bias in International Equity Investment

The domestic bias in international equity investment presents a major challenge to asset pricing models building on the assumption of symmetrically informed investors. Some further evidenc e on the home bias is provided and the question of why foreign exchang e risk or capital controls are not sufficient to explain the full effe ct is discussed. A simple noisy rational expectations model is introduc ed where, even in equilibrium, investors remain incompletely informed. It is shown that the domestic bias arises quite naturally when investor s are on average better informed about domestic stocks. Copyright 1993 by The editors of the Scandinavian Journal of Economics.

Quacks, Lemons, and Self-Regulation: A Welfare Analysis

This paper provides a framework in which suppliers of experience goods may find it in their best interests to provide, and enforce, quality standards. The incentives to form self-regulatory organizations are inversely related to ex-ante monitoring costs of the organization, as well as the number of members. This self-regulatory outcome is compared to statutory price and quality regulation. Without informational asymmetries between market participants and the social planer, self-regulatory outcomes can always be replicated by statutory regulation. Even with asymmetric information, self regulation is socially desirable only if the regulator values firms profits sufficiently highly.

Trading Costs in Early Securities Markets: The Case of the Berlin Stock Exchange 1880-1910

Based on daily prices (amtliche Kurse) we estimate effective spreads of securities traded at the Berlin Stock Exchange in 1880, 1890, 1900 and 1910. Several extensions of the Roll measure are applied. We find surprisingly tight effective spreads for the historical data, comparable with similar measures of the MDAX and DAX at the end of the 20th century.

Bid-Ask Spreads with Indirect Competition Among Specialists

Research Joint Ventures and subsidies are important R&D policy instruments. The regulator, however, is unlikely to know all the relevant information to regulate R&D optimally. The extent to which there are appropriability problems is one such variable that is private information to the firms within the industry. In a duopoly setting we analyze the characteristics of a first-best and second-best R&D policy where the government can either allow Research Joint Ventures or not and give lump-sum subisides to the parties involved. The second-best R&D policy improves upon the policy of an unsophisicated government by integrating reports of the firms on their spillovers and the correlation between the R&D spillovers of the firms into its formulation.

Natural oligopoly and customer networks in intermediated markets

Abstract The industrial structure of an intermediation industry is analyzed, in brokerage markets, where intermediaries help to reduce search frictions. The aspect of competition in intermediated markets is analyzed in an ‘island economy’, in which intermediaries invest in information networks, which allow them to inform the market about their price offers. Larger networks allow them to reach more markets and potential customers. This enhances trading probabilities. Thus the size of the information network may be viewed as a quality attribute by market participants. Price competition among intermediaries therefore exhibits features of imperfect price competition in markets of vertically differentiated products. It is shown that the number of intermediaries active in a symmetric equilibrium is bounded independently of the size of the market, as long as investments are costly. Thus, the market constitutes a natural oligopoly in the sense of Shaked and Sutton (Econometrica, 1983, 51, 1469–1483), and convergence to a fragmented industrial structure does not obtain as the economy grows large. In particular, we find a natural oligopoly consisting of generally three larger intermediaries of similar size and smaller intermediaries occupying niche markets. Nevertheless, as the number of islands increases, spreads shrink to zero and almost competitive allocations arise.

Bonus Payments and Fund Managers’ Behavior: Transatlantic Evidence

This questionnaire survey of fund managers in the United States, Germany and Switzerland documents a distinctly positive influence of bonus payments on investment behaviour on both sides of the Atlantic. Higher bonus payments are significantly related to higher working effort but not to risk taking. They also seem to induce fund managers to rely more on fundamental information. Findings within regions are confirmed by Trans-Atlantic evidence as US fund managers receive larger bonuses but also show the effects to a higher degree. The effects documented are stronger for relative than for absolute performance assessment.

(In)Transparency of Information Acquisition: A Bargaining Experiment

We analyze how transparency affects information acquisition in a bargaining context, where proposers may chose to purchase information about the unknown outside option of their bargaining partner. Although information acquisition is excessive in all our scenarios we find that the bargaining outcome depends crucially on the transparency of the bargaining environment. In transparent games, when responders can observe whether proposers have acquired information, acceptance rates are higher. Accordingly, in transparent bargaining environments information is more valuable, both individually and socially.

Introductory Offers in a Model of Strategic Competition

We show how introductory offers emerge endogenously under conditions of competition in markets with switching costs. In a standard Hotelling model we find the combination of switching costs and introductory discounts to reduce industry profits relative to industries without switching costs, in which introductory offers do not emerge. Thus, our analysis offers a formalized argument for the policy conclusion that the strategic use of introductory offers should be promoted, not banned, in environments where firms are able to discriminate across different vintages of customers.

Changing Business Models in Banking and Systemic Risk

The changing economic environment did affect the nature of banking in a profound way. Both easy monetary policy causing low interest rates as well as increasing globalization exerting competitive pressure on lending margin significantly reduced net interest margins in traditional lending. In particular, after the high interest rate period of the late 1980s long-term lending and house-bank relations did suffer severely. As a reaction the banking sector at large increasingly focused on short-term trading and investment banking. This process was accompanied by regulatory incentives and internal governance structures. In particular, the increasing focus on short term compensation based on return on equity, together with the Basle process of capital regulation opened ways of reducing loss absorbing capital and thus undermining banks’ stability as well as the resiliency of the banking sector at large. Both, the reactions of business models to a changing competitive environment as well as reactions to monetary as well as regulatory policy significantly contributed to systemic risk in Europe and the US.

On the Value of Transparency and Information Acquisition in Bargaining

Abstract We analyze how transparency affects information acquisition in a bargaining context where proposers may choose to purchase information about the unknown outside options of their bargaining partners. Although information acquisition is excessive in all scenarios, we find that bargaining outcomes depend crucially on the transparency of the bargaining environment. In transparent games, when responders can observe whether proposers have acquired information, acceptance rates are higher. Accordingly, in transparent bargaining environments, information is more valuable, both individually and socially.