Table of Contents

Dynamics of Debt Capacity

Andreea Minca, Cornell University
Johannes Wissel, Cornell University - School of Operations Research and Industrial Engineering

Technology Ladders and R&D in Dynamic Cournot Markets

Michael Ludkovski, University of California, Santa Barbara
Ronnie Sircar, Princeton University - Department of Operations Research and Financial Engineering

Fitness as Informational Fit: The Communication Channel between the Evolving Population and Its Environment

Martin Hilbert, University of California, Davis

Payoff Equivalence of Efficient Mechanisms in Large Matching Markets

Yeon-Koo Che, Columbia University
Olivier Tercieux, Paris-Jourdan Sciences Economiques (PSE)


"Dynamics of Debt Capacity" Free Download

ANDREEA MINCA, Cornell University
JOHANNES WISSEL, Cornell University - School of Operations Research and Industrial Engineering

We propose a model that explains the build-up of short term debt when the creditors are strategic and have different beliefs about the prospects of the borrowers' fundamentals. We define a dynamic game among creditors, whose outcome is the short term debt process as a function of the borrower's fundamentals. As common in the literature, this game has multiple Nash equilibria. We give a refinement of the Nash equilibrium concept that leads to a unique equilibrium. For the resulting debt-to-asset process of the borrower we define a notion of stability.

Bank runs are predictable: a bank run begins when the debt-to-asset process leaves the stability region and becomes a mean-fleeing sub-martingale with tendency to reach the debt ceiling, which is the point when the borrower becomes illiquid.

The debt ceiling and the stability region are computed explicitly. A critical ingredient in our model is the distribution of capital across the beliefs of the creditors and we allow for a wide variety of specifications for this distribution.

"Technology Ladders and R&D in Dynamic Cournot Markets" Free Download

MICHAEL LUDKOVSKI, University of California, Santa Barbara
RONNIE SIRCAR, Princeton University - Department of Operations Research and Financial Engineering

We explore optimal investment in Research and Development activities among producers in a competitive market. R&D effort is costly and results in discrete technological advances that gradually lower production costs. The aggregate cost profile is thus expressed as a stochastic multi-dimensional counting process, individually controlled by the players.

Our model combines features of patent racing with dynamic market structure, capturing the interplay between the immediate competition in terms of production rates and the long-term competition in R&D.

Using a Cournot model of competition with substitutable goods (e.g. markets for different energy commodities) we analyze the resulting Markov Nash equilibrium which reduces to analysis of a sequence of the one-step static games arising between R&D successes. Several numerical examples and extensive analysis of the emerging comparative statics are presented.

"Fitness as Informational Fit: The Communication Channel between the Evolving Population and Its Environment" Free Download

MARTIN HILBERT, University of California, Davis

Interactions among populations and their environment can be represented as a communication channel between the evolving organism and its environment. The more information is communicated over this channel, the more uncertainty is reduced, and the higher the attainable fitness. Following this intuitive notion, the article generalizes recent novel findings and presents the first complete decomposition of fitness in terms of information theory. Optimal population growth quantifies the amount of structure in the updated population that unequivocally comes from the environment through the mutual information between both. Turning this finding around, fitness can be optimized by ensuring that not more new information is included in the population distribution than is justified by environmental information. As such, the article goes beyond an ontological re-conceptualizations of fitness in terms of information theory, but also shows a way to optimize fitness. Additional side information about environmental dynamics can be used to increase fitness further, just like technological communication channels are enhanced by refining information about the source. This establishes a formal link between evolutionary ecology and long-standing engineering efforts in the optimization of communication channels. Two empirical applications to practical examples reveal inherent trade-offs among the involved information quantities during fitness optimization.

"Payoff Equivalence of Efficient Mechanisms in Large Matching Markets" Free Download

YEON-KOO CHE, Columbia University
OLIVIER TERCIEUX, Paris-Jourdan Sciences Economiques (PSE)

We study Pareto efficient mechanisms in matching markets when the number of agents is large and individual preferences are randomly drawn from a class of distributions, allowing for both common and idiosyncratic shocks. We show that, as the market grows large, all Pareto efficient mechanisms -- including top trading cycles, serial dictatorship, and their randomized variants -- are uniformly asymptotically payoff equivalent "up to the renaming of agents," yielding the utilitarian upper bound in the limit. This result implies that, when the conditions of our model are met, policy makers need not discriminate among Pareto efficient mechanisms based on the aggregate payoff distribution of participants.


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This eJournal distributes working and accepted paper abstracts of empirical and theoretical papers on game theory, defined as the study of the strategic interaction among rational agents in competitive and cooperative environments, and bargaining theory, defined as a situation in which two or more players have a common interest to co-operate, but have conflicting interests over exactly how to co-operate. The topics in this eJournal include all of the subjects in Section C7 of the JEL classification system.

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