Asymmetric Information Framework Research Articles

Causes and consequences of financial crises in 2007–2009

This article provides an asymmetric information framework to understand the nature of financial crisis. It provides the following precise definition of a financial crisis: the best investment opportunities. As a result, a financial crisis could move the economy away from equilibrium with high output, where financial markets perform well to an equilibrium in which output falls sharply.

The Lazarillo's game: Sharing resources with asymmetric conditions.

The Lazarillo of Tormes’ picaresque novel introduces a story where two subjects sequentially extract (one, two or three) tokens from a common pool in an asymmetric information framework (the first player cannot observe her partners’ actions). By introducing a reward for both subjects in case that in every period at least one subject had taken one single token, we define an interesting coordination game. We conduct an experiment with 120 undergraduate students to study their behavior in this framework. We find that if the second player is allowed to take more tokens than her partner, then the frequency of cooperators does not seem to be affected by the informational asymmetry. Nevertheless, this asymmetry (i) incentives the second player to use her ‘power of extraction’ while the social externality is still available, (ii) yields to more asymmetric profit distributions when subjects win the social externality and (iii) delays the breach period in case of coordination failure. Furthermore, the first choice of the first player is determinant for getting the reward.

Relationship banking and bankruptcy resolution in Spain: The impact of size

Within the framework of asymmetric information, the present work has the aim of analysing the influence of relationship banking in bankruptcy resolution, with particular reference to firm size. The obtained results, from a sample of 622 micro- and small and medium-sized enterprise (SME) non-financial and unlisted firms that filed for bankruptcy in 2010 (resolved by the end of 2014), allow us to conclude that: (1) SMEs are more likely to survive than micro firms; (2) the number of relationships banking is not relevant; (3) maintaining relations with one of the big banks, especially the largest bank in a country, increases the likelihood of reorganization, as opposed to liquidation.

Economic Explanation of Bad-and-good-product Coexisting Phenomenon in Online Shopping Market from a Perspective of Bidimensional Asymmetric Information

There is a typical bad-and-good-product coexisting phenomenon in online shopping market: products with high prices do not always have high quality and products with low prices do not always have low quality too, showing obvious asymmetric information. Based on the stylized fact of bidimensional asymmetric information in online shopping market, namely firms have private information in the two aspects of product quality and production costs, this paper explains the economic mechanism of the abovementioned phenomenon from a perspective of market equilibrium for the first time by establishing an analytical framework of bidimensional asymmetric information. It shows that owing to bidimensional asymmetric information, the interaction of consumers and firms makes prices and quality of products no longer have a monotonically increasing relationship, thereby possibly leading to market equilibrium of bad-and-good-product coexisting in online shopping market; and it confirms the existence of this equilibrium under reasonable conditions. By a static comparison, this paper explores the effects of changes in market environment on price signaling efficiency of product quality and consumer purchase behavior as well as the effectiveness of means such as information disclosure by online shopping firms, consumers' feedback scoring mechanism for businesses and guaranteed return of products on the elimination of bad-and-good-product coexisting phenomenon, thereby providing reference for further normative development of network industries in China.

정보비대칭 관점에서 서울 오피스 시장의 월세미납리스크에 관한 연구

정보비대칭 관점에서 서울 오피스 시장의 월세미납리스크에 관한 연구

Information- and rivalry-based perspectives on reactive patent litigation strategy

Patent litigation is a common form of legal, economic and strategic behaviors that arise in a variety of business domains. Using information-based and rivalry-based theories, this study explores how asymmetric information, competitive rivalry in a strategic group and market positions influence companies' reactions to patent litigation. By applying an experimental design method to develop scenarios for top executives of small and medium-sized enterprises, the results show that a theoretical framework of asymmetric information, competitive rivalry in a strategic group and market positions affect a firm's reactive patent litigation strategy. These findings not only broaden information- and rivalry-based theories' explanations of reactive patent litigation decisions, but also enable us to formulate the codes of conduct for the managerial capability in regard to legal astuteness in patent litigation.

Brain drain reversal and return subsidy

This paper explores how return subsidies affect an individual’s education, migration and return decisions within an asymmetric information framework. To achieve this, we develop a theoretical model in which agents are heterogeneous in their initial stocks of human capital. Our model can generate three types of migration at the same time: permanent migration, immediate return migration, and return migration with international work experience. We then examine the effects of differential return subsidies in different contexts and find that in the presence of asymmetric information, it is possible for return subsidies to play a negative role in determining a developing country’s aggregate and average human capital stock, and thus its economic growth.

The impact on welfare of the internal controllers from the investor protection—based on the analysis of mathematical model

Basing on the external financing analysis framework of asymmetric information, the paper establishes a general equilibrium model which contains the investor protection. First of all, this paper investigates that the investor protection are how to influence the size of the equilibrium interest rate, and investigates the internal mechanism of the investor protection impact of capital market equilibrium interest rate. Secondly, the paper study the effect that the investor protection on different classes of entrepreneurs investment activities and welfare, proved that firms with very weak balance sheets are not suffered any injury from a weaker investor protection policy. Entrepreneurs whose financial strength are in the borderline of policy are given the greatest effect from the weaker investor protection policy; A weaker investor protection policy has a positive impact on firms with strong balance sheets.

Investors' expectations, management fees and the underperformance of mutual funds

Why do investors buy underperforming mutual funds? To address this issue, we develop a one-period principal-agent model with a representative investor and a fund manager in an asymmetric information framework. This model shows that the investor’s perception of the fund plays a key role in the fund’s fee-setting mechanism. Using a simple relation between fees and funds’ performance, empirical evidence suggests that most US domestic equity mutual funds have added high markups during the period from July 2003 to March 2007. For these fees to be justified, we show that the investor would have expected the fund manager to deliver an overall annual net excess-return of around 1.5% above the S&P500 on a risk adjusted basis. In addition, our model offers a new classification of funds, based on their ability to provide benefits to investors’ portfolios.

Antidumping as Strategic Trade Policy under Asymmetric Information

Trade liberalization under GATT/World Trade Organization (WTO) has been partly offset by an increase in antidumping protection, possibly due to the inclusion of sales below cost in the definition of dumping. This article investigates the domestic government's antidumping duty choice in an asymmetric information framework, in which the foreign firm's cost is observed by the domestic firm, but not by the government. We show that by designing a tariff schedule contingent on firms' cost reports and accompanied by a threat to collect additional information for report verification, the domestic government may not only be able to extract the true cost information, but also succeed in implementing the full‐information, governmental welfare‐maximizing duty. The antidumping framework within GATT/WTO may thus not only offer the means to pursue strategic trade policy disguised as fair trade policy, but it also helps overcome informational problems with regard to correctly determining the optimal strategic trade policy.

The Evolution of a Financial Crisis: Collapse of the Asset‐Backed Commercial Paper Market

ABSTRACTThis paper documents “runs” on asset‐backed commercial paper (ABCP) programs in 2007. We find that one‐third of programs experienced a run within weeks of the onset of the ABCP crisis and that runs, as well as yields and maturities for new issues, were related to program‐level and macro‐financial risks. These findings are consistent with the asymmetric information framework used to explain banking panics, have implications for commercial paper investors’ degree of risk intolerance, and inform empirical predictions of recent papers on dynamic coordination failures.

Convertible bonds with resettable conversion prices

We examine the convertible bonds whose conversion prices can be reset under certain conditions, by extending the asymmetric information framework of Stein (1992). These convertibles are more common in Japan and China and are in sharp contrast with the convertible bonds with fixed conversion prices. We find that resettable convertibles can help firms reduce liquidity cost. But the adverse selection problem caused by bad firms may be exacerbated if the cost of financial distress is not sufficiently high. Firms can mitigate the problem through costly signaling with fixed-price convertibles. Finally, we show that pooling and separating equilibria may coexist for some parameter values.

Investors’ Expectations, Management Fees and the Underperformance of Mutual Funds

Why do investors keep buying underperforming mutual funds? To address this issue, we develop a one-period principal-agent model with a representative investor and a fund manager in an asymmetric information framework. This model shows that the investor’s perception of the fund plays the key role in the fund’s fee-setting mechanism. Using a simple relation between fees and funds’ performance, empirical evidence suggests that most US domestic equity mutual funds have added high markups during the period from July 2003 to March 2007. For these fees to be justified, we show that the investor would have expected the fund manager to deliver an overall annual net excess-return of around 1.5% the S&P 500 on a risk adjusted basis. In addition, our model offers a new classification of funds, based on their ability to provide benefits to investors’ portfolios.

CAN SECRET INTERVENTION BE COMPATIBLE WITH A NON‐PROFITMAKING CENTRAL BANK AND A FUNDAMENTAL‐CONSISTENT TARGET?

The coexistence of secret intervention operations and “the signaling channel” (Mussa. The Role of Official Intervention, 1981) seems confusing. Vitale ( Journal of International Economics, 49, 1999, 245–267) resolves this puzzle by employing an asymmetric information framework and an assumption of a fundamental‐inconsistent target for the exchange rate. Ferré and Manzano ( International Journal of Finance and Economics, 14, 2009, 378–393) follow Vitale's microstructure framework and argue that the central banks' profitability motivation offers a rationale for their secret intervention even under a target consistent with the fundamentals. However, that the authority uses its superior information to obtain speculative profits through secret intervention in the market is not a typical goal for central banks. To theoretically explain the opaqueness in non‐profitmaking central banks' exchange rate policies, we employ a model of a central bank's optimization by considering that no bank really knows the exact fundamental rate and they take into account the possible bad consequences of announcing the intervention. We also show that, in passing the bank's private information to market participants, a bank's announcement of the intervention size is equivalent to revealing its target rate. (JEL E58, F39)

Management Buyouts: Boon Or Bane?

In the present research a theoretical model of corporate divestitures is developed in which the wealth effects for divesting firms shareholders is examined for the case in which the acquirer is an incumbent management team and for the case when the acquirer is an outside buyer. Using an asymmetric information framework in which management enjoys specific utility from continued control of the operations, the model demonstrates that shareholders of the divesting firm should earn higher expected returns when the unit is sold to an incumbent management team rather than to an outside buyer. The subsequent empirical analysis reveals that this is in fact the case. While the announcement day ARs are statistically significant and positive for divestitures to both incumbent management teams and outside buyers, they are significantly larger when the buyer of the unit is the former. A similar and stronger results are observed for the 6 day period (t=-5 through 0) CARs. The policy implications of the theoretical model and empirical results reported above is that the divesting firms shareholders are not harmed, but receive higher returns when the units are purchased by an incumbent management team. Moreover, legislation to prevent or deter MBOs is not in the best interest of shareholders.

The Evolution and Utilization of the GATT/WTO Dispute Settlement Mechanism

This paper attempts to study the usage of the GATT/WTO dispute settlement mechanism and to explain its patterns across different regimes and decades, using a unified theoretical model. This study first explores the role of the degree of legal controversy over a panel ruling in determining countries' incentives to block/appeal a panel report under the GATT/WTO regime. The model is able to explain the surge in blocking incidence during the 1980s over the preceding GATT years and the immense frequency at which the new appellate procedure under the WTO is invoked. Furthermore, a two-sided asymmetric information framework is used to study the effects of political power on countries' incentives to use, and interactions in using, the GATT/WTO dispute settlement mechanism. It is shown that the magnitude of the political cost relative to the potential benefit that the complainant stands to gain when using this mechanism determines the pattern of filing activity and the frequency of various procedural outcomes. This result, when confronted with the statistics on disputes in different decades of the GATT regime, provides us an indicator of how well the dispute procedure has worked during various decades, in terms of how much this procedure has been subject to potential power politics.

The Evolution of a Financial Crisis: Collapse of the Asset-Backed Commercial Paper Market

This paper documents “runs” on asset-backed commercial paper (ABCP) programs using a novel dataset of all transactions in the U.S. market during its severe contraction in 2007. We find that one-third of programs were run within weeks of the onset of the ABCP crisis and that runs, as well as yields and maturities for new issues, were related to program-level and macro-financial risks. The findings are consistent with the asymmetric information framework used to explain banking panics, have implications for the degree of risk-intolerance of commercial paper investors, and inform upon empirical predictions of recent papers on dynamic coordination failures.

Investors' Misperception: A Hidden Source of High Markups in the Mutual Fund Industry

We develop a principal-agent model based on a sequential game played by a representative investor and a fund manager in an asymmetric information framework. The model shows that investors' perceptions of the fund market play the key role in the fund's fee-setting mechanism. The managers' true ability to deliver performance is not relevant. Along with a simple relation between fees and funds' performance, empirical evidence suggests that most U.S. domestic equity mutual funds have added high markups in recent years. We show that, for these fees to be justified, investors would have expected the fund managers to be able to deliver an overall annual excess-return of around 3% over the S&P 500, net of fees, irrespective of the investment style and of the risk level of the funds. Therefore, we interpret these high markups as resulting from the investors' optimism bias whose root can be found in their lack of financial literacy as well as in funds' marketing effort.

Investors' Misperception: A Hidden Source of High Markups in the Mutual Fund Industry

We develop a principal-agent model based on a sequential game played by a representative investor and a fund manager in an asymmetric information framework. The model shows that investors’ perceptions of the fund market play the key role in the fund’s fee-setting mechanism. The managers’ true ability to deliver performance is not relevant. Along with a simple relation between fees and funds’ performance, empirical evidence suggests that most U.S. domestic equity mutual funds have added high markups in recent years. We show that, for these fees to be justified, investors would have expected the fund managers to be able to deliver an overall annual excess-return of around 3% over the S&P 500, net of fees, irrespective of the investment style and of the risk level of the funds. Therefore, we interpret these high markups as resulting from the investors’ optimism bias whose root can be found in their lack of financial literacy as well as in funds’ marketing effort.

Multistage bilateral bargaining model with incomplete information—A fuzzy approach

The study proposes the implementation of an intermediation model in supply chains, integrating game theory and fuzzy logic, to represent the characteristic aspects of a bilateral bargaining with incomplete information where supplier–customer relationships are indirectly managed by a third party agent. The choice of combining these theories comes out from the necessity of smoothing the peculiar elements of the two analysis tools that, in describing real situations, present many potentialities of reciprocal adaptation. The scope is to combine a formal structure that could figure out the interrelations among actors involved in a strategic decisional context, with a mathematical elaboration of natural imprecision, uncertainty and incompleteness of data and information. The model derives from the theoretic foundation of Spulber [1999. Market Microstructure. Cambridge University Press, Cambridge, UK] and Rubinstein [1982. Perfect equilibrium in a bargaining model. Econometrica 50(1), 97–109] that, compared to the classical framework of asymmetric information and bid-spread problem by Harsanyi [1967. Games with incomplete information played by “Bayesian” players. I. The basic model. Management Science 14, 159–182], describe the process through the definition of new parameters such as bargaining power and breakdown probability. The contribution to the research is enriched by fuzzyfication process of data, considering Qi et al. [2005. Design retrieval technology of fuzzy customer requirements. In: World Congress on Mass Customization and Personalization] experiences, to build a framework that could transform inputs from the transaction, agents and market in an output that could regulate the possible concessions and the opportunity of accepting or refusing an offer.