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https://ssrn.com/abstract=3202916; We show that banker bonuses cannot be understood exclusively as incentive contracts, but also incorporate a significant risk sharing dimension between bank shareholders and bank employees. This contrasts with the conventional view whereby diversified shareholders fully insure risk averse employees. However, financial frictions imply that shareholder value is concave in a bank's cash reserves---making shareholders effectively risk averse. The optimal contract between shareholders and employees then involves some degree of risk sharing. Using extensive payroll data on 1.26 million bank employee years in the Austrian, German, and Swiss banking sectors, we show that the structure of bonus pay within and across banks is compatible with an economically significant risk sharing motive, but difficult to rationalize based on incentive theories of bonus pay only.

Economic theories posit conflicting hypotheses on how wealth inequality affects entrepre-neurial dynamism. We investigate the impact of wealth inequality on business dynamics by constructing local measures of household wealth inequality based on financial rents, home equity, and 1880 farmland. We then identify the effect of wealth inequality on entrepre-neurship by instrumenting it with land distribution under the 1862 Homestead Act. Wealth inequality decreases firm entry and exit, and the proportion of high-tech businesses across metropolitan statistical areas. Wealth inequality also lowers the supply of public goods, such as education. Growth in income per capita consequently lags.

Do credit ratings help enforce market discipline on banks? Analyzing a uniquely comprehensive data set consisting of 1,081 rating change announcements for 154 international financial institutions between January 2004 and December 2015, we find that rating downgrades for internal reasons, such as adverse changes in the operating performance or capital structure of banks, are associated with a significant credit default swap spread widening. However, this widening only occurs for banks that are not perceived as to be Too-Big-to-Fail (TBTF). Our findings question the reliability of credit ratings as a tool to discipline TBTF banks and suggest that regulatory monitoring should remain the main mechanism for disciplining these banks.

Small and micro-enterprises are usually majority-owned by entrepreneurs. Using a unique sample of loan applications from such firms, we study the role of owners’ gender in bank credit decisions and post-credit-decision firm outcomes. We find that, ceteris paribus, female entrepreneurs are more prudent loan applicants than are males because they are less likely to apply for credit or to default after loan origination. The relatively more aggressive behavior of male applicants pays off, however, in terms of higher average firm performance after loan origination.

This paper studies fictitious play in networks of noncooperative two-person games. We show that continuous-time fictitious play converges to the set of Nash equilibria if the overall n-person game is zero-sum. Moreover, the rate of convergence is 1/T, regardless of the size of the network. In contrast, arbitrary n-person zero-sum games with bilinear payoff functions do not possess the continuous-time fictitious-play property. As extensions, we consider networks in which each bilateral game is either strategically zero-sum, a weighted potential game, or a two-by-two game. In those cases, convergence requires a condition on bilateral payoffs or, alternatively, that the network is acyclic. Our results hold also for the discrete-time variant of fictitious play, which implies, in particular, a generalization of Robinson's theorem to arbitrary zero-sum networks. Applications include security games, conflict networks, and decentralized wireless channel selection. Revised version, June 2019

When observable cues correlate with optimal choices, habit-driven behavior can alleviate cognition costs. We experimentally study the degree of sophistication in habit formation and cue selection. To this end, we compare lab treatments that differ in the information provided to subjects, holding fixed the serial correlation of optimal actions. We find that a particular cue – own past action – affects behavior only in treatments in which this habit is useful. The result suggests that caution is warranted when modeling habits via a fixed non-separable utility. Despite this sophistication, lab behavior also reveals myopia in information acquisition.

The purpose of this work is to develop an evolutionary finance model with a risk-free asset playing the role of a numeraire. The model describes a market where one risk-free and several “short-lived” risky assets (securities) are traded in discrete time. The risky securities live one period, yield random payoffs at the end of it, and then are re-born at the beginning of the next period. The main goal of the study is to identify investment strategies that make it possible for an investor to “survive” in the market selection process. It is shown that a strategy of this kind exists, is in a sense asymptotically unique and can be described by a simple explicit formula amenable for quantitative investment analysis.

We consider a stochastic model of a financial market with one-period assets and endogenous asset prices. The model was initially developed and analyzed in the context of Evolutionary Finance with the main focus on questions of “survival and extinction” of investment strategies (portfolio rules). In this paper we view the model from a different, game-theoretic, perspective and analyze Nash equilibrium properties of survival portfolio rules.

The shortcomings and potential dangers of international financial flows for the health and stability of domestic banking systems in developing countries have been copiously discussed over the last decades. While the importance of capital controls and regulation as determining factors has been widely emphasised, the extent to which these policies work in episodes of financial crisis is still a matter of debate. This article examines the relationship between supervisory frameworks and banking fragility in Mexico and Brazil in the wake of the international debt crisis of 1982. It shows that the model of international banking intermediation that evolved out of the stringent capital mobility system in Brazil was considerably less vulnerable to crisis than in Mexico, which had a more lightly regulated regime. These findings provide insights into historical debates about the implications of prudential regulation and capital controls for the development and expansion of foreign finance, and whether the risks underlying international banking are necessarily inherent in the process of financial globalisation.

Covariance matrix forecasts for portfolio optimization have to balance sensitivity to new data points with stability in order to avoid excessive rebalancing. To achieve this, a new robust orthogonal GARCH model for a multivariate set of non-Gaussian asset returns is proposed. The conditional return distribution is multivariate generalized hyperbolic and the dispersion matrix dynamics are driven by the leading factors in a principle component decomposition. Each of these leading factors is endowed with a univariate GARCH structure, while the remaining eigenvalues are kept constant over time. Joint maximum likelihood estimation of all model parameters is performed via an expectation maximization algorithm, and is applicable in high dimensions. The new model generates realistic correlation forecasts even for large asset universes and captures rising pairwise correlations in periods of market distress better than numerous competing models. Moreover, it leads to improved forecasts of an eigenvalue-based financial systemic risk indicator. Crucially, it generates portfolios with much lower turnover and superior risk-adjusted returns net of transaction costs, outperforming the equally weighted strategy even under high transaction fees.

We examine the effects of majority buyout investments on employment numbers in unlisted firms and businesses taken private in Japan between 1998 and 2015. In our sample (n=184), regular employment grows at an uncorrected average of 12.3% during a mean holding period of 4.3 years, and an annual growth differential of +1.7pp relative to a matched-pairs sample. Evidence from field interviews indicates that the positive growth differential primarily results from funds not cutting jobs beyond a certain threshold for reputational concerns. These concerns moderate the decisions of funds at two stages in the investment process: funds tend to avoid investing in businesses with major restructuring needs, and to prefer growth-centred to cost-cutting strategies. The effect on employment differs neither between foreign and domestic investors, nor between domestic funds owned by management and domestic funds owned by large financial or corporate groups. This implies that the reputational concerns outweigh differences in ownership and origin.

We study the impact of monetary policy on the supply of bank credit when bank lending is denominated in foreign currencies. Accessing a comprehensive supervisory dataset from Hungary, we find that the supply of bank credit in a foreign currency is less sensitive to changes in domestic monetary conditions than the equivalent supply in the domestic currency. Changes in foreign monetary conditions similarly affect bank lending more in the foreign than in the domestic currency. Hence when banks lend in multiple currencies the domestic bank lending channel is weakened and international bank lending channels become operational.

In this short paper we briefly introduce some of the works presented during the conference “Network models and stress testing for financial stability” which was held in Mexico City hosted by Banco de Mexico on September 26-27, 2017. The papers ranged from new applications of network models for financial stability analysis to stress testing at central banks and common assets contagion. The novelty and originality of most of the works make this special issue a good read for the specialists in the Financial Stability field, including academics as well as practitioners and obviously financial authorities. We hope that you find this short introduction to the special issue and the special issue itself, interesting and useful for your everyday work.

Socially responsible behavior is crucial for slowing the spread of infectious diseases. However, economic and epidemiological models of disease transmission abstract from prosocial motivations as a driver of behaviors that impact the health of others. In an incentivized study, we show that a large majority of people are very reluctant to put others at risk for their personal benefit. Moreover, this experimental measure of prosociality predicts health behaviors during the COVID-19 pandemic, measured in a separate and ostensibly unrelated study with the same people. Prosocial individuals are more likely to follow physical distancing guidelines, stay home when sick, and buy face masks. We also find that prosociality measured two years before the pandemic predicts health behaviors during the pandemic. Our findings indicate that prosociality is a stable, long-term predictor of policy-relevant behaviors, suggesting that the impact of policies on a population may depend on the degree of prosociality.

This paper studies the effects of the bank capital requirements imposed by the European authorities in October 2011 on loan collateral and personal guarantees usage to enhance capital ratios. We use detailed information on the loan contracts granted by a representative Spanish bank and several subsidiaries to nonfinancial corporations around that date. We document that personal guarantees usage increases more than that of collateral, especially at subsidiaries with lower capital ratios. However, although the former type of guarantees demonstrably disciplined firms in their risk-taking before 2011, their subsequent overuse may have blunted their impact and may have even undermined firm performance and investment.

Assessing whether investments result in the desired non-financial performance is a key concern in the fast growing field of impact investments, including microfinance. The social performance of the...

Capital adequacy is the key microprudential and macroprudential tool of banking regulation. Financial models of capital adequacy are subject to errors, which may prevent from estimating a sufficient capital base to absorb bank losses during economic downturns. In this paper, we propose a general method to account for model risk in capital requirements calculus related to market risk. We then evaluate and compare our capital requirements values with those obtained under Basel 2.5 and the new Basel 4 regulation. Capital requirements adjusted for model risk perform well in containing losses generates in normal and stressed times. In addition, they are as conservative as Basel 4 capital requirements, but they exhibit less fluctuations over time.

We argue that incentives to take equity risk (”equity incentives”) only partially capture incentives to take asset risk (“asset incentives”). This is because leverage, while central to the theory of risk-shifting, is not explicitly considered by equity incentives. Employing measures of asset incentives that account for leverage, we find that asset risk-taking incentives can be large compared to incentives to increase firm value. Stock holdings can induce substantial risk-taking incentives, contrary to the assumption that only stock options drive risk-taking. Finally, asset incentives help explain asset risk-taking of U.S. financial institutions before the 2007/08 crisis.

This paper studies the dynamic construction of a blockchain by competitive miners. In contrast to the literature, we assume a finite time horizon. Moreover, miners are rewarded for blocks that eventually become part of the longest chain. It is shown that popular mining strategies such as adherence to conservative mining or to the longest-chain rule constitute pure-strategy Nash equilibria. However, these equilibria are not subgame perfect.

In this paper, we review the burgeoning but dispersed literature on chief executive officer (CEO) advice seeking, which has important effects on strategic decision making, the CEO’s and the board of directors’ effectiveness, and firms’ entrepreneurial orientation, innovativeness, and financial performance. We synthesize research findings about the key features of CEO advice seeking and its antecedents and outcomes across multiple levels of analysis. On the basis of our review, we identify important research gaps and develop a future research agenda that outlines new research questions and empirical foci that extend the current scope of analysis. We also highlight promising new theories and underutilized methods suitable for this area of research. With an integrative review and research agenda, we hope to stimulate cross-fertilization of different lines of inquiry and encourage new research that shines a spotlight on the remaining puzzles of CEO advice-seeking research.

In social dilemmas, choices may depend on belief-dependent motivations enhancing the credibility of promises or threats at odds with personal gain maximization. We address this issue theoretically and experimentally in the context of the Ultimatum Minigame, assuming that the choice of accepting or rejecting a greedy proposal is affected by a combination of frustration, due to unfulfilled expectations, and inequity aversion. We increase the responder's payoff from the default allocation (the proposer's outside option) with the purpose of increasing the responder's frustration due to the greedy proposal, and thus his willingness to reject it. In addition, we manipulate the method of play, with the purpose of switching on (direct response method) and off (strategy method) the responder's experience of anger. Our behavioral predictions across and within treatments are derived from the theoretical model complemented by explicit auxiliary assumptions, without relying on equilibrium analysis.

The spread of misinformation with regards to aviation disasters continues to be a point of concern for aviation companies. Much of this information usually surrounds speculation based on the cause and responsibility attributed to the incident, implicitly possessing the potential to generate significant financial market price volatility. In this paper, we investigate a number of stylised facts relating to the effects of airline disasters on aviation stocks, while considering contagion effects, information flows and the sources of price discovery within the broad sector. Results indicate a substantially elevated levels of share price volatility in the aftermath of aviation disasters, while cumulative abnormal returns present sharp under-performance of the analysed companies relative to international exchanges. When considering an EGARCH analysis, we observe that share price volatility appears to be significantly influenced by the scale of the disaster in terms of the fatalities generated. Significant contagion effects upon the broad aviation index along with substantial changes in traditional price discovery channels are also identified. The role that the spread of information on social media, whether it be correct or of malicious origins, cannot be eliminated as an explanatory factor of these changing dynamics over time and region.

Does democratization reduce the cost of credit? Using global syndicated loan data from 1984 to 2014, we find that democratization has a sizable negative effect on loan spreads: a 1-point increase in the zero-to-ten Polity IV index of democracy shaves at least 19 basis points off spreads, but likely more. Reversals to autocracy hike spreads more strongly. Our findings are robust to the comprehensive inclusion of relevant controls, to the instrumentation with regional waves of democratization, and to a battery of other sensitivity tests. We thus highlight the lower cost of loans as one relevant mechanism through which democratization can affect economic development.

We study how friendly boards design the structure of optimal compensation contracts in favor of powerful CEOs. Our study yields unexpected results. First, powerful managers receive higher pay and a contract with a higher pay-performance sensitivity (PPS) if firm performance is low and vice versa. Moreover, we identify conditions where expected pay and expected PPS are both increasing in the friendliness of the board. Second, we show that friendly boards provide managers with higher salaries, more shares, but less options. Third, friendly boards offering contracts with a higher PPS also make more intensive use of relative performance evaluation (RPE). Overall, our results suggest that frequently used indicators of poor (or sound) compensation practices should be interpreted with care. Extending the scope of our model beyond executive pay, we show that powerful managers underinvest in capital but have less incentives to manage earnings.

The negativity of managerial word choice (managerial tone) in conference calls is a telltale indicator of a company’s future. Specifically, increases in negativity–what we term “bleak tone changes”...

We study how network structure affects the dynamics of collateral in presence of rehypothecation. We build a simple model wherein banks interact via chains of repo contracts and use their proprietary collateral or re-use the collateral obtained by other banks via reverse repos. In this framework, we show that total collateral volume and its velocity are affected by characteristics of the network like the length of rehypothecation chains, the presence or not of chains having a cyclic structure, the direction of collateral flows, the density of the network. In addition, we show that structures where collateral flows are concentrated among few nodes (like in core-periphery networks) allow large increases in collateral volumes already with small network density. Furthermore, we introduce in the model collateral hoarding rates determined according to a Value-at-Risk (VaR) criterion, and we then study the emergence of collateral hoarding cascades in different networks. Our results highlight that network structures with highly concentrated collateral flows are also more exposed to large collateral hoarding cascades following local shocks. These networks are therefore characterized by a trade-off between liquidity and systemic risk., Comment: 39 pages, 7 figures

Despite the long-standing research interest in the pre-deal phase of mergers and acquisitions, many important questions remain unanswered. We review and synthesize the extensive but rather fragmented research on this topic area in the fields of management, finance, accounting, and economics. We organize our review according to six themes, that is, deal initiation, target selection, bidding and negotiation, valuation and financing, announcement, and closure, which represent the main categories of activities performed during the pre-deal phase. Our review shows that most of the existing research relies on a rather high-level, simplified, and static conception of the pre-deal phase. On the basis of our review, we put forward a research agenda that calls for a more granular examination of individual activities and decisions, a more comprehensive analysis of the interplay among the different actors involved in the pre-deal phase, a better understanding of the role of the temporal dynamics, and the extension of the theoretical base from variance-based to process-based theorizing.

We establish a variety of numerical representations of preference relations induced by set-valued risk measures. Because of the general incompleteness of such preferences, we have to deal with multi-utility representations. We look for representations that are both parsimonious (the family of representing functionals is indexed by a tractable set of parameters) and well behaved (the representing functionals satisfy nice regularity properties with respect to the structure of the underlying space of alternatives). The key to our results is a general dual representation of set-valued risk measures that unifies the existing dual representations in the literature and highlights their link with duality results for scalar risk measures.

Although regional resources have been shown to influence secessionist conflicts in developing countries, their effect in established democracies has largely been neglected. We integrate regional resource value and inter-regional transfers in a model on the optimal size of nations, and show that regional wealth correlates positively with secessionist party success in a large panel of regions. To establish causality, our difference-in-differences and triple-differences designs exploit that Scotland and Wales both feature separatist parties, but only an independent Scotland would profit from oil discoveries off its coast. We document an economically and statistically significant positive effect of regional resources and rule out plausible alternative explanations.

National audience; We study an optimal dividend problem under a bankruptcy constraint. Firms face a trade�off between potential bankruptcy and extraction of profits. In contrast to previous works, general cash flow drifts, including Ornstein–Uhlenbeck and CIR processes, are considered. We provide rigorous proofs of continuity of the value function, whence dynamic programming, as well as comparison between discontinuous sub� and supersolutions of the Hamilton–Jacobi–Bellman equation, and we provide an efficient and convergent numerical scheme for finding the solution. The value function is given by a nonlinear partial differential equation (PDE) with a gradient constraint from below in one direction. We find that the optimal strategy is both a barrier and a band strategy and that it includes voluntary liquidation in parts of the state space. Finally, we present and numerically study extensions of the model, including equity issuance and gambling for resurrection.

We investigate the effect of regulatory enforcement actions on banks' reputation by estimating the effect of non-compliance with laws and regulations among lead arrangers on the structure of syndicated loans. Consistent with a regulatory reputational stigma, a punished lead arranger increases her loan share to entice participants to continue to co-finance the loan. Consequently, when punished lead arranger initiates a new syndicated loan, then this loan tends to be more concentrated and co-funded by participants with previous collaboration with the lead arranger. However, the observed share increases by punished lead arrangers are seemingly mitigated by extending the loan guarantees, performance pricing provisions, and covenants.

We successfully show that it is possible to optimize both for risk and for asset allocation without compromising the optimization of individual goals by introducing the novel concept of a compensation portfolio. Therefore, we solve for the global vs. local optimization paradox by bridging Modern Portfolio Theory (MPT) and Behavioral Portfolio Theory (BPT).

Purpose An outcome bias occurs when performance is evaluated based upon the outcome of the decision rather than upon the quality of the decision itself. The purpose of this paper is to test experimentally whether advisors eliminating the uncertainty in the quality of decisions as a potential driver of the outcome bias can eliminate this bias in judgements. Additionally, the paper analyses whether such advisors can attenuate the emotional experience after decisions’ outcomes by supporting the cognitive understanding of these outcomes. Design/methodology/approach The paper employs a between-subject experimental setting where decision makers are asked to make investment decisions. The two variables manipulated were advice (receiving advice vs deciding without an advice) and state (loss vs neutral vs gain state). Participants were randomly assigned to each group. One group completed all tasks while receiving advice before making a final decision. Another group completed all tasks without any advice. After completing each investment task, participants were randomly assigned to one of three possible states that determine their payoff. Findings The results reveal that advisors eliminating the uncertainty in the quality of decision can eliminate the outcome bias in the judgements of decision quality, especially after bad outcomes. Nevertheless, after controlling for the perceived quality of the decisions, advised individuals show a greater emotional sensitivity to bad outcomes than non-advised decision makers. These observations suggest that advisors eliminating the uncertainty in the decision quality can improve the understanding that good decisions can lead to bad outcomes just by chance, but they are not able to prevent affective reactions after bad outcomes; on the contrary, they may even reinforce them. Research limitations/implications The observation that, after bad outcomes, advised decision makers are less willing to decide the same way than non-advised decision makers is consistent with empirical findings on the risk-taking behaviour of self-directed and mutual fund investors. Self-directed investors are less likely to revise their decision and sell an investment at a loss than mutual fund investors (Chang et al., 2016). While investors might sell funds because they are unable to observe the decision process of the manager and use the outcome to judge the manager’s skills, this study shows that such learning from decision outcomes is not necessary for observing the risk-taking behaviour of the investors. Even if the decision process of the advisor is observable (as in this study), the decision makers’ willingness to decide the same way is influenced by the losses – an effect that goes beyond the assessed quality of advice as the results of this study show. Practical implications The results of this study have important implications for advisors aiming to maintain a positive relationship with their clients. Convincing clients that an advice is optimal supports their understanding that a good advice can have bad outcomes. However, this understanding may not prevent affective reactions after bad outcomes. On the contrary, the affective response after bad outcomes is even stronger with the advice than without it. Hence, advisors should address not only issues related to the quality of the provided advice, but also emotional aspects, which could be related to what clients expect from following the advice. Originality/value This study is one of the few that account for the possibility that the outcome bias may arise because there is uncertainty regarding the optimal choice. In particular, this paper uses a much more powerful criterion to define an optimal choice than the expected value criterion used in previous studies. The criterion represents a minimal requirement for rational behaviour in expected utility theory and many non-expected utility theories.

We introduce time-varying systematic yield risk (SYR) and systematic liquidity risk (SLR) measures for sovereign bond markets of the major European Monetary Union (EMU) country members. Using daily sovereign bond data, our analysis shows that trend components of both types of risk are strongly positively correlated. Vector auto-regression and generalized impulse response analysis reveal that shocks to the SLR has significant impact on SYR lasting up to 5 days, whereas shocks to the SYR has no significant impact on SLR. Since mid-2015, both risks are gradually increasing and as of 2018, they are at their highest levels over the last five years.

Donald Trump's surprise election shifted expectations: corporate taxes would be lower and trade policies more restrictive. Relative stock prices responded appropriately. High-tax firms and those with large deferred tax liabilities (DTLs) gained; those with significant deferred tax assets from net operating loss carryforwards (NOL DTAs) lost. Domestically focused companies fared better than internationally oriented firms. A price contribution analysis shows that easily assessed consequences (DTLs, NOL DTAs, tax rates) were priced faster than more complex issues (net DTLs, foreign exposure). In sum, the analysis demonstrates that expectations about tax rates greatly impact firm values.

The symmetric two-player Hirshleifer contest admits a unique equilibrium. The equilibrium support is finite and includes the zero expenditure level. We also establish a lower bound for the cardinality of the support and an upper bound for the undissipated rent.

This paper brings together the academic literature on individual and institutional investors in order to understand the nature of difficulties faced by them and set the background for the Special Issue. This introductory article and the papers in the Special Issue contribute to the debate on how to support individuals in their savings commitments and investment decision-making and whether and how institutional investors have fulfilled their role in supporting the development of the funded pension industry. There are three main conclusions: (i) individual investors are not ready for the role that has been assigned to them in the pension industry, (ii) institutional investors are a long way short of establishing healthy relational contracts and trustworthy relationships with their clients, and (iii) more effective regulation may be needed.

We analyze the valuation effect of board industry experience and channels through which in- dustry experience of outside directors affects firm value. Our analysis shows that firms with more experienced outside directors are valued at a premium compared to firms with less expe- rienced outside directors. Additional analyses, including a quasi-experimental setting based on director deaths, mitigate endogeneity concerns. Further tests show that the board industry ex- perience-firm value relation is more pronounced for firms with larger investment programs, larger cash reserves, and during crises. In contrast, it is weaker in more dynamic industries where the value of previously acquired experience is likely to be diminished. We also provide some evidence that corporate governance problems in firms, in particular entrenched CEOs, and a limited supply of industry experts prevent firms from appointing more industry experts to their boards, even though this would be value-increasing. Overall, our findings are consistent with board industry experience being a valuable corporate governance mechanism.

The authors show that sentiments from newspaper articles can explain and predict movements in the term structure of U.S. government bonds. This effect is stronger at the short end of the curve, coinciding with greater volatility and investors' need to continually reassess the Fed's reaction function. Facing such uncertainty, market participants rely on news and sentiment as a central element in their decision-making process. Considering this dependence, the authors propose a new yield curve factor—news sentiment—that is distinct from the 3 established yield curve factors (level, slope, and curvature) as well as from fundamental macroeconomic variables.

We provide a variety of results for (quasi)convex, law-invariant functionals defined on a general Orlicz space, which extend well-known results in the setting of bounded random variables. First, we show that Delbaen's representation of convex functionals with the Fatou property, which fails in a general Orlicz space, can be always achieved under the assumption of law-invariance. Second, we identify the range of Orlicz spaces where the characterization of the Fatou property in terms of norm lower semicontinuity by Jouini, Schachermayer and Touzi continues to hold. Third, we extend Kusuoka's representation to a general Orlicz space. Finally, we prove a version of the extension result by Filipovi\'{c} and Svindland by replacing norm lower semicontinuity with the (generally non-equivalent) Fatou property. Our results have natural applications to the theory of risk measures.

We use a unique longitudinal data set to study the development of non-cognitive skills in adolescence. We measure – for the first time – the development over six years of the recently introduced non-cognitive skill “Grit.” We also measure the traditional Big Five personality traits. For Grit, we find significant within-person mean-level increases of about .5 standard deviation units for our sample of adolescent students. These increases are comparable with increases in the Big Five, where conscientiousness, agreeableness, and emotional stability also increase with similar magnitude. We show that these changes are heterogeneous and robust to reasonable measurement error.

In this paper, we examine the role of political connections in mitigating the detrimental impact of policy uncertainty on banks. Our estimates show that banks are more cautious when facing policy uncertainty, but that the effect is partially alleviated when banks are politically connected. For an increase of one standard deviation in policy uncertainty, connected banks maintain a loss provision to loan volume ratio that is almost seven percent lower compared to their unconnected peers. These findings are robust to a geographical regression discontinuity setting, as well as to a placebo test. Lastly, the mitigating role of political connections is driven mainly by smaller banks and periods of stricter banking regulations.

Counterproductive reactions to unfavorable trading prices can cause inefficiencies in economic exchange. This paper studies whether the use of a competitive pricing mechanism reduces such wasteful activities. We report data from a laboratory experiment where a powerful buyer can trade with one of two sellers—an environment that can lead to very low prices for the sellers. We find that low procurement prices trigger significantly less punishment by sellers if the buyer uses a competitive auction rather than his price-setting power to dictate the same terms of trade directly. Our data suggest that the use of competitive pricing mechanisms can mitigate inefficient reactions to unequal distributions of trade surplus.

This paper examines how family firms substitute corporate governance with family governance and self-governance at different stages of their development. We argue that the types of agency problems that family firms face as they pass from one generation to the next determine the extent to which these mechanisms can be used as substitutes for one another. Our empirical investigation provides evidence that in the early stages of a family firm's life cycle, instruments of self-governance lessen the need for mechanisms of corporate governance, whereas in the later stages, instruments of family governance can substitute for mechanisms of corporate governance.

It is shown that the equilibrium in the asymmetric Tullock contest is unique for parameter values r ≤ 2. This allows proving a revenue ranking result saying that a revenue-maximizing designer capable of biasing the contest always prefers a contest technology with higher accuracy.

We investigate the implications of technological innovation and non-diversifiable risk on entrepreneurial entry and optimal portfolio choice. In a real options model where two risk-averse individuals strategically decide on technology adoption, we show that the impact of non-diversifiable risk on the option timing decision is ambiguous and depends on the frequency of technological change. Compared to the complete market case, non-diversifiable risk may accelerate or delay the optimal investment decision. Moreover, strategic considerations regarding technology adoption play a central role for the entrepreneur’s optimal portfolio choice in the presence of non-diversifiable risk.

Responding to increasing practitioner and academic interest in Open Strategy, this article builds on recent theoretical and empirical studies in order to advance research in the following ways. We begin by developing a definition of Open Strategy that emphasizes variation along the two dimensions of transparency and inclusion, as well as the dilemmas and dynamics inherent in its practices. We identify five dilemmas in particular: those of process, commitment, disclosure, empowerment and escalation. We continue by exploring key dynamics in Open Strategy, including both movements along the dimensions of transparency and inclusion, and movements between the two dimensions. Respecting the acute dilemmas of Open Strategy, we allow in each case for movement away from greater openness. The article concludes by proposing an agenda for future research on Open Strategy.

Even though betting exchanges are considered to be the superior business model in the betting industry due to less operational risk and lower information costs, bookmakers continue to be successful. We explain the puzzling coexistence of these two market structures with the advantage of guaranteed liquidity in the bookmaker market. Using matched panel data of over 1.8 million bookmaker and betting exchange odds for 17,410 soccer matches played worldwide, we find that the bookmaker offers higher odds and bettor returns than the betting exchange when liquidity at the betting exchange is low.

A positive relation between overconfidence and investment provision has been theoretically justified and practically assumed in the literature, but has not been thoroughly investigated. We test and confirm this positive relation between direct measures of overconfidence in one's financial knowledge and choice of investment. More precisely, strong overconfidence results in excess investment, underconfidence induces underinvestment, whereas moderate overconfidence leads to accurate investments. Our experimental results are based on different subject pools, financial professionals and students, and different media: computer-, paper-, and web-based. The degree of one's overestimation of one's individual financial knowledge relative to one's actual knowledge as well as relative to the knowledge of peers explains investment decisions better than one's actual knowledge. The relation between overconfidence and investment is robust to the degree of individual risk aversion, the riskiness of the investment projects, and to the changes in incentives structure.