This paper compares perishable retailers’ quantity commitment (QC) to rational expectations equilibrium (REE) when they sell at a markdown strategy over two periods, where strategic consumers are ...disappointment averse and elation seeking, respectively. Strategic consumers weigh the expected utility of buying the product at high and low price to determine purchase timing. In low-price period, due to the risk of shortage, strategic consumers will feel a sense of elation (disappointment) which increases (decreases) their utility. In addition, when disappointment has a higher impact on utility than elation, strategic consumers are disappointment averse, otherwise, they are elation seeking. The results show that, QC is always not inferior to REE. Particularly, when the disappointment aversion (DA) level is below the threshold or in elation seeking (ES) case, QC is strictly superior to REE when the strategic consumers’ proportion is above the medium critical value. Moreover, in this case, the value of QC increases in the strategic consumers’ proportion and the DA level (or decreases in the ES level) when the proportion is medium, while it is independent of the proportion and decreases in the DA level (or increases in the ES level) when the proportion is high.
•Under QC and REE, DA and ES have opposite effects on retailers’ profits.•QC is not inferior to REE, especially for a high strategic consumer ratio.•For medium strategic consumer ratio, value of QC may in/decrease in DA/ES level.•For high strategic consumer ratio, value of QC may de/increase in DA/ES level.
Motivated by psychological evidence that attention is a scarce cognitive resource, we model investors’ attention allocation in learning and study the effects of this on asset-price dynamics. We show ...that limited investor attention leads to category-learning behavior, i.e., investors tend to process more market and sector-wide information than firm-specific information. This endogenous structure of information, when combined with investor overconfidence, generates important features observed in return comovement that are otherwise difficult to explain with standard rational expectations models. Our model also demonstrates new cross-sectional implications for return predictability.
We study the link between family violence and the emotional cues associated with wins and losses by professional football teams. We hypothesize that the risk of violence is affected by the ..."gain-loss" utility of game outcomes around a rationally expected reference point. Our empirical analysis uses police reports of violent incidents on Sundays during the professional football season. Controlling for the pregame point spread and the size of the local viewing audience, we find that upset losses (defeats when the home team was predicted to win by four or more points) lead to a 10% increase in the rate of at-home violence by men against their wives and girlfriends. In contrast, losses when the game was expected to be close have small and insignificant effects. Upset wins (victories when the home team was predicted to lose) also have little impact on violence, consistent with asymmetry in the gain-loss utility function. The rise in violence after an upset loss is concentrated in a narrow time window near the end of the game and is larger for more important games. We find no evidence for reference point updating based on the halftime score.
A sequential variation of the Arrow—Debreu abstract economy is developed to closely capture the timing of moves of the Walrasian general equilibrium model. Instead of inducing a pseudo- game, the ...extensive form game of our sequential variation is well defined. It is shown that when information is symmetric, Walrasian equilibrium allocations are equivalent to subgame-perfect equilibrium allocations. When information is asymmetric, rational expectations equilibrium allocations are shown to be equivalent to perfect Bayesian equilibrium allocations. These results are useful for understanding and characterizing Walrasian and rational expectations equilibrium allocations.
This article speaks to the classic view that mental health requires accurate self-perception. Using a representative British sample (N = 1,601) it finds that, as measured by two established ...well-being indicators, those with mistaken expectations, whether optimistic or pessimistic, do worse than realists. We index unrealistic optimism as the difference between financial expectations and financial realizations measured annually over 18 years. The effects are not small, with those holding the most pessimistic (optimistic) expectations experiencing a 21.8% (13.5%) reduction in long-run well-being. These findings may result from the decision errors and counteracting emotions associated with holding biased beliefs. For optimists, disappointment may eventually dominate the anticipatory feelings of expecting the best while for pessimists the depressing effect of expecting doom may eventually dominate the elation when the worst is avoided. Also, plans based on inaccurate beliefs are bound to deliver worse outcomes than would rational expectations.
In this paper we consider maximum likelihood estimation in some exact and inexact linear rational expectation (LRE) models. The implications of the two models on the coefficients of the vector ...autoregressive (VAR) model are spelled out. The inexact version is more complicated and possible simplification of the resulting constrained optimization problem is discussed.
•Compare exact and inexact linear rational expectation models.•Characterize the difference.•Discuss possible elimination to avoid constrained optimization for maximizing likelihood.
Asset markets like stock markets are characterized by positive feedback through speculative demand. But the supply of housing is endogenous, and adds negative feedback to the housing market. We ...design an experimental housing market and study how the strength of the negative feedback, i.e., the price elasticity of supply, affects market stability. In the absence of endogenous housing supply, the experimental markets exhibit large bubbles and crashes because speculators coordinate on trend-following expectations. When the positive feedback through speculative demand is offset by the negative feedback of elastic housing supply the market stabilizes and prices converge to fundamental value. Individual expectations and aggregate market outcome are well described by the heuristics switching model. Our results suggest that negative feedback policies may stabilize speculative asset bubbles.
We attempt to replicate a seminal paper that offered support for the rational expectations hypothesis and reported evidence that markets with certain features aggregate dispersed information. The ...original results are based on only a few observations, and our attempt to replicate the key findings with an appropriately powered experiment largely fails. The resulting poststudy probability that market performance is better described by rational expectations than the prior information (Walrasian) model under the conditions specified in the original paper is very low. As a result of our failure to replicate, we investigate an alternate set of market features that combines aspects of the original experimental design. For these markets, which include both contingent claims and homogeneous dividend payments (as in many prediction markets), we do find robust evidence of information aggregation in support of the rational expectations model. In total, our results indicate that information aggregation in asset markets is fragile and should only be expected in limited circumstances.
This paper was accepted by Bruno Biais, finance.
Supplemental Material:
The data and online appendix are available at
https://doi.org/10.1287/mnsc.2022.4463
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This paper studies the impact of strategic customer behavior on supply chain performance. We start with a newsvendor seller facing forward-looking customers. The seller initially charges a regular ...price but may salvage the leftover inventory at a lower salvage price after random demand is realized. Customers anticipate future sales and choose purchase timing to maximize their expected surplus. We characterize the rational expectations equilibrium, where we find that the seller's stocking level is lower than that in the classic model without strategic customers. We show that the seller's profit can be improved by promising either that quantities available will be limited (quantity commitment) or that prices will be kept high (price commitment). In most cases, both forms of commitment are not credible in a centralized supply chain with a single seller. However, decentralized supply chains can use contractual arrangements as indirect commitment devices to attain the desired outcomes with commitment. Decentralization has generally been associated with coordination problems, but we present the contrasting view that disparate interests within a supply chain can actually improve overall supply chain performance. In particular, with strategic customer behavior, we find that (i) a decentralized supply chain with a wholesale price contract may perform strictly better than a centralized supply chain; (ii) contracts widely studied in the supply chain coordination literature (e.g., markdown money, sales rebates, and buyback contracts) can serve as a commitment device as well as an incentive-coordinating device; and (iii) some of the above contracts cannot allocate profits arbitrarily between supply chain members because of strategic customer behavior.
Abstract
Occasionally binding constraints (OBCs) like the zero lower bound (ZLB) can lead to multiple equilibria, and so to belief-driven recessions. To aid in finding policies that avoid this, we ...derive existence and uniqueness conditions for otherwise linear models with OBCs. Our main result gives necessary and sufficient conditions for such models to have a unique (“determinate”) perfect foresight solution returning to a given steady state, for any initial condition. While standard New Keynesian models have multiple perfect-foresight paths eventually escaping the ZLB, price level targeting restores uniqueness. We also derive equilibrium existence conditions under rational expectations for arbitrary nonlinear models.
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