Behavioral Interactions, Markets, and Economic Dynamics (eBook)

EditorsShinsuke Ikeda is a professor at the Institute of Social and Economic Research (ISER), Osaka University and serves as the director of the Research Centre of Behavioral Economics in ISER. He got a B.Com. of Kobe University in 1980 and a Ph.D. (Doctor) of Osaka University (economics) in 1997. He was the former president of the Association of Behavioral Economics and Finance. He published articles on behavioral economics, macroeconomic dynamics and asset pricing in Journal of Finance, Journal of Health Economics, Journal of International Economics, Journal of Monetary Economics, International Economic Review, etc. His work on behavioral economics is incorporated into the book Economics of Self-Destructive Choices, Springer, to appear in 2015.Hideaki Kiyoshi Kato is a professor of finance at Graduate School of Economics, Nagoya University, Nagoya, Japan. Before joining Nagoya University, he taught at Kobe University. He received his Ph.D. degree from the University of Utah in 1985.  He has published several books and more than 30 articles in the leading finance journals such as Review of Financial Studies, Management Science, Journal of Financial Economics, Journal of Financial and Quantitative Analysis, International Review of Finance, Japan and the World Economy, Pacific Basin Finance Journal, Journal of Portfolio Management, Journal of Financial Research, Journal of Banking and Finance, and Journal of Futures Markets on subjects including the market efficiency and anomalies, stock options, investor behavior, dividend policy, equity offerings, and stock index futures. He is currently an associate editor of Pacific Basin Finance Journal and International Review of Finance.Fumio Ohtake is Osaka University distinguished professor and a professor in the Institute of Social and Economic Research at Osaka University and an executive vice president of Osaka University. He earned his M.A. and a Ph.D. from Osaka University in 1985 and 1996, respectively and a B.A. from Kyoto University in 1983.  He is the president of the Association of Behavioral Economics and Finance, and an executive director of the Japanese Economic Association. His research topics are behavioral economics, labor economics, income distribution and household behavior.  He is also a recipient of the 2005 Nikkei Prize for Excellent Books in Economic Science; the 2005 Suntory Prize for Social Science and Humanities; the 2005 Economist Prize; the 2006 Ishikawa Prize of the Japanese Economic Association; and the 2008 Japan Academy Prize.Yoshiro Tsutsui is a professor of economics at Konan University. He had previously taught at Nagoya City University and Osaka University. He was awarded a Ph.D. (economics) from Osaka University. He was the first president of the Association of Behavioral Economics and Finance and the president of Japan Society of Monetary Economics. His primary areas of teaching and research are behavioral economics and banking and finance. Currently, his research includes happiness study, time discounting, international linkage of stock prices and regional banking and finance. His publications appeared in Review of Economics and Statistics, Journal of Financial and Quantitative Analysis, Journal of Banking and Finance, Journal of Risk and Uncertainty, Regional Science and Urban Economics and Journal of Research in Personality. In 1988, his book, The Financial Markets and Banking Industry: Economic Analysis of Industrial Organization (Toyokeizai-Shinpo Sha, in Japanese) was awarded the Nikkei Prize for Excellent Books in Economic Science.

Preface 6
Acknowledgements 12
Contents 14
About the Editors 18
Part I Intergenerational Interactions 20
1 An Equilibrium Model of Child Maltreatment 21
1 Introduction 21
2 Issues of Child Maltreatment 23
3 The Model 25
3.1 Law of Motion of a Child's Human Capital 25
3.2 Observation Equation of the Child's Behavior 26
3.3 Parent's Incentive Schedule 27
3.4 Preferences 28
4 Optimal Interactions and Equilibrium 29
4.1 Child's Decision Problem 29
4.2 Parent's Decision Problem 31
4.3 Equilibrium System Equation and the Parent's Expectation Process 33
5 Interpretation 37
5.1 Interpreting the Stable and Unstable Expectation Processes 37
5.2 The Characteristics of a Parent and a Child at Risk of Abuse 43
6 Conclusion 48
Appendices 49
Psychological Theories of Child Maltreatment 49
The First Order Condition of the Child's Decision Problem 49
The First and Second Order Conditions of the Parent's Decision Problem 50
Mathematical Details of the Parenting Plan 52
The Derivation of the Parent's Expectation Process (The Kalman Filter) 53
Proof of Proposition 1 54
Numerical Simulation of the Equilibrium Dynamics 55
Addendum: ``An Equilibrium Model of Child Maltreatment'' as a Model of Child Development with Parent-Child Interaction 55
References 58
2 Tough Love and Intergenerational Altruism 60
1 Introduction 60
2 A Review of Empirical Evidence 64
3 A Consumption Good Economy 67
3.1 Standard Altruism Model 68
3.2 Tough Love Altruism Model 70
3.2.1 Relationship Between Transfers and the Child's Discount Factor 71
3.2.2 Comparative Statics for Changes in the Child's Income and Family Income 75
3.2.3 Relationship Between Family Permanent Income and the Child's Discount Factor 77
4 How Important Is Tough Love? 78
4.1 Paternalistic Altruism Model 78
4.2 Endogenous Altruism Model 79
5 Tough Love Altruism Model with Leisure 81
6 Conclusion 84
Appendices 86
A Proof for Proposition 1 86
A Proof for Proposition 2 88
Power Utility Function 89
Addendum: Recent Developments 90
References 92
Part II Behavioral Macroeconomics 96
3 Consumer Interdependence via Reference Groups 97
1 Introduction 97
2 Life-Styles as Low-Cost Heuristics and Reference Group Taking 99
3 Axioms of the Life-Style Hypothesis 101
4 Implications and Extensions 108
Addendum: Afterthought 111
References 113
4 Bounded Rationality, Social and Cultural Norms, and Interdependence via Reference Groups 116
1 An Overview 116
2 Bounded Rationality and the Need for Low-Cost Heuristics 121
3 Social Capital as Sources of Low-Cost Heuristics 123
4 A Sequential Satisficing of Wants 128
5 Sequential Satisficing of Wants 130
6 Interdependence via Reference Groups and Social Want 134
7 Leibenstein and Duesenberry Revisited 144
7.1 Leibenstein's Bandwagon, Snob, and Veblen Effects 144
7.2 Duesenberry's Model of Social Interdependence 146
8 Conclusion 148
Addendum: Afterthought and Possible Extensions4 149
References 151
5 Keeping One Step Ahead of the Joneses: Status, the Distribution of Wealth, and Long Run Growth 155
1 Introduction 155
2 A Model with Symmetric Agents 159
2.1 The Basic Model 159
2.2 Market Equilibrium 160
2.3 Equilibrium Dynamics 161
2.4 The Balanced Growth Equilibrium: Existence and Stability 162
2.5 The Effect of Status Preference on Long Run Growth 163
3 A Model with Asymmetric Agents 164
3.1 The Structure of the Extended Model 164
3.2 Balanced Growth Equilibrium 165
3.3 Steady State Wealth Distribution 166
3.4 Stronger Status Preference May Depress Long Run Growth 168
4 Concluding Remarks 170
Appendix: Stability of the Differential Equation System 171
Addendum 173
References 175
6 Macroeconomic Implications of Conspicuous Consumption: A Sombartian Dynamic Model 177
1 Introduction 177
2 The Model 179
2.1 Consumers and Social Status 180
2.2 Producers 183
2.3 Equilibrium 183
3 Dynamics 187
3.1 Snobbish Economy 187
3.2 Bandwagon Economy 190
4 Discussion 196
5 Concluding Remarks 197
Appendices 198
Appendix 1 198
Appendix 2 199
Appendix 3 200
Appendix 4 200
Addendum: A Caveat 201
References 203
7 On Persistent Demand Shortages: A Behavioural Approach 205
1 Introduction 205
2 The Wage Dynamics 210
2.1 The Setup 210
2.2 The Fair Wage 212
2.3 The Equilibrium Wage Adjustment 214
3 General Equilibrium 215
4 Temporary Unemployment 218
4.1 Dynamics Under Satiable Liquidity Preferences 218
4.2 Policy Implications 219
4.2.1 Monetary Policy 219
4.2.2 Fiscal Policy 221
4.2.3 Labour Supply and Productivity 222
4.2.4 Summary 223
5 Persistent Unemployment 223
5.1 Dynamics Under Insatiable Liquidity Preferences 223
5.2 Policy Implications 226
5.2.1 Monetary Policy 226
5.2.2 Fiscal Policy 229
5.2.3 Labour Supply, Productivity and Flexibility 230
5.2.4 Summary 231
6 Conclusion 232
Appendices 233
A1. The Case Where Only a Fraction of Workers Have Fairness Concerns 233
A2. Stability Under Persistent Stagnation 234
Addendum: Liquidity Trap and Long-run Stagnation 235
B1. Short-Run and Long-Run Stagnation Models 235
B2. Wealth Preference and the Zero Interest Rate 236
B3. Status Preference and Insatiable Wealth Preference 238
References 239
Part III Time Preference in Macroeconomics 241
8 Rate of Time Preference, Intertemporal Elasticity of Substitution, and Level of Wealth 242
1 Introduction 242
2 Data Description 244
2.1 The Choice of the Data 245
2.2 A Statistical Model for Data Description 245
3 Empirical Results 248
4 Interpreting the Results 251
4.1 A Model of Wealth-Varying RTP and IES 251
4.2 Motivating the Statistical Model 253
4.3 An Incomplete Market Interpretation 254
4.4 Additional Test Results 255
5 Conclusions 257
Appendix 258
Addendum: Recent Developments 258
References 259
9 Economic Development and Time Preference Schedule: The Case of Japan and East Asian NICs 261
1 Introduction 261
2 Basic Model of Consumption 263
3 Empirical Evidence 267
3.1 Econometric Methodology 268
3.2 Estimation Results 268
3.3 Nonlinear Time Preference Schedule and Turning Point 273
3.4 Robustness of the Results 275
4 Concluding Remarks 278
Appendix: Data Description 280
Addendum: Further Evidence12 280
References 283
10 Luxury and Wealth 284
1 Introduction 284
2 Consumer Behavior with Quasi-luxury Goods 287
2.1 Consumer Preferences and Quasi-luxury Goods 288
2.2 Optimal Consumer Behavior 290
2.2.1 Optimization 290
2.2.2 Steady State 292
2.2.3 Local Dynamics 294
2.3 Luxury Goods 296
2.4 The Preference for Quasi-luxuries and Optimal Wealth Accumulation 298
3 Extensions to General Equilibrium Frameworks 301
3.1 A Production Economy 302
3.2 A Two-Country World Economy 305
4 Conclusions 309
Appendix 309
Appendix 310
A.1 Properties of the Optimal Solution in Sect.2.2 310
A.1.1 Dynamics 310
A.1.2 The Effects of Preference Shifts in Sect.2.4 310
A.2 Solutions to the Production-Economy Model in Sect.3.1 312
A.2.1 Dynamics 312
A.2.2 The Effects of Quasi-luxury Taxes 313
A.3 The Two-Country Equilibrium in Sect.3.2 314
A.3.1 Dynamics 314
A.3.2 The Effects of Preference Shifts 316
Addendum: The Case of DMI 317
References 318
11 On Decreasing Marginal Impatience 321
1 Introduction 321
2 The Effects of Decreasing Marginal Impatience 323
3 Decreasing Marginal Impatience and Capital Accumulation 330
3.1 The Neoclassical Model 330
3.2 The Effects of Capital Taxation 334
3.3 The Effects of Government Spending 335
4 Conclusions 336
Appendix 336
Appendix 336
Stability of Points E and E in Proposition 1 336
Proof of Lemma 1 337
Addendum: Related Studies 338
References 340
Part IV Bubbles and Crash 343
12 Why Did the Nikkei Crash? Expanding the Scope of Expectations Data Collection 344
1 Introduction 344
2 A Preliminary on Fundamentals in Japan 346
3 Existing Time Series Data for the Japanese and United States Stock Markets 348
4 Our Surveys 348
4.1 Questions About Expectations 349
4.2 Qualitative and Scenario Questions 352
5 Why Did the Nikkei Crash? 359
Addendum: Was the Rise in American Stock Prices in 1990s a Bubble?10 361
References 365
13 Price Bubbles Sans Dividend Anchors: Evidence from Laboratory Stock Markets 366
1 Introduction 366
2 Investment Horizons and the Security Valuation 369
2.1 Long-Term Investor's Valuation 369
2.2 Short-Term Investor's Valuation 369
2.3 Difficulty of Backward Induction 370
3 The Experimental Design 371
3.1 Main Treatment: Long or Short Investment Horizons 371
3.2 Experimental Procedures 375
3.3 Robustness Variations 377
4 Experimental Results 379
5 Discussion and Concluding Remarks 395
Appendix 1: Instruction Sheets for the Subjects for Session 2 396
General Instructions 396
Investors Instructions 397
Predictors Instructions 398
Instruction Set 2 (Trading Screen Operation) 399
Appendix 2: Supplementary Materials 401
Addendum: Further Analysis (Short-Horizon Session with Two Stocks)22 401
References 403
Part V Experimental Markets 405
14 Revenue Non-equivalence Between the English and the Second-Price Auctions: Experimental Evidence 406
1 Introduction 406
2 Bidding Strategies 407
3 Experimental Analyses 409
3.1 Experimental Design 409
4 Results 412
Nomenclature 412
4.1 Certainty Case 412
4.2 Uncertainty Case 417
4.2.1 Risk Attitude 417
4.2.2 English Auction Versus Second-Price Auction 418
5 Conclusion 420
Addendum: Follow Up Research on Auction Design Under Risk and Uncertainty8 421
References 424
15 An Experimental Test of a Committee Search Model 426
1 Introduction 427
2 Model 430
3 Strategy for Identification 433
3.1 Comparison of the Single-Agent Search Model and the Committee Search Model 434
3.2 Comparison of the Different Plurality Voting Rules 435
4 Experimental Design 436
4.1 Game A: Single-Agent Search 436
4.2 Game B: Committee Search with a Common Value 437
4.3 Game C: Committee Search with Different Values 438
4.4 Hypotheses 440
4.5 Administration and Payoffs 442
5 Results 443
5.1 Search Duration 443
5.2 The Probability of Voting to Stop 449
6 Concluding Remarks 453
Appendix 455
Instructions 455
Addendum: Finite-Horizon Sequence Search Case 457
References 459
16 Equilibrium Refinement Versus Level-k Analysis: An Experimental Study of Cheap-Talk Games with Private Information 460
1 Introduction 461
2 Theory and Hypotheses 463
2.1 Games and Their Sequential Equilibria 463
2.2 Equilibrium Refinements 465
2.3 Level-k Analysis 467
2.4 Communication-Theoretic Experiments 469
2.5 Hypotheses 470
3 Experiment 471
3.1 Experimental Procedures 471
3.2 Experimental Results 472
3.2.1 Aggregate Data 472
3.2.2 Individual Data 476
4 Conclusion 478
Appendix. Instructions 479
A.1. Experimental Procedure 480
A.2. Notices 482
A.3. Questions 482
A.4. Practice 482
Addendum: Recent Developments17 483
References 485
Part VI Behavioral Contract Theory 487
17 Moral Hazard and Other-Regarding Preferences 488
1 Introduction 488
2 Theories of Other-Regarding Preferences 493
3 The Principal-Agent Model with Other-Regarding Preferences 496
3.1 Benchmark: The Self-Interest Case 496
3.2 Other-Regarding Agent 498
3.2.1 When Assumption 17.1 Does Not Hold 502
3.3 Alternative Specification 503
3.4 Other-Regarding Principal 504
4 Multiple Agents 505
4.1 The Model 505
4.1.1 Benchmark: The Self-Interest Case 507
4.2 Analysis 507
4.3 Correlated Outcomes 510
4.4 Alternative Specification 512
5 Implications for Endogenous Preferences in Organizations 514
6 Concluding Remarks 515
Appendix 516
Addendum: Revisiting Moral Hazard and Other-Regarding Preferences 518
References 520
18 Contracting with Self-Esteem Concerns 523
1 Introduction 524
2 The Model 528
3 The Optimal Contract with Self-Esteem Concerns 530
3.1 The Effect of Risk on the Agency Cost 530
3.2 On the Negative Relationship Between Risk and Incentives 534
4 Implications for Organizational Design 535
4.1 Why and How Can Team Production Be Profitable? 536
4.2 Hidden Costs of External Enforcers 538
5 Concluding Remarks 539
Appendix 540
Addendum 542
References 544
19 Optimal Promotion Policies with the Looking-Glass Effect 546
1 Introduction 546
2 The Model 550
2.1 Environment 550
2.2 Production 550
2.3 Information 551
2.4 Compensation 551
3 A Simple Example 552
4 The Analysis 553
4.1 The Optimal Effort Choice 553
4.2 The Symmetric Information Case 554
4.3 The Second-Period Problem 554
4.4 The First-Period Problem 558
5 Conclusion 561
Appendices 561
Appendix A: Proofs 561
Appendix B 564
Addendum 565
References 566
Part VII Market Efficiency and Anomalies 567
20 Is No News Good News? The Streaming News Effect on Investor Behavior Surrounding Analyst Stock Revision Announcement 568
1 Introduction 569
2 Literature Review 572
3 Data 573
4 Media Coverage and Stock Returns 577
4.1 Abnormal Returns of Stocks Revised by Sell-Side Analysts 577
4.2 Media Coverage and Post-recommendation Returns 579
4.3 Media Coverage Frequency and Post-recommendation Returns 580
4.4 Media Sentiment and Post-recommendation Returns 583
5 Robustness Checks 586
6 Conclusion 589
Addendum: News Effect on Pre-announcement Performance 590
1. Attention Effect in the Pre-announcement Period 590
2. Sentiment Effect for Stocks in the Pre-announcement Period 593
References 593
21 The Winner–Loser Effect in Japanese Stock Returns 595
1 Introduction 595
2 Do Patterns Exist in Japan? 598
3 Risk/Firm Characteristics Adjustment 601
4 Further Analysis 605
4.1 Industry Classification 605
4.2 Trading Volume 607
4.3 Overreaction to New Information 608
5 Conclusions 610
Addendum 611
Ten Years After “The Winner–Loser Effect in Japanese Stock Returns”: A Review and Recalculation 611
Discussion After Our Paper 611
A Revisit to the Momentum Effect in Japan 612
References 613
22 Addition to the Nikkei 225 Index and Japanese Market Response: Temporary Demand Effect of Index Arbitrageurs 615
1 Introduction 615
2 Changes in the Nikkei 225 Index and the Demand Effect of Index Arbitrage Trading 618
3 Data and Methodology 622
4 Stock Price Behavior Surrounding Addition to the Nikkei 225 Index 623
5 Effects of Index Arbitrageurs' Demand Shock 628
6 Conclusion 631
Addendum: Trading Simulation14 632
Summary of Other Related Literature 632
Market Efficiency Test 633
References 635
23 The Calendar Structure of the Japanese Stock Market: The `Sell in May Effect' Versus the `Dekansho-Bushi Effect' 636
1 Introduction 637
2 The Half-Year Pattern in Japanese Stock Index Returns 638
2.1 Monthly Returns of Various Indexes 638
2.2 2 Test and the Impact of Cumulative Return 641
3 Possible Biases 645
3.1 Composite Change and New Listing Effect 645
3.2 Sell in May Effect 646
3.3 Size and Value Effects 647
3.4 January Effect 649
3.5 Behavioral Explanation 651
4 Conclusion 656
Addendum: Market Psychology in the News Text15 657
Seasonal Psychology of Investors 657
News Data 657
Seasonality in the Nikkei News 658
References 660
ERRATUM 661
Index 662