Series 2005

05-01. Keister, T. "Expectations and Contagion in Self-Fulfilling Currency Attacks" pdf file

Abstract: This paper shows how expectations-driven contagion of currency crises can arise even if the currency market has a unique equilibrium when viewed in isolation. The model of Morris and Shin (1998) is extended to allow speculators to trade in a second currency market. If speculators believe that a devaluation of this other currency will make a domestic devaluation more likely, they will engage in trades that link the two markets. A sharp devaluation of the other currency will then be propagated to the domestic market and will increase the likelihood of a crisis there, fulfilling the original expectations. Even though this contagion is driven solely by expectations, the model places restrictions on observable variables, and these restrictions are broadly consistent with existing empirical evidence.

05-02. Herrera, H., and C. Martinelli "Group Formation and Voter Participation" pdf file

Abstract: We present a mobilization model of large elections with endogenous formation of voter groups. Citizens decide whether to be followers or become leaders (activists) and try to bring other citizens to vote for their preferred party. In the (unique) pure strategy equilibrium, the number of leaders favoring each party is a function of the cost of activism and the mportance of the election. Expected turnout and winning margin in the election are, in turn, a function of the number of leaders and the strength of social interactions. The model predicts a non monotonic relationship between expected turnout and winning margin in large elections.

05-03. Herrera, H., D. K. Levine, and C. Martinelli "Policy Platforms, Campaign Spending and Voter Participation" pdf file

Abstract: We model electoral competition between two parties in a winner-take-all election. Parties choose strategically first their platforms and then their campaign spending under aggregate uncertainty about voters' preferences. We use the model to examine why campaign spending in the United States has increased at the same time that politics has become more polarized. We find that the popular explanation ­ better targeting of campaign spending ­ is not a likely explanation. While better targeting does lead to greater spending, it leads to less polarization. Instead we argue that the likely explanation is that voters references have become more volatile. This will both raise campaign spending and increase polarization. At the same time it is consistent with the observation that voters have become less committed to the two parties.

05-04. Herrera, H., and E. Schroth "Developer's Expertise and the Dynamics of Financial Innovation: Theory and Evidence" pdf file

Abstract: We study product innovation and imitation in the market of corporate underwriting with a dynamic model where client switching costs and the bankers' expertise in deal structuring characterize the life cycle of a security. While the clientele loyalty allows positive rent extraction, the superior expertise can account for the documented market leadership of the innovator. As expertise on product structuring is acquired by imitators, the innovator's market share advantage decreases. Also, the speed of entry by imitators increases for later generation products. Our predictions are consistent with well documented evidence on the market share leadership of innovators. We also present new evidence from equity-linked and derivative corporate products that supports the dynamic predictions of our learning model.