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Industry Dynamics and Optimal Firm Behavior

Paper Session

Saturday, Jan. 4, 2020 10:15 AM - 12:15 PM (PDT)

Manchester Grand Hyatt, Cortez Hill B
Hosted By: Society for Computational Economics
  • Chair: Herbert Dawid, Bielefeld University

Efficient and Convergent Sequential Pseudo-Likelihood Estimation of Dynamic Discrete Games

Adam Dearing
,
Ohio State University
Jason Blevins
,
Ohio State University

Abstract

We propose a new sequential Efficient Pseudo-Likelihood (EPL) estimator for structural economic models with an equality constraint, particularly dynamic discrete choice games of incomplete information. Each iteration in the EPL sequence is consistent and asymptotically efficient, and iterating to convergence improves finite sample performance. For dynamic single-agent models, we show that Aguirregabiria and Mira's (2002, 2007) Nested Pseudo-Likelihood (NPL) estimator arises as a special case of EPL. In dynamic games, EPL maintains its efficiency properties, although NPL does not. And a convenient change of variable in the equilibrium fixed point equation ensures EPL iterations have the same computational simplicity as NPL iterations. Furthermore, EPL iterations are stable and locally convergent to the finite-sample maximum likelihood estimator at a nearly-quadratic rate for all regular Markov perfect equilibria, including unstable equilibria where NPL encounters convergence problems. Monte Carlo simulations confirm the theoretical results and demonstrate EPL's good performance in finite samples.

Dynamic Strategic Corporate Finance: A Tug of War with Financial Constraints

Ulrich Doraszelski
,
University of Pennsylvania
Joao F. Gomes
,
University of Pennsylvania

Abstract

This paper develops and solves a computational model to understand how the presence of financial market imperfections impacts dynamic strategic interactions between firms and industry dynamics. The main goal is to develop a benchmark theoretical setting that integrates the basic corporate finance insights about the impact of financial market imperfections on corporate investment with the modern literature on dynamic industrial organization.

Predatory Pricing under Uncertainty: Revisiting the Deep Pocket Argument

Maria Lavrutich
,
Norwegian University of Science and Technology
Jacco Thijssen
,
University of York

Abstract

Payout policies of firms inherently interact with their decisions in product markets. We analyze this interaction in a continuous time stochastic game between financially constrained and financially unconstrained firms. We depart from the standard literature by allowing the firms to choose both the production strategy and the payout policy. We focus on the link between predation incentives and the payout policy and find that the presence of aggressive competition induces fewer dividend payouts.
Our model predicts that the liquidity position of the prey has an important effect on the production choices of both firms and, thus, on the evolution of profits, cash holdings and stock prices.

Finite Project Life and Strategic Interactions in Investment under Uncertainty

Anne Balter
,
Tilburg University
Kuno Huisman
,
Tilburg University
Peter M. Kort
,
Tilburg University

Abstract

This article studies the effects of finite project length and an option to invest that could expire in finite time. In a monopoly setting we find that reduction of the project length delays the investment time whereas the investment size is not affected. Having a finite life of the investment option accelerates investment and reduces the investment size. For an entry deterring incumbent a finite project life implies a smaller investment, whereas there are multiple contrary effects on the investment time. If, in addition, the option life is also finite, this surprisingly leaves the investment decision unaffected.
Discussant(s)
Victor Aguirregabiria
,
University of Toronto
Vojislav Maksimovic
,
University of Maryland
Kuno Huisman
,
Tilburg University
Herbert Dawid
,
Bielefeld University
JEL Classifications
  • L1 - Market Structure, Firm Strategy, and Market Performance
  • C6 - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling