Dan Bernhardt

Menu Costs, Sticky Prices, and Strategic Firm Interaction

Sticky nominal prices represent a cornerstone of many macroeconomic models. The effects of price ... more Sticky nominal prices represent a cornerstone of many macroeconomic models. The effects of price adjustment on strategic firm interaction and the resulting price series implications are less established. This paper develops a spatial economy to analyze these interactions. In the two period environment, each firm, facing menu costs, must choose (whether to adjust) the price of its spatially identified good in the Bayesian Nash competition. These finding accord with empirical work which find that markets with more heterogeneous goods which are less competitive (e.g. labour) have stickier prices than others (e.g. wheat). Firms tend to adjust prices in concert and be more responsive towards shocks which lead to price increases than decreases, as has been documented empirically. The magnitude of menu costs affect the ability of firms to collude, so expected profits may increase with menu costs.

Strategic Promotion and Compensation

The Review of Economic Studies, 1995

... Strategic Promotion and Compensation DAN BERNHARDT Queen's University ... Thus, uneducat... more

Money, Barter, and the Optimality of Legal Restrictions

Journal of Political Economy, 1991

We examine a decentralized monetary economy in which house-holds can use a means of exchange (bar... more

Stock market dynamics with rational liquidity traders

Journal of Financial Markets, 1999

In the Kyle (1985) finite horizon model of stock market dynamics with a trader who holds long-liv... more

Who herds?

Journal of Financial Economics, 2006

This paper develops a test for herding in forecasts by professional financial analysts that is ro... more

Smart fund managers? Stupid money?

Canadian Journal of Economics, Apr 3, 2009

We develop a model of mutual fund manager investment decisions near the end of quarters. We show ... more We develop a model of mutual fund manager investment decisions near the end of quarters. We show that when investors reward better performing funds with higher cash flows, near quarter-ends a mutual fund manager has an incentive to distort new investment toward stocks in which his fund holds a large existing position. The short-term price impact of these trades increase the fund's reported returns. Higher returns are rewarded by greater subsequent fund inflows which, in turn, allow for more investment distortion the next quarter. Because the price impact of trades is short-term, each subsequent quarter begins with a larger return deficit. Eventually, the deficit cannot be overcome. Thus, our model leads to the empirically observed short-run persistence and long-run reversal in fund performance. In doing so, our model provides a consistent explanation of many other seemingly contradictory empirical features of mutual fund performance.

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Political Polarization and the Electoral Effects of Media Bias

Social Science Research Network, 2006

Many political commentators diagnose an increasing polarization of the U.S. electorate into two o... more Many political commentators diagnose an increasing polarization of the U.S. electorate into two opposing camps. However, in standard spatial voting models, changes in the political preference distribution are irrelevant as long as the position of the median voter does not change. We show that media bias provides a mechanism through which political polarization can affect electoral outcomes. In our model, media firms' profits depend on their audience rating. Maximizing profits may involve catering to a partisan audience by slanting the news. While voters are rational, understand the nature of the news suppression bias and update appropriately, important information is lost through bias, potentially resulting in inefficient electoral outcomes. We show that polarization increases the profitability of slanting news, thereby raising the likelihood of electoral mistakes. We also show that, if media are biased, then there are some news realizations such that the electorate appears more polarized to an outside observer, even if citizens' policy preferences do not change.

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Flexibility vs. protection from an unrepresentative legislative majority

Games and Economic Behavior, Sep 1, 2015

We derive the equilibrium institutional design of representative democracy by citizens who first ... more We derive the equilibrium institutional design of representative democracy by citizens who first vote on the supermajority required for a new policy to be adopted, and then delegate decision making to a legislature that selects policy given that institutional constraint. A legislature that can freely tailor policy to reflect society's current preferences is good. However, the views of the median legislator or agenda setter may differ from the median citizen's, and an unchecked legislature can implement bad policy. We characterize how the primitives describing the preferences of actors and the status quo policy affect the equilibrium degree of legislative flexibility. * We gratefully acknowledge the helpful suggestions of Odilon Camara and participants of the

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Costly auction entry, royalty payments, and the optimality of asymmetric designs

Journal of Economic Theory, Jul 1, 2020

Please refer to published version for the most recent bibliographic citation information. If a pu... more

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Trial Incentives in Sequential Litigation

American Law and Economics Review, Aug 22, 2014

The version presented here may differ from the published version or, version of record, if you wi... more The version presented here may differ from the published version or, version of record, if you wish to cite this item you are advised to consult the publisher's version. Please see the 'permanent WRAP URL' above for details on accessing the published version and note that access may require a subscription.

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Targeting Target Shareholders

Management Science, Apr 1, 2018

We integrate heterogeneity and uncertainty in investor valuations into a model of takeovers. Inve... more We integrate heterogeneity and uncertainty in investor valuations into a model of takeovers. Investors have dispersed valuations, holding shares in …rms they value more highly, and a successful o¤er must win approval from the median target shareholder. We derive the consequences for an acquiring …rm's takeover o¤er-its size and cash/equity structure-and implications for takeover premia and …rm returns. Cash o¤ers are best for the acquirer when the acquirer's own valuation exceeds the median target shareholder's. Equity o¤ers are best given the reverse. The acquirer's share price always rises following cash acquisitions, but can fall following equity o¤ers. The combined target-acquirer return is always higher after cash acquisitions than equity acquisitions (which can be negative). We characterize how synergies and uncertainty about target shareholder valuations a¤ect the optimal o¤er and probability a takeover succeeds. We thank Jie Gan, Jarrad Harford, Micah O¢ cer, and seminar participants at

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Trade-Time Measures of Liquidity

Review of Financial Studies, Mar 21, 2018

The version presented here may differ from the published version or, version of record, if you wi... more The version presented here may differ from the published version or, version of record, if you wish to cite this item you are advised to consult the publisher's version. Please see the 'permanent WRAP URL' above for details on accessing the published version and note that access may require a subscription.

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Long-term information, short-lived derivative securities

RePEc: Research Papers in Economics, Aug 1, 2000

This paper characterizes how the short-lived nature of derivative securities, such as option and ... more This paper characterizes how the short-lived nature of derivative securities, such as option and futures contracts, affects trading behavior and pricing. Specifically, the paper explores strategic trade in short-lived derivative securities by agents that possess long-term information about an underlying asset. In contrast to trading equity, where an informed agent will ultimately benefit from his trades, trading short-lived securities is profitable only if the private information is impounded in the price before expiry. A consequence is that a risk neutral informed agent's holdings of the short-lived security affects his trading behavior: Past informed trading leads to greater future informed trading. The shorter horizon in which information must be impounded for a short-lived security to pay off makes an informed agent more reluctant to trade at earlier dates. By characterizing the conditions under which liquidity traders choose to incur extra costs to roll over their short-term positions rather than trade in distant contracts, this paper provides a possible explanation for why most markets for longer-term derivative securities have little liquidity and large bid-ask spreads. The paper also shows how fixed trading costs and round lot restrictions can lead to multiple equilibria. This paper explores strategic trading by agents who have long-term information about an underlying asset but trade short-lived derivative products. To illustrate the issues involved, consider the following hypothetical example. Suppose that in 1995, an individual becomes aware that most computer databases cannot properly recognize the year 2000 (the "Y2K computer bug"). The general public has not yet become aware of the magnitude of the problem and, as such, this information has not been reflected in the stock price of a database management company, BigRed. The individual, who has limited funds, would like to trade on his "private" information. Although the information will be revealed with certainty on January 1, 2000, the company may make a public announcement prior to this date. The individual, the "informed agent", can engage in at least two possible trading strategies. One strategy is to shortsell BigRed. An advantage of shortselling is that as long as the informed agent can maintain his position, his information will eventually be incorporated into the share price. A possible disadvantage is that a temporary rise in the share price might expose the informed agent to large losses and force him to close his position. An alternative is to purchase put options for BigRed. Put options allow the informed agent to leverage his position and limit downside risk. Unfortunately

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Smart Fund Managers? Stupid Money?

Social Science Research Network, 2008

We develop a model of mutual fund manager investment decisions near the end of quarters. We show ... more We develop a model of mutual fund manager investment decisions near the end of quarters. We show that when investors reward better performing funds with higher cash flows, near quarter-ends a mutual fund manager has an incentive to distort new investment toward stocks in which his fund holds a large existing position. The short-term price impact of these trades increase the fund's reported returns. Higher returns are rewarded by greater subsequent fund inflows which, in turn, allow for more investment distortion the next quarter. Because the price impact of trades is short-term, each subsequent quarter begins with a larger return deficit. Eventually, the deficit cannot be overcome. Thus, our model leads to the empirically observed short-run persistence and long-run reversal in fund performance. In doing so, our model provides a consistent explanation of many other seemingly contradictory empirical features of mutual fund performance.

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Screening and Financial Contracting in the Face of Outside Competition

B E Journal of Theoretical Economics, Jan 11, 2012

This paper considers an investor who, at a cost, can acquire a signal about whether an entreprene... more This paper considers an investor who, at a cost, can acquire a signal about whether an entrepreneurial project will generate positive surplus. The problem for the potentially informed investor is that uninformed investors can compete to provide funding and the informed investor's contract offer conveys a signal to the entrepreneur about the project's likely payoffs, affecting the attractiveness to the entrepreneur of his uninformed funding alternatives. We determine how the investor's choices of signal quality and contracting terms are affected by project primitives. We prove that equilibrium expected payoffs in this signaling game are unique. We solve the optimal contracting problem for both the informed and uninformed investors, showing that informed investors can use equity, and that, under mild conditions, uninformed investors will compete with simple debt. Finally, we show that introducing the possibility of commitment by the informed investor alters the structure of the game, but not equilibrium payoffs.

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Monitoring and Evaluation by Financiers

This paper considers a financier contemplating a venture capital investment in a firm whose true ... more This paper considers a financier contemplating a venture capital investment in a firm whose true value is unknown. The financier must make information-gathering and investment decisions on an ongoing basis to decide whether to undertake the investment and, later, if he chooses to finance the firm, how to manage his investment. We characterize how the financier's information acquisition is affected by the liquidity of the market for his claims to the firm, and derive the implications for the pricing of the firm. We distinguish between two qualitatively different types of information acquisition: evaluation efforts made prior to a potential investment; and monitoring efforts of already-funded firms that impact upon the financier's decisions about whether to take an active position in the firm (e.g. replace management) and whether to change its financial stake. We investigate the effects of liquidity on share price, describing why the market responds more favorably to less liqu...

Kyle v. Kyle (’85 v. ’89)

Annals of Finance, 2005

Page 1. Annals of Finance (2006) 2: 2338 DOI 10.1007/s10436-005-0031-x RESEARCH ARTICLE Dan Bern... more

Barter and Money, and the Optimality of Legal Restrictions

We examine a monetary economy in which there is an absence of the temporal coincidence of wants, ... more We examine a monetary economy in which there is an absence of the temporal coincidence of wants, and households are free to barter. If the growth rate of the money supply is sufficiently small, monetary exchange is preferable. Nevertheless, barter may drive out money exchange even if monetary exchange Pareto dominates. Legal restrictions prohibiting barter exchange may therefore be necessary. With stochastic preferences, both barter and money may coexist; agents barter to supplement monetary exchange when they have an unexpectedly high demand. Again, too much exchange may be conducted in barter, and legal restrictions on barter are optimal.

Free trade equilibria to multi-country quota games

Journal of International Economics, 1989

We consider a symmetric N-country competitive general equilibrium endowment economy in which coun... more We consider a symmetric N-country competitive general equilibrium endowment economy in which countries select quotas in a static Nash game to maximize the welfare of representative citizens. Unlike tariffs, quota revenues need not accrue solely to the quota-setting country. The only possible equilibrium outcome, other than autarky, is free trade. Free trade prevails unless the quota-setting country receives a fraction of quota rents greater than (N-1)/N. We conclude that the prevalence of binding quotas, in contrast to tariffs, cannot be explained within the accepted rubric in which countries maximize the welfare of representative citizens. *We are grateful for suggestiorbs of the two anonymous referees and the editor of the Journal. Steve Neston improved the paper. The first author acknowledges support from the Social Sciences and Humanities Research Council of Canada. We accept responsibility for any errors which remain.

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Dumping, adjustment costs and uncertainty

Journal of Economic Dynamics and Control, 1984

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