Financial Predation by the ‘Weak’

2006

The paper presents the explanation of contractual commitments which are renegotiation-proof, based on "strategic default". Under this, financial contracts must provide incentives of their own so that the parties would honor the agreement. We investigates the reach of this type of commitment within the general class of extensive form games. The result is that a renegotiation-proof contract exists which commits against every deviation from the equilibrium which would induce a revenue acceleration. AMS Subj. Classification: 91A40, 91A20. | The Augmented model | Contractual commitments | Revenue acceleration | Standard debt contracts | Repeated games | 1. Introduction The use of contracts for purposes of strategic commitment has attracted economist for sometime. Aghion and Bolton (1987), Fershtman and Judd (1987), have shown that contracts can have commitment value if decisions are delegated to an agent and her preferences are manipulated in accordance with the strategic needs. Naturally, the question arises where a commitment against revenue accelerations is of practical importance. A revenue acceleration is a dynamic path of payoffs with a higher payment in the current period and a smaller value of payments in all future periods. The application considers industry exit decisions. If exit is linked to sales of remaining assets then it implies a revenue acceleration. Thus, a commitment arises to stay in an industry even if this is costly. 2. The Augmented Model Suppose that F and L are two firms in an industry competing for a common standard. Both have heavily invested in their own system which they have patented and would like to impose as the standard. So here we have two players L (the Stackelberg leader) and F (the Stackelberg follower) competing in a multi-period game of perfect information.

Proceedings of the AAAI Conference on Artificial Intelligence, 2019

Strong Stackelberg equilibrium (SSE) is the standard solution concept of Stackelberg security games. As opposed to the weak Stackelberg equilibrium (WSE), the SSE assumes that the follower breaks ties in favor of the leader and this is widely acknowledged and justified by the assertion that the defender can often induce the attacker to choose a preferred action by making an infinitesimal adjustment to her strategy. Unfortunately, in security games with resource assignment constraints, the assertion might not be valid; it is possible that the defender cannot induce the desired outcome. As a result, many results claimed in the literature may be overly optimistic. To remedy, we first formally define the utility guarantee of a defender strategy and provide examples to show that the utility of SSE can be higher than its utility guarantee. Second, inspired by the analysis of leader’s payoff by Von Stengel and Zamir (2004), we provide the solution concept called the inducible Stackelberg e...

RePEc: Research Papers in Economics, 2008

This paper examines theoretical properties of incentive contracts in the hedge fund industry. We show that it is very difficult to structure incentive payments that distinguish between unskilled managers, who cannot generate excess market returns, and skilled managers who can deliver such returns. Under any incentive scheme that does not levy penalties for underperformance, managers with no investment skill can game the system so as to earn (in expectation) the same amount per dollar of funds under management as the most skilled managers. We consider various ways of eliminating this "piggyback effect," such as forcing the manager to hold an equity stake or levying penalties for underperformance. The nature of the derivatives market means that none of these remedies can correct the problem entirely.

In this paper we experimentally investigate the impact that competing for funds has on the risk-taking behavior of laboratory hedge fund managers. We construct a simple laboratory market for capital among hedge funds where each fund o¤ers a contract that shares a stylized version of various features that are commonly observed in real-world markets of this type. We …nd that commonly used hedge fund contracts leads to ine¢ cient risk taking behavior on the part of investors. We then construct a number of di¤erent contractual environments which vary the transparency of the contracts o¤ered, their risk sharing component, their maximum return etc. and …nd that while all of these treatments prove to substantially reduce risk taking among fund managers, the most e¢ cient is our transparency treatment. Finally, we …nd an "Other People's Money" e¤ect where fund managers tend to invest the funds of their investors in a more risky manner than their own money.

1997

Payoff dominance, a criterion for choosing between equilibrium points in games, is intuitively compelling, especially in matching games and other games of common interests, but it has not been justified from standard gametheoretic rationality assumptions. A psychological explanation of it is offered in terms of a form of reasoning that we call the Stackelberg heuristic in which players assume that their strategic thinking will be anticipated by their co-player(s). Two-person games are called Stackelberg-soluble if the players' strategies that maximize against their co-players' best replies intersect in a Nash equilibrium. Proofs are given that every game of common interests is Stackelberg-soluble, that a Stackelberg solution is always a payoff-dominant outcome, and that in every game with multiple Nash equilibria a Stackelberg solution is a payoff-dominant equilibrium point. It is argued that the Stackelberg heuristic may be justified by evidentialist reasoning.