While the debate on how economic agents form expectations and how these expectationsshould be modelled has been key to modern macroeconomics, money illusion has been ananathema to macroeconomists until recently. The rational expectations revolution in the1970's thoroughly banned the study of...

For decades economists have considered money illusion aslargely irrelevant. Here we show, however, that money illusion haspowerful effects on equilibrium selection. If we represent payoffs innominal terms almost all subjects play at or close to an inefficientequilibrium whereas if we lift the...

There is abundant evidence that many individuals violate the rationality assumptions routinely made in economics. However, powerful evidence also indicates that violations of individual rationality do not necessarily refute the aggregate predictions of standard economic models that assume full...

In this paper we show that reputation formation in endogenously formed relationships is a decisive determinant for the existence and performance of credit markets. In theabsence of any third party enforcement of debt repayment the contracting parties succeed in establishing stable bilateral...

The goal of this paper is to assess, for the first time, the empirical impact of "Kaynes' beauty contest", or "higher order belief", on asset price volatility. The paper shows that heterogeneous expectations induce higher order beliefs and that heterogeneous expectation asset pricing models...

We consider a two-sided buyers & sellers' market with indiviseble goods. Agents may trade many units of any of the items available. Previous research, documenting the case ofunit-flow trades, showed that the existence of substitutability or complementarity colligations between goods. These...

These research addressess whether geographic diserfication provides benefits over industry diversification in a sample of European country and industry indexes.The methodology allows performance comparison with short-slling constraints, upper and lower bounds, and many bechmarks. In the absence...

This paper provides a stylized choice-thoretic model to analyze optimal monetary policies among interdependent economies. In response to marcoeconomic shocks, policymakers strike a balance between two objectives. The first is to stabilize marginal costs and markups to offset the distortions...

Using a new data set of small public firms in Germany, this paper analyzes the incentive and entrenchmenteffects associated witrh mangerial equity owernership. The relationship between firm value and insider ownership is found to be nonlinear: at low levels of ownership firm value is positive...

This paper tests two competing hypotheses about the influence of financial institutions as large shareholders on the performance of their industrial portfolio firms: the superior monitoring hypothesis versus the rent extraction hypothesis. The methodology of this study exploits the abolishment...