We investigate how distorted, yet structured, beliefs can persist in strategic situations. Specifically, we study two-player games in which each player is endowed with a biased-belief function that represents the discrepancy between a player’s beliefs about the opponent's strategy and the...

We present a novel theoretical mechanism that explains the capacity for non-enforceable communication about future actions to improve efficiency. We explore a two-player partnership game where, before choosing a level of effort to exert on a joint project, each player makes a cheap talk promise...

We analyze the influence of unsecured debt (subdebt) on risk-shifting in banks whose assets are risky debt claims. We assume that the stockholders and subdebt-holders jointly decide on risk-shifting. We show that replacing part of the stock with subdebt: (1) leads to fewer risk-shifting events,...

We analyze the influence of unsecured debt (subdebt) on risk-shifting in banks whose assets are risky debt claims. We assume that the stockholders and subdebt-holders jointly decide on risk-shifting. We show that replacing part of the stock with subdebt: (1) leads to fewer risk-shifting events,...

We investigate how distorted, yet structured, beliefs can persist in strategic situations. Specifically, we study two-player games in which each player is endowed with a biased-belief function that represents the discrepancy between a player’s beliefs about the opponent's strategy and the...

We investigate how distorted, yet structured, beliefs can persist in strategic situations. Specifically, we study two-player games in which each player is endowed with a biased-belief function that represents the discrepancy between a player’s beliefs about the opponent's strategy and the...

We investigate how distorted, yet structured, beliefs can persist in strategic situations. Specifically, we study two-player games in which each player is endowed with a biased-belief function that represents the discrepancy between a player’s beliefs about the opponent's strategy and the...

We present a novel theoretical mechanism that explains the capacity for non-enforceable communication about future actions to improve efficiency. We explore a two-player partnership game where, before choosing a level of effort to exert on a joint project, each player makes a cheap talk promise...

Abstract A strong correlated equilibrium is a strategy profile that is immune to joint deviations. Different notions of strong correlated equilibria were defined in the literature. One major difference among those definitions is the stage in which coalitions can plan a joint deviation: before...

Black and Cox (1976) claim that the value of junior debt is increasing in asset risk when the firm’s value is low. We show, using closed-form solution, that the junior debt’s value is hump-shaped. This has interesting implications for the market-discipline role of banks’ subdebt.