Costless delay in negotiations

We study bargaining models in discrete time with a finite number of players, stochastic selection of the proposing player, endogenously determined sets and orders of responders, and a finite set of feasible alternatives. The standard optimality conditions and system of recursive equations may not be sufficient for the existence of a subgame perfect equilibrium in stationary strategies (SSPE) in case of costless delay. We present a characterization of SSPE that is valid for both costly and costless delay. We address the relationship between an SSPE under costless delay and the limit of SSPEs under vanishing costly delay. An SSPE always exists when delay is costly, but not necessarily so under costless delay, even when mixed strategies are allowed for. This is surprising as a quasi SSPE, a solution to the optimality conditions and the system of recursive equations, always exists. The problem is caused by the potential singularity of the system of recursive equations, which is intimately related to the possibility of perpetual disagreement in the bargaining process.

Dynamic Signaling with Dropout Risk

We study the role of dropout risk in dynamic signaling. A seller privately knows the quality of an indivisible good and decides when to trade. In each period, he may draw a dropout shock that forces him to trade immediately. To avoid costly delay, the seller with a low-quality good voluntarily pools with early dropouts, implying that the expected quality of the good increases over time. We characterize the time-varying equilibrium trading dynamics. It is demonstrated that the maximum equilibrium delay of trade is decreasing in the initial belief that the good is of high quality. (JEL C73, D82, D83)

Reliable Finance

As we were drafting our first version of this chapter, the world was abruptly seized by the worst economic crisis since the 1930s. Having just written about the impact that instability, the bonus culture, and the bursting of financial bubbles might have on our collective future, it was disconcerting to see those ideas leap from the page and run amok in the global economy. Rather than tempt fate any further, we put our text on hold and went back to Jean-Philippe Bouchaud, the financial expert with whom we had discussed the potential for precisely this kind of ominous development a few months earlier. Bouchaud knows just how fast money can move. He has set up his computer systems in three separate continents, as close to the major financial centers as possible, because communication between the continents can lag by a few milliseconds—a costly delay he simply can’t afford. “The speed of hot money is close to the speed of light,” he jokes. “It’s relativistic finance.” As a physicist, Bouchaud is well aware of the constraints that the theory of relativity imposes on our actions. But that’s not the only inspiration he has drawn from the laws of nature. Bouchaud’s focus is on the most refined physics, which uses the behavior of individual atoms to explain how collective phenomena such as electrical conductivity and magnetism arise. Nowadays, he’s professor at the prestigious École Polytechnique in Paris, but he has been applying his knowledge of collective phenomena to financial market prices for many years now. Together with Jean-Pierre Aguilar and Marc Potters, Bouchaud is the cofounder of Capital Fund Management, which rapidly grew into France’s largest and most successful hedge fund. What makes the fund so successful is, perhaps, that Bouchaud’s ideas differ fundamentally from the standard approach that economists have developed over the years. A huge amount of research was carried out in the 1950s and 1960s to identify patterns in financial markets. This gave rise to the “quantitative” economic theories that banks and financial institutions now use routinely.

Recent New Combined Cycle and Gas Turbine Plant Acceptance Test Experience

In the past year, Constellation Power Source Generation (CPSG) has commissioned (or is commissioning) four new combined cycle and simple cycle gas turbine plants. Each of these plants involved different equipment, vendors and architect engineers. Acceptance testing was done for these plants in accordance with ASME PTCs 46 and 22 with support from Fossil Consulting Services, Inc. (FCS). The Performance Test Codes provided the framework for the testing done, but considerable work was required to apply the codes in accordance with relevant contracts. Problems in acceptance testing can result in costly delay and retesting. This paper describes the lessons learned in resolving issues and problems that can help others in planning for and executing similar tests. These lessons learned can also help in writing effective contracts between owners, vendors and architect engineers.