Issue 4

Christian Opitz and Kay H. Hofmann
We use a movie industry project-by-project data set to analyze the principal–agent problem in slate financing arrangements. Under this specific film financing regime, which has become a significant mode of raising capital in Hollywood over the past decade, an external investor concludes a long-term contract with a film producer and commits to cofinance a larger number of future film projects of that particular partner. In line with our theoretical conjectures, slate cofinanced movies receive poorer quality ratings and yield considerably lower return rates. Our data suggests that a substantial part of these performance differences may be attributed to adverse project selection and producer moral hazard.

John P. Lightle
Using a theoretical model of noisy expert advice, I show that language inflation can be a rational response to the vagueness of language. Experts will tend to overstate their positions to a like-minded decision maker (DM) and this constitutes a Pareto improvement over sending a sincere message. When the message space is bounded, overstatement may interfere with the DM's ability to aggregate the experts' information, because communication is less precise when the same message is sent for many states of the world. Despite this, I show that experts are willing to send either the most extreme message to the DM, or a partially overstated message, because by doing so the expert can decrease the likelihood the DM makes a suboptimal decision due to his subjective interpretation of the advice. Because the expert inflates his message toward the policy he believes the DM would be better off choosing, rather than sincerely revealing his information, I refer to this behavior as a paternalistic bias.

Marco Alderighi and Claudio A. Piga
We analyze two different cases of entry regulation in professional markets: first, when licensing is a requirement for becoming a professional (lawyers); second, when entry and price restrictions are applied on a geographical basis (pharmacists). Both cases are investigated within a circular model of localized competition and heterogeneous players. The analysis reveals that licensing introduces a selection mechanism which is effective in preventing entry of inefficient players in markets with large ex ante heterogeneity. Furthermore, because in the second case excessive entry is reduced as the degree of heterogeneity increases, our analysis lends support to a policy that simultaneously relaxes entry and price restrictions.

Hugh Kelley
This paper describes an experiment and simulation with features of a spatially explicit trading environment. Decision makers repeatedly make decisions about firm headquarters, input demands, and export patterns. A goal of this research is to determine if subjects’ management decisions reflect profit maximization, learning, or heuristic decision making. It also considers what impact decision makers’ bounded rationality has on the aggregate pattern of trade. Results indicate that bounded rationality in the form of learning and heuristic decision making are ubiquitous features of subjects’ decisions. This manifests as under-reaction to trade-driver stimuli and produces Trefler's missing trade, suggesting a behavioral basis for this anomaly.

Yrjö Koskinen, Michael J. Rebello and Jun Wang
We model the natural evolution of private information over the life of a venture capitalist financed project. In the early stages, the entrepreneur is better informed regarding the project, and when the project matures, the venture capitalist has an informational advantage over the entrepreneur. Within this framework, we examine how the venture capitalist's relative bargaining power affects cash flow rights and investment. When the bargaining advantage lies with the entrepreneur, the project may not be screened, and the venture capitalist may acquiesce to excessive initial investment but subsequently terminate the project. Increased venture capitalist bargaining power encourages project screening, attenuates the incentive to overinvest, and reduces the incidence of project termination subsequent to the initial investment. The payoff sensitivity of venture capitalist's financing contract also increases as hi