Despite the expectations of economists that the euro changeover would have no effect on prices, European consumers perceived the contrary. To shed some light on this puzzle, we develop a model of imperfect information in which cheaper goods experience higher price growth after the changeover. Retailers, aware of the consumers’ difficulties in adopting the new currency, use currency changeovers to increase profits by increasing prices. The euro– related inflation is higher the lower price transparency after the changeover. Using data on inflation (Eurostat) and price levels (Economist Intelligence Unit) we show that, although the euro changeover did not significantly increase inflation, it had distortionary effect on prices. After the changeover cheaper goods had higher inflation, and this effect was stronger in countries in which people found dealing with the new currency problematic.

We analyze an infinite horizon model of bargaining over a set of policies, in which both players receive utility in every period, and preferences evolve over time. In each period one player makes a take-it-or-leave-it offer. If the other players accepts the offer, the new policy is implemented. Otherwise, the previous period policy remains in place. In the subsequent period, the previously implemented policy becomes the default option, and the process repeats itself. The endogeneity of status quo affects the behavior of the players: in each period they trade off the current utility with the future bargaining power determined by the implemented policy. As a result, the policies implemented in each period may not be Pareto efficient. We examine how the efficiency and the inertia of policy making is affected by this dynamic linkage.

I analyze a disclosure game between an uninformed decision maker and an informed but possibly biased expert. The relevant information is contained in a set of arguments. The expert can disclose each argument credibly, but he cannot prove whether he has disclosed everything. In all equilibria some, but not all, information is revealed. The biased expert exaggerates his reports in favor of his preference, yet he does not suppress all of the unfavorable information. The decision maker takes balanced reports at face value, but is skeptical about the unbalanced ones. In the latter case, she chooses the alternative favored by the biased expert only if the expert can provide her with enough favorable arguments. The decision maker is better-off if she knows more about the complexity of the problem, and she is more likely to be persuaded in complex situations.

Why do investors excessively tilt their portfolio towards domestic assets? Recent studies suggest asymmetric information plays a significant role in the home equity bias puzzle. A key assumption in theoretical models is that agents invest in assets and process information on their own. However, most international investments are executed by managers in financial institutions. These institutions allocate significant resources to processing information, making the asymmetric information assumption less appealing. In this paper, we explain home bias at the fund level by showing how information asymmetry at the individual level has relevant implications at the portfolio management level. Agents delegate their investment decisions to portfolio managers of different and uncertain ability. Investors are better informed about the performance of domestic markets; and therefore, are more able to evaluate the ability of managers operating in these markets. This, in turn, makes investing in domestic markets less risky and attracts more managers. Additionally, highly skilled managers benefit more from higher transparency, and this is why they are more likely to choose to operate in the domestic market. Therefore, a small information asymmetry of individual investors generates home bias due to highly skilled managers in the domestic market (higher than in the foreign market) and diversification (a higher number of managers in the domestic market). We simulate the model and find that on average 69.2% of investment is in the domestic market.