the pricing of durable exhaustible resources partial or total durability characterizes a large class of exhaustible resources hotelling s r percent rule will apply to a durable resource produced in a competitive market but will not apply if the resource is produced in a monopolistic market however the r percent rule does not mean that price is steadily rising it is shown that in general the competitive market price will fall initially as the stock in circulation increases and later will rise as the stock decreases and eventually depreciates toward zero after production ceases accounting for durability may thus help explain the u shaped long term price profiles observed for many resources 11 references 3 figures

global warming and hyperbolic discounting the use of a constant discount rate to study long lived environmental problems such as global warming has two disadvantages the prescribed policy is sensitive to the discount rate and with moderate discount rates large future damages have almost no effect on current decisions time consistent quasi hyperbolic discounting alleviates both of these modeling problems and is a plausible description of how people think about the future we analyze the time consistent markov perfect equilibrium in a general model with a stock pollutant the solution to the linear quadratic specialization illustrates the role of hyperbolic discounting in a model of global warming

the origins and development of the northeast asian political economy industrial sectors product cycles and political consequences theories of the product cycle hegemony and the world system are used to analyze the creation and development of the northeast asian political economy in this century japan south korea and taiwan have each developed in a particular relationship with the others the three taken together form a hierarchical constantly interacting political economic unit during the period of colonial rule japan was unique in building an imperial economic unit marked by a strong role for the state whether in tokyo or taipei by a tight integral unking of all three nations into a communications and transport network running toward the metropole and by a strategy of both using the colonies for agricultural surpluses and then locating industries there after 1945 a diffuse american hegemony replaced japan s unilateral system but elements of the prewar model have survived strong states direct economic development in south korea and taiwan here termed bureaucratic authoritarian industrializing regimes both countries are receptacles for japan s declining industries and both countries develop in tandem if in competition with each other the most recent export led competition has seen taiwan succeed where south korea has temporarily failed leaving seoul in an export led trap burdened with rapidly increasing external debt taiwan furthermore has industrialized relatively free of social disruption whereas korean society resisted its transformation at japanese hands and remains more rebellious today there can be one japan and one taiwan but not two or many of either in the world economy

the elephant in hotelling s room this paper questions the assumption commonly used in theoretical and policy research that scarcity rents make up a large proportion of market prices for oil and coal we show that the empirical literature simple calculations of historical and future scarcity rent shares and possible theoretical explanations all imply the same overall conclusions that scarcity rents seem to have been marginal or non existent historically that they almost certainly do not dominate fossil resource prices today and that there will be other factors shaping the prices in the upcoming decades we therefore argue that using the scarcity rent as the main or only basis for policy or for explaining empirical outcomes is ill advised

fair management of social risk we provide a general method for extending social preferences defined for riskless economic environments to the context of risk and uncertainty we apply the method to the problems of managing unemployment allowances in the context of macroeconomic fluctuations and catastrophic risks in the context of climate change the method guarantees ex post fairness and pays attention to individuals risk attitudes while ensuring rationality properties for social preferences revisiting basic ideas from harsanyi s celebrated aggregation theorem harsanyi 1955 the social preferences that we obtain do not always take the form of an expected utility criterion but they always satisfy statewise dominance when we require social preferences to be expected utilities we obtain a variant of harsanyi s result under a weak version of the pareto principle and a maximin criterion under a stronger pareto requirement whenever the ex post social ordering does not depend on people s risk attitudes we also show how non expected utility individual preferences can be accommodated in the approach

asymmetric awareness and moral hazard abstract this paper introduces asymmetric awareness into the classical principal agent model and discusses the optimal contract between a fully aware principal and an unaware agent the principal enlarges the agent s awareness strategically when proposing a contract and faces a tradeoff between participation and incentives leaving the agent unaware allows the principal to exploit the agent s incomplete understanding of the world relaxing the participation constraint while making the agent aware enables the principal to use the revealed contingencies as signals about the agent s action choice relaxing the incentive constraint the optimal contract reveals contingencies that have low probability but are highly informative about the agent s effort

exercise behavior valuation and the incentive effects of employee stock options abstract we use a large database on eso exercises to document characteristics of exercise behavior and calibrate a utility based model for measuring how differences in exercise behavior are manifested in option values and incentives option values and incentives computed from the model calibrations are compared to those computed from models used to value tradable options our analysis provides guidance to both academics and practitioners about how differences in exercise behavior and model choice affect measures of eso values and incentives and underscores the importance of gaining a thorough understanding of the underlying economic forces that affect the behavior of eso holders

testing the assumptions and predictions of the hotelling model in this paper we empirically examine whether the assumptions and predictions of the hotelling model are consistent with patterns observed in data we consider nonlinear functional forms for the extraction cost and resource demand to develop an empirical hotelling model with technological progress and stock dependent extraction costs using panel data on fourteen nonrenewable natural resources to estimate this empirical hotelling model we get qualitatively different results as compared to the related literature we find evidence of stock dependent extraction costs for most resources there is no evidence against the linearity of the optimal extraction rate in the resource stock for almost all resources studied furthermore the hotelling model may sustain a zero long run growth rate in resource prices these results depend on whether firms use different extractive technologies or whether the structural break observed on resource prices is taken into account

a fairness justification of utilitarianism differences in preferences are important to explain variation in individuals behavior there is however no consensus on how to take these differences into account when evaluating policies while prominent in the economic literature the standard utilitarian criterion is controversial according to some interpersonal comparability of utilities involves value judgments with little objective basis others argue that social justice is primarily about the distribution of commodities assigned to individuals rather than their subjective satisfaction or happiness in this paper we propose and axiomatically characterize a criterion named opportunity equivalent utilitarian that addresses these claims first our criterion ranks social alternatives on the basis of individuals ordinal preferences second it compares individuals based on the fairness of their assignments opportunity equivalent utilitarianism requires society to maximize the sum of specific indices of well being that are cardinal interpersonally comparable and represent each individual s preferences

show me the money interjurisdiction political competition and fiscal extraction in china we argue that interjurisdiction competition in authoritarian regimes engenders a specific logic for taxation promotion seeking local officials are incentivized to signal loyalty and competence to their principals through tangible fiscal revenues the greater the number of officials accountable to the same principal the more intense political competition is resulting in higher taxation however too many officials accountable to the same principal leads to lower taxation due to shirking by uncompetitive officials and the fear of political instability using a panel dataset of all chinese county level jurisdictions from 1999 2006 we find strong evidence for an inverse u shaped relationship between the number of county level jurisdictions within a prefecture our proxy for the intensity of political competition and fiscal revenues in most provinces but not so in politically unstable ethnic minority regions the results are robust to various alternative specifications including models that account for heterogeneous county characteristics and spatial interdependence

the analytic valuation of american options no analytic solutions exists for the valuation of american options written on futures contracts and foreign currencies for which early exercise may be optimal this article formulates the american option valuation problem in economically and mathematically meaningful ways this enables us to derive valuation formulas for american options the properties associated with the optimal exercise boundary are examined and a numerical technique to implement the valuation formulas is presented article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

colonial legacies and state institutions in china evidence from a natural experiment what is the legacy of japanese colonial rule in east asia in this article i use a geographic regression discontinuity design to examine of the long run effects of japanese rule over northern china i find that the japanese colonization of northern china had a positive long run effect on state institutions with persistent increases in schooling health and bureaucratic density i also find suggestive evidence that colonization led to increases in wealth as measured by census data and nighttime luminosity the positive legacy of japanese colonization in northern china suggests that intense state building efforts can pay long run dividends even in the context of a brutal and extractive regime

equilibrium pricing and portfolio composition in the presence of uncertain parameters abstract we analyze the effect of parameter uncertainty on equilibrium asset prices for the symmetric case when the amount of estimation risk is the same for all securities the existing literature argues that parameter uncertainty is largely irrelevant for equilibrium our results differ we find that symmetric estimation risk affects equilibrium values of relative asset prices expected returns market weights and betas

the contribution of l c gray to the economic theory of exhaustible natural resources and its roots in the history of economic thought abstract the paper opens with an assessment of natural resources economics up to 1913 14 when gray published his two pioneering articles in natural resources economics part i an in depth study of gray weighing his contribution to the microeconomic theory of the mine and the macroeconomic theory of conservation against current literature constitutes the main body of the paper part ii gray and hotelling s contributions to the theory of the mine are compared part iii the paper concludes with a comparison drawn between the author s findings and the scant attention previously paid to gray s contributions to natural resources economics so far as i know this is the first attempt to apply economic theory to this particular problem of conservation h c taylor unpublished letter to c r van hise may 23 1913 a reference to gray s economic possibilities of conservation

generalized utilitarianism and harsanyi s impartial observer theorem harsanyi s impartial observer must consider two types of lotteries imaginary identity lotteries accidents of birth that she faces as herself and the real outcome lotteries life chances to be faced by the individuals she imagines becoming if we maintain a distinction between identity and outcome lotteries then harsanyi like axioms yield generalized utilitarianism and allow us to accommodate concerns about different individuals risk attitudes and concerns about fairness requiring an impartial observer to be indifferent as to which individual should face similar risks restricts her social welfare function but still allows her to accommodate fairness requiring an impartial observer to be indifferent between identity and outcome lotteries however forces her to ignore both fairness and different risk attitudes and yields a new axiomatization of harsanyi s utilitarianism

natural resource economics under the rule of hotelling abstract natural resource stocks held in situ are physical assets equilibrium in the assets market requires that their rates of return be such that their owners are just willing to hold on to them rather than invest elsewhere i discuss a number of factors relating to the evolution of extraction costs to the durability of the resource to market structure and to uncertainty that are important in correctly characterizing the rate of return on holding exhaustible natural resource stocks the emphasis is put on how those factors can potentially help bridge the gap between the basic hotelling s rule of natural resource exploitation and the historical behaviour of the flow price of a number of resources i also highlight some theoretical and empirical issues that need further attention

introduction to the special issue on behavioral economics and finance we are thrilled to introduce the special issue of management science titled behavioral economics and finance the theories underlying finance and economics have long relied on behavioral assumptions after all risk aversion is merely an observed behavior of individual behavior but it is now well accepted to assume that agents are risk averse surely other common and very human behaviors affect markets and management our goal with this special issue was to provide an outlet for research on these issues we believe that this special issue accomplishes that goal and makes for engaging reading the response to the special issue exceeded our expectation we received 292 submissions we are proud to say we were able to handle this workload with the same high quality review process and turnaround goals maintained by the editorial board at management science more than 90 of papers were reviewed within 90 days we could not have accomplished this goal without the support of many individuals kathleen luckey the tireless and remarkable managing editor of management science provided us with phenomenal support we are truly grateful for her willingness to go the extra mile in handling the large number of papers that we received around the submission deadline the special issue was the brainchild of gerard cachon the editor in chief of management science we are grateful for his visionary leadership of the journal and his willingness to devote scarce journal space and resources to this important topic finally we are indebted to the remarkable group of associate editors who gave of their time and expertise they were critical in ensuring high quality and prompt feedback to those who submitted papers we are amazed at the time and talent that many willingly and ably provide to the research enterprise in the end you have before you 29 papers that are separated into two issues the second issue will publish in february 2012 we have roughly split the papers into a behavioral economics issue and a behavioral finance issue though there is clearly much overlap between the two the papers include experimental theoretical and empirical papers with a common theme they all address questions that are answered with a deeper understanding of human behavior the papers deal with a wide range of behavioral factors that influence outcomes including cultural values social norms social networks attention familiarity and ambiguity aversion to name but a few taken together the papers reveal the promise that behavioral economics and finance hold and provide a strong signal of management science s commitment to the field in closing we thank all of the authors who submitted to the special issue the strong response to our call made the issue a success to those authors whose work appears in the issue thank you for all of your hard work in navigating the review process while being responsive to the deadlines of the special issue

the ethics of intergenerational risk abstract this paper addresses the evaluation of intergenerational allocations in an uncertain world it axiomatically characterizes a class of criteria named reference dependent utilitarian that assess allocations relative to a stochastic reference the characterized criteria combine social concerns for ex ante equity capturing the idea that generations should be treated equitably before risk is resolved and for ex post fairness capturing the idea that generations should be treated equitably after risk is resolved social discounting is endogenous and is governed by two opposite forces extinction risk pushes society to reduce the weight on future generations while uninsurable technological risk pushes society to increase the weight on future generations

irreversible investment and knightian uncertainty when firms make a decision about irreversible investment they may not have complete confidence about their perceived probability measure describing future uncertainty they may think other probability measures perturbed from the original one are also possible such uncertainty characterized by not a single probability measure but a set of probability measures is called knightian uncertainty the effect of knightian uncertainty on the value of irreversible investment opportunity is shown to be drastically different from that of traditional uncertainty in the form of risk specifically an increase in knightian uncertainty decreases the value of investment opportunity while an increase in risk increases it

environmental and resource economics a canadian retrospective the paper reviews research contributions to environmental and resource economics by scholars in canada we focus mainly on work from the past 25 years but also highlight earlier pathbreaking work we begin by looking at broad trends in research both internationally and within canada we then review canadian contributions to various topics in the field canadians have played a leading role in the development of the field especially in resource economics international environmental economics and the valuation of environmental amenities

risk ambiguity and the exercise of employee stock options abstract we investigate the importance of ambiguity or knightian uncertainty in executives stock option exercise decisions we develop an empirical estimate of ambiguity and include it in regression models alongside the traditional measure of risk equity volatility we show that each variable has a significant effect on the timing of option exercises with volatility causing executives to hold options longer to preserve option value and ambiguity increasing the tendency for executives to exercise early

quadratic social welfare functions john harsanyi has provided an intriguing argument that social welfare can be expressed as a weighted sum of individual utilities his theorem has been criticized on the grounds that a central axiom that social preference satisfies the independence axiom has the morally unacceptable implication that the process of choice and considerations of ex ante fairness are of no importance this paper presents a variation of harsanyi s theorem in which the axioms are compatible with a concern for ex ante fairness the implied mathematical form for social welfare is a strictly quasi concave and quadratic function of individual utilities

managing catastrophic climate risks under model uncertainty aversion we propose a robust risk management approach to deal with the problem of catastrophic climate change that incorporates both risk and model uncertainty using an analytical model of abatement we show how aversion to model uncertainty influences the optimal level of mitigation we disentangle the role of preferences from the structure of model uncertainty which we define by means of a simple measure of disagreement across models with data from an expert elicitation about climate change catastrophes we quantify the relative importance of these two effects and calibrate a numerical integrated assessment model of climate change the results indicate that the structure of model uncertainty and specifically how model disagreement varies in abatement is the key driver of optimal abatement and that model uncertainty warrants a higher level of climate change mitigation this paper was accepted by manel baucells decision analysis

search and knightian uncertainty suppose that uncertainty about labor market conditions has increased does this change induce an unemployed worker to search longer or shorter this paper shows that the answer is drastically different depending on whether an increase in uncertainty is an increase in risk or that in true uncertainty in the sense of frank knight we show in a general framework that while an increase in risk the mean preserving spread of the wage distribution that the worker thinks she faces increases the reservation wage an increase in knightian uncertainty a decrease in her confidence about the wage distribution reduces it

reverse bayesianism a choice based theory of growing awareness this article introduces a new approach to modeling the expanding universe of decision makers in the wake of growing awareness and invokes the axiomatic approach to model the evolution of decision makers beliefs as awareness grows the expanding universe is accompanied by extension of the set of acts the preference relations over which are linked by a new axiom invariant risk preferences asserting that the ranking of lotteries is independent of the set of acts under consideration the main results are representation theorems and rules for updating beliefs over expanding state spaces and events that have the flavor of reverse bayesianism jel d81 d83 according to the bayesian paradigm as new discoveries are made and new infor mation becomes available the universe shrinks with the arrival of new information events replace the prior universal state space to become the posterior state space or universe of discourse this process of destruction reflects the impossibility in the bayesian framework of expanding the state space and of updating the probabilities of null events coupled with the fact that conditioning on new information renders null events that a priori were nonnull yet experience and intuition alike contradict this view of the world becoming accustomed to possibilities that were once inconceivable is part of history and our own life experience there is a sense therefore in which our universe expands as we become aware of new opportunities in this paper we take a step toward modeling the process of growing awareness and expansion of the universe or state space in its wake 1 to model the evolution of beliefs in response to growing awareness we invoke the theory of choice under uncertainty borrowing its language and structure while modifying it to fit our pur pose in particular we allow for new consequences and feasible acts to be discovered and for new evidence to establish in the mind of decision makers new links between acts and consequences the interpretation of the updating is somewhat dif ferent for the discovery of new feasible acts and consequences on the one hand

equally distributed equivalent utility ex post egalitarianism and utilitarianism we provide an axiomatization of expected equally distributed equivalent utility social welfare functions in the context of harsanyi s impartial observer theorem for this family of social welfare functions we show what additional axiom is necessary and sufficient for the observer to exhibit aversion to ex post inequality we also relate this axiomatization to our axiomatization in a companion paper of generalized utilitarian social welfare functions given certain richness assumptions the only social welfare functions that belong to both families are the utilitarian

bounded awareness heuristics and the precautionary principle the precautionary principle has been proposed as a basis for making decisions about environmental issues but remains controversial using a model of inductively justified propositions about awareness this paper shows how the precautionary principle may be interpreted as a heuristic guide for boundedly rational decision makers faced with the possibility of unfavorable surprises

unjust intergenerational allocations abstract an intergenerational allocation is defined to be unjust if there is a feasible allocation with more total consumption and less relative inequality unjust allocations are characterized in technologies satisfying certain regularity conditions after ruling out unjust allocations the consequences of letting generations choose according to a standard form of altruistic preferences are explored in to particular classes of technologies a connection between excluding unjust allocations and maximizing the welfare of the worst off generation is established in these technologies

employee stock option exercises an empirical analysis this paper describes the exercise behavior of over 50 000 employees who hold longterm options on employer stock at eight corporations employees typically exercise options years before expiration commonly sacrificing half of the black scholes value exercise is strongly associated with recent stock price movements the market to strike ratio proximity to vesting dates time to maturity volatility and the employee s level within the company these findings have implications for compensation planners the fasb as it develops a new accounting standard for options and financial statement users and preparers who apply and interpret the new fasb standard

the effect of the discount rate on depletion of exhaustible resources this paper argues that despite its widespread acceptance in the literature the basic proposition that a reduction an increase in the discount rate leads to greater conservation faster depletion of an exhaustible resource is not generally valid it shows that the effect of the discount rate on the rate of resource depletion depends on capital requirements for production of the substitute and extraction of the resource and on the size of the resource stock in fact it shows that there always exist at least two ranges of the resource stock size for which the effect is opposite to that conventionally believed

trends in natural resource commodity prices an analysis of the time domain abstract this paper attempts to reconcile the theoretical predictions of increasing real prices for nonrenewable natural resource commodities obtained from hotelling style models with the empirical findings of falling prices for these commodities a theoretical model for relative price movements is derived for the case of exogenous technical change and endogenous change in the grade of ores mined the model suggests a u shaped time path for relative prices the implied price movements are tested for all the major metals and fuels and the model parameters are found to be statistically significant for 11 out of the 12 commodities tested

the time path of scarcity rent in the theory of exhaustible resources there is now a consensus in the literature on resource economics that a depletable resource should command a price in excess of its marginal extraction cost simply to reflect the opportunity cost of using a unit of it today rather that conserving it for the future but how this excess is to change along an optimal or competitive equilibrium path of resource use is still an unresolved question this might at first seem puzzling since according to the fundamental theorem of economics of exhaustible resources or hotelling i 93 i rule on an optimal path price minus marginal extraction cost also termed interchangeably as scarcity rent user cost or royalty should steadily grow over time at the social rate of discount however the literature contains sharply contrasting views on the subject for example kay and mirrlees 1975 have argued that since along an optimal path the scarcity rent grows exponentially as a finite stock of a resourcexnears exhaustion then situations in which the resource stock is still very large and yet the price greatly exceeds the marginal extraction cost should indicate that the price is significantly above its optimal level and that the resource is overconserved in stark contrast to this view heal i976 has argued that as the resource stock nears exhaustion the difference between price and marginal cost or what he termed social cost of extraction falls monotonically to zero hanson i980 analyses the same model as heal s but unlike heal who assumes the unit extraction cost to be convex he postulates it to be concave and yet like heal concludes that the scarcity rent will be monotonically declining over time solow and wan i976 analyse a still different situation where resource deposits differ in quality and the unit extraction cost increases as higher grade deposits are exhausted and extraction proceeds to lower grades they show that along an optimal path the shadow price of a resource must rise at the real rate of interest despite differential extraction costs but that the difference between price and the marginal extraction cost or what they call degradation charge declines monotonically over time to zero these sharply differing conclusions suggest that far from being resolved the question of how scarcity rent changes over time is much in want of a close scrutiny the need for such a scrutiny becomes even stronger once it is noted

justifying social discounting the rank discounted utilitarian approach the popular discounted utilitarian criterion for infinite horizon social choice has been criticized on the ground that it treats successive generations unfairly i propose to evaluate intergenerational welfare with a rank discounted utilitarian rdu criterion instead the criterion amounts to discounted utilitarianism on non decreasing paths but it treats all generations impartially discounting becomes the mere expression of intergenerational inequality aversion i show that more inequality averse rdu societies have higher social discount rates when future generations are better off i apply the rdu approach in two benchmark economic growth models and i prove that it promotes sustainable policies maximizing discounted utility

on equilibrium pricing under parameter uncertainty prior theoretical work on estimation risk generally has been restricted to single period returns based models in which the investor must estimate the vector of expected returns but the covariance matrix is known this paper extends the literature on parameter uncertainty in several ways first we analyze asymmetric parameter uncertainty in a model based on payoffs second we explore the effects of both symmetric and asymmetric estimation risk on equilibrium asset prices when the covariance matrix for payoffs must also be estimated finally we investigate the effects on equilibrium of asymmetric parameter uncertainty in a simple multiperiod model

the hotelling rule in non renewable resource economics a reassessment harold hotelling s 1931 contribution is known for providing a basic principle the hotelling rule to the economics of non renewable resources nearly ninety years later empirical tests conclude the rule lacks empirical validity requiring strong amendments to describe the long term aggregate behavior of its target object on the basis of hotelling s unpublished archival material this paper revisits the place given to the hotelling rule in non renewable resource economics our reconstruction shows that hotelling s 1931 paper has been misinterpreted from the outset the hotelling rule was not valid for mineral resources in contrast the consideration of two inherent geological constraints alongside exhaustibility offered the opportunity for an alternative basic framework capable to generate bell shaped and u shaped equilibrium trajectories for supplies and prices respectively inspired by this unknown aspect of hotelling s work brought to light by our archival investigation we sketch this alternative basic model enabling non renewable resource economics to circumvent the empirical shortfalls of the hotelling rule

assessing risky social situations this paper reexamines the welfare economics of risk it singles out a class of criteria the expected equally distributed equivalent as the unique class that avoids serious drawbacks of existing approaches such criteria behave like ex post criteria when the final statistical distribution of well being is known ex ante and like ex ante criteria when risk generates no inequality the paper also provides a new result on the tension between inequality aversion and respect of individual ex ante preferences in the vein of harsanyi s aggregation theorem

robust permanent income and pricing i suppose there exists an extremely powerful and if i may so speak malignant being whose whole endeavours are directed toward deceiving me rene descartes meditations ii 1

hotelling under pressure we show that oil production from existing wells in texas does not respond to oil prices while drilling activity and costs respond strongly to explain these facts we reformulate hotelling s class

time discounting in harold hotelling s approach to natural resource economics the unsolved ethical question the paper focuses on harold hotelling s approach to time discounting in the context of the intertemporal allocation of exhaustible natural resources in 1931 hotelling introduces a positive discount rate when dealing with the social value or total utility derived from a resource his position was in contrast with early economic literature on conservation as well as with the point of view of frank ramsey according to whom time discounting expressed an unjustified preference for the welfare of present generations over that of future ones hence it has been argued that hotelling dismissed ethical concerns using archival material we find that for hotelling economic questions should not be restricted to issues of economic efficiency that his choice to discount utility which he considered as analogous to a concrete benefit at the interest rate is compatible with ramsey s position and more broadly that this choice does not preclude an ethical position on the desirable distribution of exhaustible resources through time to hotelling ethics is implemented by politics through fiscal corrections of the interest rate revisiting hotelling on the articulation between ethics allocative efficiency and policies allows us to rethink the way we do that in current models using time discounting