trends in time allocation a cross country analysis abstract using detailed time use data for seven industrialized countries from the 1970s until today we document general decreases in men s market work coupled with increases in men s unpaid work and child care and increases in women s paid work and child care coupled with decreases in unpaid work we also find almost universal increases in the time devoted to watching television over this period and uncover a widespread increase in leisure inequality in favor of lower educated adults trends in leisure inequality mirror the general increase in income and earnings inequality experienced in most countries over this period especially after the mid 1980s all these findings are consistent with previous results for the us however in contrast to the increases in leisure found for the us we fail to find common trends in leisure time across countries over the period analyzed

optimal dynamic pricing of inventories with stochastic demand over finite horizons in many industries managers face the problem of selling a given stock of items by a deadline we investigate the problem of dynamically pricing such inventories when demand is price sensitive and stochastic and the firm s objective is to maximize expected revenues examples that fit this framework include retailers selling fashion and seasonal goods and the travel and leisure industry which markets space such as seats on airline flights cabins on vacation cruises and rooms in hotels that become worthless if not sold by a specific time we formulate this problem using intensity control and obtain structural monotonicity results for the optimal intensity resp price as a function of the stock level and the length of the horizon for a particular exponential family of demand functions we find the optimal pricing policy in closed form for general demand functions we find an upper bound on the expected revenue based on analyzing the deterministic version of the problem and use this bound to prove that simple fixed price policies are asymptotically optimal as the volume of expected sales tends to infinity finally we extend our results to the case where demand is compound poisson only a finite number of prices is allowed the demand rate is time varying holding costs are incurred and cash flows are discounted the initial stock is a decision variable and reordering overbooking and random cancellations are allowed

the drivers of structural change the main goal of this paper is to provide an integrated survey of the literature devoted to identifying the drivers of structural change broadly defined as the process of reallocation of economic activity across the three broad sectors agriculture manufacturing and services using the ggdc 10 sector database this paper first presents the empirical facts associated with structural change in different regions of the world that is europe and the usa asia latin america and africa then reviews four determinants of structural change i changes in income ii changes in relative sectoral prices iii changes in input output linkages and iv changes in comparative advantage s via globalization and trade

inflation costly price and quantity adjustments and time spent in the keynesian regime abstract this paper considers a menu cost firm under inflation due to costly quantity adjustments the firm is sometimes in a keynesian regime where sales are demand determined with a positive real interest rate the proportion of time in the keynesian regime is less than the inverse of the absolute value of the average elasticity of demand in that regime

valuing lost home production of dual earner couples using a life cycle model in which women divide their time between home and market work we establish a link between retirement wealth and the value of forgone home production we use data from the health and retirement study to estimate the model s parameters and adjust the growth rate of gdp to reflect reductions in non market output we find that the value of forgone home production is modest about 25 percent of women s measured earnings

the role of options in the resolution of agency problems a comment the aim of the contracting literature in economics is to explain observed contractual arrangements or organizations as minimizing the costs of incentive conflicts in the agency cost literature of financial economics the contractual arrangement at issue is the mix of securities held by inside management of a firm and outside suppliers of capital the ownership structure of the firm in jensen and meckling s 8 terminology in explaining the ownership structure of a corporation jensen and meckling focus on two sources of agency or incentiveconflict costs a the manager s tendency to consume excessive perquisites and b the manager s tendency to invest in prospects of high risk so as to effect an ex post transfer from bondholders to stockholders a recent article in this journal by haugen and senbet 61 examines the role of stock options in resolving these agency problems and claims to show in particular that a call option in the insider portfolio can eliminate the first type of agency costs this article re examines the role of options in the resolution of agency problems we argue in section i that options cannot eliminate the agency problem of excessive perquisite consumption contrary to haugen and senbet the essential point is that unless outside financing can be provided entirely by riskless debt then outsiders must have a residual claim on the net income of the firm in some states of the world outsiders therefore share in the costs of increased perquisite consumption whatever the ownership structure of the firm this negative externality means that excessive perquisite consumption is inevitable the question remains do call options nonetheless have a role in the mitigation of agency costs an insider portfolio consisting only of equity leaves the manager with the same proportion of residual claim in each state of the world we show using a formal principal agent model that the efficient insider s share of profits is relatively high in favorable high profit states of the world insider call options arise as means of transferring residual claim to the manager in favorable states of the world relative to low profit states the basic agency model has been solved in substantial generality by holmstrom 7 and others we employ here a more specific model that draws on the techniques developed by green and kahn 4 and that is an extension to continuous states of the finite state model of sappington 12 the extension allows a simple characterization of the optimal contract a characterization that

empirical evidence on the relation between stock option compensation and risk taking abstract we examine whether executive stock options esos provide managers with incentives to invest in risky projects for a sample of oil and gas producers we examine whether the coefficient of variation of future cash flows from exploration activity our proxy for exploration risk increases with the sensitivity of the value of the ceo s options to stock return volatility eso risk incentives both eso risk incentives and exploration risk are treated as endogenous variables by adopting a simultaneous equations approach we find evidence that eso risk incentives has a positive relation with future exploration risk taking additional tests indicate that eso risk incentives exhibits a negative relation with oil price hedging in a system of equations where eso risk incentives and hedging are allowed to be endogenously determined overall our results are consistent with esos providing managers with incentives to mitigate risk related incentive problems

indexed executive stock options abstract we design and derive a pricing model for an executive stock option with a strike price indexed to a benchmark and investigate its valuation and incentive implications in both up and down markets the indexed option filters out common risks beyond the executive s control thereby increasing the efficiency of incentive contracts the indexed option has a different payoff structure and much lower initial value than a traditional option incentive effects of the indexed option also differ from those of traditional options we design an optional penalty function to reduce the payoff if executives manipulate specified model parameters such as volatility

dynamic pricing with loss averse consumers and peak end anchoring we study the dynamic pricing implications of a new behaviorally motivated reference price mechanism based on the peak end memory mode this model suggests that consumers anchor on a reference price that is a weighted average of the lowest and most recent prices loss averse consumers are more sensitive to perceived losses than gains relative to this reference price we find that a range of constant pricing policies is optimal for the corresponding dynamic pricing problem this range is wider the more consumers anchor on lowest prices and it persists when buyers are loss neutral in contrast with previous literature in a transient regime the optimal pricing policy is monotone and converges to a steady state price which is lower the more extreme and salient the low price anchor is our results suggest that behavioral regularities such as peak end anchoring and loss aversion limit the benefits of varying prices and caution that the adverse effects of deep discounts on the firm s optimal prices and profits might be more enduring than previous models predict

dynamic pricing of inventory capacity with infrequent price changes we consider a problem of dynamically pricing a single product sold by a monopolist over a short time period if demand characteristics change throughout the period it becomes attractive for the company to adjust price continuously to respond to such changes i e price discriminate intertemporally however in practice there is typically a limit on the number of times the price can be adjusted due to the high costs associated with frequent price changes if that is the case instead of a continuous pricing rule the company might want to establish a piece wise constant pricing policy in order to limit the number of price adjustments such a pricing policy which involves optimal choice of prices and timing of price changes is the focus of this paper we analyze the pricing problem with a limited number of price changes in a dynamic deterministic environment in which demand depends on the current price and time and there is a capacity inventory constraint that may be set optimally ahead of the selling season the arrival rate can evolve in time arbitrarily allowing us to model situations in which prices decrease increase or neither we consider several plausible scenarios where pricing and or timing of price changes are endogenized various notions of complementarity single crossing property supermodularity and total positivity are explored to derive structural results conditions sufficient for the uniqueness of the solution and the monotonicity of prices throughout the sales period furthermore we characterize the impact of the capacity constraint on the optimal prices and the timing of price changes and provide several other comparative statics results additional insights are obtained directly from the solutions of various special cases

executive effort and selection of risky projects this article examines the incentives of executives to adopt risky projects the agency problem considered is that of motivating the executive to expend effort to generate information about the profitability of projects and to select the best project conditional upon the information that his effort generates we show that the executive and the principal will not always agree regarding which project is best we provide conditions under which this conflict of interest leads from the principal s perspective to either an underinvestment or an overinvestment in risky projects

structural transformation and the deterioration of european labor market outcomes this paper examines hours worked in continental europe and the united states from 1956 to 2003 the empirical work establishes two results first hours worked in europe decline by almost 45 percent compared to the united states over this period second this decline is almost entirely accounted for by the fact that europe develops a much smaller market service sector than the united states a simple model of time allocation is used to understand these patterns i find that relative increases in taxes and technological catch up can account for most of the differences between the european and american time allocations over this period

time allocation and home production technology abstract this paper studies the effect of the relative productivity between the market sector and the home sector on time allocation a novelty of the paper is to jointly estimate home productivity and the elasticity of substitution between market goods and home hours which is accomplished through structural estimation based on income decile level data with a high elasticity of substitution and a slower growth rate of productivity in the home sector relative to the market sector the model can produce key data patterns of time allocation in both the cross sections and time series quantitatively relative productivity can account for 32 of the variation in market hours and 18 of the variation in home hours

underwater options and the dynamics of executive pay to performance sensitivities we empirically analyze the dynamics of executives pay to performance sensitivities option pay to performance sensitivities become weaker as options fall underwater often leading to pressures to reprice options or restore pay to performance sensitivity in other ways building a detailed data set on executives portfolios of stock and options we find that the responsiveness of pay to performance sensitivities created by all executive holdings of stock and options to changes in stock price is large the elasticity of pay to performance sensitivities with respect to stock price decreases is about 0 7 and is larger for high option executives and for executives with high percentages of options already underwater the dominant mechanism through which companies offset declines in option pay to performance sensitivities is larger option grants following stock price declines on average these larger grants restore approximately 40 of the stock price induced pay to performance sensitivity declines option repricings are inconsequential in this regard despite the attention they have attracted in looking at positive returns we find the reverse higher returns both directly increase pay to performance sensitivities and lead to larger option grants which raise pay to performance sensitivities further thus option grants to executives tend to be largest following large stock price increases or large stock price decreases

on the allocation of time a quantitative analysis of the roles of taxes and productivities basic theory suggests that increases in labor income taxes induce people to substitute household production for market work time use surveys for 12 oecd countries during 1970 2010 however show that instead people substituted leisure for market work to understand why this happened we carefully measure the labor productivity of household production and find that it grew strongly in many countries of our sample employing a calibrated model of household production we show that strong growth in the labor productivity of household production implies that leisure absorbs the reductions in market work after labor income tax increases

integration of inventory and pricing decisions with costly price adjustments motivated by the widespread adoption of dynamic pricing in industry and the empirical evidence of costly price adjustments in this paper we consider a periodic review inventory model with price adjustment costs that consist of both fixed and variable components in each period demand is stochastic and price dependent the firm needs to coordinate the pricing and inventory replenishment decisions in each period to maximize its total discounted profit over a finite planning horizon we develop the general model and characterize the optimal policies for two special scenarios namely a model with inventory carryover and no fixed price change costs and a model with fixed price change costs and no inventory carryover finally we propose an intuitive heuristic policy to tackle the general system whose optimal policy is expected to be very complicated our numerical studies show that this heuristic policy performs well

empirical research on ceo turnover and firm performance a discussion abstract engel hayes wang and farrell whidbee provide new evidence on how firms weight alternative performance measures in making ceo retention and replacement decisions while their results are statistically significant firm performance continues to explain very little of the variation in ceo turnover i argue we have probably reached a point of diminishing returns in estimating logit models that focus on the relation between ceo turnover and firm performance measures we will have to consider other less explored issues to increase our understanding of ceo turnovers and replacements analyzing age related issues is one example

structural transformation marketization and household production around the world we provide evidence on household and market production in 36 countries since 1960 on average the household sector accounts for almost half of total hours worked as gdp per capita increases the employment share of household production in total hours worked initially declines and then hardly changes while the employment shares of market goods and services decrease and increase estimating the value added of household production yields similar patterns labor productivity of household production is lower than and positively correlated with that in the market these findings can be used as an input into quantitative work involving household production

top executive rewards and firm performance a comparison of japan and the united states this paper studies top executive turnover and compensation and their relation to firm performance in the largest japanese and u s companies japanese executive turnover and compensation are related to earnings stock returns and to a lesser extent sales performance measures the fortunes of japanese top executives therefore are positively correlated with stock performance and current cash flows or with factors contributing to such performance the relations for the japanese executives are generally economically and statistically similar to those for their u s counterparts there is some evidence however that the fortunes of japanese executives are more sensitive to low income but less sensitive to stock returns than those of u s executives

engines of liberation electricity was born at the dawn of the last century households were inundated with a flood of new consumer durables what was the impact of this consumer durable goods revolution it is argued here that the consumer goods revolution was conducive to liberating women from the home to analyse this hypothesis a beckerian model of household production is developed households must decide whether or not to adopt the new technologies and whether a married woman should work can such a model help to explain the rise in married female labour force participation that occurred in the last century yes the housewife of the future will be neither a slave to servants nor herself a drudge she will give less attention to the home because the home will need less she will be rather a domestic engineer than a domestic labourer with the greatest of all handmaidens electricity at her service this and other mechanical forces will so revolutionize the woman s world that a large portion of the aggregate of woman s energy will be conserved for use in broader more constructive fields thomas alva edison as interviewed in good housekeeping magazine lv no 4 october 1912 p 436

child care choices and children s cognitive achievement the case of single mothers we evaluate the effect of child care versus maternal time inputs on child cognitive development using single mothers from the nlsy79 to deal with nonrandom selection of children into child care we exploit the exogenous variation in welfare policy rules facing single mothers in particular the 1996 welfare reform and earlier state level policy changes generated substantial increases in their work child care use we construct a comprehensive set of welfare policy variables and use them as instruments to estimate child cognitive ability production functions in our baseline specification we estimate that a year of child care reduces child test scores by 2 1

homework in development economics household production and the wealth of nations we introduce home production into the neoclassical growth model and examine its consequences for development economics in particular we study the extent to which one can account for international income differences with differences in policies that distort capital accumulation in models with home production such policies not only reduce capital accumulation but also change the mix of market and nonmarket activity hence these models can generate larger differences in output than standard models for a given policy differential we also show how the welfare implications change when we incorporate home production

revenue management with costly price adjustments we consider a novel variant of the perishable inventory profit management problem faced by a firm that sells a fixed inventory over a finite horizon in the presence of price adjustment costs in economics literature such price adjustment costs are widely studied and are typically assumed to include a fixed component e g advertising costs an inventory dependent component e g inventory relabeling costs as well as a component that depends on the magnitude of the price adjustment e g cognitive and coordination managerial costs we formulate the firm s profit management problem as a finite horizon dynamic program in which the state of the system is described by the inventory level as well as the current price level we derive first order properties of the optimal value function and give a complete characterization of optimal policies for the case of ample inventory through a set of examples we demonstrate the complex and counterintuitive nature of optimal price adjustment policies consequently we focus on developing easily computable and implementable heuristics with demonstrably good performance to this end we develop and solve a fluid model based on the original stochastic dynamics and propose three fluid based heuristic policies we derive expressions for the expected profit generated by each one of these heuristics when applied to the stochastic problem and derive sufficient conditions for the asymptotic optimality of the policies when the initial inventory levels and planning horizons are proportionally scaled up we test the performance of the heuristics in a numerical study and demonstrate a robust near optimal performance of one of the heuristics which we call the fluid time heuristic for a wide range of problem parameters finally we demonstrate the importance of proper accounting of price adjustment costs in several alternative business settings

wealth and executive compensation using new data on the wealth of swedish ceos i show that higher wealth ceos receive stronger incentives since high wealth excluding own firm holdings implies low absolute risk aversion this is consistent with a risk aversion explanation to examine whether wealth is likely to proxy for power i use lagged wealth typically measured before the ceo was hired and the results remain for one of two incentive measures also the wealth incentive result is not stronger for ceos likely to face limited owner oversight finally wealth is unrelated to pay levels and is hence unlikely to proxy for skill the compensation of chief executives of large listed companies is often largely in the form of risky instruments such as shares and options since share prices are affected by many factors outside management control this exposes ceos to risk according to standard agency theory the risk inherent in incentive compensation should reduce optimal incentives looking across firms the evidence that volatile stock prices reduce incentives in actual compensation has been mixed see e g aggarwal and samwick 1999 core and guay 2001 and prendergast 2002 for different views the importance of risk for incentives is thus in dispute 1 this paper takes another look at ceo incentives exploiting variation in risk aversion rather than risk decreasing absolute risk aversion implies that a wealthy ceo is less risk averse than a similar same coefficient of relative risk aversion but less wealthy ceo wealth should therefore proxy for risk aversion wealth may also be related to ceo skill and power obviously using wealth variation empirically hinges on having adequate data on individual wealth i use swedish tax filings to construct a proxy of wealth in sweden tax authorities provide data on aggregate yearly income

the sensitivity of ceo wealth to equity risk an analysis of the magnitude and determinants abstract to control risk related incentive problems equity holders are expected to manage both the convexity and slope of the relation between firm performance and managers wealth i find stock options but not common stockholdings significantly increase the sensitivity of ceos wealth to equity risk cross sectionally this sensitivity is positively related to firms investment opportunities this result is consistent with managers receiving incentives to invest in risky projects when the potential loss from underinvestment in valuable risk increasing projects is greatest firms stock return volatility is positively related to the convexity provided to managers suggesting convex incentive schemes influence investing and financing decisions

a near rational model of the business cycle with wage and price inertia this paper presents a model in which insignificantly suboptimal behavior causes aggregate demand shocks to have significant real effects the individual loss to agents with inertial price wage behavior is second order in terms of the parameter describing the shock while the effect on real economic variables is first order thus significant changes in business activity can be generated by anticipated money supply changes provided that some agents are willing to engage in nonmaximizing behavior which results in small losses

justifying the first order approach to principal agent problems it is of interest to know when the incentive compatibility conditio n in principal agent problems can be replaced by the condition that the agent s expected utility be stationary in effort the mirrlees rogerson conditions do not work if the principal can observe more than one observable statistic also the mirrlees rogerson assumption that the distribution function of output is convex in the agent s action is unsatisfactory even in the context of the basi c model it is too restrictive the paper presents a suite of conditio ns that are applicable to the multistatistic case and replaces the objectionable convex distribution function assumption copyright 1988 by the econometric society

the provision of incentives in firms i ncentives are the essence of economics despite many wide ranging claims about their supposed importance there has been little empirical assessment of incentive provision for workers the purpose of this paper is to critically overview existing work on the provision of incentives since the interests of workers and their employers are not always aligned a large theoretical literature has emphasized how firms design compensation contracts to induce employees to operate in the firm s interest this literature has reached into many areas of compensation and has pointed to a multitude of different mechanisms that can be used to induce workers to act in the interests of their employers these include piece rates options discretionary bonuses promotions profit sharing efficiency wages deferred compensation and so on my objective here is to evaluate this literature in the light of a growing empirical literature on compensation where possible i will address the literature from two perspectives first an underlying assumption of this literature is that individuals respond to contracts that reward performance accordingly i consider whether agents behave in this way and whether these responses are always in the firm s interest second i address whether firms write contracts with these responses in mind in other words do contracts look like the predictions of the theory incentives are provided to workers

why do europeans work so little market work per person is roughly 10 higher in the united states than in sweden however if we include the work carried out in home production the total amount of work only differs by 1 i set up a model and show that differences in policy mainly taxes can account for the discrepancy in both labor supply and home production between sweden and the united states these results are independent of the elasticity of labor supply

optimal starting times for end of season sales and optimal stopping times for promotional fares many industries face the problem of selling a fixed stock of items over a finite horizon these industries include airlines selling seats before planes depart hotels renting rooms before midnight theaters selling seats before curtain time and retailers selling seasonal goods such as air conditioners or winter coats before the end of the season given a fixed number of seats rooms or coats the objective for these industries is to maximize revenues in excess of salvage value when demand is price sensitive and stochastic pricing is an effective tool to maximize revenues in this paper we address the problem of deciding the optimal timing of a single price change from a given initial price to either a given lower or higher second price under mild conditions we show that it is optimal to decrease resp to increase the initial price as soon as the time to go falls below resp above a time threshold that depends on the number of yet unsold items

farms families and markets new evidence on completeness of markets in agricultural settings the farm household model has played a central role in improving the understanding of small scale agricultural households and non farm enterprises under the assumptions that all current and future markets exist and that farmers treat all prices as given the model simplifies households simultaneous production and consumption decisions into a recursive form in which production can be treated as independent of preferences of household members these assumptions which are the foundation of a large literature in labor and development have been tested and not rejected in several important studies including benjamin 1992 using multiple waves of longitudinal survey data from central java indonesia this paper tests a key prediction of the recursive model demand for farm labor is unrelated to the demographic composition of the farm household the prediction is unambiguously rejected the rejection cannot be explained by contamination due to unobserved heterogeneity that is fixed at the farm level local area shocks or farm specific shocks that affect changes in household composition and farm labor demand we conclude that the recursive form of the farm household model is not consistent with the data developing empirically tractable models of farm households when markets are incomplete remains an important challenge

structural change and the kaldor facts in a growth model with relative price effects and non gorman preferences u s data reveal three facts 1 the share of goods in total expenditure declines at a constant rate over time 2 the price of goods relative to services declines at a constant rate over time and 3 poor households spend a larger fraction of their budget on goods than do rich households i provide a macroeconomic model with non gorman preferences that rationalizes these facts along with the aggregate kaldor facts the model is parsimonious and admits an analytical solution its functional form allows a decomposition of u s structural change into an income and substitution effect estimates from micro data show each of these effects to be of roughly equal importance

executive compensation and principal agent theory the empirical literature on executive compensation generally fails to specify a model of executive pay on which to base and test hypotheses regarding its determinants in contrast this paper analy

the other side of the trade off the impact of risk on executive compensation the principal agent model of executive compensation is of central importance to the modern theory of the firm and corporate governance yet the exiting empirical evidence supporting it is quite wea

structural change in a multisector model of growth we study a multi sector model of growth with differences in tfp growth rates across sectors and derive sufficient conditions for the coexistence of structural change characterized by sectoral labour reallocation and constant aggregate growth path the conditions are weak restrictions on the utility and production functions commonly applied by macroeconomists we present evidence from us two digit industries that is consistent with our predictions about structural change and successfully calibrate the historical shift from agriculture to manufacturing and services we show quantitatively that reasonable deviations from our conditions do not have a big impact on the properties of the model

why do firms use incentives that have no incentive effects this paper illustrates why firms might choose to implement stock option plans or other pay instruments that reward luck i consider a model where adjusting compensation contracts is costly and where employees outside opportunities are correlated with their firms performance the model may help to explain the use and recent rise of broad based stock option plans as well as other financial instruments even when these pay plans have no effect on employees on the job behavior the model suggests that agency theory s often overlooked participation constraint may be an important determinant of some common compensation schemes particularly for employees below the highest executive ranks many compensation plans reward or punish employees for factors they cannot control an often discussed example of this phenomenon is executive compensation where stock options are not generally indexed to the overall market however many firms also offer firm wide stock options and profit sharing plans that provide even weaker incentives than executive plans after all most workers can expect to reap trivial personal gain from their contribution to firm value or profits i consider an explanation for this phenomenon in which firms contract with employees as a means of indexing wages to market rates rather than to provide incentives while much of the agency literature has concentrated on inducing optimal effort i consider the importance of the generally overlooked participation constraint i study a model in which employees outside opportunities are correlated with firm profits or stock price and in which both turnover and adjusting the pay scheme parameters are costly given these assumptions the firm may find it most profitable to pay the employee in a way that is correlated with the outside options presented by the outside labor market despite the requisite risk premium rather than pay a fixed wage that insures participation in all states the model derived below starts from the assumption that wage adjustments are costly but that workers are willing to make part of their pay contingent

beyond balanced growth balanced growth models are commonly used in macroeconomics because they are consistent with the well known kaldor facts regarding economic growth these models however are inconsistent with one of the most striking regularities of the growth process the massive reallocation of labour from agriculture into manufacturing and services this paper presents a simple model consistent with both the kaldor facts and the dynamics of sectoral labour reallocation

are ceos really paid like bureaucrats a common view is that there is little correlation between firm performance and ceo pay using a new fifteen year panel data set of ceos in the largest publicly traded u s companies we document a strong relationship between firm performance and ceo compensation this relationship is generated almost entirely by changes in the value of ceo holdings of stock and stock options in addition we show that both the level of ceo compensation and the sensitivity of compensation to firm performance have risen dramatically since 1980 largely because of increases in stock option grants

optimal exercise prices for executive stock options although exercise prices for executive stock options can be set either below or above the grant date market price in practice virtually all options are granted at the money we offer an economic rationale for this apparent puzzle by showing that pay to performance incentives for risk averse undiversified executives are typically maximized by setting exercise prices at or near the grant date market price we provide an operationally useful alternative to black scholes 1973 for the purpose of both valuing executive stock options and measuring the incentives created by options our framework has implications not only for exercise price policies but also for indexed options option repricings exchanges of cash for stock based compensation and the design of bonus plans

optimal pricing with costly adjustment evidence from retail grocery prices in many theoretical models it is assumed that there are costs associated with adjusting prices in this paper the existence type and magnitude of such costs are investigated empirically a discrete choice dynamic programming model that nests fixed and variable costs is developed and econometric estimates of the adjustment cost function are obtained the data used to implement the model consist of weekly retail prices and sales of three brands of saltine crackers sold by four chains of grocery stores in a small u s town the study has several distinguishing characteristics first the data are highly disaggregate at the level of brand and store second variables are sampled at weekly intervals third the model nests fixed and variable adjustment costs and can therefore determine their relative importance finally the discrete choice model is both structural and dynamic

the magnitude of menu costs direct evidence from large u s supermarket chains we use store level data to document the exact process of changing prices and to directly measure menu costs at five multistore supermarket chains we show that changing prices in these establishments is a complex process requiring dozens of steps and a nontrivial amount of resources the menu costs average 105 887 year per store comprising 0 70 percent of revenues 35 2 percent of net margins and 0 52 price change these menu costs may be forming a barrier to price changes specifically 1 a supermarket chain facing higher menu costs due to item pricing laws that require a separate price tag on each item changes prices two and one half times less frequently than the other four chains 2 within this chain the prices of products exempt from the law are changed over three times more frequently than the products subject to the law in principle fixed costs of changing prices can be observed and measured in practice such costs take disparate forms in different firms and we have no data on their magnitude so the theory can be tested at best indirectly at worst not at all alan blinder 1991 p 90

changes in sectoral composition associated with economic growth in this paper the author uses dynamic general equilibrium methods to examine the interrelationship between sectoral composition and growth she shows that growth is affected by sectoral composition and vice versa the model is basically a solow model of sustained growth with multiple consumption goods and nonhomothetic preferences each consumption good is produced using different factor intensities the rate of exogenous technological change is different in each sector nonhomotheticity of preferences drives the result that sectoral composition affects growth rates copyright 1997 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

periodic pricing of seasonal products in retailing this paper studies intertemporal pricing policies when selling seasonal products in retail stores we first present a continuous time model where a seller faces a stochastic arrival of customers with different valuations of the product for this model we characterize the optimal pricing policies as functions of time and inventory we use this model as a benchmark against which we compare more realistic models that consider periodic pricing reviews we show that the structure of the optimal pricing policies in this case is consistent with the procedures observed in practice retail stores successively discount the product during the season and promote a liquidation sale at the end of the planning horizon we also show that the loss experienced when implementing periodic pricing reviews instead of continuous policies is small when the appropriate number of reviews is chosen several interesting economic insights emerge from our analysis for example uncertainty in the demand for new products leads to higher prices larger discounts and more unsold inventory finally we study the effect of announced discount policies on prices and profits we show that stores that have adopted this type of strategy usually set prices such that with high probability the merchandise is sold during the first periods and the largest discounts rarely take place

dynamic pricing in the presence of inventory considerations research overview current practices and future directions the benefits of dynamic pricing methods have long been known in industries such as airlines hotels and electric utilities where the capacity is fixed in the short term and perishable in recent years there has been an increasing adoption of dynamic pricing policies in retail and other industries where the sellers have the ability to store inventory three factors contributed to this phenomenon 1 the increased availability of demand data 2 the ease of changing prices due to new technologies and 3 the availability of decision support tools for analyzing demand data and for dynamic pricing this paper constitutes a review of the literature and current practices in dynamic pricing given its applicability in most markets and its increasing adoption in practice our focus is on dynamic intertemporal pricing in the presence of inventory considerations

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

estimating the value of employee stock option portfolios and their sensitivities to price and volatility the costs associated with compiling data on employee stock option portfolios is a substantial obstacle in investigating the impact of stock options on managerial incentives accounting choice financing decisions and the valuation of equity we present an accurate method of estimating option portfolio value and the sensitivities of option portfolio value to stock price and stock return volatility that is easily implemented using data from only the current year s proxy statement or annual report this method can be applied to either executive stock option portfolios or to firm wide option plans in broad samples of actual and simulated ceo option portfolios we show that these proxies capture more than 99 of the variation in option portfolio value and sensitivities sensitivity analysis indicates that the degree of bias in these proxies varies with option portfolio characteristics and is most severe in samples of ceos with a large proportion of out of the money options however the proxies explanatory power remains above 95 in all subsamples

taxation and labor supply of married couples across countries a macroeconomic analysis we document contemporaneous dierences in the aggregate labor supply of married couples across 18 oecd countries relative to their us counterparts european married men work on average 9 to 17 percent and married women in western and southern europe 26 and 31 percent fewer hours married women in scandinavia and eastern europe however work almost as many hours as us married women we nd that a model of joint household decision making can largely replicate these facts if the full non linearity of labor income taxes and the tax treatment of married couples are taken into account going to a system of strictly separate taxation would increase labor supply of married women by more than 100 hours annually in a third of our sample countries

sticky prices in a dynamic oligopoly an investigation of s s thresholds abstract the strategic implications of costly price adjustment are investigated empirically i assume that managers are engaged in a state space game and ask if the dynamic considerations that arise when they condition their choices on the state cause prices to be more or less rigid than when players use more myopic pricing rules the answer to this question depends on a parametric specification of the problem that lends itself to empirical assessment the micro panel data used to investigate this issue consist of weekly prices sales costs and promotional activity for three brands of saltine crackers sold by four chains of grocery stores in a small us town i find that in this market strategic behavior exacerbates price rigidity the thresholds are wider and the time between changes is longer than would be observed in a more myopic setting

lower salaries and no options on the optimal structure of executive pay we estimate a standard principal agent model with constant relative risk aversion and lognormal stock prices for a sample of 598 us ceos the model is widely used in the compensation literature but it predicts that almost all of the ceos in our sample should hold no stock options instead ceos should have lower base salaries and receive additional shares in their companies for a typical value of relative risk aversion almost half of the ceos in our sample would be required to purchase additional stock in their companies from their private savings the model predicts contracts that would reduce average compensation costs by 20 while providing the same incentives and the same utility to ceos we investigate a number of extensions and modi cations of the standard model but nd none of them to be satisfactory we conclude that the standard principal agent model typically used in the literature cannot rationalize observed contracts one reason may be that executive pay contracts are suboptimal

risk aversion performance pay and the principal agent problem this paper calculates numerical solutions to the principal agent problem and compares the results to the stylized facts of ceo compensation the numerical predictions come from parameterizing the models of grossman and hart and of holmstrom and milgrom while the correct incentives for a ceo can greatly enhance a firm s performance providing such incentives need not be expensive for many parameter values ceo compensation need increase only by about 10 for every 1 000 of additional shareholder value for some values the amount is 0 003 cents

compensation incentives and the duality of risk aversion and riskiness the common folklore that giving options to agents will make them more willing to take risks is false in fact no incentive schedule will make all expected utility maximizers more or less risk averse this paper finds simple intuitive necessary and sufficient conditions under which incentive schedules make agents more or less risk averse the paper uses these to examine the incentive effects of some common structures such as puts and calls and it briefly explores the duality between a fee schedule that makes an agent more or less risk averse and gambles that increase or decrease risk with the growing interest in executive compensation and agency problems

does option compensation increase managerial risk appetite this paper solves the dynamic investment problem of a risk averse manager compensated with a call option on the assets he controls under the manager s optimal policy the option ends up either deep in or deep out of the money as the asset value goes to zero volatility goes to infinity however the option compensation does not strictly lead to greater risk seeking sometimes the manager s optimal volatility is less with the option than it would be if he were trading his own account furthermore giving the manager more options causes him to reduce volatility managers with convex compensation schemes play an important role in financial markets this paper solves for the optimal dynamic investment policy for a risk averse manager paid with a call option on the assets he controls the paper focuses on how the option compensation impacts the manager s appetite for risk when he cannot hedge the option position on one hand the convexity of the option makes the manager shun payoffs that are likely to be near the money under the optimal policy the manager either significantly outperforms his benchmark or else incurs severe losses furthermore in examples of optimal trading strategies asset volatility goes to infinity as asset value goes to zero yet option compensation does not strictly lead to greater risk seeking as asset value grows large or if the evaluation date is far away the manager moderates asset risk for example if the manager has constant relative risk aversion crra asset volatility converges to the merton constant as asset value goes to infinity in some situations the manager actually chooses a lower asset volatility than he would if he were investing on his own because the leverage inherent in his option magnifies his exposure to the asset volatility in addition with all constant or decreasing absolute risk averse utility functions from the hyperbolic absolute risk averse hara class giving the manager more options causes him to reduce asset volatility in the crra case for example the manager targets a fixed volatility for his personal

for love or money or both this paper explores the implications for economic analysis societal well being and public policy of the movement of care services such as child and elder care from home to market a broad empirical overview sets the stage for the argument that this process cannot be properly evaluated using only a priori judgments about the suitability of marketization the context in which markets operate is crucial and while the growth of market provision poses some risks it also offers some potential benefits

small menu costs and large business cycles a macroeconomic model of monopoly i introduction the conflict between modern neoclassical and traditional keynesian theories of the business cycle centers upon the pricing mechanism in neoclassical models prices are fully flexible they represent the continuous optimization of economic agents and the continuous intersection of supply and demand in keynesian models prices are often assumed to be sticky they do not necessarily equilibrate all markets at all times one of the reasons for the resurgence of the equilibrium approach to macroeconomics has been the absence of a theoretical underpinning for this keynesian price stickiness this note shows that sticky prices can be both privately efficient and socially inefficient the business cycle results from the suboptimal adjustment of prices in response to a demand shock to the extent that policy can stabilize aggregate demand it can mitigate the social loss due to this suboptimal adjustment in some keynesian models prices are simply exogenously fixed 2 in others agents must set their prices in advance of the transaction date the act of altering a posted price is certainly costly these costs include such items as printing new catalogs and informing salesmen of the new price yet these menu costs are small and therefore generally perceived as providing only a weak foundation for these fixed price models however this inference is flawed small menu costs can cause large welfare losses the claim that price adjustment costs are small does not rebut the claim that they are central to understanding economic fluctuations

introducing convexity into optimal compensation contracts abstract we study when it is appropriate to add a convex component such as stock options to an optimal managerial compensation contract we show that convexity is introduced when managers have moderate levels of relative risk aversion and decreasing absolute risk aversion in addition we study how convexity is affected as the distribution of outcomes becomes more skewed toward low outcomes here we show that while convexity increases when skewness is increased without regard to the effect on mean stock price the opposite effect results when increases in skewness leave the mean stock price unchanged

accounting for employee stock options employee stock options eso s are a ubiquitous form of compensation in corporate america by the late 1990 s eso s outstanding at large corporations averaged 7 percent of total outstanding shares with top executives holding approximately one third of total eso s john core and guay 2001 empirical evidence suggests that firms use eso s to align employees and shareholders interests attract and retain employees and compensate employees for their labor while simultaneously raising capital from employees core and guay 1999 2001 kevin j murphy 1999 there is currently an intense debate nationally and internationally among standard setters politicians investors corporate executives and academics about whether to require corporations to deduct the estimated value of eso grants as a business expense in reported income existing accounting standards require firms to expense most forms of pay such as salaries cash bonuses and the value of stock grants but allow firms to choose whether to expense the value of eso grants until very recently nearly all firms chose not to expense eso s however firms that do not expense eso s must publicly disclose in the financial statement footnotes what reported income would have been if the eso s were expensed in a recent sample of large growth firms christine botosan and marlene plumlee 2001 find that mandatory expensing of eso s would have resulted in a 14 percent median reduction in firms earnings per share firms are also required to disclose details of top executive eso compensation in the annual proxy statement underlying the eso debate is the concern that the choice among alternative financialaccounting treatments have real economic consequences a large literature beginning with ross watts and jerold zimmerman 1978 provides evidence that accounting choice can impose economic costs on firms when contracts e g debt and executive compensation contracts or influential external parties e g tax authorities rely on reported accounting numbers see thomas fields et al 2001 for a survey of this literature accounting choice can also have economic consequences if investors fixate on particular numbers such as reported earnings resulting in security mispricing and misallocation of capital proponents of mandatory expensing argue that eso s reflect a cost of acquiring employee labor and that expensing eso s conveys this information to outsiders consistently with other labor costs some argue that the absence of eso expense results in stock mispricings because investors fixate on reported earnings and fail to understand or utilize supplemental footnote disclosures about the true economic cost of eso grants others argue that when investors and boards of directors fixate on accounting earnings the absence of eso expense exacerbates ineffective corporate governance and allows management to use eso s to extract excessive compensation proponents of this view argue that expensing eso s will reign in management compensation by putting it under a brighter light opponents of expensing eso s argue that deducting the cost of eso s from earnings conveys an impression of weaker financial results to investors and under the assumption that investors fixate on reported earnings could raise the firms cost of financing and stifle corporate investment and innovation there is also a concern that external parties such as taxing authorities might use changes in financial accounting treatment as a cue to alter regulatory and tax policy

an analysis of the principal agent problem most analyses of the principal agent problem assume that the principal chooses an incentive scheme to maximize expected utility subject to the agent s utility being at a stationary point an important paper of mirrlees has shown that this approach is generally invalid we present an alternative procedure if the agent s preferences over income lotteries are independent of action we show that the optimal way of implementing an action by the agent can be found by solving a convex programming problem we use this to characterize the optimal incentive scheme and to analyze the determinants of the seriousness of an incentive problem

ceo incentives and firm size we develop a model that clarifies how to measure ceo incentive strength and how to reconcile the enormous differences in pay sensitivities between executives in large and small firms the crucial parameter is shown to be the elasticity of ceo productivity with respect to firm size we find that ceo marginal products rise significantly with firm size confirming rosen s conjecture that ceos of large firms have a chain letter effect on firm performance and overall ceo incentives are roughly constant or decline slightly with firm size we employ a multitask model to discuss implications for the design of control systems

managerial incentives and capital management the paper shows how career concerns rather than effort aversion can induce a natural incongruity in risk preferences between managers and superiors a model based on learning about managerial talent is developed to study second best contractual remedies we show that the optimal wage contract is an option of the value of the manager s human capital for insurance reasons and that consequently rationing of capital is often required to counterbalance the manager s resulting incentive to overinvest rationing is strictly superior to price decentralization offering one reason for the prevalence of centralized capital budgeting procedures