strategic capacity rationing to induce early purchases dynamic pricing offers the potential to increase revenues at the same time it creates an incentive for customers to strategize over the timing of their purchases a firm should ideally account for this behavior when making its pricing and stocking decisions in particular we investigate whether it is optimal for a firm to create rationing risk by deliberately understocking products then the resulting threat of shortages creates an incentive for customers to purchase early at higher prices but when does such a strategy make sense if it is profitable to create shortages what is the optimal amount of rationing risk to create we develop a stylized model to study this problem in our model customers have heterogeneous valuations for the firm s product and face declining prices over two periods customers are assumed to have identical risk preferences and know the price path and fill rate in each period via its capacity choice the firm is able to control the fill rate and hence the rationing risk faced by customers customers behave strategically and weigh the payoff of immediate purchases against the expected payoff of delaying their purchases we analyze the capacity choice that maximizes the firm s profits first we consider a monopoly market and characterize conditions under which rationing is optimal we examine how the optimal amount of rationing is affected by the magnitude of price changes over time and the degree of risk aversion among customers we then analyze an oligopoly version of the model and show that competition reduces the firms ability to profit from rationing indeed there exists a critical number of firms beyond which a rationing equilibrium cannot be supported

complex systems and valuation abstract ecological and economic systems are undeniably complex whereas a goal of delineating ecosystem services is to make readily apparent some of the important ways in which ecosystems underpin human welfare insights are also gained by appreciating the nonlinear dynamic properties of ecosystems in this paper we review some of the relevant characteristics of complex systems ecosystems and economic systems share many properties but valuation has typically been driven by short term human preferences here we argue that as the force of humanity increases on the planet ecosystem service valuation will need to switch from choosing among resources to valuing the avoidance of catastrophic ecosystem change

testing for the absence of expected real profits from forward market speculation abstract this paper tests for the absence of expected real profits from forward market speculation it contrasts with the literature that has considered opportunities for expected nominal profit from speculation that is profits denominated in one of the currencies these studies assume money illusion on the part of market participants but this paper does not empirical results fail to find evidence of unexploited real profit opportunities

the benefits of dollarization when stabilization policy lacks credibility and financial markets are imperfect dollarization entails two potentially large benefits for emerging economies first it may eliminate price and wealth distortions induced by the lack of credibility of stabilization policies second it may improve the efficiency of financial markets by weakening informational or institutional frictions driving credit constraints quantitative analysis of a dynamic stochastic equilibrium model calibrated to mexican data shows that the mean welfare gains of eliminating policy uncertainty are staggering ranging between 6 4 and 9 percent of trend consumption the mean welfare gain of weakening credit constraints is 4 6 percent liability dollarization and sharp fluctuations in relative prices play a key role in these results

incomplete markets borrowing constraints and the foreign exchange risk premium abstract this paper solves a model consisting of two monetary economies with incomplete markets in which agents are subject to borrowing constraints the paper investigates if such a framework is able to account for the volatility and the size of the foreign exchange risk premium the model succeeds in increasing substantially the volatility of the risk premium to about 30 of that in the data however this more volatile risk premium does not translate into sufficiently large predictable excess returns it thus appears unlikely that excess returns from currency speculation can be uniquely explained by a time varying risk premium in an incomplete markets economy with exogenous borrowing constraints

welfare measurement under threats of environmental catastrophes abstract welfare measures under threats of environmental catastrophes are studied using the parable apparatus of weitzman and lofgren on the welfare significance of green accounting as taught by parable j environ econ manage 32 1997 139 153 the occurrence probability of the catastrophic events is driven at least partly by anthropogenic activities such as natural resource exploitation without external effects the green nnp is a genuine welfare measure vis a vis a particular parable economy often however the occurrence hazard constitutes a public bad treated as an externality by agents who ignore their own contribution to its accumulation in such cases the green nnp although accounting for the event hazard rate per se fails to properly internalize future effects on the hazard rate of current economic activities and as a result overestimates welfare the bias term associated with the green nnp is derived and expressed in a simple and interpretable form

interest rates and currency prices in a two country world abstract this paper is a theoretical study of the determination of prices interest rates and currency exchange rates set in an infinitely lived two country world which is subject both to stochastic endowment shocks and to monetary instability formulas are obtained for pricing all equity claims nominally denominated bonds and currencies and these formulas are related to earlier closely related results in the theories of money finance international trade

asset prices in a huggett economy this paper explores asset pricing in economies where there is no direct insurance against idiosyncratic risks but other assets can be used for self insurance subject to exogenously imposed borrowing limits we analyze an endowment economy based on huggett 1993 11 both with and without aggregate risk our main innovation is that we obtain full analytical tractability by studying the case with maximally tight borrowing constraints we illustrate by looking at riskless bonds equity and the term structure of interest rates and we show that the model can reproduce many features of observed asset prices when idiosyncratic risks are quantitatively reasonable

on the optimal pricing policy of a monopolist the paper presents a simple explanation of price dispersion by a monopolist assuming only that consumers arrive in a random order and are served on a first come first served basis a firm can sometimes increase its profits by charging two different prices for the same good and rationing sales at the lower price however it is never necessary to charge more than two prices and a single price is sufficient as long as either the marginal revenue curve is everywhere downward sloping or the marginal cost of production is constant

the making of a hot product a signaling explanation of marketers scarcity strategy every marketer s dream is to create a hot product that customers would absolutely want to have thus generating considerable profit to the marketer according to one school of thought marketers should make products hard to get in order to create really hot products in this paper using a game theoretic model we investigate if such scarcity strategies can indeed be optimal while a scarcity strategy may appear to be a viable approach for making a firm s product successful further analysis raises some puzzling issues in particular it is not clear why a firm would not increase its price to get demand and supply in sync and increase its profit in the process we therefore offer a signaling explanation for the optimality of such strategies and show that a high quality seller may optimally choose to make the product scarce in order to credibly signal the quality of its product to uninformed customers our analysis indicates that a high quality seller optimally employs scarcity as a signaling device in product markets that are characterized ceteris paribus by a small difference in marginal cost between high and low quality products a low reservation price for a low quality product a greater heterogeneity in reservation prices for a high quality product and a moderate number of informed consumers our results provide a rationale for the fact that scarcity strategies are usually observed for discretionary or specialty products but not for commodity products staple products or new to the world products

commodity trade and international risk sharing how much do financial markets matter abstract this paper evaluates the social gains from international risk sharing in some simple general equilibrium models with output uncertainty a simulation model calibrated to selected moments of u s and japanese data estimates the incremental loss from a ban on international portfolio diversification to be on the order of 0 20 percent of output per year even the theoretical gains from asset trade may disappear under alternative sets of assumptions on preferences and technology the paper argues that the small magnitude of potential trade gains may help explain the apparently inconsistent findings of empirical studies on the degree of international capital mobility

sustainability and technical progress a rigorous model connects together the following three basic concepts 1 sustainability meaning the generalized future power of an economy to consume over time 2 green nnp meaning a current measure of national income that subtracts off from gnp not just depreciation of capital but also more generally depletion of environmental assets evaluated at current efficiency prices 3 technological progress meaning a projection onto the future of the so called solow residual a simple general formula is derived some crude calculations suggest a possibly strong effect of the residual which hints that our best present estimates of long term sustainability may be largely driven by predictions of future technological progress

social accounting and welfare measurement in a growth model with human capital this paper addresses social accounting and welfare measurement in an economy where human capital is an important factor in the economic system human capital accumulation depends on the time consumers spend in education however human capital is also a separate argument in the production function facing firms which gives rise to a production externality in a command optimum where the externality is internalized we show that an augmented nnp measure is the appropriate welfare indicator we also discuss the taxtransfer system required for the decentralized economy to reach a command optimum

on the foreign exchange risk premium in a general equilibrium model abstract the foreign exchange risk premium in a cash in advance model is investigated some weaknesses of the definition of the risk premium generally used are discussed it is shown that the primary ultimate source of foreign exchange risk is the covariance of monetary shocks with real output shocks several studies have assumed this covariance is zero and hence assumed away the major source of risk in the model finally the risk premium generated from standard versions of this model is argued to be very small because it is the same order of magnitudeas covariances of money and output growth rates

using survey data to test standard propositions regarding exchange rate expectations survey data provide a measure of exchange rate expectations superior to the forward rate in that no risk premium interferes we estimate extrapolative adaptive and regressive models of expectations static or random walk expectations and bandwagon expectations are rejected current appreciation generates the expectation of future depreciation because variables other than the contemporaneous spot rate receive weight in comparing expectations to the process governing the spot rate we find statistically significant bias no variable is as ubiquitous in international financial theory and yet as elusive empirically as investors expectations regarding exchange rates in the past expectations have been modeled in an ad hoc way often by using the forward exchange rate there is however a serious problem with using the forward discount as the measure of the expected change in the exchange rate in that the two may not be equal the gap that may separate the forward discount and expected depreciation is generally interpreted as a risk premium most of the large empirical literature testing the unbiasedness of the forward exchange rate for example has found it necessary either arbitrarily to assume away the existence of the risk premium if the aim

profits risk and uncertainty in foreign exchange markets this paper examines the properties of nominal profits from speculation in dollar dominated forward contracts using a representative agent cash in advance model modified to allow for heteroscedasticity in the exogenous processes the model is simulated by estimating exogenous processes from the data and the remaining free parameters with a simulated method of moments technique simulated expected profits are variable heteroskedastic and serially correlated but the magnitude of these second moments fall short of those of the predictable component of observed profits on the u s dollar as in the actual data simulated forward rates display biasedness in predicting simulated future spot rates

does nnp growth indicate welfare improvement abstract we show that instantaneous increases in real nnp over time are an accurate indicator of true dynamic welfare improvements this highlights a connection between the theory of green or comprehensive national income accounting and the theory of real price indices

the foreign exchange risk premium is it real this paper presents a numerical analysis of an optimizing equilibrium model of the risk premium in the forward foreign exchange market an overlapping generations model with incomplete markets is employed because the equilibria are analytically intractable the model must be solved numerically the authors show how changes in the distribution of the exogenous variables affect the distribution of the risk premium they find that the properties of the real risk premium have far more intuitive appeal than those of the more commonly employed nominal risk premium copyright 1995 by ohio state university press

the risk premium in the foreign exchange market this paper presents a dynamic optimizing model of the risk premium in the forward foreign exchange market agents face random endowments and money growth rates complete insurance markets do not exist and foreign exchange is held to hedge against risk in some examples with log linear preferences the size of the risk premium in the forward market is related to the variability of output and money growth an interesting conclusion of the model is that for plausible examples the convexity component of the nominal risk premium due to siegel s paradox may be quite large relative to the total risk premium copyright 1989 by ohio state university press

the implications of first order risk aversion for asset market risk premiums abstract in an effort to explain simultaneously the excess return predictability observed in equity bond and foreign exchange markets we incorporate preferences exhibiting first order risk aversion into a general equilibrium two country monetary model when we calibrate the model to us and japanese data we find that first order risk aversion substantially increases excess return predictability however this increased predictability is insufficient to match the data we conclude that the observed patterns of excess return predictability are unlikely to be explained purely by time varying risk premiums generated by highly risk averse agents in a complete markets economy

international business cycles with endogenous incomplete markets backus kehoe and kydland 1992 baxter and crucini 1995 and stockman and tesar 1995 find two major discrepancies between standard international business cycle models with complete markets and the data in the models cross country correlations are much higher for consumption than for output while in the data the opposite is true and cross country correlations of employment and investment are negative while in the data they are positive this paper introduces a friction into a standard model that helps resolve these anomalies the friction is that international loans are imperfectly enforceable any country can renege on its debts and suffer the consequences for future borrowing to solve for equilibrium in this economy with endogenous incomplete markets the methods of marcet and marimon 1999 are extended incorporating the friction helps resolve the anomalies more than does exogenously restricting the assets that can be traded

development ecological resources and their management a study of complex dynamic systems abstract human well being depends to a large extent on services provided by ecological systems in poor countries this dependence is more transparent than in industrialised countries where the dependence is more indirect effective management of these systems requires a good understanding of their properties and in particular a knowledge of the dynamics of the systems in the article the dynamics of one simple system is analysed economically the system is a lake and the interaction between the run off of nutrients into the lake and the growth of either algae eutrophication in lakes in northern europe and north america or water hyacinths in lakes in southern and eastern sfrica is studied it turns out that the dynamics exhibit bifurcation points so that there are two basins of attraction if the system flips to one basin and it is regarded desirable to return to the other basin there will be hysteresis assuming that there are different users of the lake a differential game is constructed that captures the strategic interests of the users the resulting equilibrium shows first the conventional negative externality that will force the system to a different basin od attraction finally we investigate the use of a tax for bringing back the system to a pareto optimum

consumption pollution tradeoffs in an environment vulnerable to pollution related catastrophic collapse abstract this paper considers the consequences of an avoidable risk of irreversible environmental catastrophe for society s optimal long run consumption pollution tradeoffs the risk is assumed to be a nondecreasing function of pollution concentration which evolves as a dynamic environmental renewal process the main objective of the paper is to derive qualitative insights regarding the effects of such risk on optimal management

national accounts and environmental resources in the paper optimal growth theory is used to derive the appropriate definition of the net national product concept when there are environmental resources and environmental damage to take into account the basic conclusions are that conventional defined np should be corrected by deducting environmental damage and adding the value of the net change of all resources

changing beliefs and systematic rational forecast errors with evidence from foreign exchange this paper addresses a new interpretation to the appearance in the early 1980s of systematic errors in forecasting the dollar exchange rate following a change in the process of a fundamental variable market participants revise their beliefs about the process using bayes rule since the market does not immediately recognize the change forecast errors are on average wrong during a period when the market is rationally learning for conservative parameter values the learning behavior of the dollar exchange rate in the early 1980s appears consistent with about half of the dollar s underprediction implied by the forward market copyright 1989 by american economic association

a dominant strategy double auction a double auction mechanism that provides dominant strategies for both buyers and sellers is analyzed this mechanism satisfies the 1n convergence to efficiency of the buyer s bid double auction in addition the mechanism always produces full information first best prices the inefficiency arises because the least valuable profitable trade may be prohibited by the mechanism the mechanism has an oral implementation utilizing bid and asked prices

accounting for forward rates in markets for foreign currency absteract forward and spot exchange rates between major currencies imply large standard deviations of both predictable returns from currency speculation and of the equilibrium price measure the intertemporal marginal rate of substitution representative agent theory with time additive preferences cannot account for either of these properties we show that the theory does considerably better along these dimensions when the representative agent s preferences exhibit habit persistence but that the theory fails to reproduce some of the other properties of the data in particular the strong autocorrelation of forward premiums since the advent of flexible exchange rates in the early 1970s a large body of statistical work has established that forward rates for major currencies are not optimal predictors of future spot rates relevant evidence is reported in studies by baillie lippens and mcmahon 1983 bekaert 1991 bilson 1981 boothe and longworth 1984 cumby 1988 cumby and obstfeld 1984 fama 1984 gregory and mccurdy 1984 hansen and hodrick 1983 hodrick and srivastava 1984 and korajczyk and viallet 1990 a more complete list of references is provided by hodrick 1987 these papers indicate that returns from speculation in forward and spot currency markets are predictable and that the predictable components vary considerably over time a number of alternative explanations have been offered for the predictable variation in foreign currency market excess returns kaminsky 1988 korajczyk 1985 and krasker 1980 suggest that infrequent extreme events may make returns appear predictable in small samples the so called peso problem lewis 1989 argues that rational learning following infrequent changes in the process governing equilibrium prices can explain part of the ex post predictability of currency returns froot and frankel 1989 and froot and thaler 1990 examine the hypothesis that market forecasts of future spot

asset returns with transactions costs and uninsured individual risk abstract we explore whether incorporating an explicit motive for holding liquid assets within an equilibrium asset pricing model helps explain the following features of asset returns and turnover in the post war u s economy i the low risk free real interest rate ii the large spread between returns on liquid assets and stocks and iii the greater transaction velocity of liquid assets relative to stocks we introduce a demand for liquid assets by adding uninsured individual risk together with differential costs of trading securities numerical simulations attempting to match the return data generate a ratio of liquid assets to income considerably below observed levels

adjusting green nnp to measure sustainability weitzman provides a foundation for nnp as the stationary equivalent of a wealth maximizing path when there is a constant interest rate and no exogenous technological progress here the implications of weitzman s foundation are explored in a case encountered in resource models i e the case of non constant interest rates in a setting that allows for exogenous technological progress an expression for nnp is obtained that adjusts green nnp for anticipated capital gains and interest rate effects to produce a measure that indicates sustainability this result is important when measuring the relative sustainability of resource rich and resource poor countries i introduction how should net national product nnp be adjusted for the depletion of natural and environmental resources a prerequisite for examining this problem is to decide on an underlying notion of income at the personal level hicks 1946 defines income as the consumption that if kept constant would yield the same present value as a person s actual future receipts since market prices are not influenced by any single person this notion of income equals a person s maximal sustainable consumption at the national level national income can likewise be defined as the consumption that if kept constant would yield the same present value as the actual future consumption path unless the nation is a small open economy faced with given international prices this notion of national income will exceed

accounting for global warming risks resource management under event uncertainty abstract optimal management of atmospheric pollution is discussed with a special emphasis on the uncertainty concerning the occurrence of undesirable events associated with the greenhouse effect the uncertainty considered here stems from our ignorance of the exact pollution level required to trigger the event rather than from the genuinely stochastic nature of the processes involved taking atmospheric pollution level as the state variable it is found that uncertainty implies the existence of an equilibrium interval within which the emission rate of the greenhouse gases should be kept equal to the natural removal rate of these gases processes initiated outside the equilibrium interval must converge monotonically to its nearest endpoint the determination of the interval requires no knowledge of the optimal policy in contrast ignoring event occurrence risk implies a single equilibrium level attracting the optimal process from any initial level

a contribution to the theory of welfare accounting a kind of unified theory is proposed as a dynamic generalization of the standard consumer surplus methodology for evaluating welfare changes the unified theory allows rigorous dynamic welfare comparisons to be inferred between any two economic situations from just knowing current incomes and observing a short run market demand schedule essentially the change in present discounted future utility is exactly captured by the formula difference in current income plus consumer surplus this well known formula is thereby shown to cover a far wider class of welfare comparisons than is customarily treated in the textbook static case

the economics of non convex ecosystems introduction the word convexity is ubiquitous in economics but absent from economics in this paper we explain why and show what difference it makes to economic analysis if ecosystem non convexities are taken seriously a simple proof is provided of the connection between self similarity and power laws we also provide an introduction to each of the papers in the symposium and draw out the way in which they form a linked set of contributions

income and wealth heterogeneity in the macroeconomy how do movements in the distribution of income and wealth affect the macroeconomy we analyze this question using a calibrated version of the stochastic growth model with partially uninsurable idiosyncratic risk and movements in aggregate productivity our main finding is that in the stationary stochastic equilibrium the behavior of the macroeconomic aggregates can be almost perfectly described using only the mean of the wealth distribution this result is robust to substantial changes in both parameter values and model specification our benchmark model whose only difference from the representative agent framework is the existence of uninsurable idiosyncratic risk displays far less cross sectional dispersion and skewness in wealth than u s data however an extension that relies on a small amount of heterogeneity in thrift does succeed in replicating the key features of the wealth data furthermore this extension features aggregate time series that depart significantly from permanent income behavior

optimal pricing with speculators and strategic consumers this paper studies a monopolist firm selling a fixed capacity the firm sets a price before demand uncertainty is resolved speculators may enter the market purely with the intention of resale which can be profitable if demand turns out to be high consumers may strategically choose when to purchase and they may also choose to purchase from the firm or from the speculators we characterize equilibrium prices and profits and analyze the long run capacity decisions of the firm there are three major findings first the presence of speculators increases the firm s expected profits even though the resale market competes with the firm second by facilitating resale the firm can mimic dynamic pricing outcomes and enjoy the associated benefits while charging a fixed price third speculative behavior may generate incentives for the seller to artificially restrict supply and thus may lead to lower capacity investments we also explore several model extensions that highlight the robustness of our results

optimal management with potential regime shifts we analyze how the threat of a potential future regime shift affects optimal management we use a simple general growth model to analyze four cases that involve combinations of stock collapse versus changes in system dynamics and exogenous versus endogenous probabilities of regime shift prior work in economics has focused on stock collapse with endogenous probabilities and reaches ambiguous conclusions on whether the potential for regime shift will increase or decrease intensity of resource use and level of resource stock we show that all other cases yield unambiguous results in particular with endogenous probability of regime shift that affects system dynamics the potential for regime shift causes optimal management to become precautionary in the sense of maintaining higher resource stock levels

asset pricing puzzles and incomplete markets the representative agent theory of asset pricing is modified to incorporate heterogeneous agents and incomplete markets the model features two types of agents who differ up to a nontradable idiosyncratic component in their endowment processes numerical solutions indicate that individuals are able to diversify a substantial portion of their idiosyncratic income risk through riskless borrowing and lending alone restrictions on the variability of intertemporal marginal rates of substitution hansen and jagannathan 1991 are used to argue that incomplete markets as modeled here cannot account for the properties of asset returns that are anomalous from the perspective of representative agent theory a large literature in financial economics has investigated the extent to which variants of the lucas 1978 general equilibrium theory of asset pricing can account for the joint behavior of aggregate u s consumption and asset returns by and large this literature has concluded that a theory based upon frictionless arrow debreu markets and or a representative agent makes strongly counterfactual predictions regarding even the simple unconditional properties of this relationship mehra and prescott 1985 for instance show that the theory drastically underpredicts the average excess rate of return on u s stocks the so called equity premium puzzle weil 1989 points out as did mehra and prescott that the magnitude of the average risk free rate is far below that predicted by the theory this has been dubbed the risk free rate puzzle numerous authors including grossman melino and shiller 1987 and backus gregory and zin 1989 show that the theory cannot account for term premia inherent in the yield curve hodrick 1987 surveys a large literature which documents the theory s shortcomings in accounting for excess expected returns in foreign exchange markets the notion that the representative agent model cannot account for excess returns across a wide array of asset markets can be made more precise by using tools developed by hansen and jagannathan 1991 and shiller 1982

heterogeneity aggregate uncertainty and the short term interest rate this article analyzes the relationship between the short term interest rate and diversity i e the number of types in models with heterogeneous agents and incomplete markets the number of types needed to approximate a continuum varies across examples in all cases however the number of types has little effect on the average interest rate and consumption variability in these models the set of state variables is large because the equilibrium law of motion depends on the cross sectional wealth distribution the article shows how to solve these models numerically by approximating the distribution using moments or percentiles

a general approach to welfare measurement through national income accounting a framework is developed for analyzing national income accounting using a revealed welfare approach that is sufficiently general to cover both the standard discounted utilitarian and maximin criteria as special cases we show that the basic welfare properties of comprehensive national income accounting previously ascribed only to the discounted utilitarian case extend to this more general framework in particular under a wider range of circumstances it holds that real nnp growth or equivalently a positive value of net investments indicates welfare improvement we illustrate the applicability of our approach in the dasgupta heal solow model of capital accumulation and resource depletion

exchange rate volatility and deviations from unbiasedness in a cash in advance model abstract this paper examines time series properties of exchange rate changes the forward premium and the forward bias in the context of a variant of svensson s cash in advance model the model is solved and simulated using realistic forcing processes whose law of motion is estimated from u s japan data and then approximated by a markov chain although method of moments estimation shows that the over identifying restrictions implied by the model are not rejected it fails dramatically in producing a sufficiently variable risk premium on forward market speculation this result is robust to various pertubations to the model s parameters forcing processes and preference structure the model also fails to match exchange rate and forward premium volatility simultaneously

evaluating projects and assessing sustainable development in imperfect economies we are interested in three related questions 1 how should accounting prices be estimated 2 how should we evaluate policy change in an imperfect economy 3 how can we check whether intergenerational well being will be sustained along a projected economic programme we do not presume that the economy is convex nor do we assume that the government optimizes on behalf of its citizens we show that the same set of accounting prices should be used both for policy evaluation and for assessing whether or not intergenerational welfare along a given economic path will be sustained we also show that a comprehensive measure of wealth computed in terms of the accounting prices can be used as an index for problems 2 and 3 above the remainder of the paper is concerned with rules for estimating the accounting prices of several specific environmental natural resources transacted in a few well known economic institutions

global warming endogenous risk and irreversibility this paper develops two period analytical and numerical models to study the question given a stock of greenhouse gases that poses a risk of future damages of unknown magnitude and the possibility of learning about damages how do sunk abatement capital and a nondegradable stock of greenhouse gases affect optimal first period investment we show that both affect investment the former negatively and the latter positively additionally endogenous risk the risk of damages dependent on the stock of gases results in an increase in optimal investment for any level of capital sunkness or greenhouse gas degradability quantitatively the effect of sunk capital is stronger than the effect of greenhouse gas irreversibility or that of endogenous risk

is it risk explaining deviations from uncovered interest parity abstract this paper analyzes ex ante returns to forward speculation and asks if these returns can be explained by models of a foreign exchange risk premium after presenting evidence that both nominal and real expected speculative profits are nonzero the paper examines if real returns to forward speculation are consistent with consumption based models of risk premia estimates of the conditional covariance between real speculative returns and real consumption growth are presented and like ex ante returns to forward speculation they exhibit statistically significant fluctuations over time and often change sign

advance purchase discounts and monopoly allocation of capacity optimal pricing by a monopoly airline that faces capacity constraints during the peak demand period is studied the existence of capacity constraints means that in order to expand output the airline must divert demand from the peak period to the off peak period a particular advance purchase discount policy is shown to be the profit maximizing method of selling tickets if the advance purchase requirement were infeasible output and total surplus would both be lower jel l12 substantial discounts for air travel are generally available to travelers who are willing to purchase tickets a week or more in advance of the departure date this paper demonstrates why the imposition of an advance purchase requirement may be a profit maximizing strategy for a monopoly airline facing capacity constraints during times of peak demand 1 the practice of imposing an advance purchase requirement on discount tickets is also placed in a favorable light in terms of its impact on social

electronic tickets smart cards and online prepayments when and how to advance sell advance selling occurs when sellers allow buyers to purchase at a time preceding consumption shugan and xie 2000 electronic tickets smart cards online prepayments and other technological advances make advance selling possible for many if not all service providers these technologies lower the cost of making complex transactions at a greater distance from the seller s site they also give sellers more control over advance selling by decreasing arbitrage as technology enhances the capability to advance sell more academic attention is vital this paper strives to exploit these technologies by developing advance selling strategies until recently advance selling research focused on the airline industry and specific characteristics of that industry these characteristics included the price insensitivity of late arrivals e g business travelers compared with early arrivals e g leisure travelers demand uncertainty across flights on the same day and capacity constraints recent findings by shugan and xie 2000 show that advance selling is a far more general marketing tool than previously thought it does not require these industry specific characteristics it only requires the existence of buyer uncertainty about future valuations moreover sellers without the ability to price discriminate can use advance selling to improve profits to the level of first degree price discrimination this finding is important because buyers are nearly always uncertain about their future valuations for most services e g the utility of next year s vacation or a future college education in this paper we take the next step from shugan and xie 2000 we show that advance selling profits do not come from buyer surplus but from more buyers being able to purchase we determine when and how to advance sell in a variety of situations including situations with limited capacity second period arrivals refunds buyer risk aversion exogenous credibility continuous preference distributions and premium pricing we determine when advance selling improves profits and when it does how to set advance prices we ask and answer seven questions first when should sellers advance sell second how much can advance selling improve profits compared with only spot selling third what factors impact the profitability of advance selling and how fourth should advance prices be higher or lower or the same as spot prices fifth how do capacity constraints impact advance selling strategies sixth should sellers limit the number of advance sales finally what is the possible impact of buyer risk aversion first we provide precise conditions when sellers should advance sell for example without capacity constraints we show that sellers should advance sell when marginal costs are sufficiently low to make it profitable to sell to buyers with low valuations and sufficiently high to convince buyers that the spot price will be higher than the advance price second we find that advance selling can almost double the profits from optimal spot selling to early arrivals we also show that advance selling has no impact on consumer surplus in markets with homogenous consumers and no capacity constraints therefore advance selling can increase social welfare because seller profits increase third we find that two very important factors impacting the profitability of advance selling are seller credibility and marginal costs buyers only advance buy when they expect an advantage from advance buying over spot buying without capacity constraints sellers must credibly convince buyers that the advance price is at a discount to the spot price we show that this condition is met under different circumstances for example large marginal costs can create credibility because buyers believe that these costs will lead to high spot prices fourth we find although optimal advance prices can be at a discount to the spot price that sometimes a premium is optimal premiums are optimal when capacity is large but limited and marginal costs are not too large buyers advance purchase at a premium to spot prices when capacity is limited and spot prices are low note that this is not a risk premium and risk aversion is not required no prior research has suggested this strategy because that research relies on the assumption that early arrivals are more price sensitive than later ones without that assumption premium advance pricing is sometimes optimal fifth we find that binding capacity constraints can impact the profitability of advance selling in opposite ways on one hand capacity constraints create seller credibility buyers believe that spot prices will be high when they know spot capacity is limited and perhaps more limited by advance sales on the other hand when capacity is limited the need to increase sales from discounted advance prices diminishes sixth consistent with desiraju and shugan 1999 we find that limiting advance sales can be profitable but only under restrictive conditions these conditions are 1 selling to all early arrivals would leave insufficient capacity in the spot period to sell to all second period arrivals with high valuations 2 the optimal spot price is high and 3 marginal costs are sufficiently small to make advance selling profitable finally we find that buyer risk aversion can sometimes increase the profitability of advance selling our findings provide precise guidelines for a large number of service providers that will have the technical capability to advance sell for those service providers advance selling provides a creative pricing strategy that can potentially provide substantial improvements in profits

pollution control in an uncertain environment abstract the effects of the threat of occurrence of environmental catastrophes on optimal pollution control are considered recent analysis of irreversible events is extended to two types of reversible events single occurrence and multiple occurrence recurrent events while it is possible that the threat of irreversible events induces more pollution we show that reversible events under quite general conditions induce more conservation less pollution the analysis is carried out via a simple method the h method to identify optimal steady states by comparing steady state policies with small variations from them for recurrent events the optimal state process must approach a unique steady state from any initial level in this case the h method characterizes the dynamic behavior of the optimal state process without actually solving for it

equilibrium price dispersion under demand uncertainty the roles of costly capacity and market structure when capacity is costly and prices are set in advance firms facing uncertain demand will sell output at multiple prices and limit the quantity available at each price i show that the optimal price strategy of a monopolist and the unique pure strategy nash equilibria of oligopolists both exhibit intrafirm price dispersion moreover as the market becomes more competitive prices become more dispersed a pattern documented in the airline industry while generating similar predictions the model differs from the revenue management literature because it disregards market segmentation and fare restrictions that screen customers

natural resources national accounting and economic depreciation abstract the current value hamiltonian in an aggregate optimal growth problem with heterogeneous capital stocks including exhaustible renewable and environmental stocks is the nnp function routine substitutions reveal that the using up of natural resource stocks is representable as easy to interpret economic depreciation magnitudes we obtain true nnp inclusive of natural resource stock diminution implications for actual national accounting practices are also discussed

regime shifts and resilience in fisheries management a case study of the argentinean hake fishery we investigate the role of potential regime shifts in argentinean hake fishery and the inter linkage between ecological and economic resilience we develop a theoretical model incorporated with the hazard function for resource management under alternative conditions and derive the corrective tax applying the model to the case of argentinean hake fishery we obtain insights for fishery management in the presence of risk for a regime shift based on three value functions our model simulation indicates that the higher the relative loss from the fishery collapse the more important the risk management would be with the resilience value taken into account a higher level of fish stock leads to a higher optimized value and a lower corrective tax rate when the stock level is lower we need to introduce a higher tax rate to best avoid the fishery collapse decomposing the marginal value of the fish stock into a stock service value for fish production and a resilience value for flip risk reduction we find that a higher fish stock leads to a lower tax rate because of the higher resilience of the fish stock and hence the corrective tax rate as an instrument for managing fishery becomes less important

a reconsideration of the uncovered interest parity relationship abstract this paper argues that the uncovered interest parity uip relationship is distinct from and more important than the unbiasedness of forward exchange rates as predictors of future spot rates the standard finding that the slope estimate b is roughly 3 in regressions of s t on t 1 s t 1 implies rejection of unbiasedness but not necessarily uip the hypothesis that monetary authorities manage interest rates so as to smooth their movements while also resisting changes in exchange rates is attractive conceptually and is capable of explaining not only the b 3 finding but also several other notable features of the data

cost of business cycles with indivisibilities and liquidity constraints it is almost universally agreed that individuals face incomplete insurance markets and cannot perfectly insure against the idiosyncratic risk in this paper simple general equilibrium models with incomplete insurance markets are examined in order to assess the impact of imperfect insurance on the magnitude of the welfare costs of business cycles two versions of incomplete insurance markets are considered and certain statistical properties of the equilibrium stochastic processes in these environments are compared with those of a perfect insurance economy

the risk free rate in heterogeneous agent incomplete insurance economies abstract why has the average real risk free interest rate been less than one percent the question is motivated by the failure of a class of calibrated representative agent economies to explain the average return to equity and risk free debt i construct an economy where agents experience uninsurable idiosyncratic endowment shocks and smooth consumption by holding a risk free asset i calibrate the economy and characterize equilibria computationally with a borrowing constraint of one year s income the resulting risk free rate is more than one percent below the rate in the comparable representative agent economy

quantitative asset pricing implications of endogenous solvency constraints we study the asset pricing implications of an economy where solvency constraints are endogenously determined to deter agents from defaulting while allowing as much risk sharing as possible we solve analytically for efficient allocations and for the corresponding asset prices portfolio holdings and solvency constraints for a simple example then we calibrate a more general model to u s aggregate as well as idiosyncratic income processes we find equity premia risk premia for long term bonds and sharpe ratios of magnitudes similar to the u s data for low risk aversion and a low time discount factor article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

on the welfare significance of green accounting as taught by parable abstract green nnp is a national accounting concept that subtracts off from gnp not just depreciation of capital but also depletion of environmental assets for a time autonomous technology green nnp has a rigorous welfare interpretation as an exact measure of the economy s future power to consume the present paper extends the standard framework to cover the case of labor augmenting technological progress for this special case of time dependence a powerful conceptual parable applies it is as if the conclusion from a simple minded welfare story told by the standard neoclassical one sector growth model covers a far more general situation involving any number of different types of capital any convex production possibilities set and fully optimizing behavior implications and applications are discussed

regulating environmental threats environmental consequences of natural resource exploitation often entail threats of future occurrences of detrimental abrupt events rather than or in addition to inflicting a damage gradually the possibility of abrupt occurrence of climate change related calamities is a case in mind the uncertainty associated with the realization of these threats and their public bad nature complicate the design of optimal economic response we derive a pigouvian hazard tax schedule that implements the socially optimal outcome the tax is based on the expected cost of the hazard generating activities and serves to reduce hazardous emissions well in advance of the catastrophic occurrence a numerical example illustrates possible effects of the proposed regulation scheme implications for climate policy are discussed

purchasing pricing and quick response in the presence of strategic consumers we consider a retailer that sells a product with uncertain demand over a finite selling season the retailer sets an initial stocking quantity and at some predetermined point in the season optimally marks down remaining inventory we modify this classic setting by introducing three types of consumers myopic consumers who always purchase at the initial full price bargain hunting consumers who purchase only if the discounted price is sufficiently low and strategic consumers who strategically choose when to make their purchase a strategic consumer chooses between a purchase at the initial full price and a later purchase at an uncertain markdown price in equilibrium strategic consumers and the retailer make optimal decisions given their rational expectations regarding future prices availability of inventory and the behavior of other consumers we find that the retailer stocks less takes smaller price discounts and earns lower profit if strategic consumers are present than if there are no strategic consumers we find that a retailer should generally avoid committing to a price path over the season assuming such commitment is feasible committing to a markdown price or to not mark down at all is often too costly inventory may remain unsold even in the presence of strategic consumers the better approach is to be cautious with the initial quantity and then mark down optimally furthermore we discuss the value of quick response the ability to procure additional inventory after obtaining updated demand information albeit at a higher unit cost than the initial order we find that the value of quick response to a retailer is generally much greater in the presence of strategic consumers than without them on average 67 more valuable and as much as 558 more valuable in our sample in other words although it is well established in the literature that quick response provides value by allowing better matching of supply with demand it provides more value often substantially more value by allowing a retailer to control the negative consequences of strategic consumer behavior