risk attitudes to low probability climate change risks wtp for flood insurance abstract natural disasters may increase in frequency and severity in the future as a result of climate change which is likely to have an impact on the demand for natural disaster insurance insights about individual risk beliefs and behavioural responses to changing risks are relevant for insurers as it allows them for example to estimate the demand for new insurance products that cover weather related damage this study elicits individual risk beliefs and the demand for low probability high impact flood insurance using the contingent valuation survey method among approximately 1000 homeowners in the dutch river delta this study is of practical relevance since currently flood insurance is not available in the netherlands while insurers have been considering to provide such insurance individuals generally do not behave in accordance with the expected utility model since a significant proportion of homeowners neglect the low probability flood risk the willingness to pay wtp of those individuals who demand flood insurance is on average considerably higher than the expected value of the flood risk they face moreover the wtp for flood insurance is less than proportionally related to increased flood probabilities that were presented to respondents in the questionnaire individuals follow a process of bayesian updating of flood probabilities since perceptions of flood risk are an important determinant of the wtp while objective risks derived from geographical characteristics influence the wtp to a lesser extent communication of baseline probabilities and changes in flood probabilities using risk ladders facilitate the comprehension of risk by respondents and has a considerable effect on the level of the wtp and its sensitivity to probability changes the results indicate that the current ex post public compensation scheme of flood damage lowers demand for private insurance

a laboratory study of auctions with a buy price i introduction the rapid growth in the use of auction markets on the internet has led to a number of innovations in auction design one of these innovations is the development of the buy price a buy price allows the seller during the listing of his or her item to indicate a price at which he or she would be willing to sell if during the course of the auction the buy price is accepted by a buyer then the usual auction procedure is halted and the item is sold to that buyer for the specified price the buy price has been implemented by different online auction sites using various rules on ebay the buy price is temporary and is only available to bidders until an initial bid or more precisely a bid that exceeds the reservation value is made yahoo which currently only has auction sites active in hong kong taiwan and japan uses a permanent buy price that is available throughout the auction amazon also featured a permanent buy price when its auction site was active although both yahoo and amazon closed their respective auction sites in the united states apparently unable to successfully compete with ebay for a variety of reasons the fact that the buy price took various forms on these different sites is an interesting phenomenon the buy price has proven to be quite popular in a cnet news corn article kane 2002 noted that 33 of ebay listings worldwide in the second quarter of 2002 featured ebay s version of a buy price called buy it now and that 19 of gross merchandise sales were accounted for by fixed price sales both buy it now prices in auctions and the ebay stores format anderson et al 2008 studied a sample of 1 177 auctions for a palm brand personal digital assistant sold on ebay in the late summer of 2001 they found that 49 4 of auctions that ended in a sale were listed with a buy price the use of a buy price was popular with both high and low volume sellers their two high volume sellers accounting for 28 4 of the auctions used a buy price 100 of the time of the remaining auctions listed by lower volume sellers 29 4 used a buy price the popularity of the buy price raises several interesting questions what does a seller gain by using a buy price for example does it increase revenue under what conditions would a buyer find a buy price attractive how do buyers respond to different buy price types and levels what incentive is there for an auction house to allow sellers to specify a buy price does the use of a buy price affect bid timing or auction efficiency and finally our primary question why would different auction sites use different versions of a buy price this article is an attempt to gain some insight into these issues through the use of laboratory markets the experiments discussed here make use of three types of auctions auctions with no buy price auctions with a temporary buy price that disappears once a bid is made and auctions with a permanent buy price that is available throughout the entire auction all three types of auctions are examined in the context of two institutions an ascending bid auction with proxy bidding and an ascending bid auction without proxy bidding both auction institutions are implemented with a hard close a specific ending time for the auction finally when a buy price is available in these markets its effects are examined at three different levels the data from these experiments lead to results in four areas revenue bidder utilization bid timing and auction efficiency first seller revenue is higher in auctions with buy prices than in auctions without and revenue is higher when the buy price is permanent rather than temporary this difference between permanent and temporary buy price revenues is most pronounced in the auctions that do not use proxy bidding second auctions that utilize a permanent buy price are slightly more likely to end with the buy price being exercised than those in which the buy price is temporary and buyers respond to lower buy price levels in the manner one would expect with lower buy prices being exercised more frequently

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

how do selling mechanisms affect profits surplus capacity and prices with unknown demand i analyze a model in which a seller wishes to sell multiple homogeneous goods to a large group of buyers with unknown demand the seller may either sell objects via a posted price mechanism a discriminatory price auction a uniform price auction their open bid analogs or a revelation mechanism in which the seller first asks all potential buyers to report their valuations and then sets a reserve price i show that the revelation mechanism leads to the greatest profits the auction mechanisms result in identical expected profits and the posted price mechanism results in the smallest profits however the more profitable mechanisms impose stronger informational requirements that may make these mechanisms infeasible in practice and the posted price mechanism also results in the greatest total surplus i also find the seller chooses a lower capacity and reserve price in an auction than in the posted price mechanism

greater prudence and greater downside risk aversion abstract variation in the degree of downside risk aversion across decision makers has implications for efficient risk sharing however except for small differences in risk preferences there is no index analogous to the arrow pratt index of risk aversion that depends only on local properties of the utility function and indicates the degree of aversion to downside risk a measure that does depend only on local properties of the utility function u the index of prudence p u u is related to downside risk aversion which is indicated by a positive value for u although we show that the degree of prudence is not an accurate indicator of the degree of downside risk aversion we nonetheless demonstrate that a uniform increase in prudence accompanied by a uniform increase decrease in risk aversion is sufficient to indicate greater downside risk aversion provided prudence is greater less than three times the degree of risk aversion

ordering quantity decisions considering uncertainty in supply chain logistics operations abstract this research seeks to determine the optimal order amount for a retailer given uncertainty in a supply chain s logistics network due to unforeseeable disruption or various types of defects e g shipping damage missing parts and misplacing products mixture distribution models characterize problems from solitary failures and contingent events causing network to function ineffectively the uncertainty in the number of good products successfully reaching distribution centers dcs and retail stores poses a challenge in deciding product order amounts because the commonly used ordering plan developed for maximizing expected profits does not allow retailers to address concerns about contingencies this research proposes two improved procedures with risk averse characteristics towards low probability and high impact events several examples illustrate the impact of a dc s operation policies and model assumptions on a retailer s product ordering plan and resulting sales profit

auctions versus posted price selling two popular selling methods posted price selling and auctions are compared here in an independent private values model without auctioning costs auctioning is always optimal when auctioning is costly auctions are still preferable if the marginal revenue curve is sufficiently steep the global steepness of the marginal revenue curve is found to coincide with the dispersion around the mean for a number of standard distributions finally the prices of the monopoly seller and of the social optimum are compared copyright 1993 by american economic association

optimal monitoring policies in agencies this article considers a principal agent problem in which the principal has access to a costly monitoring technology that can be used to acquire additional information about the agent s actions subsequent to observing the agent s output although randomized monitoring policies are feasible we show that in a variety of contexts optimal monitoring policies are deterministic and lower tailed that is there exists some critical level of output such that further investigation of the agent s actions occurs if and only if output falls below this critical level

moral hazard and contractibility in investment decisions abstract this paper uses a principal agent framework to study the incentive effects of contractibility and moral hazard at the first stage of a two stage investment decision we show that when the intermediate signal is publicly observable and contractible there is overinvestment relative to the first best in second stage production purely for incentive reasons however if the intermediate signal cannot be contracted on and in addition the agent and the principal are permitted to act opportunistically the optimal delegated investment decision is to underinvest we discuss the implications of our analysis for the literature on costly monitoring

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

buy out prices in auctions seller competition and multi unit demands online auction sites often enable sellers to add a buy out price in one shot auctions this has been motivated by appeal to impatience or risk aversion we offer additional justification in a dynamic model by showing that an early seller has an incentive to use a buy out price if a similar product is offered later by another seller and bidders desire multiple objects revenue in the first auction increases but revenue in the second auction decreases as does the sum of revenues the buy out price causes the auction sequence to become inefficient because the first item may be awarded to a bidder who should have received none

the dynamic vickrey auction abstract we study the efficient allocation of a single object over a finite time horizon buyers arrive randomly over time are long lived and have independent private values the valuation of a buyer may depend on the time of the allocation in an arbitrary way we construct an incentive compatible mechanism in which a there is a single financial transaction with the buyer b ex post participation constraints are fulfilled c there is no positive transfer to any agent and d payments are determined online we exploit that under the efficient allocation rule there is a unique potential winning period for each buyer this reduces the multidimensional type to one dimension and the payment of the winner can be defined as the lowest valuation for the potential winning period with which the buyer would have won the object in a static model this payment rule coincides with the payment rule of the vickrey auction

limited liability contracts between principal and agent abstract the optimal strategy of the principal is examined in an environment where there are ex post limitations on the maximum penalty that can be imposed on a riskneutral agent contrary to the case in which such limitations are not imposed it is in the principal s interest to deliberately forego the opportunity to induce socially efficient behavior and to instead design a contract that induces the agent to realize an efficient outcome only in the most productive state of nature and perhaps in certain very unproductive states the properties of the contract are examined in detail

buy price english auction abstract consider an english auction for a single object in which there is an option for a bidder to guarantee a purchase at a seller specified buy price b at any time we show that there exist v and v v such that a bidder purchases at the buy price immediately if his valuation v is no less than v or v v v and at least one other bidder is participating in the auction if b v v he purchases at the buy price once the current bid reaches a strategically chosen threshold price a properly set buy price increases expected social welfare and the expected utility of each agent when either buyers or seller are risk averse

extreme event risk management a review of lee b preston f 2012 preparing for high impact low probability events lessons from eyjafjallajőkull london chatham house abstract this paper provides a short communication based on a review of bernice lee and felix preston with gemma green 2012 this white paper received 36 survey responses from businesses related to the impact of the eyjafjallaj kull volcano most reported negative profit impacts although 47 reported that it took less than a week to return to normal operations this volcanic incident represents events that have significant impact on supply chains that have low enough rates of occurrence that they cannot be expected to be forecast therefore there is a great deal of value to put the organization in a position to adapt to whatever might occur and to have contingency plans in effect

mapping the cost risk of agricultural residue supply for energy application in rural china this research aims to shed light on the interaction mechanism of cost risks for biomass material supply in power generation especially for biomass coal dual fuel systems firstly a game model is established to analyze interactions among factors including unit procurement cost unit transportation cost basic price and coal price for crop residue collection secondly a monte carlo simulation is implemented to compare the profit increase under material competition with that under price alliance the methodology is illustrated with a case study in a biomass power plant in shandong province china it shows that developing a price alliance will benefit both the allied enterprises and the local collection area in most circumstances thirdly a risk tolerance area approach is applied in mapping the cost risk and in explaining the risky circumstances of the case study

price formation in a sequential selling mechanism abstract this paper studies a dynamic trade institution where an auction is combined with a buy it now option this option presents a take it or leave it price offered by the seller to a potential buyer before the auction if the buyer rejects this buyout price the object is auctioned off in equilibrium sales should take place only in the auction an experimental test reveals that average buyout prices and profits are well captured by the theoretical prediction however a substantial amount of sales takes place before the auction this is caused by offering too low or accepting too high buyout prices we discuss alternative explanations such as risk preferences and wrong formation of beliefs that might account for agents behavior

opportunity cost inattention and the bidder s curse abstract auction winners sometimes suffer a bidder s curse paying more for an item at auction than the fixed price charged for an identical item by other sellers this seemingly irrational behavior is puzzling because the information necessary to avoid overpaying would appear to be readily available to bidders yet they seem to ignore it to understand this behavior we consider the bidders decisions whether to acquire information about the fixed price before bidding in the presence of opportunity costs our theory introduces costly information acquisition into an auction model with a fixed price aftermarket selling an identical good when information about the fixed price is costly bidders sometimes remain rationally ignorant and overbid in the auction generating the bidder s curse to assess the empirical validity of our proposed explanation we study the model s predictions in an experiment where subjects have an opportunity cost of looking up a fixed price and bid in an auction we find that information acquisition decreases and overbidding increases with opportunity cost as predicted most observed lookup behavior is rationalizable and rational ignorance reliably generates the bidder s curse

inventory management with auctions and other sales channels optimality of s s policies we study periodic review inventory replenishment problems with fixed ordering costs and show the optimality of s s inventory replenishment policies inventory replenishment is instantaneous i e the lead time is zero we consider several sales mechanisms e g auction mechanisms name your own price mechanisms and multiple heterogeneous sales channels we prove this result by showing that these models satisfy a recently established sufficient condition for the optimality of s s policies thus this paper shows that the optimality of s s policies extends well beyond the traditional sales environments studied so far in the inventory literature

modeling competitive bidding a critical essay in analyzing bidding modeling matters this paper is a critical analysis of the models available to aid competitive bidding decision making bidding strategy and auction design in real transactions after an introductory overview this paper describes the contexts in which auctions arise reviews the mainstream theory of single isolated auctions and discusses the important work involved in enrichment of this theory in doing so it indicates results that have been obtained and the sort of changes in analytical approach that are needed to tackle other critical enrichments the paper summarizes briefly what is known about the direct use of models by bidders and auction designers a general theme of this paper is that enriched models are needed to bring bidding theory closer to direct applicability in decision making

buy prices in online auctions irrationality on the internet abstract buy prices are puzzling it makes sense for a seller at auction to set a minimum bidding level i e a reserve price surely but a maximum we explore the use of maximum bidding levels buy prices in online auctions and provide a rational explanation for this seemingly irrational auction mechanism we show that augmenting an english auction with a buy price can improve the seller s profits by partially insuring and therefore increasing the expected payment from some risk averse bidders perhaps more surprising is that the english auction augmented with a buy price can also be superior even to the first price sealed bid and dutch auctions when bidders are risk averse

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

capital rationing and organizational slack in capital budgeting this paper reconciles three stylized facts about capital budgeting in firms and shows that they are tied to the presence of asymmetric information among the several members of the firm each with his or her own objectives and decisions the facts of interest are 1 the existence of organizational slack 2 the rationing of resources within organizations 3 the stated cut off rate for accepting capital projects in firms is often greater than the market rate of interest organizational slack is defined as the excess of resources allocated over the minimum necessary to accomplish the tasks assigned resource rationing is defined as the under allocation of resources i e an increase in the amount allocated would generate revenues in excess of its costs rationing and slack are both manifestations of ex post inefficiencies an lp model is used to show that these inefficiencies can occur in ex ante efficient organizational designs when asymmetric information is present the optimal allocation policy involves a hurdle rate criterion in which the hurdle rate is strictly in excess of the cost of capital thus inducing rationing in some states of the world typically resources are optimally allocated such that slack exists in other states the optimal allocation policy trades off these two inefficiencies