understanding dynamic mean variance asset allocation abstract we provide a new portfolio decomposition formula that sheds light on the economics of portfolio choice for investors following the mean variance mv criterion we show that the number of components of a dynamic portfolio strategy can be reduced to two the first is preference free and hedges the risk of a discount bond maturing at the investor s horizon while the second hedges the time variation in pseudo relative risk tolerance both components entail strong horizon effects in the dynamic asset allocation as a result of time varying risk tolerance and investment opportunity sets we also provide closed form solutions for the optimal portfolio strategy in the presence of market return predictability the model parameters are estimated over the period 1963 to 2012 for the u s market we show that i intertemporal hedging can be very large ii the mv criterion hugely understates the true extent of risk aversion for high values of the risk aversion parameter and the more so the shorter the investment horizon and iii the efficient frontiers seem problematic for investment horizons shorter than one year but satisfactory for large horizons overall adopting the mv model leads to acceptable results for medium and long term investors endowed with medium or high risk tolerance but to very problematic ones otherwise

the cost of contract renegotiation evidence from the local public sector the renegotiation of regulatory contracts is known to prevent regulators from achieving the full commitment efficient outcome in dynamic contexts however assessing the cost of such renegotiation remains an open issue from an empirical viewpoint to address this question we fit a structural principal agent model with renegotiation on a set of urban transport service contracts the model captures two important features of the industry first only two types of contracts are used in practice fixed price and cost plus second subsidies increase over time we compare a scenario with renegotiation and a hypothetical situation with full commitment we conclude that the welfare gains from improving commitment would be significant but would accrue mostly to operators

regulation of natural gas distribution using policy benchmarks local distribution companies ldcs play the role of purchasing and delivering natural gas to their consumers and state regulators oversee the pricing of natural gas to consumers the common method of regulation based on the cost of service provides arguably little incentive for the ldc to optimally manage their procurement activities in the light of recent deregulation and other changes benchmarking based regulatory schemes are being increasingly perceived as the right direction to pursue various states are experimenting with simple benchmark mechanisms that have inherent deficiencies and are often criticized in this paper we propose and characterize a new kind of benchmark that we call a policy benchmark as a mechanism for regulation using variance as the measure of risk we formulate the regulator s and the ldc s problems as multiple objective optimizations we provide rigorous characterizations of the dominance frontiers for a two stage model we also provide multistage formulations that take

effects of the change from rate of return to price cap regulation this article focuses on the use of incentive regulation in the telephone industry in the united states we first characterize some of the difficulties that have led regulators to move away from traditional rate ofreturn cost based regulation and toward systems of regulation that provide incentives for increasingly efficient production allowing firms to share in the social gains from efficiency with increased profits we then discuss the basic structure of incentive regulation as it has most commonly been adopted in the telephone industry in the united states the first is price cap pc regulation which typically allows the firm to

supply storage and service reliability decisions by gas distribution utilities a chance constrained approach this paper explores the trade offs among purchases storage and service reliability decisions faced by natural gas distribution utilities the short term demand for natural gas fluctuates because of the weather to encourage load leveling the pipeline transmission companies that supply the utilities use a demand contract that charges utilities based on their peak day needs and often charge for a minimum daily purchase requirement whether that purchase is made or not the policy variables available to the utility include increasing its storage capacity and providing interruptible service to some customers thereby lowering reliability of service there are also technological constraints on the maximum storage gas flows to explore these trade offs a chance constrained cost minimization problem is formulated two decision rules for gas purchases and storage operation are examined in these rules an initial decision is made at the beginning of each month about either the level of purchases or the level of

uncertainty effects on production mix and on hedging decisions the case of brazilian ethanol and sugar abstract the use of food crops to produce biofuels has been subject of interest in literature the relationship between food and fuel prices can remarkably affect production strategies these prices are subject to high uncertainty and producers must adopt hedging and storage strategies in order to avoid financial losses this study investigates the effect of uncertainty on production storage and hedging of ethanol and sugar in brazilian mills a robust optimization model to define production storage and hedging strategies is proposed uncertainty sets on returns are constructed based on a state space model kalman filter the presented model was applied to brazilian ethanol and sugar markets in different economic scenarios the study analyses efficient frontiers and optimal strategies and the results indicate that even adopting good price forecast models the optimal strategies can be deeply affected by uncertainty

multitask agency and contract choice an empirical exploration the multitask agency problem is examined empirically using contracts between private integrated oil companies and their service stations in the city of vancouver the empirical tests assess how variations in the characteristics of one task affect the choice of agent compensation scheme for another comparative statics from the model predict that higher powered incentives will be offered for gasoline sales when the secondary activity is not highly complementary with gasoline retailing where complementarity is measured by the cross price demand effect the covariation in uncertainty and the degree of effort substitutability copyright 1996 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

new developments in experiments for agricultural economics discussion huffman et al provide an excellent illustration of how a laboratory experiment can assess both the impact and value of information using auctions to elicit willingness to pay wtp for gmand standard labeled foods the experiment compares the effects of positive information about gm from agribusinesses in two settings one in which consumers received only negative gm information and the other in which they received both negative and independently verifiable third party information the results show that the value of agribusiness information is reduced in the presence of third party information the extension to calculating public good value is novel but in doing so the authors assume that information has value only if it results in a change in purchases this may be overly restrictive since it ignores any value to people already purchasing gm product and it also brings up the question about the possible value of negative information since it too can presumably lead to changes in behavior if positive and negative information were introduced simultaneously and resulted in no change in purchases would this assumption force one to conclude that neither had any value

tariff based incentives for improving coal power plant efficiencies in india improving the efficiency of coal based power plants plays an important role in improving the performance of india s power sector it allows for increased consumer benefits through cost reduction while enhancing energy security and helping reduce local and global pollution through more efficient coal use a focus on supply side efficiency also complements other ongoing efforts on end use efficiency the recent restructuring of the indian electricity sector offers an important route to improving power plant efficiency through regulatory mechanisms that allow for an independent tariff setting process for bulk purchases of electricity from generators current tariffs based on normative benchmarks for performance norms are hobbled by information asymmetry where regulators do not have access to detailed performance data hence we propose a new incentive scheme that gets around the asymmetry problem by setting performance benchmarks based on actual efficiency data rather than on a normative basis the scheme provides direct tariff based incentives for efficiency improvements while benefiting consumers by reducing electricity costs in the long run this proposal might also be useful for regulators in other countries to incorporate similar incentives for efficiency improvement in power generation

are those paid more really more productive the case of experience this study uses computerized personnel microdata on the white male managerial and professional employees at a major u s corporation to address the following question can the additional earnings which are associated with more labor market experience at a point in time really be explained by higher productivity at the same point in time our answer to this question based on both cross sectional and longitudinal information is that performance plays a substantially smaller role in explaining cross sectional experience earnings differentials and earnings growth than is claimed by those who have adopted the human capital explanation of the experience earnings profile this response depends critically on our assumption that the performance ratings which supervisors give to their white male managerial and professional subordinates adequately reflect the subordinates relative productivity in the year of assessment we present a great deal of evidence which strongly supports this assumption

a marginal cost pricing model for gas distribution utilities we develop a natural gas distribution utility pricing model that includes optimization of supply mix and capacity expansion financial analysis of revenue requirements and design of either average cost or marginal cost based rates and apply it using data from the east ohio gas company the results clearly point to the superiority of marginal cost over average cost pricing policies in terms of lesser capital requirements better capacity utilization and higher end use economic efficiency

optimal risk allocation for regulated monopolies and consumers abstract the model shows how a regulated monopolist s price should change as random cost and demand parameters are revealed the regulator has a ramsey type problem with a linear tariff a trade off between allocative efficiency and risk sharing typically exists the attitudes of the consumer and the firm to both income and price risk determine how the price should move sufficient conditions are found for price adjustment schemes used in practice to be optimal these schemes include full partial and zero pass through of marginal costs and price caps average cost pricing and caps on total revenue for demand risk

the impact of alternative forms of state regulation of at t on direct dial long distance telephone rates federal and state regulatory agencies have traditionally used rate of return regulation to set profit and rate levels for utilities a price cap framework in which the regulatory agency sets a maximum rate below which the regulated utility has pricing flexibility is possibly a more efficient alternative to rate of return regulation this article presents an econometric analysis that compares at t s prices of intrastate long distance telephone service in states that allow at t pricing flexibility with those in states that do not the results of this analysis suggest that at t s daytime evening nighttime and weekend rates are significantly lower in states that allow pricing flexibility than in states that use rate of return regulation

internal labor markets too many theories too few facts that firms employ internal labor markets in which wages and careers are partly shielded from the vagaries of external labor markets seems well accepted yet peter doeringer and michael piore s 1985 seminal work on internal labor markets has had a rather limited impact on the economics profession in contrast to textbooks on human resource management which have adopted their paradigm wholeheartedly labor economics texts tend to pay only cursory attention to internal labor markets the competitive model in which wages reflect an individual s marginal product remains the paradigm of choice there are many reasons for this lackluster reception including intellectual convenience a more acceptable excuse is that while doeringer and piore s study which was based on interviews with 75 companies identified several key regularities ports of entry career ladders etc that have come to shape our perception of internal labor markets the book never presented a theory to explain these findings with the advent of information economics and contract theory models of internal labor markets or at least selected features of these markets have begun to emerge the objective of these theories is to show that internal labor market outcomes can be construed as second best solutions to contracting problems under incomplete information for instance tournament theory edward lazear and sherwin rosen 1981 sees the attachment of wages to jobs as part of an efficient incentive scheme michael waldman 1984 explains the same phenomenon as an insurance arrangement against variations in individual productivity seniority rules in promotion and wagesetting can be understood as responses to problems of collusion or influence activities paul milgrom and john roberts 1988 the list could be extended at this point there is hardly any feature of internal labor markets that cannot be given some logical explanation using the right combination of uncertainty asymmetric information and opportunism doeringer and piore 1985 in the preface to the second printing of their book take exception with this line of theoretical research they believe that internal labor markets are inherently a social group phenomenon and that something fundamental is missed by pursuing individualistic models be that as it may we think there is another more serious problem with the direction that this research has taken too much of it relies on the old empirical stereotype the original study was done 25 years ago and focused almost exclusively on blue collar male unionized manufacturing workers one might rightly wonder how relevant these findings are in today s environment and whether they extend to white collar work as most discussions seem to assume before proceeding with the theory it is prudent to ask do we have the facts right in this paper we report on two recent case studies of individual firms that use personnel records to analyze wage and career paths of managerial workers lazear 1992 and baker et al 1994a b 1 person

regulating a monopolist with unknown demand and cost functions we consider the design of regulatory policy when the regulator is imperfectly informed about both the firm s cost function and the demand function it faces to some extent the optimal policy here is the natural combination of the optimal policies when there is uncertainty only about either demand or cost important qualitative differences also exist however for example it may be optimal to set prices below marginal cost and the pricing authority delegated to the firm may be more limited when there is uncertainty about both cost and demand

bargaining and regulation with asymmetric information about demand and supply abstract rate regulation is studied as a bargaining process in which consumers and the firm negotiate output and payments under asymmetric information the feasible set of transactions given incentive compatibility and individual rationality constraints is characterized the set of interim incentive efficient mechanisms for the direct revelation game is also characterized sufficient conditions are given for efficient mechanisms to be full information efficient efficient mechanisms are identified which correspond to nonlinear monopoly pricing monosony compensation schedules and the baron myerson regulation model

government intervention in production and incentives theory a review of recent contributions national science foundation the commissariat general du plan and the center for energy policy research at m i t

on the design of regulatory price adjustment mechanisms abstract price adjustment mechanisms are employed in the electric utility industry to pass changes in fuel costs on to consumers without formal rate review by a regulatory commission the predictability of this pass through and the regulator s limited ability to observe the actions of a firm can create potential incentive problems associated with the choices of technology and fuel supply this paper is concerned with the regulatory design of pass through formulas when a factor price is uncertain the optimal design involves deviating from the full information optimal price formulas in order to mitigate the incentive problems

payment systems and the structure of inequality conceptual issues and an analysis of salespersons in department stores output related payment systems such as commissions and piece rates are common in many jobs their central feature is that the wage of an employee is tied directly to her current performance focusing on salespersons in department stores the author considers wage differences under three payment systems a straight salary a straight commision and a salary plus commission four conceptions of wage inequalities under the three systems are contrasted a risk sharing a bargaining a sorting and a social status interpretation the empirical analyses compare the pay schemes and wages of approximately 63 000 salespersons in 178 department stores in 1981

simple binomial processes as diffusion approximations in financial models a binomial approximation to a diffusion is defined as computationally simple if the number of nodes grows at most linearly in the number of time intervals it is shown how to construct computationally simple binomial processes that converge weakly to commonly employed diffusions in financial models the convergence of the sequence of bond and european option prices from these processes to the corresponding values in the diffusion limit is also demonstrated numerical examples from the constant elasticity of variance stock price and the cox ingersoll and ross 1985 discount bond price are provided article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

monitoring of performance in organizational contracting the case of defense procurement this paper contains an agency theoretic analysis of procurement contracts in which the government designs optimal linear contracts for a risk averse supplier in the presence of moral hazard private information and imperfect monitoring optimal contracts deviate from first best risk sharing the direction of the deviation depends on the relative severity of the moral hazard and private information problems and on the precision of the monitor in contrast to the usual result in the moral hazard literature the government may in some cases prefer that the effort of the supplier be taxed choice of the precision of the monitor and the categories of costs covered by the monitor are also studied

job assignments signalling and efficiency this article analyzes a model in which information about a worker s ability is only directly revealed to the firm employing the worker other firms however use the worker s job assignment as a signal of ability three results recur throughout the analysis first wage rates tend to be more closely associated with jobs than with ability levels second there is frequently an inefficient assignment of workers to jobs i e even when a firm has complete information about a worker s output third the severity of this inefficiency tends to be negatively correlated with the level of firm specific human capital in the economy

an exact algorithm for the capacitated total quantity discount problem in this paper we analyze the procurement problem of a company that needs to purchase a number of products from a set of suppliers to satisfy demand the suppliers offer total quantity discounts and the company aims at selecting a set of suppliers so to satisfy product demand at minimum purchasing cost the problem known as total quantity discount problem tqdp is strongly np hard we study different families of valid inequalities and provide a branch and cut approach to solve the capacitated variant of the problem capacitated tqdp where the quantity available for a product from a supplier is limited a hybrid algorithm called help heuristic enhancement from lp is used to provide an initial feasible solution to the exact approach help exploits information provided by the continuous relaxation problem to construct neighborhoods optimally searched through the solution of mixed integer subproblems a streamlined version of the proposed exact method can optimally solve in a reasonable amount of time instances with up to 100 suppliers and 500 products and largely outperforms an existing approach available in the literature and cplex 12 2 that frequently runs out of memory before completing the search

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

marketing agreement impacts in an experimental market for fed cattle marketing agreements between meatpacking and cattle feeding firms have created concerns about their effects on fed cattle prices profit sharing marketing agreements were imposed onto a simulated fed cattle market price level and variability differences with and without agreements between agreement participants and nonparticipants during agreement and nonagreement periods and between participants receiving and not receiving a monetary incentive were evaluated prices and variability for nonagreement cattle were higher during the agreement periods marketing agreement participants realized lower less variable prices than nonparticipating firms monetary incentives did not affect price levels but increased price variability

a new explanation for the wtp wta disparity abstract we propose a new explanation for the wtp wta disparity in experiments and surveys uncertainty irreversibility and limited learning opportunities can generate commitment costs driving a wedge between wtp and wta we present experimental evidence that supports our hypothesis

a theory of yardstick competition in the typical regulatory scheme a franchised monopoly has little incentive to reduce costs this article proposes a mechanism in which the price the regulatedfirm receives depends on the costs of identical firms in equilibrium each firm chooses a socially efficient level of cost reduction the mechanism generalizes to cover heterogeneous firms with observable differences medicare s prospective reimbursement of hospitals by using diagnostically related groups is a scheme very similar to the one outlined here

adverse risk incentives and the design of performance bases contracts this paper uses option pricing theory to value and analyze many performance based fee contracts that are currently in use a potential problem with some of these contracts is that they may induce portfolio managers to adversely alter the risk of the portfolios they manage the paper is prescriptive in that it presents conditions for contract parameters that provide proper risk incentives for classes of investment strategies for buy and hold and rebalancing strategies adverse risk incentives are avoided when the penalties for poor performance outweigh the rewards for good performance

a theory of yes men this paper illustrates an incentive for workers to conform to the opinion of their supervisors when firms use subjective performance evaluation this desire to conform arises endogenously from the firm s need to induce the worker to exert effort the author shows that firms may optimally eschew the use of incentive contracts to retain workers incentives for honesty the author illustrates that the incentive to conform implies inefficiencies even when workers are risk neutral and is likely to lead to more centralized decision making than in the absence of the desire to conform copyright 1993 by american economic association

simple cost sharing contracts we extend rogerson s 2003 intriguing analysis of the performance of simple procurement contracts to consider settings where the supplier s innate production cost is not necessarily distributed uniformly although the simple contract that rogerson analyzes performs remarkably well when the smaller cost realizations are relatively likely it can perform poorly when the larger cost realizations are relatively likely we show that in all settings under consideration though a fairly simple pair of contracts one that involves linear cost sharing and one that involves full cost reimbursement can always secure more than 73 of the gain achieved with a fully optimal contract

the recognition and reward of employee performance this paper examines when and to what extent an individual s relative wage depends on his her productivity relative to others doing the same job starting wages were influenced by background characteristics and training cost realizations but not by relative productivity wages one year later were influenced by productivity but the effects were small the wage elasticity was 2 at small establishments and 0 at establishments with over 400 employees the wage response to relative productivity and training costs was weaker in small labor markets suggesting that wages do not fully respond to performance because of the firm specificity of job performance differentials

a note on purchased power adjustment clauses a recent series of papers has examined some of the economic effects of automatic fuel adjustment clauses on the behavior of the regulated firm see baron and debondt 1979 gallop and karlson 1978 cowing and stevenson 1979 atkinson and halvorsen 1980 isaac 1982 kaserman and tepel 1982 for the most part these papers have analyzed the implications of profit maximization under two alternative regulatory regimes one in which the firm s output price is determined by the terms of an adjustment clause formula and one in which it is not 1 today virtually all electric utilities are subject to some sort of fuel cost adjustment mechanism 2 since the specific formulas embodied in these mechanisms exhibit considerable variation across regulatory virtually all electric utilities are subject to some sort of fuel cost adjustment mechanism one way in which these formulas differ is in their treatment of purchased power this paper examines the effect that alternative treatments of purchased power have on the incentive of the regulated firm to minimize short run costs through its choice of purchased versus owngenerated power the theoretical model indicates that excluding purchased power from the formula creates an economic incentive to overutilize the firm s own generating equipment based on data for 113 privately owned u s electric utilities the empirical analysis confirms the theoretical prediction we gratefully acknowledge the financial support provided by the public policy research center and the public utilities research center at the university of florida and a grant from resources for the future without implicating them in what follows we also acknowledge the helpful comments on an earlier draft provided by john mayo and especially by two anonymous referees 1 the study by gollop and karlson 1978 is an exception they create an index that varies directly with the value of the adjustment clause formula to the firm 2 fuel adjustment clauses were in effect in 43 states in 1976 see isaac 1982 p 159

using cost observation to regulate firms the paper emphasizes the use of accounting data in regulatory or procurement contracts when the supplier 1 has superior information about the cost of the project and 2 invests in cost reduction the main result states that under risk neutrality the supplier announces an expected cost and is given an incentive contract linear in cost overruns this optimal contract moves toward a fixed price contract as the announced cost decreases an investment choice is then introduced and the use of a rate of return regulation is studied

performance incentive fees an agency theoretic approach this paper employs recent developments in agency theory to study the impact that com pensation contracts have on portfolio management investment decisions in a restricted mean variance world two types of incentive contracts for mutual fund managers are ana lyzed and compared the results show that the symmetric contract while not necessar ily eliminating agency costs dominates the bonus contract in aligning the manager s interests with those ofthe investor investment companies and by extension their managers control a large and increasing percentage ofthe aggregate wealth of their clients more investors are putting their money under the control of these advisers than ever before con sequently potential conflicts of interest arise between investment company own ers and their financial management advisers the securities and exchange com mission sec has been concerned with this issue for a number of years the agency has commissioned several studies to investigate the issue and has set forth certain rulings concerning the behavior of investment company advisers of par ticular importance has been the compensation arrangement between mutual fund management and the fund owners in fact the sec has issued specific guidelines regarding allowable fee schedules for managers these guidelines have ied to a policy debate concerning whether the sec has been too stringent or not stringent enough in regulating compensation for investment managers the present study takes a new approach to this problem in an attempt to resolve this debate the fiduciary relationship between mutual fund management and the inves tors they represent may be viewed as a principal agent relationship conse quently the methodology from the agency literature can be applied to study the impact of various compensation arrangements on the potential conflict of interest between these two groups

factor price changes technical efficiency and revenue requirements regulation a regulatory framework is considered in which output price adjustments can be initiated only by a change in the price of a non capital input e g fuel at some time in the future which is uncertain at that time there is a processing period and then an adjustment of the output price so that the revenues of the firm meet an allowed rate of return s the regulated firm choosing a putty clay technology is shown to overcapitalize for large values of s and to undercapitalize for sufficiently small values of s a decrease in the length of the processing period is found to accentuate the extent of either the undercapitalization or overcapitalization resulting from the specified rate of return

cost reductions cost padding and stock market prices the chilean experience with price cap regulation we study the chilean electricity distribution industry and find that costs the ratio of reported costs to revenues have fallen since price caps were introduced cost reductions are u shaped since 1989 strong initial cost reductions reverse every four years coinciding with regulatory reviews a possible explanation is that firms are behaving strategically we then use stock market data to complement our study we construct a measure of cumulative abnormal returns for regulated firms around their quarterly announcements and a measure of naive cost expectations which excludes any indication of the occurrence of review periods in general cost reports in excess of naive cost expectations have a negative effect on returns even after we control for company fixed effects the exception is cost surprises that happen during review periods which increase abnormal returns the estimated effects fall over time this is consistent with the hypothesis of strategic firms and that the regulatory regime translates these games into higher rates in a way that is not completely anticipated by the market more generally the results suggest there may be value in complementing regulatory procedures with stock market information

consumer s surplus without apology the purpose of this paper is to settle the controversy surrounding consumer s surplus and by so doing to validate its use as a tool of welfare economics i will show that observed consumer s surplus can be rigorously utilized to estimate the unobservable compensating and equivalent variations the correct theoretical measures of the welfare impact of changes in prices and income on an individual i derive precise upper and lower bounds on the percentage errors of approximating the compensating and equivalent variations with consumer s surplus these bounds can be explicitly calculated from observable demand data and it is clear that in most applications the error of approximation will be very small in fact the error will often be overshadowed by the errors involved in estimating the demand curve the results in no way depend upon arguments about the constancy of the marginal utility of income consequently this paper supplies specific empirical criteria which can replace the apologetic caveats frequently employed by those who presently apply consumer s surplus moreover the results imply that consumer s surplus is usually a very good approximation to the appropriate welfare measures to preview below i establish the validity of these rules of thumb for a

regulation competition and liberalization in many countries throughout the world regulators are struggling to determine whether and how to introduce competition into regulated industries this essay examines the complexities involved in the liberalization process while stressing the importance of case specific analyses this essay distinguishes liberalization policies that generally are procompetitive from corresponding anticompetitive liberalization policies

good regulatory regimes assuming simple functional forms numerical methods are used to analyze linear regulatory rules that include cost plus and price cap regimes regulators are assumed to observe actual cost but not the disutility of cost reduction and are assumed unable to impose taxes or make transfers best linear regimes depend importantly on the level and form of uncertainty the regulatory objective function and the firm profitability constraint under uncertainty regimes in which price depends in part on actual cost generally substantially outperform pure price caps particularly in terms of consumers surplus

estimating cost functions in regulated industries characterized by asymmetric information abstract in this paper a structural model is developed to estimate a cost function that includes both an adverse selection and a moral hazard variable it is shown how traditional cost function estimates may produced biased results if moral hazard is present this gives an alternative reason to feinstein and wolak the econometric implications of incentive compatible regulation in g f rhodes ed advances in econometrics vol 9 159 204 jai press greenwich ct 1991 of why scale economics may be overestimated in regulated industries parameter estimates from our model can be used to design an optimal contract or any other regulatory mechanism we illustrate our approach using data from the norwegian bus transport industry

is dea useful in the regulation of water utilities a dynamic efficiency evaluation the discussion about public utilities efficiency and its management has become increasingly important in the last decades we focus on the distribution of water which is one of the most important natural resources marshall 1879 this research shows the relationship between efficiency and institutional factors such as management system for this purpose we have data about some spanish water utilities under different provision systems during the period 1985 to 2000 using data envelopment analysis dea we estimate potential cost savings in this context we will extend the results obtained by thanassoulis 2000a b in attempt to guide the regulation of this sector

does it all add up benchmarks and the compensation of active portfolio managers in this article the authors examine theoretically the use of benchmark portfolios in the compensation of privately informed portfolio managers they find that the use of a benchmark and particularly the types of benchmarks often observed in practice cannot be easily rationalized specifically commonly used benchmark adjusted compensation schemes are generally inconsistent with optimal risk sharing and do not lead to the choice of an optimal portfolio for the investor moreover benchmarks do not help in solving potential contracting problems such as inducing the manager to expend effort or trying to screen out uninformed managers copyright 1997 by university of chicago press

robust strategies for natural gas procurement abstract in order to serve their customers natural gas local distribution companies ldcs can select from a variety of financial and non financial contracts the present paper is concerned with the choice of an appropriate portfolio of natural gas purchases that would allow a ldc to satisfy its demand with a minimum tradeoff between cost and risk while taking into account risk associated with modeling error we propose two types of strategies for natural gas procurement dynamic strategies model the procurement problem as a mean risk stochastic program with various risk measures naive strategies hedge a fixed fraction of winter demand the hedge is allocated equally between storage futures and options we propose a simulation framework to evaluate the proposed strategies and show that i when the appropriate model for spot prices and its derivatives is used dynamic strategies provide cheaper gas with low risk compared to naive strategies ii in the presence of a modeling error dynamic strategies are unable to control the variance of the procurement cost though they provide cheaper cost on average based on these results we define robust strategies as convex combinations of dynamic and naive strategies the weight of each strategy represents the fraction of demand to be satisfied following this strategy a mean variance problem is then solved to obtain optimal weights and construct an efficient frontier of robust strategies that take advantage of the diversification effect

aggregation and linearity in the provision of intertemporal incentives we consider the problem of providing incentives over time for an agent with constant absolute risk aversion the optimal compensation scheme is found to be a linear function of a vector of n accounts which count the number of times that each of the n kinds of observable events occurs the number n is independent of the number of time periods so the accounts may entail substantial aggregation in a continuous time version of the problem the agent controls the drift rate of a vector of accounts that is subject to frequent small random fluctuations the solution is as if the problem were the static one in which the agent controls only the mean of a multivariate normal distribution and the principal is constrained to use a linear compensation rule if the principal can observe only coarser linear aggregates such as revenues costs or profits the optimal compensation scheme is then a linear function of those aggregates the combination of exponential utility normal distributions and linear compensation schemes makes computations and comparative statics easy to do as we illustrate we interpret our linearity results as deriving in part from the richness of the agent s strategy space which makes it possible for the agent to undermine and exploit complicated nonlinear functions of the accounting aggregates

optimal contracts in a continuous time delegated portfolio management problem this article studies the contracting problem between an individual investor and a professional portfolio manager in a continuous time principal agent framework optimal contracts are obtained in closed form these contracts are of a symmetric form and suggest that a portfolio manager should receive a fixed fee a fraction of the total assets under management plus a bonus or a penalty depending upon the portfolio s excess return relative to a benchmark portfolio the appropriate benchmark portfolio is an active index that contains risky assets where the number of shares invested in each asset can vary over time rather than a passive index in which the number of shares invested in each asset remains constant over time fund managers compensation schemes in a delegated portfolio management setting have been of special interest to both academics and practitioners academic interest stems in part from the rapid growth of managed funds over the last two decades gompers and metrick 1998 report that by december 1996 mutual funds pension funds and other financial intermediaries held discretional control over more than half of the u s equity market it is thus of importance to study the impact of institutional trading on asset prices and to integrate into one model both asset pricing and delegated portfolio management compensation as advocated by brennan 1993 allen and santomero 1997 and allen 2001 it is also important to understand the relationship between a manager s trading strategies and his implicit incentives or career concerns see e g brown harlow and starks 1996 brown goetzmann and park 1997 chevalier and ellison 1999 and chen and pennacchi 2000 these concerns include internal promotion from a small to a large fund higher outside offers and the flow of money through the fund under management 1 the importance of fund manager compensation is also underscored by congressional passage in 1970 of the amendment to

relative efficiency measurement and prospects for yardstick competition in brazilian electricity distribution abstract the paper considers the non parametric methodology of data envelopment analysis dea in the context of efficiency measurement for brazilian electricity distribution in 1997 98 indicating the existence of firms operating substantially below the efficiency frontier the potential and difficulties associated with the implementation of yardstick competition schemes are then discussed stressing in particular the role of relative efficiency scores obtained from the dea approach

linearity with project selection and controllable diffusion rate in continuous time principal agent problems i extend holmstrom and milgrom s model by allowing the agent to control privately or publicly the diffusion rate process and show that the optimal contract is still linear i discuss the conditions under which conflicts over the choice of diffusion rate do and do not arise as an application i examine project selection problems of a firm conflicts between the manager and investors arise because giving the manager too much incentive to work to increase the profit from ongoing operations can induce him to be too conservative in project selection possibly resulting in optimal contracts with low sensitivities

economy of mutuality merging financial and social sustainability the article posits the concept of economy of mutuality as an intellectual mediation space for shifts in emphasis between market and social structures within economic theory and practice economy of mutuality it is contended provides an alternative frame of reference to the dichotomy of market economy and social economy for inquiry about what business is for and what values it presupposes and creates the article centers around the objective of gaining a broadened understanding of business so as to include not just market economy but social enterprise and social economy in pursuit of this objective a range of various archetypes of business enterprise are considered in light of higher ends of economic life the highest telos of business encompassing all such archetypes it is argued is founded on reciprocity and integral human development the article concludes that compared to market economy per se economy of mutuality provides a better conceptual framework for business in undertaking the challenges of sustainability

toward a common good theory of the firm the tasubinsa case tasubinsa is a special employment and occupational center constituted in accordance with spanish law where 90 of the workers have mental sensorial or physical impairments of at least 30 its positive experience of more than 15 years provides entirely different responses from mainstream neoclassical theory transaction cost theory agency theory and shareholder theory to basic questions such as what is a firm what is its purpose who owns a firm and what do a firm s owners seek the article discusses how these different premises give rise to a distinctive corporate culture centered on the handicapped person

the productivity effects of employee stock ownership plans and bonuses evidence from japanese panel data the authors report the first results for japanese firms on the effects of employee stock ownership plans esops and bonuses by estimating production functions using new panel data they find that the introduction of an esop will lead to a 4 5 percent increase in productivity this productivity payoff takes three to four years there is a modest productivity gain from the bonus system the authors also find evidence that the productivity effect of bonuses is enhanced by the existence of esops suggesting that esops may create a climate conducive to profit sharing by enhancing long term commitment and peer monitoring copyright 1995 by american economic association

the politics of shareholder activism in nigeria shareholder activism has become a force for good in the extant corporate governance literature in this article we present a case study of nigeria to show how shareholder activism as a corporate governance mechanism can constitute a space for unhealthy politics and turbulent politicking which is a reflection of the country s brand of politics as a result we point out some translational challenges and suggest more caution in the diffusion of corporate governance practices across different institutional environments we contribute to the literature on corporate governance in africa whilst creating an understanding of the political embeddedness of shareholder activism in different institutional contexts i e a step closer to a political theorising of shareholder activism

implicit contracts incentive compatibility and involuntary unemployment this paper considers the enforceability of employment contracts when employees performance cannot be verified in court so that piece rate contracts are not legally enforceable part i shows that there exists a variety of self enforcing implicit contracts modelled as perfect equilibria in a repeated game and characterizes all the wage and performance outcomes that can be implemented implementation requires a strictly positive surplus from employment the form of the contract depending on how this surplus is divided between firm and employee piece rate contracts and contracts with an informally agreed bonus can be made self enforcing but the use of severance pay and bonding does not extend the set of implementable allocations the resulting contracts resemble actual labor contracts more than do the contracts in standard principal agent models part ii analyses market equilibrium with these contracts also modelled as perfect equilibria in a repeated game and shows that many such equilibria exist unfilled vacancies and unemployed workers can co exist despite the existence of contracts that are potentially mutually beneficial for those jobs that are filled any division of the potential surplus is possible so that the market can have at the same time involuntary unemployment and vacancies that are unfilled despite filled jobs earning positive profits as a criterion for selecting equilibria a notion of renegotiation proofness is applied then either all workers are employed or all jobs filled but any division of the potential surplus is still possible the paper explores what further restrictions on beliefs give rise to a walrasian outcome in which all the potential surplus goes to the short side of the market and to an efficiency wage type outcome in which the potential surplus goes to the long side

robust optimization policy benchmarks and modeling errors in natural gas abstract the problem of regulating natural gas procurement has become a huge burden to regulators especially due to the plethora of complicated financial contracts that are now being used by local distribution companies ldcs for risk management purposes muthuraman aouam and rardin 2008 proposed a new benchmarking scheme called policy benchmarks and showed that these benchmarks do not suffer from the usual criticisms that are made against existing regulatory methods such policy benchmarks based regulation has however faced hurdles in being adopted one of the primary reasons has been concerns over its robustness we demonstrate in this paper that when modeling errors are present the policy benchmarks proposed earlier can backfire and are hence as suspected not well suited for regulation we begin our analysis with a more general model than the one that has been used earlier by accommodating the ldc s ability to reduce cost by exerting effort as in classical economics we derive solutions to the ldcos problem find closed form solutions for the regulator s optimal fee fraction along with risk sharing implications and provide insights into the policy benchmark selection we then construct a robust optimization based policy benchmarking mechanism that inherits all the original benefits we further demonstrate that these unlike the earlier benchmarks are robust against modeling errors

optimal departures from marginal cost pricing focuses on departures from marginal cost pricing optimal allocation or resources level of tax revenue that will be collected by the government theorems developed for resource allocation ebsco

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