the good the bad and the regulator an experimental test of two conditional audit schemes conditional audit rules are designed to achieve regulatory compliance with fewer inspections than required by random auditing a regulator places individuals into audit pools that differ in probability of audit or severity of fine and species transition rules between pools future pool assignment is conditional on current audit results we conduct an experiment to compare two specific schemes harrington s past compliance targeting and friesen s optimal targeting against random auditing we find a production possibility frontier between compliance and minimizing inspections optimal targeting generates the lowest inspection rates as predicted but random auditing the highest compliance past compliance targeting is intermediate

the valuation of options on yields abstract many contingent claims incorporate options on yield levels i derive closed form expressions for european yield option prices using a general equilibrium model in which the underlying yield is the relevant state variable the properties of these options differ markedly from those of conventional options on traded assets for example yield call values can be less than their intrinsic value and can be decreasing functions of the underlying yield these features have important hedging implications i examine the empirical implications of the model using price data for the 13 week t bill options traded on the chicago board options exchange

meta analysis in model implementation choice sets and the valuation of air quality improvements this research illustrates how the methods developed for meta analysis can serve to document and summarize voluminous information derived from repeated sensitivity analyses our application is to the sensitivity of welfare estimates derived from discrete choice models to assumptions about the choice set these assumptions affect welfare estimates through both the estimated parameters of the model and conditional on the parameters the substitution among alternatives in our specific application the evaluation is in terms of estimated benefits of air quality improvements in los angeles based on discrete choices of neighborhood and housing copyright 2007 john wiley sons ltd

public information as a deterrent to environmental infractions past studies of the impact of publicly announced violations of environmental laws on the market value of the offending firms have yielded equivocal results a particularly troubling aspect of this research is whether the market imposes a reputation penalty for such violations this article uses the event study methodology to estimate the effect of announced environmental infractions on the market returns of the violators stockholders experienced significant negative abnormal returns in the event window cross sectional analysis showed these cumulative losses to be a function of firm size type of legal action and specific toxin the reputation component of abnormal returns was influenced by these factors as well

do switching costs make markets less competitive abstract the conventional wisdom in economic theory holds that switching costs make markets less competitive this article challenges this claim the authors formulate an empirically realistic model of dynamic price competition that allows for differentiated products and imperfect lock in they calibrate this model with data from frequently purchased packaged goods markets these data are ideal in the sense that they have the necessary variation to identify switching costs separately from consumer heterogeneity equally important consumers exhibit inertia in their brand choices a form of psychological switching cost this makes the results applicable to the broad range of products that are distinctly identified i e branded rather than just to products for which there is a product adoption cost or explicit switching fee in the simulations prices are as much as 18 lower with than without switching costs more important equilibrium prices do not increase even in the presence of switching costs that

computing the constant elasticity of variance option pricing formula this paper expresses the constant elasticity of variance option pricing formula in terms of the noncentral chi square distribution this allows the application of well known approximation formulas and the derivation of a whole class of closed form solutions in addition a simple and efficient algorithm for computing this distribution is presented this paper shows that the constant elasticity of variance cev formula can be expressed as a function of the noncentral chi square distribution a simple and efficient algorithm for computing this distribution is presented approximations to this distribution can be used to estimate accurately the cev formula when the computation of the exact solution is problematic section i discusses theories and some evidence on the association between volatility and price level section ii presents the particular kind of relationship assumed by the cev model and reviews empirical evidence on the model section iii shows that the cev formula can be expressed in terms of the noncentral chisquare distribution a simple algorithm for computing this distribution is derived in section iv section v presents some special closed form solutions to this distribution finally section vi shows that an approximation to the cev formula can be used when the exact solution converges slowly i relationship between volatility and price level several theoretical arguments imply an association between stock price and volatility geske 11 black 3 and christie 5 consider the effects of financial leverage on the variance of the stock an increase in the stock price reduces the debt equity ratio of the firm and therefore reduces the variance of the stock s returns black hypothesizes that price changes may also affect volatility through their impact on operating leverage in addition he proposes a reverse causal relationship whereby an increase in the volatility of stocks causes prices to fall in rubinstein s 171 displaced diffusion model the relation between price and volatility of returns depends on the firm s asset mix and debt equity ratio empirical evidence supports the hypothesis that volatility changes with stock price schmalensee and trippi 19 examining just over a year of weekly data on six stocks find a strong negative relationship between stock price changes and changes in implied volatility black 3 using over ten years of data on thirty stocks finds that a given proportional increase decrease in stock price is

the effect of punishment on firm compliance with hazardous waste regulations abstract this paper examines the effect of epa s dramatic 1991 increase in the penalties associated with violations of hazardous waste regulations on firm compliance although data from epa s rcra information system show an increase in detected violations after the penalty change once inspection levels are incorporated into the analysis through a censored bivariate probit model i find that violations have decreased since the penalty change however the decrease in violations appears small relative to the increase in recommended penalty levels i also find evidence that the likelihoods of inspection and compliance vary significantly across regions

quota enforcement in resource industries self reporting and differentiated inspections quotas are frequently used in the management of renewable resources and emissions however in many industries there is concern about their basic effectiveness due to non compliance we develop an enforcement model of a quota regulated resource and focus on a situation with significant non compliance and exogenous constraints on fines and enforcement budget we propose a new enforcement system based on self reporting of excess extraction and explicit differentiation of inspection rates depending on compliance history we use differentiated inspections to induce firms to self report excess extraction this system increases the effectiveness of the quota by allowing the regulator to implement a wider range of aggregate extraction targets than under traditional enforcement while ensuring an efficient allocation of extraction in addition inspection costs can be reduced without reductions in welfare

a damped diffusion framework for financial modeling and closed form maximum likelihood estimation abstract asset price bubbles can arise unintentionally when one uses continuous time diffusion processes to model financial quantities we propose a flexible damped diffusion framework that is able to break many types of bubbles and preserve the martingale pricing approach damping can be done on either the diffusion or drift function oftentimes certain solutions to the valuation pde can be ruled out by requiring the solution to be a limit of martingale prices for damped diffusion models monte carlo study shows that with finite time series length maximum likelihood estimation often fails to detect the damped diffusion function while fabricates nonlinear drift function an alternative method based on ait sahalia s specification test on parametric models is proposed

paying not to go to the gym how do consumers choose from a menu of contracts we analyze a novel dataset from three u s health clubs with information on both the contractual choice and the day to day attendance decisions of 7 752 members over three years the observed consumer behavior is difficult to reconcile with standard preferences and beliefs first members who choose a contract with a flat monthly fee of over 70 attend on average 4 3 times per month they pay a price per expected visit of more than 17 even though they could pay 10 per visit using a 10 visit pass on average these users forgo savings of 600 during their membership second consumers who choose a monthly contract are 17 percent more likely to stay enrolled beyond one year than users committing for a year this is surprising because monthly members pay higher fees for the option to cancel each month we also document cancellation delays and attendance expectations among other findings leading explanations for our findings are overconfidence about future self control or about future efficiency overconfident agents overestimate attendance as well as the cancellation probability of automatically renewed contracts our results suggest that making inferences from observed contract choice under the rational expectation hypothesis can lead to biases in the estimation of consumer preferences

leverage effect volatility feedback and self exciting market disruptions equity index volatility variation and its interaction with the index return can come from three distinct channels first index volatility increases with the market s aggregate financial leverage second positive shocks to systematic risk increase the cost of capital and reduce the valuation of future cash flows generating a negative correlation between the index return and its volatility regardless of financial leverage finally large negative market disruptions show self exciting behaviors this article proposes a model that incorporates all three channels and examines their relative contribution to index option pricing and stock option pricing for different types of companies

displaced diffusion option pricing this paper develops a new option pricing formula that pushes the underlying source of risk back to the risk of individual assets of the firm the formula simultaneously encompasses differential riskiness of the assets of the firm their relative weights in determining the value of the firm the effects of firm debt and the effects of a dividend policy with both constant and random components although this setting considerably generalizes the black scholes 1 analysis it nonetheless produces a formula via riskless arbitrage arguments that given estimated inputs is as easy to use as the black scholes formula

relating inertia and experience in technology markets an analysis of households personal computer choices this article empirically analyses how households pc purchasing behaviours change with market experience we find that households generally exhibit inertia in their pc purchases the level of inertia is increasing as a function of experience on the pc market and for households switching brands the likelihood of buying a lesser known brand increases with experience regardless of the brand of the previous purchase these findings are consistent with the predictions of a simple learning model and extend our understanding of how market experience affects purchasing behaviour to an important technology product with implications that may apply to other similar products

entrepreneurship social mobility and income redistribution in south india development economists have been preoccupied with the problem of increasing the size of the gnp pie to the relative neglect of its distribution despite the recent disenchantment with the viewpoint that all classes share in the benefits of industrial growth empirical data on the distribution of income business opportunity and economic power are in short supply many of the studies on entrepreneurship and economic development when they are not apologetics for ruthless capitalist exploitation as paul baran suggests extol the achievements of the capitalist entrepreneur without examining class origins and monopoly advantage joseph schumpeter sees entrepreneurs irrespective of class origin as heroic figures with the dream and will to found a private kingdom to conquer adversity to achieve success for its own sake and to experience the joy of creation for gustav papanek 1967 the private entrepreneur who is frugal diligent far sighted remarkably able and willing to take political risks is in large part responsible for the success of pakistan in achieving rapid industrialization

a reconsideration of enforcement leverage when penalties are restricted abstract harrington s 1988 model of state dependent enforcement of pollution standards indicates the potential for significant reductions in monitoring cost however this approach results in firms with identical pollution cost functions polluting at different levels and thereby failing to minimize control cost for a given total pollution reduction derivations indicate that a state independent approach with a modified standard will often yield a lower sum of pollution control and monitoring cost for a given level of pollution control

pricing and static hedging of american style options under the jump to default extended cev model abstract this paper prices and hedges american style options through the static hedge approach shp proposed by chung and shih 2009 and extends the literature in two directions first the shp approach is generalized to the jump to default extended cev jdcev model of carr and linetsky 2006 and plain vanilla american style options on defaultable equity are priced the robustness and efficiency of the proposed pricing solutions are compared with the optimal stopping approach offered by nunes 2009 under both the jdcev framework and the nested constant elasticity of variance cev model of cox 1975 using different elasticity parameter values second the early exercise boundary near expiration is derived under the jdcev model

comparison friction experimental evidence from medicare drug plans consumers need information to compare alternatives for markets to function efficiently recognizing this public policies often pair competition with easy access to comparative information the implicit assumption is that comparison friction the wedge between the availability of comparative information and consumers use of it is inconsequential because information is readily available and consumers will access this information and make effective choices we examine the extent of comparison friction in the market for medicare part d prescription drug plans in the united states in a randomized field experiment an intervention group received a letter with personalized cost information that information was readily available for free and widely advertised however this additional step providing the information rather than having consumers actively access it had an impact plan switching was 28 percent in the intervention group versus 17 percent in the comparison group and the intervention caused an average decline in predicted consumer cost of about 100 per year among letter recipients roughly 5 percent of the cost in the comparison group our results suggest that comparison friction can be large even when the cost of acquiring information is small and may be relevant for a wide range of public policies that incorporate consumer choice

static hedging and pricing american knock in put options abstract this paper extends the static hedging portfolio shp approach of derman et al 1995 carr et al 1998 to price and hedge american knock in put options under the black scholes model and the constant elasticity of variance cev model we use standard european calls puts to construct the shps for american up and in down and in puts we also use theta matching condition to improve the performance of the shp approach numerical results indicate that the hedging effectiveness of a bi monthly shp is far less risky than that of a delta hedging portfolio with daily rebalance the numerical accuracy of the proposed method is comparable to the trinomial tree methods of ritchken 1995 boyle and tian 1999 furthermore the recalculation time the term is explained in section 1 of the option prices is much easier and quicker than the tree method when the stock price and or time to maturity are changed

approximate arbitrage free option pricing under the sabr model abstract the stochastic alpha beta rho sabr model introduced by hagan et al 2002 provides a popular vehicle to model the implied volatilities in the interest rate and foreign exchange markets to exclude arbitrage opportunities we need to specify an absorbing boundary at zero for this model which the existing analytical approaches to pricing derivatives under the sabr model typically ignore this paper develops closed form approximations to the prices of vanilla options to incorporate the effect of such a boundary condition different from the traditional normal distribution based approximations our method stems from an expansion around a one dimensional bessel process extensive numerical experiments demonstrate its accuracy and efficiency furthermore the explicit expression yielded from our method is appealing from the practical perspective because it can lead to fast calibration pricing and hedging

enforcement leverage when penalties are restricted in the united states empirical studies of the enforcement of continuous compliance with environmental regulations especially air and water pollution regulations have repeatedly demonstrated the following i for most sources the frequency of surveillance is quite low ii even when violations are discovered fines or other penalties are rarely assessed in most states iii sources are nonetheless thought to be in compliance a large part of the time the evidence for the apparently low level of enforcement activity is found in a number of case studies of state and local enforcement of air and water quality regulations conducted jointly by the environmental protection agency epa and council on environmental quality ceg together with periodic surveys of implementation of air and water quality legislation conducted by the general accounting office gao these surveys show

estimating neighborhood choice models lessons from a housing assistance experiment we use data from a housing assistance experiment to estimate a model of neighborhood choice the experimental variation effectively randomizes the rents which households face and helps identify a key structural parameter access to two randomly selected treatment groups and a control group allows for out of sample validation of the model we simulate the effects of changing the subsidy use constraints implemented in the actual experiment we find that restricting subsidies to even lower poverty neighborhoods would substantially reduce take up and actually increase average exposure to poverty furthermore adding restrictions based on neighborhood racial composition would not change average exposure to either race or poverty jel i32 i38 r23 r38

mergers with differentiated products the case of the ready to eat cereal industry traditional merger analysis is difficult to implement when evaluating mergers in industries with differentiated products i discuss an alternative which consists of demand estimation and the use of a model of postmerger conduct to simulate the competitive effects of a merger i estimate a brand level demand system for ready to eat cereal using supermarket scanner data and use the estimates to 1 recover marginal costs 2 simulate postmerger price equilibria and 3 compute welfare effects under a variety of assumptions the methodology is applied to five mergers two of which occurred and for which i compare predicted to actual outcomes

the influence of financial status on the effectiveness of environmental enforcement abstract this paper analyzes the influence of financial status on the effectiveness of environmental enforcement it considers multiple dimensions of both enforcement and financial status regarding enforcement the paper considers both the likelihood of enforcement as captured by the likelihood of inspections conducted at regulated facilities and the severity of enforcement as captured by the size of sanctions imposed on polluting facilities found violating their effluent limits as indicators of corporate financial status the paper considers measures of liquidity solvency and profitability a proxy for corporate managerial skill all of which can influence the likelihood that a firm faces liquidity and or bankruptcy constraints the paper first develops a theoretical model of optimal abatement in the presence of liquidity and bankruptcy constraints and uses the model to investigate the impact of financial status on optimal abatement and the effectiveness of enforcement then the paper empirically examines the interactions between enforcement and financial status using data on wastewater discharges from us chemical manufacturing facilities for the years 1995 to 2001 empirical results suggest that the financial status dimensions considered here in general play an important role in determining the incentives created by enforcement as the most striking result we show theoretically and empirically that when financial dimensions are included in the analysis the conventional wisdom regarding the effect of enforcement likelihood on abatement no longer holds i e increased enforcement can actually lead to worse environmental performance

the bidder s curse reply in our paper the bidder s curse malmendier and lee 2011 we introduce a novel research design to identify overbidding on ebay we compare the final price in an auction to the fixed price at which the same item was simultaneously available on ebay during the sample period overbidding was surprisingly prevalent affecting around 40 50 percent of auctions across different datasets the overbidding percentages ranged from 0 to 72 percent for different item categories the paper shows that such widespread overbidding is generated by a small number of bidders auctions emerge as a tool to fish for fools whose bids generate high final prices cf malmendier and szeidl 2012 our research design has been used or discussed in a number of papers 1 including schneider 2016 schneider applies the comparison to another dataset of dvd auctions he finds a very similar range of overbidding percentages between 0 percent and 69 percent without shipping cost and 0 percent to 83 percent with shipping cost depending on the movie and 23 percent on average the emphasis of the paper however is different schneider points to users inability to inspect all relevant ebay listings of an item e g to click page down or next page but also to use all relevant search terms he proposes that these failings indicate that traditional

non parametric tests of consumer behaviour the neoclassical model of consumer behaviour postulates that a consumer s choice behaviour can be described as deriving from utility maximization subject to a budget constraint one is then naturally led to ask what this model implies about observed behaviour this question has been addressed from two quite distinct approaches the first approach originating in the work of slutsky 1915 and antonelli 1886 derives necessary and sufficient conditions involving the derivatives of the demand functions the second approach originating in the work of samuelson 1938 1947 1948 derives algebraic conditions on the demand functions implied by maximizing behaviour

bounded rationality models tasks to become intellectually competitive abstract research in experimental economics has cogently challenged the fundamental precept of neoclassical economics that economic agents optimize the last two decades have seen elaboration of boundedly rational models that try to move away from the optimization approach in ways consistent with experimental findings nonetheless the collection of alternative models has made little headway supplanting the dominant paradigm we delineate key ways in which neoclassical microeconomics holds continuing and compelling advantages over bounded rationality models and suggest via a few examples the sorts of further difficult pushes that would be needed to redress this state of affairs closer collaboration between theoretic modeling and experiments is clearly seen to be necessary jel b40 c72 c90 d01 d21

changes of numeraire for pricing futures forwards and options a change of numeraire argument is used to derive a general option parity or equivalence result relating american call and put prices and to obtain new expressions for futures and forward prices the general parity result unifies and extends a number of existing results the new futures and forward pricing formulas are often simpler to compute in multifactor models than existing alternatives we also extend previous work by deriving a general formula relating exchange options to ordinary call options a number of applications to diffusion models including stochastic volatility stochastic interest rate and stochastic dividend rate models and jump diffusion models are examined a self financing portfolio is called a numeraire if security prices measured in units of this portfolio admit an equivalent martingale measure the most commonly used numeraire is the reinvested short rate process the corresponding equivalent martingale measure is the risk neutral measure geman el karoui and rochet 1995 show that other numeraires can simplify many asset pricing problems in this article we build on their results and using the reinvested asset price as the numeraire unify and extend the literature on option parity or equivalence results relating american call and put prices for asset and futures options the same numeraire change is used to obtain new pricing formulas for futures and forwards that are often simpler to compute in multifactor models finally we use a numeraire change to simplify exchange option pricing extending a similar result in geman el karoui and rochet to dividend paying assets the change of numeraire method is most intuitive in the context of foreign currency derivative securities as discussed by grabbe 1983 an american call option to buy 1 dm with dollar price process s for k dollars is equivalent to an american put option to sell k dollars with dm price process k s for a strike price of 1 dm the dollar price of the call must therefore equal the product of the current exchange rate s0 and the dm price of the put the call price is computed using the dollar value of a u s i am grateful to kerry back the editor and costis skiadas for their many helpful suggestions thanks also to peter demarzo matt jackson naveen khanna david marshall robert mcdonald jim moser phyllis payette and an anonymous referee for their comments this article subsumes schroder 1992

panel data analysis of regulatory factors shaping environmental performance this is the publisher s version also available electronically from http www mitpressjournals org doi abs 10 1162 003465304323023895 u1q6giuvdgi

pricing and hedging path dependent options under the cev process much of the work on path dependent options assumes that the underlying asset price follows geometric brownian motion with constant volatility this paper uses a more general assumption for the asset price process that provides a better fit to the empirical observations we use the so called constant elasticity of variance cev diffusion model where the volatility is a function of the underlying asset price we derive analytical formulae for the prices of important types of path dependent options under this assumption we demonstrate that the prices of options which depend on extrema such as barrier and lookback options can be much more sensitive to the specification of the underlying price process than standard call and put options and show that a financial institution that uses the standard geometric brownian motion assumption is exposed to significant pricing and hedging errors when dealing in path dependent options

adding asymmetrically dominated alternatives violations of regularity and the similarity hypothesis an asymmetrically dominated alternative is dominated by one item in the set but not by another adding such an alternative to a choice set can increase the probability of choosing the item that dominates it this result points to the inadequacy of many current choice models and suggests product line strategies that might not otherwise be intuitively plausible

state dependence and alternative explanations for consumer inertia for many consumer packaged goods products researchers have documented inertia in brand choice a form of persistence whereby consumers have a higher probability of choosing a product that they have purchased in the past using data on margarine and refrigerated orange juice purchases we show that the finding of inertia is robust to flexible controls for preference heterogeneity and not due to autocorrelated taste shocks thus the inertia is at least partly due to structural not spurious state dependence we explore three economic explanations for the observed structural state dependence preference changes due to past purchases or consumption experiences which induce a form of loyalty search and learning our data are consistent with loyalty but not with search or learning properly distinguishing among the dierent sources of inertia is important for policy analysis because the alternative sources of inertia imply qualitative dierences in firm s pricing incentives and lead to quantitatively dierent equilibrium

the revealed preferences of state epas stringency enforcement and substitution abstract the epa suggests states inspect polluters at least once a year and use sampling and nonsampling inspections equally states face two separate pressures in their attempts to comply with these mandates political and budgetary budgetary considerations arise because inspections are costly while political pressures arise because the stringency of enforcement in part determines the cost abatement this study estimates the relative importance of political and budgetary pressures in the stringency with which the clean water act is enforced the results suggest that inspections determined by budgetary concerns and the stringency of inspections is determined in part by political factors

sinking swimming or learning to swim in medicare part d under medicare part d senior citizens choose prescription drug insurance offered by numerous private insurers we examine nonpoor enrollees actions in 2006 and 2007 using panel data our sample reduced overspending by 298 on average with gains by 81 percent of them the greatest improvements were by those who overspent most in 2006 and by those who switched plans decisions to switch depended on individuals overspending in 2006 and on individualspecific effects of changes in their current plans the oldest consumers and those initiating medications for alzheimer s disease improved by more than average suggesting that real world institutions help overcome cognitive limitations

systematic equity based credit risk a cev model with jump to default we use equity as the traded primitive for a detailed analysis of systematic default risk default is parsimoniously represented by equity value hitting the zero barrier so that unlike in reduced form models the explicit linkage to the firm s capital structure is preserved but unlike in structural models restrictive assumptions on the structure are avoided default risk is either jump like or diffusive the equity price can jump to default in line with recent empirical evidence on the jump to default risk price we highlight how reasonable choices of the pricing kernel can imply remarkable differences in the equity price dependent status between the objective default intensity and the risk neutral intensity as equity returns experience negative diffusive shocks their cev type local variance increases and boosts the objective and risk neutral probabilities of diffusive default a parsimonious version of our general model simultaneously enables analytical credit risk management and analytical pricing of credit sensitive instruments easy cross asset hedging ensues

further results on the constant elasticity of variance call option pricing model the black scholes 4 call option model is a member of the class of constant elasticity of variance call option models proposed by cox 6 while the black scholes model assumes that the volatility or instantaneous variance of return is constant through time the other members of the class allow the volatility to change with the stock price this property is of interest because empirical evidence suggests that returns to common stock are heteroscedastic and also that volatilities implied from the black scholes model and market prices of call options are not constant

does price framing affect the consumer price sensitivity of health plan choice this paper provides field evidence on how price framing affects consumers decision to switch health plans in 2009 german federal regulation required insurers to express premium differences between standardized health plans in absolute euro values relative to a federal reference price rather than in percentage point payroll tax differences representative individual level panel data and aggregated health plan level panel data on the universe of health plans show that the reform strongly increased enrollees willingness to switch plans with demand elasticities increasing fourfold the salience of premium differences and the default premium are obviously key driving forces in the decision to switch insurers

shrouded attributes consumer myopia and information suppression in competitive markets bayesian consumers infer that hidden add on prices e g the cost of ink for a printer are likely to be high prices if consumers are bayesian firms will not shroud information in equilibrium however shrouding may occur in an economy with some myopic or unaware consumers such shrouding creates an inefficiency which firms may have an incentive to eliminate by educating their competitors customers however if add ons have close substitutes a curse of debiasing arises and firms will not be able to profitably debias consumers by unshrouding add ons in equilibrium two kinds of exploitation coexist optimizing firms exploit myopic consumers through marketing schemes that shroud high priced add ons in turn sophisticated consumers exploit these marketing schemes it is not possible to profitably drive away the business of sophisticates it is also not possible to profitably lure either myopes or sophisticates to nonexploitative firms we show that informational shrouding flourishes even in highly competitive markets even in markets with costless advertising and even when the shrouding generates allocational inefficiencies

pricing options on scalar diffusions an eigenfunction expansion approach this paper develops an eigenfunction expansion approach to pricing options on scalar diffusion processes all contingent claims are unbundled into portfolios of primitive securities calledeigensecurities eigensecurities are eigenvectors eigenfunctions of the pricing operator present value operator all computational work is at the stage of finding eigenvalues and eigenfunctions of the pricing operator the pricing is then immediate by the linearity of the pricing operator and the eigenvector property of eigensecurities to illustrate the computational power of the method we develop two applications pricing vanilla single and double barrier options under the constant elasticity of variance cev process and interest rate knock out options in the cox ingersoll ross cir term structure model

the enforcement of pollution control laws inspections violations and self reporting targeting is the practice of inspecting firms most likely to violate a regulation this paper provides empirical evidence on the role of targeting in regulatory compliance i propose that self reporting by a firm is used to demonstrate that firms are willing to cooperate the results indicate that there is a one quarter penalty period following a violation inspections are also determined by the economic situation of the surrounding community demonstrating that targeting opens the door to interest group influence inspections that detect violations encourage self reporting showing that firms demonstrate their desire to cooperate with regulators by disclosing violations

why do firms engage in environmental management an empirical study in china abstract there are increasing pressures being put on firms from a number of different sources such as governmental regulation community participation and market demand to engage firms in environmental initiatives these factors play different roles at various development periods government regulation was the major pressure initially however community participation and market demand have become more and more important thus a better understanding of the determinant factors that play a role in engaging firms to take environmental management initiatives may help policy makers develop more effective environmental policies using data collected from 89 firms in wujin county of jiangsu province china this paper developed an index system to evaluate the corporate environmental management performance furthermore we used econometric methodology to identify the main factors that probably shape corporate environmental management performance including both external pressures and firm characteristics the results showed that pressures from supply chain customers and communities played positive roles in engaging firms to improve environmental management performance however the pressure from the regulatory system did not implicate positive effect on environmental management performance when basic compliance is not an issue in the region anymore the results also showed that firms with larger scale will be more active in engaging in environmental management initiatives finally our results suggest that a regulation s stimulation may be reduced as long as firms have complied with requirements of local environmental standards and other environmental laws b policy makers should pay more attention to market and information instruments c more financial and technical support should be provided to encourage small and medium sized enterprises smes to improve environmental performance

health insurance choice and risk preferences under cumulative prospect theory an experiment we investigate how consumers choose insurance contracts when using a measure of decision quality based on individual risk preferences for this we use a laboratory experiment with a sequential design first subjects face insurance choices then we elicit risk preferences allowing for different latent decision making theories i e cumulative prospect theory and expected utility theory we find that the vast majority are cumulative prospect theory types analyzing whether subjects choose contracts consistent with their risk preferences we find that about 14 of all participants show inconsistent behavior and low decision quality yet the majority shows consistent behavior and good decision quality our results suggest that one explanation for inconsistent choices is the application of heuristics

how are snap benefits spent evidence from a retail panel we use a novel retail panel with more than six years of detailed transaction records to study the effect of participation in the supplemental nutrition assistance program snap on household spending we frame our approach using novel administrative data from the state of rhode island the marginal propensity to consume snap eligible food mpcf out of snap benefits is 0 5 to 0 6 the mpcf out of cash is much smaller these patterns obtain even for households for whom snap benefits are economically equivalent to cash in the sense that benefits do not cover all food spending we reject the hypothesis that households respect the fungibility of money in a semiparametric framework a model with mental accounting can match the facts

selection on moral hazard in health insurance economic analysis of market failure in insurance markets tends to analyze selection and moral hazard as distinct phenomena in this paper we explore the potential for selection on moral hazard in insurance markets by this we mean the possibility that moral hazard effects are heterogenous across individuals and that individuals selection of insurance coverage is affected by their anticipated behavioral response to coverage we examine these issues empirically in the context of employer provided health insurance in the united states specifically we break down the general

paying attention or paying too much in medicare part d we study whether people became less likely to switch medicare prescription drug plans pdps due to more options and more time in part d panel data for a random 20 percent sample of enrollees from 2006 2010 show that 50 percent were not in their original pdps by 2010 individuals switched pdps in response to higher costs of their status quo plans saving them money contrary to choice overload larger choice sets increased switching unless the additional plans were relatively expensive neither switching overall nor responsiveness to costs declined over time and above minimum spending in 2010 remained below the 2006 and 2007 levels

tenure dependence in consumer firm relationships an empirical analysis of consumer departures from automobile insurance firms a typical pattern in markets featuring long term consumer firm relationships is for departure probabilities to decline with tenure a crucial question is whether this actually implies increasing consumer preference for firms if so firms should actively try to convince consumers to remain through the early periods of the relationship and should enter new markets quickly however the pattern can also be explained by selection on unobserved heterogeneity the challenge is to use the data available in these markets generally details on the consumers of one firm to distinguish between these explanations i rely on individual price histories in auto insurance findings include an economically relevant level of both relationship effects and heterogeneity but a much more important role for heterogeneity

neoclassical theory versus prospect theory evidence from the marketplace several experimental studies have provided evidence that suggest indifference curves have a kink around the current endowment level these results which clearly contradict closely held economic doctrines have led some influential commentators to call for an entirely new economic paradigm to displace conventional neoclassical theory e g prospect theory which invokes psychological effects this paper pits neoclassical theory against prospect theory by investigating data drawn from more than 375 subjects actively participating in a well functioning marketplace the pattern of results suggests that prospect theory adequately organizes behavior among inexperienced consumers but consumers with intense market experience behave largely in accordance with neoclassical predictions moreover the data are consistent with the notion that consumers learn to overcome the endowment effect in situations beyond specific problems they have previously encountered this transference of behavior across domains has important implications in both a positive and normative sense

beyond revealed preference choice theoretic foundations for behavioral welfare economics we propose a broad generalization of standard choice theoretic welfare economics that encompasses a wide variety of nonstandard behavioral models our approach exploits the coherent aspects of choice that those positive models typically attempt to capture it replaces the standard revealed preference relation with an unambiguous choice relation roughly x is strictly unambiguously chosen over y written xp y iff y is never chosen when x is available under weak assumptions p is acyclic and therefore suitable for welfare analysis it is also the most discerning welfare criterion that never overrules choice the resulting framework generates natural counterparts for the standard tools of applied welfare economics and is easily applied in the context of specific behavioral theories with novel implications though not universally discerning it lends itself to principled refinements

choice inconsistencies among the elderly evidence from plan choice in the medicare part d program comment consumers enrollment decisions in medicare part d can be explained by abaluck and gruber s 2011 model of utility maximization with psychological biases or by a neoclassical version of their model that precludes such biases we evaluate these competing hypotheses by applying nonparametric tests of utility maximization and model validation tests to administrative data we find that 79 percent of enrollment decisions from 2006 to 2010 satisfied basic axioms of consumer theory under the assumption of full information the validation tests provide evidence against widespread psychological biases in particular we find that precluding psychological biases improves the structural model s out of sample predictions for consumer behavior

voluntary pollution reductions and the enforcement of environmental law an empirical study of the 33 50 program abstract this paper studies determinants and effects of firms participation in the 33 50 program which is a voluntary pollution reduction vpr program initiated by government regulators we examine a wide range of explanations for voluntary corporate environmentalism and find evidence in support of an enforcement theory that predicts that 1 vpr participation is rewarded by relaxed regulatory scrutiny 2 the anticipation of this reward spurs firms to participate in the program and 3 the program rewards regulators with reduced pollution we also find that 33 50 participation was more likely for firms operating in states with larger environmentalist constituencies

public disclosure programs vs traditional approaches for environmental regulation green goodwill and the policies of the firm abstract a public disclosure program pdp is compared to a traditional environmental regulation exemplified by a tax subsidy in a simple dynamic framework a pdp aims at revealing the environmental record of firms to the public this information affects its image goodwill or brand equity and ultimately its profit a firm polluting less than its prescribed target would win consumer s sympathy and raise its goodwill whereas it is the other way around when the firm exceeds its emissions quota the evolution of this goodwill is assumed to depend also on green activities or advertising expenditures within this framework we analyze how a pdp affects the firm s optimal policies regarding emissions pricing and advertising as compared to a traditional regulation we show that advertising acts as a complementary device to pricing and that emissions are increasing in goodwill the role of a standard or target level for emissions turns out to be totally different under both policy regimes in the case of a tax subsidy approach this target level only acts as constant who increases or decreases profit by a fixed amount but it does not affect the policy of the firm on the contrary if a pdp is implemented the target value for emissions enters in an important way in the goodwill accumulation mechanism and determines how the firm reacts to the regulation and what is the time path for the economic and environmental variables moreover this value is also crucial to determine the possibility that a pdp is profit improving a policy implication of this fact is that regulators should be particularly careful in fixing the emission standard when a pdp is applied the theoretical results are complemented with a numerical illustration

corporate environmentalism and environmental statutory permitting abstract studies have shown that despite infrequent inspections and low penalties for statutory violations a large fraction of firms comply with environmental restrictions what then motivates compliance i investigate this question by focusing on the length of time it takes environmental agencies to process and issue new source construction permits pursuant to clean air act regulations and new industrial discharge permits pursuant to clean water act regulations i find that plants or firms with fewer instances of noncompliance receive permits for major projects more quickly in addition i find that permit delays are sensitive to economic conditions as well such as local area unemployment as far as voluntary pollution control behavior is concerned i find that regulators that issue permits for plant modifications focus primarily on statutory compliance but when permitting new plant construction where there is no plant compliance history to go on voluntary pollutant releases do matter

choice based on reasons the case of attraction and compromise effects building on previous research this article proposes that choice behavior under preference uncertainty may be easier to explain by assuming that consumers select the alternative supported by the best reasons this approach provides an explanation for the so called attraction effect and leads to the prediction of a compromise effect consistent with the hypotheses the results indicate that 1 brands tend to gain share when they become compromise alternatives in a choice set 2 attraction and compromise effects tend to be stronger among subjects who expect to justify their decisions to others and 3 selections of dominating and compromise brands are associated with more elaborate and difficult decisions

model free hedge ratios and scale invariant models a price process is scale invariant if and only if the returns distribution is independent of the price measurement scale we show that most stochastic processes used for pricing options on financial assets have this property and that many models not previously recognised as scale invariant are indeed so we also prove that price hedge ratios for a wide class of contingent claims under a wide class of pricing models are model free in particular previous results on model free price hedge ratios of vanilla options based on scale invariant models are extended to any contingent claim with homogeneous pay off including complex path dependent options however model free hedge ratios only have the minimum variance property in scale invariant stochastic volatility models when price volatility correlation is zero in other stochastic volatility models and in scale invariant local volatility models model free hedge ratios are not minimum variance ratios and our empirical results demonstrate that they are less efficient than minimum variance hedge ratios

monitoring and enforcement of environmental regulations lessons from a natural field experiment in norway abstract relying on a small natural field experiment conducted by the norwegian environmental protection agency i estimate effects of three fundamental elements of most monitoring and enforcement practices self reporting audit frequency and specific deterrence i find evidence of under reporting of violations in firms self audits as more violations are detected in on site audits than in self audits announcing the increased audit frequency has no effect on firms compliance but an audit raises subsequent compliance substantially

choosing the wrong calling plan ignorance and learning when a firm offers several tariff options to its customers the possibility arises that they will make an ex post mistake in tariff choice this occurs since consumers cannot commit to a certain purchase level at the time they subscribe to the service option and thus they might find out later that a different choice of tariff could have resulted in a lower payment for their actual level of consumption this is a common feature of increasingly important subscriptions markets in which buyers and sellers maintain long term nonanonymous relations and where learning induces interesting dynamics on the one hand buyers may learn their taste over time thus making the right choice as times goes by on the other hand the seller may design options to identify the type of each buyer and if possible to extract a higher proportion of their consumer surplus by offering tariff options that are better tailored to the profile of the consumer this paper focuses on the first type of learning in turn i document buyer behavior in a subscriptions market using data from a tariff experiment run by south central bell scb in kentucky during the second half of 1986 the most frequently studied case of subscriptions markets is the choice among optional calling plans ocps in the telephone industry this paper shows that contrary to the conven

diagnosing consumer confusion and sub optimal shopping effort theory and mortgage market evidence mortgage loans are leading examples of transactions where experts on one side of the market take advantage of consumers lack of knowledge and experience we study the compensation that borrowers pay to mortgage brokers for assistance from application to closing two findings support the conclusion that confused borrowers overpay for brokers services i a model of effective shopping shows that bor rowers sacrifice at least 1 000 by shopping from too few brokers ii borrowers who compensate their brokers with both cash and a commission from the lender pay twice as much as similar borrowers who pay no cash jel d12 d14 g21 we study a large and financially complex expenditure that the majority of consumers make only a few times in their lives the payment for mortgage origination services in these transactions information is not only imperfect but traditional market practices have likely contributed to consumer confusion these payments range from 0 to 30 000 for mortgages of normal size mortgage brokers receive payments from both borrowers and from wholesale lenders on most loans broker fees paid in cash by the borrower are usually broken down into more than a dozen individual items such as origination fee discount points funding fee and doc prep in addition to these cash payments about half of the value that the bor rower transfers to the broker takes the form of a payment from the wholesale lender to the mortgage broker the borrower bears the burden of this part of the payment in the form of a higher interest rate on the loan these payments compensate mortgage brokers for arranging mortgage loans we stress that this paper is about how and how much borrowers pay their brokers for origination services the broker is an administrator of the process of loan origination the broker bears none of the risk of default on the mortgage so that risk is not a determinant of the broker s compensation under standard theories of pricing because consumers enter the mortgage market infrequently and because features of the market make it difficult to learn the best price mortgage origination pricing

services as experience goods an empirical examination of consumer learning in automobile insurance accurate is information at initial purchase how rapidly do consumers learn from product experiences and how much impact does learning have on purchase decisions i answer these questions for the case of automobile insurance using a panel of 18 595 consumers from one firm my principal findings are patterns of consumer departures following claims point to learning consumers enter the firm overly optimistic about its quality and are generally disappointed by experience and the impact of learning is mitigated by the slow arrival of claims and the development of lock in jel d12 d83 g22 l15

choice inconsistencies among the elderly evidence from plan choice in the medicare part d program we evaluate the choices of elders across their insurance options under the medicare part d prescription drug plan using a unique data set of prescription drug claims matched to information on the characteristics of choice sets we document that elders place much more weight on plan premiums than on expected out of pocket costs value plan financial characteristics beyond any impacts on their own financial expenses or risk and place almost no value on variance reducing aspects of plans partial equilibrium welfare analysis implies that welfare would have been 27 higher if patients had all chosen rationally

investigating external and internal pressures on corporate environmental behavior in papermaking enterprises of china abstract as china s ecological environmental problem becomes severe corporate environmental behavior ceb has become the focus of a range of stakeholders policy makers and the whole society since the operating activities of companies is the main source of environmental pollution this study used a questionnaire survey and structural equation model sem to examine the relative importance of external and internal pressures eip on driving ceb data was obtained from 702 papermaking companies in china the mechanism of eip effects on ceb was tested employing sem through path analysis using amos 21 0 the results showed that government pressure economic pressure and internal pressure played significant positive roles in environmental behavior of papermaking companies in china economic pressure was the most important factor on environmental behaviors including defensive accommodative and proactive behaviors of papermaking companies furthermore the role of internal pressure on ceb defensive and proactive was second only to economic pressure while the role of government pressure on ceb was much weaker than our expectation however the role of social pressure which was imposed by general public and environmental non governmental organizations ngos was not significant thus policy makers should emphasize on the interactions of economic mechanism government regulation and internal incentive mechanism to stimulate firms to adopt active environmental behavior more concerns from the general public shall be addressed to enhance their driving effect on ceb in chinese papermaking industry

the valuation of options on coupon bonds abstract we derive simple closed form expressions for european options on coupon bonds using the general equilibrium term structure framework of cox ingersoll and ross the properties of these options are very different from those implied by the black scholes model for example bond call and put values can move in the same direction as the value of the underlying bond changes this has important implications for hedging interest rate risk with bond options furthermore bond option values can be decreasing functions of interest rate volatility as well as their time to expiration we also examine the properties of american bond options

adverse selection and inertia in health insurance markets when nudging hurts this paper investigates consumer inertia in health insurance markets where adverse selection is a potential concern we leverage a major change to insurance provision that occurred at a large firm to identify substantial inertia and develop and estimate a choice model that also quantifies risk preferences and ex ante health risk we use these estimates to study the impact of policies that nudge consumers toward better decisions by reducing inertia when aggregated these improved individual level choices substantially exacerbate adverse selection in our setting leading to an overall reduction in welfare that doubles the existing welfare loss from adverse selection jel d82 g22 i13 a number of potential impediments stand in the way of efficient health insur ance markets the most noted of these is adverse selection first studied by akerlof 1970 and rothschild and stiglitz 1976 in insurance markets prices reflect the expected risk costs of the insured pool whether the reason is price regulation or private information when insurers cannot price all risk characteristics riskier consumers choose more comprehensive health plans this causes the equilibrium prices of these plans to rise and healthier enrollees to select less comprehensive coverage than they would otherwise prefer

great expectations assortment size expectations and satisfaction abstract recent research challenges the idea that greater choice is always desirable showing that larger assortments can increase choice deferral and switching the current research demonstrates that even when consumers make a purchase the same item may generate lower satisfaction when chosen from a larger rather than a smaller assortment the authors explain this effect in terms of an expectation disconfirmation mechanism when assortments are small consumers have low expectations about their ability to match their preferences as assortment sizes increase so do consumers expectations of the degree of preference match they can achieve subsequently consumers may experience greater negative expectation disconfirmation or less positive expectation disconfirmation when a chosen item comes from a larger rather than a smaller set either less positive or more negative disconfirmation leads to lower choice satisfaction the results from three studies support this expectation based process and establish t

incentive generating state dependent penalty system the case of income tax evasion abstract penalty systems can very often be looked upon as corrective measures established in order to eliminate or reduce costly externalities generated by optimizing economic agents hence penalties can be viewed as regulatory measures and their efficient structure should be of interest to economists we propose a dynamic incentive generating penalty system which if instituted may reduce at a given cost the generation of undesirable externalities the special case to which we refer is income tax evasion although our scheme should be applicable to any kind of externalities such as pollution of the environment violation of antirust laws and others which are created by repititive actions of economic agents

an experimental study of compliance and leverage in auditing and regulatory enforcement evidence suggests that a large majority of firms and individuals comply with regulations and tax laws even though the frequency of inspections and audits is often low moreover fines for noncompliance are also typically low when regulatory violations are discovered these observations are not consistent with static compliance models harrington 1988 modified these static models by specifying a dynamic game in which some agents have an incentive to comply even when the cost of compliance each period is greater than the expected penalty this paper reports a laboratory experiment based on the harrington model framework in which subjects move between two inspection groups that differ in the probability of inspection and severity of fine subjects decide to comply or not in the presence of low medium or high compliance costs enforcement leverage arises in the harrington model from movement between the inspection groups based on previous observed compliance and noncompliance our results indicate that consistent with the model violation rates increase when compliance costs become higher and as the probability of switching groups becomes lower behavior does not change as sharply as the model predicts however since violation rates do not jump from 0 to 1 as parameters vary across critical thresholds a simple model of bounded rationality explains these deviations from optimal behavior

integrated insurance design in the presence of multiple medical technologies the classic theory of moral hazard concerns the insurance of a single good and predicts that co insurance is larger when the elasticity of demand is higher and when small risks are insured we extend this analysis to the insurance of multiple goods for example the simultaneous insurance of medical services and prescription drugs we show that when multiple goods are either complements or substitutes so that a change in co insurance for one service affects the demand of others the classic moral hazard results do not hold for example the single good model would predict high co payments for prescription drugs since drug demand is elastic and of modest financial risk however a model of multi good insurance suggests such drug coverage may optimally involve zero or even negative co insurance when it is a substitute to other services insured such as hospital care or physician services we summarize some of the empirical evidence in support of markets adopting optimal integrated pricing structures rather than individually optimal pricing structures this abstract was borrowed from another version of this item

pricing and static hedging of american style knock in options on defaultable stocks abstract this paper applies the static hedge portfolio approach shp of chung et al 2013 in two new directions first the shp approach is generalized from the constant elasticity of variance cev model of cox 1975 to the jump to default extended cev jdcev framework of carr and linetsky 2006 for this purpose the recovery value of the american style down and in put is hedged through the one attached to a european style plain vanilla contract whereas for an up and in put it is necessary to use the recovery component of the corresponding european style up and in option second the shp methodology is adapted from single to double barrier american style knock in options by matching the value of the hedging portfolio along both lower and upper barriers finally and to benchmark the accuracy of the novel shp pricing solutions the optimal stopping approach of nunes 2009 is also extended to price american style double knock in options under the jdcev framework such extension highlights the relevant credit derivative component embedded in american style knock in equity puts

when governments regulate governments this article advances a political theory of regulation that accounts for the choices of regulators and regulated entities when both are governments leading theories of regulation assume that governments regulate profit maximizing firms governments set rules to which firms respond rationally in ways that constrain their behavior but often the entities that governments regulate are other governments we argue that government agencies and private firms often face different compliance costs and that agencies have greater incentives than firms to appeal regulations through political channels simultaneously the typical enforcement instruments that regulators use to influence firm behavior may be less effective against governments our empirical subjects are public and private entities compliance with the u s clean air act and safe drinking water act we find that compared with private firms governments violate these laws significantly more frequently and are less likely to be penalized for violations

price uncertainty and consumer search a structural model of consideration set formation we offer an econometric framework that models consumer s consideration set formation as an outcome of her costly information search behavior because frequently purchased products are characterized by frequent price promotions of varying depths of discounts a consumer faces significant uncertainty about the prices of the brands the consumers engage in a fixed sample search strategy that results in their discovering the posted prices of a subset of the available brands this subset is referred to as the consumer s consideration set the proposed model is estimated using the scanner data set for liquid detergents our key empirical results are i consumers zincur significant search costs to discover the posted prices of the brands ii whereas in store displays and feature ads do not influence consumers quality perceptions of the brands they significantly reduce search costs for observing the prices of the brands iii per capita income of consumer s household significantly increases her search costs and iv the consumers price sensitivity is seriously underestimated if we were to assume that consumers get to know all the posted prices at zero cost the proposed model is also estimated for the ketchup category to enable us to do cross category comparisons of consumers price search behavior

pricing american options under the constant elasticity of variance model and subject to bankruptcy this paper proposes an alternative characterization of the early exercise premium that is valid for any markovian and diffusion underlying price process as well as for any parameterization of the exercise boundary this new representation is shown to provide the best pricing alternative available in the literature for medium and long term american option contracts under the constant elasticity of variance model moreover the proposed pricing methodology is also extended easily to the valuation of american options on defaultable equity and possesses appropriate asymptotic properties

pricing interest rate derivatives a general approach the relationship between affine stochastic processes and bond pricing equations in exponential term structure models has been well established we connect this result to the pricing of interest rate derivatives if the term structure model is exponential affine then there is a linkage between the bond pricing solution and the prices of many widely traded interest rate derivative securities our results apply to m factor processes with n diffusions and l jump processes the pricing solutions require at most a single numerical integral making the model easy to implement we discuss many options that yield solutions using the methods of the article

the valuation of american options for a class of diffusion processes we present an integral equation approach for the valuation of american style derivatives when the underlying asset price follows a general diffusion process and the interest rate is stochastic our contribution is fourfold first we show that the exercise region is determined by a single exercise boundary under very general conditions on the interest rate and the dividend yield second based on this result we derive a recursive integral equation for the exercise boundary and provide a parametric representation of the american option price third we apply the results to models with stochastic volatility or stochastic interest rate and to american bond options in one factor models for the cases studied explicit parametric valuation formulas are obtained finally we extend results on american capped options to general diffusion prices numerical schemes based on approximations of the optimal stopping time such as approximations based on a lower bound or on a combination of lower and upper bounds are shown to be valid in this context