resolving differences in willingness to pay and willingness to accept reply gwendolyn c morrison 1997 raises a logical point regarding our experimental test of the divergence between willingness to pay wtp and willingness to accept wta measures of economic value shogren et al 1994 she argues that our design does not provide a true test of the existence of a fundamental endowment effect since we did not control for the potential of a pivoting indifference map daniel kahneman et al 1990 she concludes that even though our ev idence shows that the mean wtp and wta bids for market goods with close substitutes e g candy bars and coffee mugs converge after market experience the endowment effect might still be alive and well albeit at statisti cally insignificant levels

how to value employee stock options one of the arguments often used against expensing employee stock options is that calculating their fair value at the time they are granted is very difficult this article presents an approach to calculating the value of employee stock options that is practical easy to implement and theoretically sound it explicitly considers the vesting period the possibility that employees will leave the company during the life of the option the inability of employees to trade their options and the relevant dilution issues this approach is an enhancement of the approach suggested by the financial accounting standards board s statement of financial accounting standards no 123 because it does not require an arbitrary reduction in the life of the option to allow for early exercise caused by the inability of employees to trade their options

clearly irrational financial market behavior evidence from the early exercise of exchange traded stock options this paper analyzes the early exercise of exchange traded options by different classes of investors over the 1996 to 1999 period a large number of exercises are identified as clearly irrational without invoking any model of market equilibrium customers of discount brokers and customers of full service brokers both engage in a significant number of irrational exercises while traders at large investment houses exhibit no irrational early exercise behavior rational and irrational exercise is triggered for discount and full service customers by the underlying stock price attaining its highest level over the past year and by high returns on the underlying stock it is well known that in the absence of market frictions it is irrational to exercise american call options early except in some circumstances just before the underlying stock goes ex dividend even in the presence of market frictions it is possible to identify without the imposition of any model of market equilibrium call exercises that are clearly irrational in this paper we employ a previously unavailable data set to analyze the rationality of early exercises of chicago board option exchange cboe calls over the 1996 to 1999 period by customers of discount brokers discount customers customers of full service brokers full service customers and traders at large investment houses trading for their firms own accounts firm proprietary traders our first main finding is that there are a large number of early exercises that can be definitively identified as irrational and irrational exercise activity is not evenly distributed across the investor classes discount customers and full ser

psychological factors and stock option exercise we investigate stock option exercise decisions by over 50 000 employees at seven corporations controlling for economic factors psychological factors influence exercise consistent with psychological models of beliefs employees exercise in response to stock price trends exercise is positively related to stock returns during the preceding month and negatively related to returns over longer horizons consistent with psychological models of values that include reference points employee exercise activity roughly doubles when the stock price exceeds the maximum price attained during the previous year

employee reload options pricing hedging and optimal exercise reload options call options granting new options on exercise are popularly used in compensation although the compound option feature may seem complicated there is a distribution free dominant policy of exercising reload options whenever they are in the money the optimal policy implies general formulas for numerical valuation simpler formulas for valuation and hedging follow from black scholes assumptions with or without continuous dividends time vesting affects the optimal policy but numerical results indicate that it is nearly optimal to exercise in the money whenever feasible the results suggest that reload options produce similar incentives as employee stock options and share grants the valuation of options in compensation schemes is important for several reasons valuations are needed for preparing accounting statements and tax returns and more generally for understanding what value has been promised to the employees and what residual value remains with the shareholders furthermore understanding the hedge ratios and the overall shape of the valuation function clarifies the employee s risk exposure and incentives this article studies the optimal exercise and valuation of a relatively new but increasingly commonplace type of employee stock option the reload option these options have attracted a fair amount of controversy we believe that in large part this controversy is due to a seemingly complex structure in the statement of financial accounting standards sfas 123 financial accounting standards board 1995 paragraph 186 concludes the board continues to believe that ideally the value of a reload option should be estimated on the grant date taking into account all of its features however at this time it is not feasible to do so on close examination however these options are in fact comparatively simple to analyze and understand moreover under black and scholes 1973 assumptions on the stock price we are able to provide explicit valuation and hedging formulas we hope our analysis helps to demystify reload options and permit a more focused debate

backdating executive stock options an ex ante valuation abstract when backdating executive stock options esos the exercise price is set in favor of the recipient executive relative to a non backdated benchmark we find an ex ante upper bound for the cost of backdating to shrink from 10 to about 3 7 as a consequence of the regime change represented by the sarbanes oxley act sox we frame the backdating behavior as a compound exotic option considering both simple and extended models of the underlying eso in the latter case we draw on the analytical eso models of sircar and xiong 2007 post sox we use a longstaff schwartz inspired least squares monte carlo approach

a general framework for evaluating executive stock options abstract motivated by recent recommendations by both european and american accounting standards boards that executive stock options be expensed in firms statements we provide an analytical and flexible framework for their evaluation our approach takes into account the vesting period american style resetting and reloading provisions that are features of many option programs and also considers the trading restriction on executives we identify a recursive structure in the stream of options that are granted to the executive over the course of her employment by exploiting this we are able to obtain a near explicit formula for the option value this enables us to discuss the joint effects of the different features on the exercising strategies and firms granting cost especially we highlight some significant interactions among these features

effects and value of verifiable information in a controversial market evidence from lab auctions of genetically modified food food products containing genetically modified gm ingredients have entered the market over the past decade the biotech industry and environmental groups have disseminated conflicting private information about gm foods this paper develops a unique methodology for valuing independent third party information in such a setting and applies this method to consumers willingness to pay for food products that might be gm data are collected from real consumers in an auction market setting with randomized information and labeling treatments the average value of third party information per lab participant is small but the public good value across u s consumers is shown to be quite large jel c91 d12 d82

paper millionaires how valuable is stock to a stockholder who is restricted from selling it abstract many firms have stockholders who face severe restrictions on their ability to sell their shares and diversify the risk of their personal wealth we study the costs of these liquidity restrictions on stockholders using a continuous time portfolio choice framework these restrictions have major effects on the optimal investment and consumption strategies because of the need to hedge the illiquid stock position and smooth consumption in anticipation of the eventual lapse of the restrictions these results provide a number of important insights about the effects of illiquidity in financial markets

price information and bidding behavior in repeated second price auctions examining panel data on bidding behavior in over forty second price auction markets with repeated trials we observe that i posted prices influence the behavior of the median naive bidder ii posted prices do not affect the behavior of the median experienced bidder or the bidder for familiar goods and iii anticipated strategic behavior wanes after two trials the results suggest that while affiliation might exist in auctions for new goods the repeated trial design with nonprice information removes the correlation of values and provides the experience that bidders need to understand the market mechanism

leverage decision and manager compensation with choice of effort and volatility abstract we study the incentive effects of granting levered or unlevered stock to a risk averse manager the stock is granted by risk neutral shareholders who choose leverage and compensation level the manager applies costly effort and selects the level of volatility both of which affect expected return the results are driven by the attempt of the risk neutral shareholders to maximize the value of their claims net of the compensation package we consider a dynamic setting and find that levered stock is optimal for high type managers firms with high momentum large firms and firms for which additional volatility only implies a modest increase in expected return

revisiting the incentive effects of executive stock options abstract we develop a multiperiod framework to evaluate the incentive effects of executive stock options esos for a given increase in the grant date firm stock price and a concurrent increase in return volatility the increment of total value at the vesting date acts as a proxy for the incentive effects of esos if the option is attached to the existing contract without adjusting cash compensation we suggest that a firm should not always fix the strike price to the grant date stock price instead the strike price should vary with the length of the vesting period we also show that compared with at the money options restricted stock generates greater incentives to increase stock prices in some scenarios especially when equity based awards are vested early if the vesting period is long the firm could grant options instead of restricted stock to maximize incentives

conflict inflation estimating the contributions to wage inflation in australia during the 1990s one of the major emerging macroeconomic problems during the past century has been the tendency for inflation to accelerate under prolonged periods of full employment according to isaac and kaldor this arises because the three major objectives of wage earners often conflict the first objective is the desire to maintain relativities the second is the desire to have a fair share of companies profits and the third is a reluctance to allow any encroachment on achieved standards of living owing to unfavourable exogenous events this paper tests how well these three objectives explain wage inflation in australia using a pseudo panel data based on the period 1989 2000 the authors find that wages are sensitive to the three major objectives but not to occupational unemployment rates

5 information impact and allocation rules in auctions with affiliated private values a laboratory study in affiliated private value auctions each bidder has perfect information regarding his her own value for the object at auction but higher values of the item for one bidder make higher values for other bidders more likely we report on a series of experiments examining three key implications of these auctions i in a first price auction public information about rivals values increases expected revenue ii an english auction increases expected revenue compared to a first price auction and iii a second price auction is isomorphic to an english auction in examining these issues we compare predictions of some ad hoc bidding models with nash equilibrium predictions in the first price auction experiments nash equilibrium bidding theory organizes the data better than either of two ad hoc bidding models public information about others valuations does increase average revenue but the increase in revenue is smaller and less reliable than predicted under risk neutral nash equilibrium bidding lower average revenue might be attributed to risk aversion while the high variability is attributed to a sizable frequency of individual bidding errors relative to the theory bidding theory precisely organizes english auction outcomes after a brief initial learning period the dominant strategy equilibrium does not organize second price auctions nearly as well as market prices persistently exceed predicted prices the difference between english and second price outcomes is attributed to effects of different information flows inherent in the structure of the two institutions on eliminating bidding errors revenue impacts of these two institutions relative to a first price auction are examined in light of observed bidding patterns

altering the terms of executive stock options abstract we examine the practice of resetting the terms of previously issued executive stock options we identify properties of reset options develop a model for valuing resettable options and characterize the firms that have reset options we find the vast majority of options are reset at the money resulting on average in the strike price dropping 40 our valuation model suggests that resetting has only a small impact on the ex ante value of an option award but the ex post gain can be substantial finally we find resetting has a strong negative relation with firm performance even after correcting for industry performance

posted prices and bid affiliation evidence from experimental auctions in most experimental auctions researchers ask participants to bid on the same item in multiple po tentially binding rounds posting the price submitted by the top bidder or bidders after each of those rounds if bids submitted in later rounds are affiliated with posted prices from earlier rounds this practice could result in biased value estimates in this article we discuss the results of an experiment designed explicitly to test whether posted prices affect bidding behavior we find that for familiar items high posted prices lead to increased bids in subsequent rounds our results have implications for researchers conducting experimental auctions article advances the literature in several im portant ways first we report the design and results of the only study designed specifically to control for the effects of posted prices on bids in subsequent rounds we do this with the aid of confederate bidders who were instructed to bid within a certain narrow range thus we have multiple treatments that vary only by the presence or absence of confederate bidders al lowing for what we believe to be the cleanest possible test of the effect of posted prices on bidding behavior in later rounds while list and shogren 1999 model bids in round t as a function of the posted price in round t 1 through our use of confederate bidders to con trol posted prices we are able to test whether exposure to high posted prices has an effect that accumulates over the course of multiple rounds leading to a gradual increase in mean bids second our methods of analysis are more complete than previous work examining bid af filiation we not only compare summary statis tics from early and late rounds but we also use panel data analysis to understand how in dividual participants bids are affected by the presence of confederate bidders focusing on individuals rather than summary statistics al lows us to understand how individual specific characteristics influence affiliation and it also allows us to better understand the role of out liers

auctions with a buy price the case of reference dependent preferences abstract in an auction with a buy price the seller provides bidders with an option to end the auction early by accepting a transaction at a posted price this paper develops a model of an auction with a buy price in which bidders use the auction s reserve price and buy price to formulate a reference price the model both explains why a revenue maximizing seller would want to augment her auction with a buy price and demonstrates that the seller sets a higher reserve price when she can affect the bidders reference price through the auction s reserve price and buy price than when she can affect the bidders reference price through the auction s reserve price only the comparative statics properties of bidding behavior are in sharp contrast to equilibrium behavior in other models where the existence and size of the auction s buy price have no effect on bidding behavior

nontraded asset valuation with portfolio constraints a binomial approach we provide a simple binomial framework to value american style derivatives subject to trading restrictions the optimal investment of liquid wealth is solved simultaneously with the early exercise decision of the nontraded derivative noshort sales constraints on the underlying asset manifest themselves in the form of an implicit dividend yield in the risk neutralized process for the underlying asset one consequence is that american call options may be optimally exercised prior to maturity even when the underlying asset pays no dividends applications to executive stock options eso are presented it is shown that the value of an eso could be substantially lower than that computed using the black scholes model we also analyze nontraded payoffs based on a price that is imperfectly correlated with the price of a traded asset the economics of asset pricing when one or more of the assets in the opportunity set are either subject to trading restrictions or entirely nontraded is a matter of great interest viewed from a practical perspective we have several important examples of such assets that are subject to trading restrictions pensions which represent perhaps the most significant of assets held by individual households are subject to trading restrictions it is typically the case that assets in pensions are not available for immediate consumption borrowing against pension assets is subject to significant direct and indirect costs by way of taxes and early withdrawal penalties human capital is another example housing investment is also illiquid and subject to significant transaction costs together pensions human capital and housing constitute a substantial part of a typical household s assets the significance of such nontraded assets for risk premia has already been noted by bewley 1982 there are other circumstances where lack of unrestricted trading plays an important role executive compensation plans usually take the this article was presented at boston university we would like to thank the editor bernard dumas and two anonymous referees for very helpful comments we also thank nalin kulatilaka and seminar participants for useful suggestions ganlin chang fei guan and carlton osakwe provided valuable research assistance j detemple acknowledges support from the social sciences and humanities research

easy money managerial power and the option backdating game revisited abstract this paper presents a model of a firm that backdates executive stock option grants in order to maximize actual compensation for a given level of reported compensation the model is used to estimate the magnitude of the difference between the actual and reported values of option grants although the sarbanes oxley act has reduced the likelihood of very large differentials it has had a relatively minor impact on the average differential misreporting has a greater magnitude on average when the share price is more volatile the options vest earlier or have shorter lifetimes or there is a longer window in which to grant the options we analyze more than 36 000 option grants between 2003 and 2019 and find that when recipients have more to gain from strategic backdating or when there is likely to be less monitoring from independent directors firms are more likely to exhibit behavior consistent with strategic backdating

estimating the public value of conflicting information the case of genetically modified foods environmental groups have be food products other than those that norcome the chief antagonists toward agricultural bio mally carry allergens see friends of the technology innovations they demonstrate and dis earth 2001 greenpeace international 2001 seminate private information with the objective of through press releases web sites and pro changing the behavior of consumers and productests environmental ers we use experimental auctions with adult u s groups have been succonsumers and show that this information reduces cessful at publicizing their negative views significantly the demand for genetically modified on gm foods and affecting consumers and gm food products and that it has significant producer s behavior 2 public good value an average of 3 cents per prod environmental groups share the costs uct purchased or roughly 2 billion annually we of producing negative gm information 3 also show that the dissemination of independent third party information about agricultural biotech their members benefit collectively from nology dissipatesmost of the public good value of reductions in demand for gm products negative gm product information

comparing open ended choice experiments and experimental auctions an application to golden rice we use two experimental valuation methods to estimate consumer demand for genetically modified golden rice the first is an open ended choice experiment oece where participants name the quantities of golden rice and conventional rice demanded at each of several price combinations one of which will be randomly chosen as binding this allows us to estimate market demand by aggregating demand across participants this estimate of market demand also allows us to estimate own price elasticity and consumer surplus for golden rice comparing willingness to pay wtp estimates from the oece with those from a uniform price auction we find that oece wtp estimates exhibit less affiliation across rounds and the effects of positive and negative information under the oece are more consistent with prior expectations and existing studies we also find that while auction wtp estimates more than double across five rounds oece wtp estimates are stable across rounds and are always roughly equal to those from the final auction round

the exercise and valuation of executive stock options abstract in theory hedging restrictions faced by managers make executive stock options more difficult to value than ordinary options because they imply that exercise policies of managers depend on their preferences and endowments using data on option exercises from 40 firms this paper shows that a simple extension of the ordinary american option model which introduces random exogenous exercise and forfeiture predicts actual exercise times and payoffs just as well as an elaborate utility maximizing model that explicitly accounts for the nontransferability of options the simpler model could therefore be more useful than the preference based model for valuing executive options in practice

asset markets with insider trading disclosure rule and reselling constraint an experimental analysis abstract we investigate the impact of compulsory insider trading disclosure and its combination with a mandatory holding rule on price predictability and asset mispricing we modify the dynamic price adjustment model to account for insiders private information our results show that insiders produce weakly characterized price signals that induce a less than proportional price adjustment to the changes in the dividend value in both markets with disclosure rule and holding requirement in comparison with unregulated markets a shift in insiders strategies from information motivated to liquidity motivated trading appears to fuel the impairment of price predictability in regulated markets the exacerbation of asset mispricing in markets with holding restriction is characterized by a growth in the speculative transactions and loss making trading proposals

strategic real options abstract i study hidden investment in quality in a dynamic persuasion game a seller such as a project manager or startup company controls an asset and wants to convince a potential buyer such as an acquiring company or a regulator that it has high quality the buyer observes exogenous news with quality dependent drift and holds a call option on the asset the seller is privately informed about quality and can wait at a flow cost upgrade at a fixed cost or exit the market for low upgrade costs multiple equilibria exist and exhibit novel reputational dynamics resetting barriers and skew brownian motion a generalization of a reflected stochastic process in one type of equilibrium a seller with low quality waits until his reputation hits rock bottom and then upgrades with some probability inducing upward reputational jumps in equilibrium the seller may exit at an intermediate reputation in a second type the low quality seller mixes over exiting at low reputations and upgrading in an intermediate sweet spot region the results suggest a social benefit to setting high expectations for effort when agents start with low reputations and help explain why agents respond to adversity in drastically different ways across environments

pricing executive stock options under employment shocks abstract we obtain explicit expressions for the subjective objective and market value of perpetual executive stock options esos under exogenous employment shocks driven by an independent poisson process previously we obtain the executive s optimal exercise policy from the subjective valuation that is necessary for the objective one or fair value the perpetual eso is compared with the true finite maturity eso finding that the approximation is reasonably good to illustrate the usefulness of the objective valuation for accounting purposes we analyze the statistical distribution of the fair value when there is uncertainty about the employment shock intensity finally the role of esos in the design of executives incentives is also discussed

the valuation of american barrier options using the decomposition technique in this paper we propose an alternative approach for pricing and hedging american barrier options speci cally we obtain an analytic representation for the value and hedge parameters of barrier options using the decomposition technique of separating the european option value from the early exercise premium this allows us to identify some new put call symmetry relations and the homogeneity in price parameters of the optimal exercise boundary these properties can be utilized to increase the computational e ciency of our method in pricing and hedging american options our implementation of the obtained solution indicates that the proposed approach is both e cient and accurate in computing option values and option hedge parameters our numerical results also demonstrate that the approach dominates the existing lattice methods in both accuracy and e ciency in particular the method is free of the di culty that existing

information and the divergence between willingness to accept and willingness to pay abstract there is considerable empirical and experimental evidence that there is a divergence between willingness to accept compensation to give up a good and willingness to pay to obtain a good this divergence persists even when the good in question is small relative to income a result in apparent conflict with standard economic theory this paper develops a theoretical bidding model with costly information acquisition to explain this divergence the model generates a gap between offers to sell and bids to buy consistent with the experimental results we argue that the model does a better job of explaining empirical and experimental data than either of the two commonly invoked theoretical explanations the endowment effect and the substitution effect

american garch employee stock option valuation abstract we implement a flexible simulation based approach for the fair value of employee stock option eso that accounts for the vesting period departure risk and voluntary suboptimal early exercise we introduce garch effects on the underlying asset and we analyze the price bias with respect to the constant volatility case we also perform a sensitivity analysis with respect to changes in several eso characteristics we compare this valuation with fas 123 method revealing a fas overvaluation finally we value a real eso plan providing the confidence intervals for the estimated eso prices

on the optimality of resetting executive stock options the practice of resetting strike prices on underwater executive stock options has drawn criticism for weakening managerial incentives our model shows that although the anticipation of resetting can negatively affect initial incentives resetting can still be an important value enhancing aspect of compensation contracts even from an ex ante standpoint in fact we find that some resetting is almost always optimal the relative advantages of resetting diminish with greater ability of managers to influence the resetting process greater relative importance of external factors on stock performance and lower costs of replacing incumbent managers

employee stock option exercises an empirical analysis this paper describes the exercise behavior of over 50 000 employees who hold longterm options on employer stock at eight corporations employees typically exercise options years before expiration commonly sacrificing half of the black scholes value exercise is strongly associated with recent stock price movements the market to strike ratio proximity to vesting dates time to maturity volatility and the employee s level within the company these findings have implications for compensation planners the fasb as it develops a new accounting standard for options and financial statement users and preparers who apply and interpret the new fasb standard

benefit evaluation of the country of origin labeling in taiwan results from an auction experiment this research is aimed at investigating the consumer s preference for food produced in taiwan and the economic benefits for the country of origin labeling cool the study used vickrey second price sealed bid auction to elicit the consumer s willingness to pay wtp for products under cool the study compared the bid functions estimated with tobit model and the premium functions estimated with ordinary least squares ols due to price affiliation it is more reliable to use the estimated premium functions the estimated premiums are 67 5 84 7 and 99 for taiwan products over their alternatives of china olives china oolong tea and vietnam oolong tea respectively the study concludes that enacting and rigorously enforcing a cool law would increase economic benefits to consumers in taiwan and at the same time placing the imported products in the leveled playing field

non transferable non hedgeable executive stock option pricing abstract to value non transferable non hedgeable ntnh contingent claims and price executive stock options esos we use a replication argument to translate portfolios with ntnh derivatives into portfolios of primary assets only with stochastic portfolio constraints by identifying stochastic discount factors and finding subjective prices of ntnh european and american esos for block and continuous partial exercise we derive executives optimal exercise policies and use these to find objective prices costs of esos to firms through numerical simulations we obtain policy implications regarding esos incentivizing efficiency for the first time we demonstrate that unlike under block exercise subjective prices under continuous partial exercise may be higher than objective ones moreover volatility regimes and executives other wealth are important in eso pricing and are thus essential to empirical executive compensation studies

risk aversion and block exercise of executive stock options abstract it is well documented that executives granted stock options tend to exercise early and in a few large transactions or blocks standard risk neutral valuation models cannot explain these patterns and attempts to capture the exercise behavior of risk averse executives have been limited to the special case of one option this paper solves for the optimal exercise behavior for a risk averse executive who is granted multiple stock options we show that utility based models do not predict block exercise behavior rather the risk averse executive exercises stock options individually at a sequence of increasing price thresholds when in addition the executive faces frictions such as costly exercise he faces a trade off between exercising little and often to maximize return and exercising larger quantities on fewer occasions to minimize effort this generates realistic block exercise behavior and yields new predictions in particular executives should begin by exercising large blocks of options but the block sizes should become smaller over time our framework also allows us to study the impact of multiple exercise dates on estimates of the cost of options to the company we find that assuming the executive can only exercise on a single occasion underestimates the cost of the options compared with allowing for optimal exercise behavior

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

using laboratory experimental auctions in marketing research a case study of new packaging for fresh beef this paper illustrates the use of laboratory experimental auctions in a pretest market research program for new products we review the experimental auctions literature discuss the range of auction mechanisms available and present the advantages and disadvantages of using a particular mechanism for a laboratory pretest market we then present a step by step example of how a theoretically incentive compatible auction mechanism fifth price sealed bid was used in a laboratory pretest market for vacuum packaged beef based on the illustration we discuss the potential for using laboratory experimental auctions in pretest market research we present the limitations that may be encountered in such applications and outline research aimed at improving the behavioral properties of the technique

preference learning in consecutive experimental auctions this paper explores the origins of the strikingly high price premia paid for new food products in lab valuation exercises our experimental design distinguishes between two explanations of this phenomenon novelty of the experimental experience versus the novelty of the good i e preference learning bids reflect a person s desire to learn how an unfamiliar good fits into their preference set subjects bid in four consecutive experimental auctions for three goods that vary in familiarity candy bars mangos and irradiated meat our results suggest that preference learning is the main source of the high premia and that novelty of the experimental experience does not in itself artificially inflate valuations copyright 2000 oxford university press

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

the cross price effect on willingness to pay estimates in open ended contingent valuation abstract previous literature has shown that potential buyers use a reference price or product to form their opinion about the value of a new product therefore the pricing decision is an interactive process we investigate the two generalizations of the cross price effect the neighborhood price effect and the asymmetric price effect on consumer willingness to pay wtp for multiple similar products in an open ended contingent valuation context results show that the cross price effect on wtp is prominent with the neighborhood price effect holding in contingent valuation no conclusions are reached about the asymmetric price effect