ironing out the kinks in executive compensation linking incentive pay to average stock prices abstract traditional stock option grant is the most common form of incentive pay in executive compensation applying a principal agent analysis we find this common practice suboptimal and firms are better off linking incentive pay to average stock prices among other benefits averaging reduces volatility by about 42 making the incentive pay more attractive to risk averse executives holding the cost of the option grant to the firm constant asian stock options are more cost effective than traditional stock options and provide stronger incentives to increase stock price more importantly the improvement is achieved with little impact on the option grant s risk incentives after adjusting for option cost finally averaging also improves the value and incentive effects of indexed stock options

management turnover and product market competition empirical evidence from the u s newspaper industry we examine the relationship between management turnover and market structure for newspapers in 50 large cities from 1950 to 1993 we find that competitive markets display greater turnover rates than monopolistic markets and that turnover rates are increasing in the degree to which a newspaper trails its competition in market share we find no evidence that the turnover performance relationship varies with market structure we discuss the implications of these findings for theories concerning competition and managerial employment contracting the results appear most consistent with the hypothesis that the greater likelihood of liquidation in competitive markets leads to elevated turnover rates copyright 2000 by university of chicago press

hospital ownership and performance this study compares the performance of three ownership forms of hospitals for profit private nonprofit and public further classified according to whether or not the hospital is run by a hospital chain data come from a 1979 national survey of u s hospitals the authors find that hospital cost is quite similar among alternative ownership forms as is profitability the results do not provide much empirical support for standard property rights theory several reasons are suggested why this may be so

implicit delivery options and optimal delivery strategies for financial futures contracts abstract futures contract specification usually allow the short position some variation as to when where how much and what is to be delivered in this paper we derive the optimal delivery policy for the treasury bond futures contracts and find that our policy produces profits that are positive and statistically significant this indicates that future prices are too high in that the short position can earn profits by skillfully exercising his delivery options we find the actual delivery policies of market participants depart substantially from the optimal strategy the implications of these findings for futures traders and bond dealers are discussed

nonbudgetary constraints in consumer demand for gasoline this paper develops a conceptual framework for taking into account nonbudgetary constraints in economic analysis of consumer demand for gasoline the individual s need for gasoline is defined and the process of satisfying the need is recognized thus nonbudgetary factors are used to restrict the consumption space to a relevant subset in the commodity space the restriction of the consumption space enables nonbudgetary factors to be included in a theoretical model of utility maximization this formulation implies the dependency of income and price elasticities on nonbudgetary factors in studies of the demand for gasoline as in many other empirical studies researchers are frequently confronted with the considerable gap existing between empirical relationships and economic theory this gap underlies the comment by henderson and quandt 1980 that theorists would provide examples that were of little aid for empirical work and econometricians would estimate relations that had little connection with utili

efficiency effect of privatization in the developing countries privatization gained considerable momentum in the developing world in the 1980s the motives were many but the hope for higher economic efficiency underlined the expectations of the implementing governments and agencies in the developing countries while the merits of a market based economic system are well established under certain theoretical conditions far less is known of its empirical relevance in the developing world yet to the best of the author s knowledge no empirical study has examined the macro efficiency effect of privatization in the developing countries studies concerned with this issue often limit themselves to the impact of privatization at the firm level for a small number of companies and countries thus the current study is an attempt to provide a systematic quantitative measure of the magnitude of the macroeconomic effect of privatization in 45 developing countries using the concept of frontier production function efficiency differences between developing countries with differ

lessons from the united states s antitrust history abstract the united states s antitrust policy spans more than 100 years for most of its history the united states has had the toughest antitrust laws and enforcement policies of any country in the world a shift to a more permissive attitude with regard to antitrust matters has occurred in recent years however this paper traces the changes in antitrust policy that have occurred and the concurrent shifts in thinking among economists on antitrust questions following this review the paper offers a critical appraisal of both the economic underpinning of the new learnings on antitrust matters and the changes in antitrust policy that have accompanied them it closes with a discussion of the implications of the analysis for european antitrust competition policy

nonparametric conditional pricing of higher order multivariate contingent claims abstract this paper describes and applies a nonparametric model for pricing multivariate contingent claims multivariate contingent claims are contracts whose payoffs depend on the future prices of more than one underlying variable the pricing however of these kinds of contracts represents a challenge all known models are adaptations of earlier ones that have been introduced to price plain vanilla calls and puts they are imposing strong assumptions on the distributional properties of the underlying variables in contrast this study adopts a methodology that relaxes such restrictions following barone adesi g bourgoin f giannopoulos k 1998 don t look back risk 11 august 100 104 barone adesi g engle r mancini l 2004 garch options in incomplete markets mimeo university of applied sciences of southern switzerland long x 2004 semiparametric multivariate garch model mimeo university of california riverside multivariate pathways for a set of underlying variables are constructed before the option payoffs are computed this enables the covariances in addition to the means and variances to be modelled in a dynamic and nonparametric manner the model is particular suitable for options whose payoffs depend on variables that are characterised by high nonlinearities and extremes and on higher order multivariate options whose underlying variables are more unlikely to conform to a common theoretical distribution

the new institutional economics and the theory of the firm abstract concepts of importance in the literature of the new institutional economics such as transaction costs and bounded rationality have been used to extend the standard neoclassical model of the firm but the hybrid models created have failed to provide adequate explanations of enterprise behavior an alternative neoinstitutional model of the firm is developed in the paper that differs from the pure neoclassical model and hybrid models in respect to both the nature of the solution it yields and the process by which it reaches a solution the neoinstitutional firm cannot be expected to achieve either the hypothetical allocative efficiency promised by the frictionless neoclassical model or the relatively efficient constrained pareto optimal solutions predicted by the largely frictionless hybrid models the orthodox marginal rules of neoclassicism can only be used to solve lower level problems that appear within the firm

a policy oriented theory of corruption perspectives from political science and economics are drawn on to suggest an integrated theory of governmental corruption the theory is oriented toward policy choices and corruption is viewed as a product of individual and structural variables that interact to produce both positive and negative consequences individual level considerations such as greed and the likelihood of detection and prosecution suggest one set of policies for reducing corruption bureaucratic constraints citizen participation and the congruence of legal structures and social demands offer a competing set of concerns that must be dealt with in analyzing corrupt practices we show that corruption as a process influences the optimal level of social welfare alternative conceptions are examined and a model is developed to evaluate policy choices related to corruption from the perspective of welfare optimization applied to the analysis of corruption the model integrates general equilibrium theory deterrence theory and structural conditions finally policy implications are considered

an economic model for evaluating mining and manufacturing ventures with output yield uncertainty this paper develops an operational risk management model for evaluating production efforts in manufacturing and mining industries where the resource to be exploited is nonhomogenous using acontingent claims methodology now commonly encountered in financial applications we formulate a production control model in an environment characterized bymarket andprocess uncertainty in our analysis market risk is depicted by the output price while process uncertainty is captured by the random variability inherent in the output s yield in this light adjustments to the rate of production are viewed as a sequence of nested real options affording operating flexibility we account for an optimal sequence of production adjustments over a preestablished production horizon by taking the production rate as an adapted positive real valued process accordingly techniques of stochastic control theory and contingent claims analysis cca are employed to ensure value maximizing production policies are rendered in a manner consistent with an equilibrium price structure

farm price responsiveness and the choice of functional form abstract the estimated responsiveness of farmers to changes in the prices of output or inputs is in general very sensitive to the econometric model used using cross section survey data for farms in marginal rice growing districts in west malaysia price elasticities based on estimated input demand equations derived from a quadratic restricted profit function were found to be superior to those derived from translog or cobb douglas production functions or from a translog restricted profit function the cobb douglas production function is restrictive and should be used sparingly restricted profit functions are only believable if the available price data are of high quality

the corporation competition and the invisible hand few would disagree that adam smith s invisible hand theorem is the heart of the economist s weltanschauung ask whether trade barriers should be lowered the spread of multinational corporations restrained oil prices deregulated cartels dissolved or more fundamentally whether a market based capitalist system is economically superior to a state run socialist system and economists almost certainly will begin to answer the question by trying to apply the theorem every student knows that the theorem depends on the assumption of atomistic competition which in turn assumes that the system is decentralized and that no competitor is large relatively to others there is another crucial assumption however that is often ignored and usually underemphasized namely that all competition is price competition in reality one of the most distinctive features of capitalism one that is most often raised in lay discussions of its merits and demerits is the prevalence of other forms of competition such as competition in research development and advertising competition to obtain and hold monopoly and competition for corporate growth these various forms of non price competition we shall aim to show are not clearly analogous with the theory of price competition more non price competition rather than less is not necessarily pareto optimal self evidently the production side of a market economy is decentralized only to a limited degree i e to the level of a decision making unit composed of more than one human such a unit playing neuron to the invisible hand is typically called a firm it is in fact a team rather than remaining small firms are in practice composed of any number of individuals from a handful on to half a million some

the new institutional economics and its applicability to development abstract the several remarkable developments in the social sciences which have come to be known as the new institutional economics nie have not yet been fully exploited for analyzing the determinants and effects of institutional change in the context of development this paper identifies two important components of the nie and illustrates both a potential complementarities between them and b their applicability to various problems and policies in the long term development of developing countries

private property and economic efficiency a study of a common pool resource abstract the british columbia halibut fishery provides a natural experiment of the effects of privatizing the commons using firm level data from the fishery 2 years before private harvesting rights were introduced the year they were implemented and 3 years afterward a stochastic frontier is estimated to test for changes in technical allocative and economic efficiency the study indicates that 1 the short run efficiency gains from privatization may take several years to materialize and can be compromised by restrictions on transferability duration and divisibility of the property right 2 substantial long run gains in efficiency can be jeopardized by preexisting regulations and the bundling of the property right to the capital stock and 3 the gains from privatization are not just in terms of cost efficiency but include important benefits in revenue and product form

pricing american style securities using simulation abstract we develop a simulation algorithm for estimating the prices of american style securities i e securities with opportunities for early exercise our algorithm provides both point estimates and error bounds for the true security price it generates two estimates one biased high and one biased low both asymptotically unbiased and converging to the true price combining the two estimators yields a confidence interval for the true price the proposed algorithm is especially attractive compared with lattice and finite difference methods when there are multiple state variables and a small number of exercise opportunities preliminary computational evidence is given

options on the minimum or the maximum of two risky assets analysis and applications this paper provides analytical formulas for european put and call options on the minimum or the maximum of two risky assets the properties of these formulas are discussed in detail options on the minimum or the maximum of two risky assets are useful to price a wide variety of contingent claims of interest to financial economists applications discussed in this paper include the valuation of foreign currency debt option bonds compensation plans risk sharing contracts secured debt and growth opportunities involving mutually exclusive investments

an intertemporal general equilibrium model of asset prices this paper develops a continuous time general equilibrium model of a simple but complete economy and uses it to examine the behavior of asset prices in this model asset prices and their stochastic properties are determined endogenously one principal result is a partial differential equation which asset prices must satisfy the solution of this equation gives the equilibrium price of any asset in terms of the underlying real variables in the economy in this paper we develop a general equilibrium asset pricing model for use in applied research an important feature of the model is its integration of real and financial markets among other things the model endogenously determines the stochastic process followed by the equilibrium price of any financial asset and shows how this process depends on the underlying real variables the model is fully consistent with rational expectations and maximizing behavior on the part of all agents our framework is general enough to include many of the fundamental forces affecting asset markets yet it is tractable enough to be specialized easily to produce specific testable results furthermore the model can be extended in a number of straightforward ways consequently it is well suited to a wide variety of applications for example in a companion paper cox ingersoll and ross 7 we use the model to develop a theory of the term structure of interest rates many studies have been concerned with various aspects of asset pricing under uncertainty the most relevant to our work are the important papers on intertemporal asset pricing by merton 19 and lucas 16 working in a continuous time framework merton derives a relationship among the equilibrium expected rates of return on assets he shows that when investment opportunities are changing randomly over time this relationship will include effects which have no analogue in a static one period model lucas considers an economy with homogeneous individuals and a single consumption good which is produced by a number of processes the random output of these processes is exogenously determined and perishable assets are defined as claims to all or a part of the output of a process and the equilibrium determines the asset prices our theory draws on some elements of both of these papers like merton we formulate our model in continuous time and make full use of the analytical tractability that this affords the economic structure of our model is somewhat similar to that of lucas however we include both endogenous production and

theories of non profit institutions abstract as thoughtful modelling and empirical research of non profit enterprises continues to grow two general views of non profit organizations are emerging one view is that non profit firms are inefficient and wasteful another view is that non profit firms are a response to market failure and thus may improve efficiency the purpose of this paper is to explore the theoretical and empirical work that represents the current divided state of thinking in this area

monte carlo valuation of american options through computation of the optimal exercise frontier this paper introduces a monte carlo simulation method for pricing multidimensional american options based on the computation of the optimal exercise frontier we consider bermudan options that can be exercised at a finite number of times and compute the optimal exercise frontier recursively we show that for every date of possible exercise any single point of the optimal exercise frontier is a fixed point of a simple algorithm once the frontier is computed we use plain vanilla monte carlo simulation to price the option and obtain a low biased estimator we illustrate the method with applications to several types of options

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

might makes rights a theory of the formation and initial distribution of property rights this paper is a theoretical and empirical investigation into the formation and initial distribution of property rights violence is singled out as a major constraint on this formation process its role is explicitly modeled in a choice theoretic framework and some of the implications are tested using data collected from contracts written during the california gold rush of 1848

behavior of the firm under regulatory constraint a recent article by akira takayama discusses an earlier paper by harvey averch and leland l johnson on fair rate of return regulation of public utilities although takayama p 255 agrees with averch and johnson s general conclusions that a firm will tend to increase its investment with the introduction of an active constraint on its rate of return he criticizes the a j argument as being confusing ambiguous and in error takayama then attempts a clarification and presents a new formulation which leads to the a j result quoted above this comment will discuss several of takayama s criticisms in addition to showing that the so called a j effect cannot be derived from the basic assumptions made by both averch and johnson and takayama 1 we will show that the very assumptions used to prove the a j effect by defining the region of x require an assumption that the a j effect exists in the first place

cooperative enterprise an alternative conceptual basis for analyzing a complex institution a recent review of the theoretical literature on cooperative enterprise in agriculture concludes the formal treatment of agricultural co operation is currently impoverished by a long period of neglect levay p 40 the years between the early 1940s and the early 1960s were a period of creative ferment among cooperative theorists the most durable products of which were several variants of the model of the profit seeking firm from neoclassical price theory with the profit maximization objective replaced by other simple maximizing criteria e g enke helmberger and hoos such models are capable of generating hypotheses about cooperative price and output levels but more comprehensive theoretical analogues are necessary to investigate other important aspects of the modern complex cooperative corporation in agriculture it is the development of these latter that has suffered neglect while the past two decades may have generated little progress in the futher development of cooperative theory they have been productive years for the development of more comprehensive alternatives to the simple profitmaximization model to explain the behavior of the modem complex investor owned corporation this development began with the ad hoc theorizing of the various managerial theories of the firm proceeded with the creation of a new institutional economics based on the concepts of transactions costs property rights and agency relationships and is currently at the stage of integrating these previous developments into a generalized neoclassical theory of organizations de alessi this paper is motivated by the belief that the evolving concepts of neoclassical organization theory hold considerable promise for the further productive development of cooperative theory the purpose of the paper is to apply some of these concepts in cursory fashion to cooperative organizations and thereby suggest a framework for the eventual development of a more comprehensive organization theory of cooperatives

the quality delivery option in treasury bond futures contracts this paper uses three methods to estimate quality option values for cbot treasury bond futures contracts it presents evidence regarding 1 payoffs from exercising this option at delivery 2 estimates from a t bond futures pricing model that incorporates this option and 3 estimates obtained from an exchange option pricing formula the results indicate that this option is worth considerably less than reported by kane and marcus 1986a for example payoffs obtained by switching from the bond cheapest to deliver three months prior to delivery to the one cheapest at time of delivery average less than 0 30 percentage points of par

even the bad times are good a behavioural theory of transformation pressure a theory of transformation pressure was developed in sweden in the 1990s whichsuggested that structural changes rationalisations and innovations are stimulatedby pro t crises arising for example from negative demand shocks and restrictiveeconomic policies firms will then either become more creative or abandon anovercon dent risk prone and irrational status quo strategy a quali ed theorystates that productivity will increase as external pressures become stronger but onlyup to a certain point a competing quali ed theory maintains that productivity ismaximised if periods of hard pressure are succeeded by periods of nancial andtechnical consolidation scale advantages and weaker demands for defensive actionsto raise productivity key words transformation pressure x inef ciency productivity growth irratio nality economic psychologyjel classi cations d24 d81 l21 o31

optimal investment and uncertainty on china s carbon emission abatement abstract to realize environmentally sustainable development of the economy china has decided to cut carbon dioxide emissions per unit of gdp by 40 to 45 percent by 2020 compared with the level in 2005 based on china s emission abatement target this paper first analyzes enterprises emission reduction pathways in practical production processes and then develops a framework to derive the magnitude of investment required in each pathway in order to achieve the designated target at the minimal cost under the framework it is found that in the absence of policy guidance individual enterprises emission reduction investments deviate from the optimal level to correct the distortion an alternative option is provided meanwhile to ensure achievement of the emission reduction target a stochastic model is introduced to measure the uncertainty arising from emission abatement investment the results show that an appropriate emission abatement ratio can reduce the systemic risk of emission abatement finally a simulation is given to demonstrate the results derived from the stochastic model

property rights and x efficiency comment louis de alessi s paper 1983 begins in an ecumenical spirit and suggests that property rights theory and the x efficiency approach have not drawn on each other s contributions i share that spirit there is much to learn from a variety of approaches but as de alessi proceeds the ecumenical spirit withers the last three sections argue to the effect that general neoclassical theory i e property rights theory obtains the same results as x efficiency theory but has a superior methodology de alessi s paper puts me in the position of a reluctant dualist his approach resembles an intellectual takeover bid since it argues 1 that neoclassical theory is flawed 2 that the property rights approach has corrected the flaws and 3 by implication that it supercedes other micro approaches 2 the concepts of property rights transaction costs and adjustment costs and their motivational implications are certainly useful i see no reason to argue against them or against property rights theory but i believe that there is more to the explanation of inefficiency thus i will stress the special nature of the x efficiency approach examine our differences and attempt to correct some of de alessi s misinterpretations nevertheless i believe that de alessi s article renders an important service since it gives a succinct summary of property rights theory and explains its significance the main differences between us lie in the basic presupposition behind the two approaches in answering the motivation question property rights theory seems to say that property rights are the only motivating force and that people act to fully maximize wealth given the limits of their property rights when they do so their activities are efficient the x efficiency approach raises a different type of question namely it asks within the firm and outside of the exchange relationship what are the motivating forces that determine effort and productivity including the motivating forces leading to maximizing or less than maximizing behavior property rights are of course a motivating force however it is one of many not the only motivating force nor in many instances is it the most important one determining effort it is important to highlight these differences because different modes of analysis determine not only results but what the analyst looks for and possibly finds the value of a theory depends in part on the research it generates another difference lies in the interest in inefficiency it is not clear whether de alessi cares about inefficiency the postulate of maximization of utility by all individuals and the explicit assertion by de alessi that the equilibrium solution associated with a given set of constraints is efficient p 73 gives the impression that inefficiency is assumed away clearly the x efficiency approach sees inefficiency as a major problem only if one employs an approach that at least recognizes within it the possibility of inefficiency can one have empirical results which indicate an approximation to efficiency inefficiency must be a variable if we are to be able to find meaningful empirical instances which are efficient compared to the neoclassical approach the property rights approach seems to dissect the firm into component individuals and their implicit contracts after dissection the property rights approach assumes that the ordinary utility maximization rules still apply professor of economics and population department of economics harvard university 204 littauer center cambridge ma 02138 i am indebted to h barkai j dean r frantz e helpman j medoff and j rothenberg for valuable comments they are not responsible for errors or viewpoints the labels property rights theory and general neoclassical theory will be used interchangeably 2to stake his claim de alessi might have considered at least some other alternative approaches such as the work of oliver williamson 1970 and that of richard nelson and sidney winters 1982

a note on the pricing of commodity linked bonds the owner of a commodity linked bond can exchange the bond s face value for the maturity value of a commodity in an interesting application of optionpricing theory schwartz 7 provides a general framework for valuing commodity linked bonds this very general valuation framework allows for commodity price risk default risk and interest rate risk along with interest payments and dividends a partial differential equation and its associated boundary condition are derived but not solved schwartz states that the solution to the general problem is difficult even by numerical methods in order to find closed form solutions schwartz considers commodity price risk in conjunction with default risk or interest rate risk but not both this note presents a closed form solution for the value of a commodity linked bond when all three types of risk are present

option pricing in a multi asset complete market economy this paper extends the seminal cox ross rubinstein 1979 crr hereafter binomial model to multiple assets it differs from previous models in that it is derived under the complete market environment specified by duffie and huang 1985 and he 1990 the complete market assumption requires the number of states to grow linearly with the number of assets however the number of correlations grows at a faster rate causing the crr model to be indirectly extendable we solve such a problem by recognizing that the fast growing correlation number is matched by the number of the angles of the edges of a hypercube spanned by the risky assets as a result we derive a solution that allows the number of equations to equal the number of risky assets and the riskless bond the resulting tree structure hence provides the same intuition of pricing and hedging contingent claims as that provided by the crr model finally the proposed model is not only as easy to implement as the one dimensional crr model but also it is more memory efficient than the existing multi factor lattice models

the structure of a contract and the theory of a non exclusive resource the process of arriving at a useful concept of analysis is not only slow and painful but also may go astray and attain nothing useful someone begins with one example or observation followed by a theory which is intuitively plausible a theoretical term associated with a vague concept is coined examples of a seemingly different type emerge which call for another theory the process goes on as examples and theories continue to accumulate the different categories under the same heading of analysis serve only to confuse and each associated theory becomes ad hoc such has been the fate of the concept of externality a more useful approach i think is via contractual conditions the example chosen for illustration is marine fisheries where the fishing right is taken

numerical valuation of high dimensional multivariate european securities we consider the problem of pricing a contingent claim whose payoff depends on several sources of uncertainty using classical assumptions from the arbitrage pricing theory the theoretical price can be computed as the discounted expected value of future cash flows under the modified risk neutral information process although analytical solutions have been developed elsewhere for a few particular option pricing problems computing the arbitrage prices of securities under several sources of uncertainty is still an open problem in many instances in this paper we present efficient numerical techniques based upon monte carlo simulation for pricing european contingent claims depending on an arbitrary number of risk sources we introduce in particular the method of quadratic resampling qr a new powerful error reduction technique for monte carlo simulation quadratic resampling can be efficiently combined with classical variance reduction methods such as importance sampling our numerical experiments show th

the spark spread and clean spark spread option based valuation of a power plant with multiple turbines abstract this paper offers a novel study of two key factors that affect the valuation of a natural gas fired power plant having multiple turbines carbon allowance prices and the ability to switch among turbines amid stricter environmental rules on co2 emissions a power plant operator needs to be able to judge how the purchase of carbon allowances affects the plant s expected value and whether the plant s value rises from switching among turbines this paper presents a model analysis of a spark spread and clean spark spread option based valuation of a power plant with multiple gas turbines using a bivariate and a tri variate lattice respectively results demonstrate that the purchase of co2 allowances lowers the plant s expected value conversely when operations of turbines are switched in response to price movements the plant s value increases this outcome has implications for plant management decisions when to switch among turbines and how the purchase of co2 allowances affects the plant s value

a lattice approach for pricing of multivariate contingent claims abstract the lattice approach developed by boyle evnine and gibbs beg is hitherto one of the most appealing when it comes to pricing multivariate contingent claims the beg approach has however some problems two of the major ones being that the method can lead to negative jump probabilities and has a slow rate of convergence in this paper a lattice approach the nek approach is developed which avoids both of the aforementioned problems of the beg approach it is shown that the nek approach has a very fast rate of convergence the results are accurate enough for most needs with as few as ten time steps and the results are astonishingly accurate with twenty time steps moreover the nek approach is simple and easy to understand and also easy to implement the latter property follows from the fact that all jump probabilities are equal and that the formulas for the jump sizes are extremely simple

dominant firms and their alleged decline abstract by way of a survey of recent literature on the theory of strategic competition this paper focuses on the question of whether dominant firms decline the traditional argument suggesting decline is found to be based on a rather unsatisfactory modelling of dominance and more acceptable conceptualizations suggest that such privileged positions will persist

transaction costs risk aversion and the choice of contractual arrangements publisher summary this chapter discusses transaction costs risk aversion and the choice of contractual arrangements every transaction involves a contract and the transactions conducted in the marketplace entail outright or partial transfers of property rights among individual contracting parties the contractual arrangements through which these transfers are negotiated are several and varied the chapter presents a theory that states that economic efficiency is the same under various land tenure arrangements subject to the constraint of private property rights although transaction costs exist in the real world the theory enables the understanding of much of the farming behavior however the presence of a variety of contractual arrangements under the same constraint of competition poses the question of the choice of these arrangements if a firm can increase efficiency in production by employing productive resources of more than one resource owner a contract to combine the resources will be obtained the formation of the contract involves partial transfers of property rights in one form or another such as leasing hiring or mortgaging

options on the maximum or the minimum of several assets using an intuitive approach that also provides new intuition concerning the black and scholes equation this paper extends the results of johnson and stulz to the pricing of options on the minimum or the maximum of several risky assets

a branch of economics is missing micro micro theory jn the life history of most sciences there are movements toward the study of larger aggregates or toward the detailed study of smaller and more fundamental units my impression is that in most fields the movement toward the study of more micro units has predominated yet in economics in the 1930 s the movement was in the macro direction both physics and biology in the last three decades have made great strides by studying smaller and smaller entitiesphysics by studying more minute fundamental particles and biology by studying the fundamental elements determining genetics in a general sense economics has not been moving in this direction although some work of this nature exists the purpose of this paper is to review some samples of the work that exists and to argue that this area must become a major field of economic research and study the question of how individuals in multiperson firms influence firm decisions seems like such a natural question to ask that it is amazing that it is not part of the formal agenda of economists as a profession of course it has been asked but not by present day economists in their professional capacity in other words micromicroeconomics has never become an established field for the most part theorists have not only not raised this question but they have continued to develop micro theory in such a way as to discourage economists from raising this question part of the reason for this lies in the maximizing and optimizing biases of conventional micro theory and part can be ascribed to the consequences of the long period required to refine the theory so that elements that did not fit the basic model were discarded

property rights and x efficiency reply recently 1983 i assessed the relative merits of x efficiency and of neoclassical economic theory generalized to include the constraints imposed by transaction costs and the structure of property rights on both theoretical and empirical grounds i concluded that such a generalization encompassed whatever limited explanatory power x efficiency had to offer harvey leibenstein s comment 1983 sharpens his presentation of x efficiency and in my view highlights the limitations of that construct because the main points he raises were already addressed in my original article further discussion would be repetitive leibenstein however seems to misinterpret several key aspects of my analysis accordingly it is useful to restate these points to avoid misunderstanding by other readers and to facilitate assessment of the positions at issue neoclassical economic theory defined as the utility maximization theory of the consumer and the wealth maximization theory of the firm assumed inter alia that all rights to the use of resources were fully allocated privately held and exchanged at zero information and transaction costs by the late 1950 s empirical studies began to reveal some serious limitations of this framework and stimulated a variety of proposed reforms different lines of research eventually led to the generalization of neoclassical theory to include the explicit consideration of transaction costs and the structure of property rights this approach has turned out to be extremely fruitful not only has it reconciled the theory with broad classes of previously unexplained phenomena but it has opened the way for important new applications in particular it has allowed extension of the utility maximization hypothesis to all choices i e by household business and government decision makers subject to constraints this advance has ended the dichotomy between the theory of consumer choice and the theory of the firm and has established a more powerful framework for investigating the organization of economic activity thus for example analysis of the shirking information problem of team production is offering new insights into why firms exist indeed it is providing a new perspective on vertical integration occasioning a major reappraisal of antitrust policies on the circumstances affecting the choice of business organization including single proprietorships partnerships and other profit sharing arrangements corporations nonprofits and government owned firms and on the economic consequences of alternative ownership arrangements both theory and evidence indicate that the choice of organizational form and the rules adopted within it depend crucially not only on transaction costs but also on the formal legal system as well as on the work ethic customs conventions and other components of a society s system of property rights transaction costs and the system of property rights simply belong to the group of variables that determine the opportunity set faced by a utility maximizing decision maker it follows that property rights like transaction costs is not a theory it is a variable that enters economic theory it is not a motivational force other than in the sense that it affects the opportunity set it does not imply that individuals act to fully maximize wealth given the limits of their property rights its most distinguishing feature is the insistence upon the universal applicability of law and economics center university of miami p o box 248000 coral gables fl 33124 i am indebted to roger e meiners and robert j staaf for helpful comments leibenstein s statement that i should have considered other alternative approaches including williamson s is mystifying first i was not writing a review of the literature second williamson s work is a major keystone of the analysis i presented my paper contained several statements to that effect plus repeated references to his writings

x efficiency rent seeking and social costs this paper investigates shifts in cost functions of monopoly and regulated firms operating under conditions of x inefficiency and rent seeking behavior we show that x inefficiency and rent seeking have significantly different implications for economic welfare distinctions are drawn between pecuniary and real x inefficiency and between sunk and continuing rent seeking costs in general for a given cost shift rent seeking behavior implies larger social costs than does x inefficiency theory however cost shifts caused by either x inefficiency or rent seeking are observationally equivalent this implies empirically measured cost shifts cannot unambiguously be attributed to either cause

numerical evaluation of multivariate contingent claims we develop a numerical approximation method for valuing multivariate contingent claims the approach is based on an n dimensional extension of the lattice binomial method closed form solutions for the jump probabilities and the jump amplitudes are obtained the accuracy of the method is illustrated in the case of european options when there are three underlying assets article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

heterogeneous firms and the organization of production firms in the same industry exhibit systematic differences in the organization of production and the structure of employment entrepreneurial ability is the specific scarce input that limits the size of a firm this input must be allocated to two activities coordinating production and monitoring workers able entrepreneurs can convert calendar time into larger supplies of coordinating effort that enable them to assemble large firms greater ability implies a higher shadow price of time which increases the implicit costs of monitoring a dispersion of entrepreneurial abilities generates an equilibrium size distribution of firms differences in monitoring costs affect the choice of worker productivities the design of products and the organization of production the monitoring cost hypothesis advanced in this paper goes a long way in explaining the equilibrium of an industry containing heterogeneous firms that differ in size and behavior

a lattice framework for option pricing with two state variables a procedure is developed for the valuation of options when there are two underlying state variables the approach involves an extension of the lattice binomial approach developed by cox ross and rubinstein to value options on a single asset details are given on how the jump probabilities and jump amplitudes may be obtained when there are two state variables this procedure can be used to price any contingent claim whose payoff is a piece wise linear function of two underlying state variables provided these two variables have a bivariate lognormal distribution the accuracy of the method is illustrated by valuing options on the maximum and minimum of two assets and comparing the results for cases in which an exact solution has been obtained for european options one advantage of the lattice approach is that it handles the early exercise feature of american options in addition it should be possible to use this approach to value a number of financial instruments that have been created in recent years

the new institutional economics and the theory of behaviour under uncertainty the new institutional economics nie is diverse in terms of the theory of behaviour under uncertainty some views are close to neoclassical economics but others are similar to those held by heterodox economists distinctions between procedural and substantive uncertainty weak and strong uncertainty and ambiguity and fundamental uncertainty help to identify different approaches to uncertainty in nie regarding the influence of institutions on economics behaviour not all nie focuses on institutions as constraints and takes individuals as given the dominant views of rationality in nie are standard neoclassical maximization and bounded rationality but alternative notions have also been defended