unemployment rates and political outcomes an incentive for manufacturing a political business cycle in recent years the interdependence of politics and economics has received an increasing amount of attention by both economists and political scientists the explanation for this interest lies in the rediscovery of political economy and may be at least partly due to the recent experiences that governmental advisors have had with simultaneously increasing inflation and unemployment conventional macroeconomic approaches have failed to pin point causes for the stagflation and to provide methods for solving the problem the traditional economic policies may have failed in part because these traditional solutions were simply not plausible in the political environments in which they were proposed it is the intent of a growing body of work to develop macromodels with endogenous political sectors the inference made in this literature is that 1 the economy can be manipulated or affected by a political sector and that 2 there is an incentive for the political sector to manipulate the economy this literature has however just begun to formalize the interaction of the political and economic sectors and empirical work is virtually nonexistent the purpose of this paper is to present some evidence on these two inferences in section 1 the first inference is examined in section ii literature on which the first inference is based is reviewed and evidence on the possible incentive to create such a cycle is presented in section iii concluding remarks are offered

on the integration of production and financial hedging decisions in global markets we study the integrated operational and financial hedging decisions faced by a global firm who sells to both home and foreign markets production occurs either at a single facility located in one of the markets or at two facilities one in each market the company has to invest in capacity before the selling season starts when the demand in both markets and the currency exchange rate are uncertain the currency exchange rate risk can be hedged by delaying allocation of the capacity to specific markets until both the currency and demand uncertainties are resolved and or by buying financial option contracts on the currency exchange rate when capacity commitment is made a mean variance utility function is used to model the firm s risk aversion in decision making we derive the joint optimal capacity and financial option decision and analyze the impact of the delayed allocation option and the financial options on capacity commitment and the firm s performance we show that the firm s financial hedging strategy ties closely to and can have both quantitative and qualitative impact on the firm s operational strategy the use or lack of use of financial hedges can go beyond affecting the magnitude of capacity levels by altering global supply chain structural choices such as the desired location and number of production facilities to be employed to meet global demand

option pricing with downward sloping demand curves the case of supply chain options this article investigates the role of option contracts in a supply chain when the demand curve is downward sloping we consider call put options that provide the retailer with the right to reorder return goods at a fixed price we show that the introduction of option contracts causes the wholesale price to increase and the volatility of the retail price to decrease in general options are not zero sum games conditions are derived under which the manufacturer prefers to use options when this happens the retailer is also better off if the uncertainty in the demand curve is low however if the uncertainty is sufficiently high then the introduction of option contracts alters the equilibrium prices in a way that hurts the retailer

investment uncertainty and liquidity we analyze the dynamic investment decision of a firm subject to an endogenous financing constraint the threat of future funding shortfalls lowers the value of the firm s timing options and encourages acceleration of investment beyond the first best optimal level as well as highlighting another way by which capital market frictions can distort investment behavior this result implies that 1 the sensitivity of investment to cash flow can be greatest for high liquidity firms and 2 greater uncertainty has an ambiguous effect on investment

cyclical and political influences on the size distribution of income in the us 1959 1989 the quesion of whether the size distribution of income is subject to cyclical fluctuations in unemployment and inflation has been investigated in several studies in these studies however the fact that unemployment inflation and distribution may be influenced intentionally by policy makers is ignored in order to investigate whether any political influence on the size distribution of income actually exists a model is formulated in which the distribution not only depends on unemployment and inflation but also on a variable representing the political process the model is tested using time series data pertaining to the case of the us in the period 1958 to 1989 the results indicate that inequality tends to be negatively influenced by democratic administrations

investor valuation of the abandonment option abstract we investigate whether investors price the option to abandon a firm at its exit value theory prices this real option as an american put with both a stochastic strike price exit value and a stochastic value of the underlying security the value of cash flows the empirical implications are that firm value increases in exit value after controlling for expected going concern cash flows and that more generalizable assets produce more abandonment option value using discounted earnings forecasts to proxy for expected cash flows and prior literature to categorize asset generalizability we find strong support for the predictions of abandonment option theory

rates of time preference and valuations of the duration of life abstract this paper develops a multi period markov model of the lifetime choice of occupational fatality risks the empirical model analyzes the wage effects of job risks using the 1982 university of michigan panel study of income dynamics in conjunction with death statistics from the u s national traumatic occupational fatality survey evidence regarding workers intertemporal choices with respect to risks with long term implications is broadly consistent with rational behavior workers implicit real rate of time preference with respect to future life years equals approximately 11 percent this rate of time preference decreases with education

evaluating natural resource investments notwithstanding impressive advances in the theory of finance over the past 2 decades practical procedures for capital budgeting have evolved only slowly the standard technique which has remained unchanged in essentials since it was originally proposed see dean 1951 bierman and smidt 1960 derives from a simple adaptation of the fisher 1907 model of valuation under certainty under this technique expected cash flows from an investment project are discounted at a rate deemed appropriate to their risk and the resulting present value is compared with the cost of the project this standard textbook technique reflects modern theoretical developments only insofar as estimates of the discount rate may be obtained from crude application of single period asset pricing theory but see brennan 1973 bogue and roll 1974 turnbull 1977 constantinides 1978 the inadequacy of this approach to capital budgeting is widely acknowledged although not widely discussed its obvious deficiency is its the evaluation of mining and other natural resource projects is made particularly difficult by the high degree of uncertainty attaching to output prices it is shown that the techniques of continuous time arbitrage and stochastic control theory may be used not only to value such projects but also to determine the optimal policies for developing managing and abandoning them the approach may be adapted to a wide variety of contexts outside the natural resource sector where uncertainty about future project revenues is a paramount concern

structural estimation of real options models we propose a numerical approach for structural estimation of a class of discrete markov decision processes emerging in real options applications the approach is specifically designed to account for two typical features of aggregate data sets in real options the endogeneity of firms decisions the unobserved heterogeneity of firms the approach extends the nested fixed point algorithm by rust 1987 optimal replacement of gmc bus engines an empirical model of harold zurcher econometrica 55 5 999 1033 1988 maximum likelihood estimation of discrete control processes siam journal of control and optimization 26 5 1006 1024 because both the nested optimization algorithm and the integration over the distribution of the unobserved heterogeneity are accommodated using a simulation method based on a polynomial approximation of the value function and on recursive least squares estimation of the coefficients the monte carlo study shows that omitting unobserved heterogeneity produces a significant estimation bias because the model can be highly non linear with respect to the parameters

non parametric frontier estimates of mutual fund performance using c and l moments some specification tests there is a burgeoning literature using non parametric frontier methods to measure mutual fund performance these articles measure the relationship between the various characteristics mainly return information and some costs of ownership of these specialized financial products to establish a ranking using some efficiency measure we argue in favor of the use of the shortage function which is compatible with general investor preferences and question some of the often maintained hypotheses in this line of research the empirical part employs a large database of us and european mutual funds to offer extensive tests of the underlying modeling assumptions using various frontier estimators

optimal investment strategies for flexible resources considering pricing and correlated demands we study the optimal resource investment decision faced by a two product price setting firm that operates in a monopolistic setting and employs a postponed pricing scheme the firm has the option to invest in dedicated resources as well as a more expensive flexible resource that can satisfy both products while the resource investment decision is made under demand uncertainty pricing and resource allocation decisions are postponed to the time when demand curves are realized our analysis provides the structure of the firm s optimal resource investment strategy as a function of demand parameters and investment costs and shows that the flexible resource investment decision follows athreshold policy we also show that it can be optimal for the firm to invest in the flexible resource even when demand patterns are perfectly positively correlated the reason for flexible capacity investment in this case is financial rather than risk pooling on the other hand we show that it can be optimal for the firm not to invest in the flexible resource even when demand patterns are perfectly negatively correlated the flexible resource investment decision in this case depends on the profitability of the two products based on our analysis we provide principles on the firm s optimal resource investment decision

a patent race in a real options setting investment strategy valuation capm beta and return volatility abstract in this paper we study financial properties of r d intensive firms through a continuous time real options patent race model numerical analysis in this study shows that intense competition drives a firm to invest more aggressively which then pushes up its cost of capital and return volatility while introducing negative return correlation with its competitor furthermore we find that a firm s position in competition has important impacts on its financial properties for instance a firm s cost of capital is a non monotonic function of its relative position in the race in addition the relationship between cash flow uncertainty and investment can be negative when a firm is far ahead or far behind or positive when firms are close in the race

financing flexibility the case of outsourcing abstract we investigate the relationship between the extent and timing of vertical flexibility and the financial choices of a firm by vertical flexibility we mean partial total and reversible outsourcing of a necessary input a firm simultaneously selects the vertical setting and the financial sources of investment in flexibility in particular debt and venture capital a loan may come from a lender that requires the payment of a fixed coupon over time and an option to buy out the firm in certain circumstances debt leads to the same level of flexibility of an unlevered firm yet investment occurs earlier the injection of venture capital reduces the quest for vertical flexibility and speeds up investment then there arises a fresh substitutability between a financial venture capital and a real variable vertical flexibility

valuing flexibility as a complex option this paper develops an approach for valuing flexible production systems using contingent claims pricing demand curves for our model s underlying assets output products may be downward sloping in contrast with the standard option pricing assumption also our marginal production exercise costs may be increasing in addition we allow for multiple products and a production capacity constraint these elements of the model result in complex exercise decisions for the contingent claims which comprise the production system s value we illustrate our approach by valuing a flexible system that produces two products which have profit margin functions with stochastic parameters

capital budgeting for interrelated projects a real options approach this paper explores the effect of project interrelationships on investment decisions and project values in a real options framework we examine in detail the mutually exclusive case where a firm may invest in the development stage of two projects and then may select only a single project to implement the firm can develop the projects in parallel or in sequence the choice of development policy depends on the relative values of the embedded options for each strategy sequential development is shown to be superior to parallel development when projects have highly correlated values and when they require a large commitment of capital for development are short term in nature and have relatively low volatility we also show that the optimal ordering of sequential projects does not always begin with the most profitable project

continuous time methods in finance a review and an assessment i survey and assess the development of continuous time methods in finance during the last 30 years the subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing term structure theory asset pricing and optimal consumption and portfolio choices during the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance this latter subperiod has seen significant progress in econometric theory computational and estimation methods to test and implement continuous time models capital market frictions and bargaining issues are being increasingly incorporated in continuous time theory the roots of modern continuous time methods in finance can be traced back to the seminal contributions of merton 1969 1971 1973b in the late 1960s and early 1970s merton 1969 pioneered the use of continuous time modeling in financial economics by formulating the intertemporal consumption and portfolio choice problem of an investor in a stochastic dynamic programming setting merton 1973b also showed how such a framework can be used to develop equilibrium asset pricing implications thereby significantly extending the asset pricing theory to richer dynamic settings and expanding the scope of applications of continuous time methods to study problems in financial economics 1 within a span of about 30 years from the publication of merton s inf luential papers continuous time methods have become an integral part of financial economics indeed in certain core areas in finance such as e g asset pricing derivatives valuation term structure theory and portfolio selection continuoustime methods have proved to be the most attractive way to conduct research and gain economic intuition the continuous time approach in these areas has produced models with a rich variety of testable implications the econometric theory for testing continuous time models has made rapid strides in the last decade and has thus kept pace with the impressive progress on the theoretical front one hopes that the actual empirical investigations and estimation using the new procedures will follow suit soon

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

real flexibility and financial structure an empirical analysis i examine the empirical relation between real flexibility and financial structure i test whether real flexibility increases debt capacity by lowering default risk and making assets more marketable or decreases debt capacity by facilitating risk shifting and asset substitution i measure real flexibility as the sensitivity of marginal production and investment decisions to variations in the economic environment i find that financial leverage is negatively related to production flexibility but positively related to investment flexibility this split in results suggests that although asset substitution facilitated by investment flexibility can be prevented contractually risk shifting facilitated by production flexibility is intractable copyright 2003 oxford university press

valuation of product mix flexibility using real options abstract flexibility in manufacturing operations is becoming increasingly more important to industrial firms due to e g increasing market demand volatility internationalisation of markets and competition and shorter product life cycles defining measuring and evaluating manufacturing flexibility have not been straightforward neither in theory nor in practice the use of real options has shown to be an accessible approach for the valuation of certain types of flexibility when using real options for capital budgeting purposes it is possible to take flexibility options into account in the valuation process in this paper we use real options to evaluate one specific type of manufacturing flexibility i e product mix flexibility we provide both theoretical and practical perspectives based on a real case the main interest of the company under study is to evaluate product mix flexibility with respect to capacity set ups level of automation and multi functionality of resources the case involves multiple products and demand uncertainty wherefore product demands are used as the underlying asset in the real options models thus the contribution of this paper concerns the combination of real case multiple products capacity constraints and set up costs the results of the analysis show that i the value of flexibility decreases when demand volatility increases ii flexible resources add substantial value as compared to dedicated resources and iii the flexibility value of marginal capacity decreases with increasing levels of capacity

applications of option pricing theory twenty five years later nobel lecture to the memory of alfred nobel december 9 1997 this abstract was borrowed from another version of this item

timing and eco nomic efficiency of climate friendly investments in supply chains abstract emission trading schemes such as the european union emissions trading system euets attempt to reconcile economic efficiency with ecological efficiency by creating financial incentives for companies to invest in climate friendly innovations using real options methodology we demonstrate that under uncertainty economic and ecological efficiency continue to be mutually exclusive this problem is even worse if a climate friendly project depends on investing in of a whole supply chain we model a sequential bargaining game in a supply chain where the parties negotiate over implementation of a carbon dioxide co2 saving investment project we show that the outcome of their bargaining is not economically efficient and even less ecologically efficient furthermore we show that a supply chain becomes less economically efficient and less ecologically efficient with every additional chain link finally we make recommendations for how managers or politicians can improve the situation and thereby increase economic as well as ecological efficiency and thus also the eco efficiency of supply chains

fixed versus flexible production systems a real options analysis in this work we address investment decisions in production systems by using real options as is standard in literature the stochastic variable is assumed to be normally distributed and then approximated by a binomial distribution resulting in a binomial lattice the methodology establishes a discrete valued lattice of possible future values of the underlying stochastic variable demand in our case and then computes the project value we have developed and implemented stochastic dynamic programming models both for fixed and flexible capacity systems in the former case we consider three standard options the option to postpone investment the option to abandon investment and the option to temporarily shut down production for the latter case we introduce the option of corrective action in terms of production capacity that the management can take during the project by considering the existence of one of the following i a capacity expansion option ii a capacity contraction option or iii an option considering both expansion and contraction the full flexible capacity model where both the contraction and expansion options exist leads as expected to a better project predicted value and thus investment policy however we have also found that the capacity strategy obtained from the flexible capacity model when applied to specific demand data series often does not lead to a better investment decision this might seem surprising at first but it can be explained by the inaccuracy of the binomial model the binomial model tends to undervalue future decreases in the stochastic variable demand while at the same time tending to overvalue an increase in future demand values

notes on multiperiod valuation and the pricing of options a mean variance risk return tradeoff relationship is derived for the diffusion process limiting case of a state preference model with aggregate consumption serving as a pivotal variable the model is compared to other recent models along the dimensions of generality and tractable implementation the incorporation of stochastic interest rates in general equilibrium and arbitrage based valuation models is examined and an extension to earlier methods is discussed in connection with the implementation of robust general valuation procedures this paper develops an integrative discussion of some recent developments in the theory of multiperiod valuation our aim is not to survey the rapidly burgeoning literature in this area in an exhaustive way instead it is our goal to highlight some results of our own and others that have a bearing on judgments regarding promising and robust directions of enquiry in this area of research in doing so areas that have been particularly empnasized are 1 the incorporation of aggregate consumption as a pivotal variable in general and specialized multiperiod valuation formulae and 2 the incorporation of endogenized dynamics for the riskless rate of interest in black scholes 4 type option pricing methodology throughout our emphasis is on the internal consistency generality and simplicity of different models insofar as full information valuation in a general equilibrium context is concerned rather than on issues pertaining to empirical testing and econometric methodology the starting point for much of our analysis is rubinstein s 28 important paper on multiperiod valuation and hakansson s 15 related contributions in this paper rubinstein considers a multiperiod state preference model of general exchange equilibrium with no explicit modeling of production investment in order to develop pricing relationships linking the prices of elementary arrow

the valuation of multivariate contingent claims in discrete time models there are several examples in the literature of contingent claims whose payoffs depend on the outcomes of two or more stochastic variables familiar cases of such claims include options on a portfolio of options options whose exercise price is stochastic and options to exchange one asset for another this paper derives risk neutral valuation relationships rnvrs in a discrete time setting that facilitate the pricing of such complex contingent claims in two specific cases joint lognormally distributed underlying variables and constant proportional risk aversion on the part of investors and joint normally distributed underlying variables and constant absolute risk aversion preferences respectively this methodology is then applied to the valuation of several interesting complex contingent claims such as multiperiod bonds multicurrency option bonds and investment options

interactions of corporate financing and investment decisions a dynamic framework this article analyzes the interaction between a firm s dynamic investment operating and financing decisions in a model with operating adjustment and recapitalization costs using numerical analysis we solve the model for cases that highlight interaction effects we find that higher production flexibility due to lower costs of shutting down and reopening a production facility enhances the firm s debt capacity thereby increasing the net tax shield value of debt financing while higher financial flexibility resulting from lower recapitalization costs has a similar effect production flexibility and financial flexibility are to some extent substitutes we find that the impact of debt financing on the firm s investment and operating decisions is economically insignificant

managing flexible capacity in a make to order environment flexible capacity has been shown to be very effective to hedge against forecast errors at the investment stage in a make to order environment this flexibility can also be used to hedge against variability in customer orders in the short term for that purpose production levels must be adjusted each period to match current demands to give priority to the higher margin product or to satisfy the closest customer however this will result in swings in production inducing larger order variability at upstream suppliers and significantly higher component inventory levels at the manufacturer through a stylized two plant two product capacitated manufacturing setting we show that the performance of the system depends heavily on the allocation mechanism used to assign products to the available capacity although managers would be inclined to give priority to higher margin products or to satisfy customers from their closest production site these practices lead to greater swings in production result in higher operational costs and may reduce profits

option exercise games an application to the equilibrium investment strategies of firms under the standard real options approach to investment under uncertainty agents formulate optimal exercise strategies in isolation and ignore competitive interactions however in many real world asset markets exercise strategies cannot be determined separately but must be formed as part of a strategic equilibrium this article provides a tractable approach for deriving equilibrium investment strategies in a continuous time cournot nash framework the impact of competition on exercise strategies is dramatic for example while standard real options models emphasize that a valuable option to wait leads firms to invest only at large positive net present values the impact of competition drastically erodes the value of the option to wait and leads to investment at very near the zero net present value threshold copyright 2002 oxford university press

efficiency with costly information a reinterpretation of evidence from managed portfolios we investigate the informational efficiency of mutual fund performance for the period 1965 84 results are shown to be sensitive to the measurement of performance chosen we find that returns on s p stocks returns on non s p stocks and returns on bonds are significant factors in performance assessment once we correct for the impact of non s p assets on mutual fund returns we find that mutual funds do not earn returns that justify their information acquisition costs this is consistent with results for prior periods coauthors are martin j gruber sanjiv das and matthew hlavka article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the investment strategies for a dynamic supply chain under stochastic demands abstract a successful supply chain management scm should aim to maximize the net present value of joint profits along the supply chain however the volatile market conditions cause the future cash flows along the supply chain more difficult to anticipate to obtain higher supply chain value the supplier and the retailer should cooperatively determine the optimal entry time this paper proposes a two stage dynamic optimization model by using a real option approach and then performs the sensitivity analyses for the option value and the investment threshold the impacts of some critical factors including the growth rate and the volatility of demand shock sunk cost and relating operational costs cost rates fix costs holding costs of inventory and shipping costs are investigated

blurred stars mutual fund ratings in the shadow of conflicts of interest using unique data on trading commission payments to mutual fund rating companies mfrcs by mutual funds in china this paper investigates whether the conflicts of interest arising from trading commission payments bias mfrcs mutual fund star ratings and hence affect their informativeness we find the rating of a mutual fund is more optimistic when the mfrc either i receives trading commission fees from the mutual fund or ii can potentially receive fees in the future the paper further shows that the usefulness of ratings in terms of predicting a fund s future performance is negatively impacted by conflicts of interest there is also evidence that investors can see through the problem responding less enthusiastically in terms of fund flows to the ratings of conflicted mfrcs we further find that the introduction of a rating qualification system that aims to improve mutual fund rating quality exacerbates the rating bias

morningstar s risk adjusted ratings the characteristics of the risk adjusted rating rar on which morningstar bases its star ratings and category ratings are analyzed and the rar is compared with more traditional mean variance measures the rar measure has characteristics similar to those of an expected utility function based on an underlying bilinear utility function these characteristics are of some concern because strict adherence to maximizing expected utility with such a function could lead to extreme investment strategies this study finds that morningstar varies one of the parameters of this function in a manner that frequently produces results similar to the results of using the excess return sharpe ratio finally the argument is presented that neither morningstar s measure nor the excess return sharpe ratio is an efficient tool for choosing mutual funds within peer groups for a multifund portfolio

compensating wage differentials and the value of life abstract this paper examines the relationship between willingness to pay and compensating wage differential measures of the value of a statistical life it resolves some recently noted discrepancies between such measures

coordinating the resource investment decision for a two market price setting firm abstract we study the capacity investment decision of a two product firm that is a price setter for both products the products are of varying complexities such that the resource that can be used to produce the higher level product can also be used to produce the lower level one but not vice versa although the firm needs to make its capacity investment decision under demand uncertainty it can utilize this limited downward resource flexibility in addition to pricing to more effectively match its supply with demand as an example consider a firm that owns a main plant satisfying both end product and intermediate product demand and a subsidiary satisfying the intermediate product demand only we formulate this decision problem as a two stage stochastic programming problem with recourse and analyze the impact of coordinated decision making when the resource flexibility is taken into account in the investment decision and demand correlation on the firm s optimal investment strategy our results offer managerial principles on the firm s optimal resource investment strategy

the performance of us equity mutual funds the paper examines the performance of us no load equity mutual funds fund performance is derived using stochastic frontier analysis for a flexible functional form this analysis allows us to derive parametric estimates of efficiency scores for each fund in our sample for the first time in the literature our results indicate that us no load equity funds display varying levels of efficiency over time but also depending on size and on investment style robustness analysis reaffirm the efficiency scores remain consistent across different selections of inputs and outputs as well as the underlying distribution of the return having estimated each fund s efficiency in the sample we unveil their underlying dynamics also with respect to risk and operational characteristics such as flows assets and morningstar star ratings panel var estimations reveal that the response of funds efficiency to a shock in risk is positive and substantial some evidence of reverse causality is also observed finally we extend our analysis to investigate the relationship between funds performance and key covariates across subgroups defined by size

uncertainty and stepwise investment we analyze the optimal investment strategy of a firm that can complete a project either in one stage at a single freely chosen time point or in incremental steps at distinct time points the presence of economies of scale gives rise to the following trade off lumpy investment has a lower total cost but stepwise investment gives more flexibility by letting the firm choose the timing individually for each stage our main question is how uncertainty in market development affects this trade off the answer is unambiguous and in contrast with a conventional real options intuition higher uncertainty makes the single stage investment more attractive relative to the more flexible stepwise investment strategy

survival versus consumption we develop an indirect method to estimate utility and willingness to pay wtp for reductions in the risk of death at various ages using a life cycle model of consumption we assume that an individual sets his consumption level each year so as to maximize his expected lifetime utility alternative assumptions about opportunities for borrowing and annuities characterize two polar types of societies in our robinson crusoe case an individual must be entirely self sufficient and annuities are not available in our perfect markets case an individual can borrow against future earnings and purchase actuarially fair annuities we show that under these assumptions wtp is the sum of livelihood discounted expected future earnings and consumer surplus to illustrate our methods we derive wtp for an average financially independent american man under plausible assumptions the model is calibrated to 1978 earnings e g 18 000 per year for men aged 45 54 with at least some income in the robinson crusoe case wtp increases from 500 000 at age 20 to a peak of 1 250 000 at age 40 and declines to 630 000 at age 60 in the perfect markets case age variations are less pronounced wtp is 1 050 000 at age 20 peaks at 1 070 000 at age 25 and declines to 600 000 at age 60 these results suggest that individuals value risks to their lives at several times the pro rata share of their future earnings

flexible waste management under uncertainty in this paper we use stochastic dynamic programming to model the choice of a municipality which has to design an optimal waste management program under uncertainty about the price of recyclables in the secondary market the municipality can by undertaking an irreversible investment adopt a flexible program which integrates the existing landfill strategy with recycling keeping the option to switch back to landfilling if profitable we determine the optimal share of waste to be recycled and the optimal timing for the investment in such a flexible program we find that adopting a flexible program rather than a non flexible one the municipality i invests in recycling capacity under circumstances where it would not do so otherwise ii invests earlier and iii benefits from a higher expected net present value c 2013 elsevier b v all rights reserved less

empirical evidence of political influence on the size distribution of income in the united states 1959 1991 abstract political influence on the size distribution of income is tested in a statistical model using annual u s data for 1959 1991 we present empirical evidence that both democratic administration and reelected president appear to have significant downward redistributive effects

discrete time financial planning models under loss averse preferences we consider a dynamic asset allocation problem formulated as a mean shortfall model in discrete time a characterization of the solution is derived analytically under general distributional assumptions for serially independent risky returns the solution displays risk taking under shortfall as well as a specific form of time diversification also for a representative stock return distribution risk taking increases monotonically with the number of decision moments given a fixed horizon this is related to the well known casino effect arising in a downside risk and expected return framework as a robustness check we provide results for a modified objective with a quadratic penalty on shortfall an analytical solution for a single stage setup is derived and numerical results for the two period model and time diversification are provided

investments in flexible production capacity abstract we examine the technology and capacity choice problem of a multi output firm facing stochastic demands in a continuous time framework the firm can install output specific capital or at greater cost flexible capital that can be used to produce different outputs investment is irreversible the firm must choose a technology and decide how much capital to install knowing it can add more later as demand evolves we formulate the capacity choice problem as a singular stochastic control problem show that the value of the firm equals the value of its installed capital plus the value of its options to add capacity in the future and derive an optimal investment rule that maximizes the firm s market value we also address the analogous problem for a multi input firm that faces stochastically evolving factor costs and can install input specific or flexible capital

optimal operating policies in the presence of exchange rate variability we study the structure of the optimal policies for a firm operating plants in different countries the relative costs of production between the plants are assumed to vary over time due to economic and political factors such as exchange rates inflation taxes and tariffs based on the costs the firm can alter the quantity produced in each plant we determine the structure of the optimal policies for deciding when and by how much to alter the production quantities when the switch over costs are linear or step functions regardless of whether the variable production costs are concave or piece wise linear convex and regardless of whether the firm is supplying one or more markets the optimal policy is always a barrier policy the optimal barriers can be determined by using linear programming techniques and the optimal costs can be computed by solving a system of linear equations when the number of optimal barriers is two the optimal expected costs and the condition that determines the optimal barriers are explicitly derived

real options and product life cycles in this paper i develop an option valuation framework that explicitly incorporates a product life cycle i then use the framework to value the real option to change a project s capacity standard techniques for valuing real options typically ignore product life cycle models and specify instead a constant expected growth rate for demand or price i show that this specification can lead to significant error in the valuation of capacity options in particular the standard technique tends to undervalue the option to contract capacity and overvalue the option to expand capacity this result has important implications for capital investment decisions especially in high technology industries that feature regular introductions of newly improved products

time to build option value and investment decisions abstract investment decisions and outlays are often made sequentially for example the rate at which construction proceeds is usually flexible and can be adjusted with the arrival of new information traditional discounted cash flow methods which treat the pattern of investment as fixed ignore this flexibility and understate the value of the project this paper uses contingent claims analysis to derive optimal decision rules and to value such investments we determine the effects of time to build opportunity cost and uncertainty on the investment decision for reasonable parameter values we show how a simple npv rule can lead to gross errors

investment and competition this paper examines how industry structure affects corporate investment patterns real options theory shows that deferring irreversible investment in the face of uncertainty is valuable theory also shows that the value of waiting to invest falls if investment opportunities are contestable consistent with these theories we find that firms in monopolistic industries exhibit lower investment q sensitivity and are slower to invest than firms in competitive industries however we find that investment q sensitivity and investment speed are highest in oligopolistic industries suggesting that the value of investing strategically can outweigh the value of waiting indeed oligopolistic industries experience less entry and more exit than other industries