are estimates of earnings inequality sensitive to measurement choices a case study of canada in the 1980s while it is necessary that researchers make choices in order to estimate inequality the reasons for the measurement choices and their impact on inequality estimates have not been widely assessed this paper uses canadian data from the 1980s to analyse whether inequality estimates are sensitive to common measurement choices seemingly minor technical choices about the treatment of outlying observations such as the use of top income coded data exclusion of very high and low observations and differences among data sets in the capture of very high observations affect estimates of inequality further the impact of the treatment of outlying observations on inequality estimates are at least as large as the impact of measurement choices of a conceptual nature such as the income definition and population selection the sensitivity of inequality estimates to measurement choices which often remain invisible affect inferences about the relative degree of inequality at a given point in time among countries and

optimal pricing and composition of multiple bundles a two step approach abstract this paper analyzes the problem facing a firm that must determine the optimal composition and pricing of multiple bundles it supplies to a single market segment it is assumed the firm s competitors does not react in the short run to its decisions and that their bundles prices and characteristics are known it is further assumed that potential consumers of bundles are rational and maximize a random utility function the problem is modeled as a mixed integer non linear program though such programs are normally hard to solve using traditional methods the difficulties are circumvented here by taking advantage of the problem s mathematical structure to develop a novel two phase solution approach two aspects of the solution are particularly worthy of note 1 we demonstrate that the optimal price of a bundle marketed by a firm depends on the composition of all the firm s bundles and not on their prices and on the composition and price of all the competitors bundles in the market and 2 that if the consumer choice behavior is described by a logit model then the firm s bundles should be very similar to each other

investment strategies reversibility and asymmetric information abstract in this paper we examine the reversibility effects on a firm s investment trigger timing and quantity strategies in the presence of asymmetric information between the firm owner and the manager we obtain five main results under conditions of asymmetric information first information asymmetry increases delays investment trigger timing second under information asymmetry investment quantity increases in degree of reversibility while under information symmetry it is constant third social loss arising from information asymmetry increases in degree of manager s informational rent and degree of reversibility but decreases in volatility fourth an increase in volatility increases the owner s value while it decreases the manager s value fifth an increase in volatility increases the ex post manager s value while it decreases the ex ante manager s value an increase in degree of reversibility decreases the ex post manager s value while it increases the ex ante manager s value

real options agency conflicts and optimal capital structure abstract we examine the impact of a stockholder bondholder conflict over the timing of the exercise of an investment option on firm value and corporate financial policy we find that an equity maximizing firm exercises the option too early relative to a value maximizing strategy and we show how this problem can be characterized as one of overinvestment in risky investment projects equityholders incentive to overinvest significantly decreases firm value and optimal leverage and significantly increases the credit spread of risky debt numerical solutions illustrate how the agency cost of overinvestment and its effect on corporate financial policy vary with firm and project characteristics

ambiguity aversion in buyer seller relationships a contingent claims and social network explanation negotiations between buyers and sellers or suppliers of goods and services have become increasingly important due to the growing trend towards international purchasing outsourcing and global supply networks together with the high uncertainty associated with them this paper examines the effect of ambiguity aversion on price negotiations using multiple priors based real options with non extreme outcomes we study price negotiation between a buyer and seller in a dual contingent claims setting call option holding buyer vs put option holding seller to derive optimal agreement conditions under ambiguity with and without social network effects we find that while higher ambiguity aversion raises the threshold for commitment for the seller it has equivocal effects on the buyer s negotiation prospects in the absence of network control conversely when network position and relative bargaining power are accounted for we find the buyer s implicit price or negotiation threshold decreases or increases unequivocally with increasing aversion to ambiguity extending extant real options research on price negotiation to the case of ambiguity this set of results provides new insights into the role of ambiguity aversion and network structures in buyer seller relationships including how they influence the range of negotiation agreement between buyers and sellers the results also help assist managers in formulating robust buying selling strategies for bargaining under uncertainty by knowing their network positions and gathering background information or inferring the other party s ambiguity tolerance beforehand buyers and sellers can anticipate where the negotiation is heading in terms of price negotiation range and mutual agreement possibilities

real investment decisions under adjustment costs and asymmetric information abstract we study the cost of adjustment model of investment when there is asymmetry of information between owners the principal and managers the agent information asymmetry distorts the relationship between investment and the cost of capital for all agent types and a regime of inaction appears over a certain cost range in an observationally different way than when fixed adjustment costs or irreversibilities cause a similar phenomenon uncertainty in the form of an increase in the spread of agents types tends to reduce investment despite symmetric adjustment cost and perfect competition the model gives a new interpretation of tobin s q under asymmetric information explaining some results of the mergers and acquisition literature

measuring heterogeneous reservation prices for product bundles this paper develops a model for capturing continuous heterogeneity in the joint distribution of reservation prices for products and bundles our model is derived from utility theory and captures both within and among subject variability furthermore it provides dollarmetric reservation prices and individual level estimates that allow the firm to target customers and develop customized and nonlinear pricing policies our experiments show that regardless of whether the products are durables or nondurables the model captures heterogeneity and predicts well models that assume homogeneity perform poorly especially in predicting choice of the bundle furthermore the methodology is robust even when respondents evaluate few profiles self stated reservation prices do not have any informational content beyond that contained in the basic model the direct elicitation method appears to understate overstate the variation in reservation prices across consumers for low priced high priced products and bundles hence this method yields biased demand estimates and leads to suboptimal product line pricing policy the optimization results show that the product line pricing policy depends on the degree of heterogeneity in the reservation prices of the individual products and the bundle a uniformly high price strategy for all products and bundles is optimal when heterogeneity is high otherwise a hybrid strategy is optimal

incomplete contracts and privatization the paper offers a selective survey on the incomplete contracts approach to privatization furthermore a simple model of privatization to an owner manager is developed in which different allocations of ownership rights lead to different allocations of inside information about the firm which in turn affect allocative and productive efficiency in this model privatization is a commitment device of the government to credibly reward the manager for a successful cost reduction and to harden his budget constraint

investment under uncertainty with strategic debt service the presence of a well designed bankruptcy code is an important part of the nancialarchitecture in developed economies by allowing the creditors to seize the assets of theborrowers who fail to make contractual payments the code generates bene cial ex ante e ectson debt capacity and rm value by giving the borrowers options to renegotiate their debtobligations and seek bankruptcy protection the code increases the likelihood that borrowersmay avoid ine cient ex post liquidation as hart 1999 notes the code should balanceex ante rm value maximization with ex post e ciency the bankruptcy codes in di erentcountries weight this tradeo di erently and hence vary in terms of the distribution of rightsand powers between borrowers and lenders in this paper we provide an inter temporal framework to examine how the creditors liquidation rights and the distribution of ex post bargaining powers in uence the rm s in vestment and nancing decisions and a ect ex ante rm value we show that strongerequityholders bargaining power lowers debt capacity reduces rm value and discouragesgrowth option exercising our calibration suggests that the quantitative e ects of ex poststrategic renegotiation on ex ante rm value may be large our paper provides an attempt to integrate nancial architecture into the theory of in vestment growth option exercising by building on two strands of literature investment anddebt pricing we extend the real options approach to investment pioneered by mcdonaldand siegel 1986 and brennan and schwartz 1985 to allow for capital structure decisionsunder strategic debt service we also draw insights from corporate debt pricing capital struc ture literature which focuses on leverage and security pricing after investment has alreadybeen made merton 1974 black and cox 1976 and leland 1994 our paper bridgesthe gap between these two strands of literature by characterizing the optimal investment and nancing decisions and the option value of waiting in closed form we show that the inter action between nancing and investment decisions in the presence of strategic debt servicegenerates new insights and also quantitatively important e ects on ex ante rm value

corporate control and real investment in incomplete markets abstract in the standard real options approach to investment under uncertainty agents formulate optimal policies under the assumptions of risk neutrality or perfect capital markets however in most situations corporate executives face incomplete markets either because they receive compensation packages that restrict their portfolios or because cash flows from the firm s investment opportunities are not spanned by those of existing assets the present paper examines the impact of managerial risk aversion on investment decisions when the manager is exposed to idiosyncratic risk and faces the risk of a control challenge in the paper the investment policy selected by the manager reflects a trade off between his incentives to reduce risk and the need to ensure sufficient efficiency to prevent control challenges the analysis demonstrates that risk aversion induces the manager to speed up investment leading to a significant erosion of the value of the option to wait

optimal financial policy and firm valuation since the classic work of miller and modigliani 1961 laid down the principles for the valuation of firms under conditions of certainty some two decades ago academic interest in the problem of valuing the individual firm has waned yet in addition to the obvious importance of this problem for security analysts investors and acquirers of corporations the issue of firm valuation is fundamental to much of the theory of corporate finance what determines the risk of the firm how the rate of return required by investors may be inferred from capital market data the influence of financing policy on firm value and other issues of central concern to the theory of financial management this almost total neglect of firm valuation is attributable perhaps to the overwhelming influence of the research programme initiated by the development of the capital asset pricing model only three years after the publication of the above mentioned paper by miller and modigliani in its primary form the capital asset pricing model is a statement about the equilibrium rates of return on securities rather than about the equilibrium values of securities it is straightforward to transform the model into a statement about the dependence of current equilibrium values upon an exogenously specified distribution of end of period values however in this form the model is inherently unsatisfactory since it fails to take account of the fact that in reality the distribution of end of period firm values is not exogenously given but is determined as part of a subsequent capital market equilibrium attempts to iterate the single period capital asset pricing model over several periods in order to avoid the need to take the distribution future security values as exogenous have been unsuccessful for the most part since not being able to derive they have been forced to assume both the requisite normality of the distribution of subsequent security prices and the legitimacy of ignoring endogenously determined shifts in the individual investor s investment

venture capital staged financing and optimal funding policies under uncertainty abstract our paper presents a dynamic model of entrepreneurial venture financing under uncertainty based on option exercise games between an entrepreneur and a venture capitalist vc in particular we analyze the impact of multi staged financing and both economic and technological uncertainty on optimal contracting in the context of vc financing our novel approach combines compound option pricing with sequential non cooperative contracting allowing us to determine whether renegotiation will improve the probability of coming to an agreement and proceed with the venture it is shown that both sources of uncertainty positively impact the vc investor s optimal equity share specifically higher uncertainty leads to a larger stake in the venture and renegotiation may result in a dramatic shift of control rights in the venture preventing the venture from failure moreover given ventures with low volatility situations might occur where the vc investor loses his first mover advantage based on a comparative static analysis new testable hypotheses for further empirical studies are derived from the model

industrial districts old wine in new bottles harrison b 1992 industrial districts old wine in new bottles reg studies 26 469 483 according to the theory of industrial districts a new wave of economic growth is being led in a number of regions in europe north america and east asia by spatially concentrated networks of mostly small and medium sized enterprises often using flexible production technology and characterized by extensive local interfirm linkages does this amount to a re emergence of the dominance of what urban and regional economists call agglomeration economies over the well known pressures on business to spatially disperse its operations neoclassical economic theorizing from marshall to perroux provides one perspective on the contemporary industrial district phenomenon another is afforded by granovetter s more recent elaboration of the ideas of embedding under and over socialization confronting each of these theoretical approaches with the other leads me to conclude that the industrial district prototypes involv

bundling as an entry barrier in this paper we look at the case for bundling in an oligopolistic environment we show that bundling is a particularly effective entry deterrent strategy a company that has market power in two goods a and b can by bundling them together make it harder for a rival with only one of these goods to enter the market bundling allows an incumbent to credibly defend both products without having to price low in each the traditional explanation for bundling that economists have given is that it serves as an effective tool of price discrimination by a monopolist although price discrimination provides a reason to bundle the gains are small compared with the gains from the entry deterrent effect i introduction in this paper we look at the case for bundling in an oligopolistic environment we show that bundling is a particularly effective entry deterrent strategy a company that has market power in two goods a and b can by bundling them together make it harder for a rival with only one of these goods to enter the market bundling allows an incumbent to defend both products without having to price low in each while it is still possible to compete by offering a rival bundle a monopolist can significantly lower the potential profits of a one product entrant without having to engage in limit pricing prior to entry we also show that bundling continues to be an effective pricing tool even if entry deterrence fails or if there is already an existing one product rival a company with a monopoly in product a and a duopoly in product b makes higher profits by selling an a b bundle than by selling a and b independently leveraging market power from a into b and accepting some one product competition against the bundle is better than using the monopoly power in good a all by itself since bundling mitigates the impact of competition on the incumbent an entrant can expect the bundling strategy to persist even without any commitment the traditional explanation for bundling that economists have given is that it serves as an effective tool of price discrimination by a monopolist see stigler 1968 adams and yellen

bundling retail products models and analysis we consider the impact of bundling products on retail merchandising we consider two broad classes of retail products basic and fashion for these product classes we develop models to calculate the optimal bundle prices order quantities and profits under bundling we use this analysis to establish conditions and insights under which bundling is profitable our analysis confirms that bundling profitability depends on individual product demands bundling costs and the nature of the relationship between the demands of the products to be bundled we also provide detailed numerical examples

measuring the agency cost of debt we adapt a contingent claims model of the firm to reflect the incentive effects of the capital structure and thereby to measure the agency costs of debt an underlying model of the firm and the stochastic features of its product market are analyzed and an optimal operating policy is chosen we identify the change in operating policy created by leverage and value this change the model determines the value of the firm and its associated liabilities incorporating the agency consequences of debt the optimal capital structure for a firm is now widely regarded to be determined by a broad range of factors including a mix of tax effects the various agency problems associated with different securities and the various costs of issuing securities including the costs created by adverse selection while the existence of a theoretical optimum has been demonstrated in a variety of papers a less explored area has been the construction of detailed models that enable us to measure each of the relevant factors for a particular company and thereby to determine the actual optimal mix for that firm this gap in our understanding is particularly glaring in the case of agency costs in order to allow a careful modelling of strategic relations the parameters of most agency models are either so simplified that it is impossible to associate them with measurable parameters of a real world case or else the models simply abstract from certain critical factors such as a robust measure of price risk that must be incorporated into any real application for example although we now understand that sinking funds dividend restrictions and other bond covenants help to resolve the conflict of interest between bondholders and equity we do not yet have much in the way of models with which to determine the optimal parameters of these very covenants contingent claims models can provide a consistent framework for multiperiod valuation that properly accounts for risk but they usually abstract from the agency factors entering capital structure decisions when using a contingent claims model to value a firm s securities it is common to take the value of the firm itself as governed by an exogenously defined stochastic process the value of the firm s securities are then derived from this underlying value and as merton 1974 points out in his paper on the pricing of risky debt the modigliani miller theorem obtains so that the value of the firm is independent of the value and the type of debt in order to apply the contingent claims techniques to a setting in which agency problems are central some adaptation is necessary in this paper we

uncertainty irreversibility and the likelihood of entry an empirical assessment of the option to defer abstract recent work in the real options approach to investment has argued that firms face significant opportunity costs when entry costs are largely irreversible and these costs equal the value of an option to defer investment this study seeks to examine empirically these claims by investigating the interactive effects of uncertainty and irreversibility on the likelihood of entry into new business by diversified firms we investigate both industry and firm specific factors influencing the degree of investment irreversibility in general we find support for the notion that real option value affects the likelihood of entry

excessive risk taking and the maturity structure of debt abstract this paper analyses the effect of short term debt on equityholders risk taking decisions we show that if short term debt limits the expropriation of debtholders it also implies a lower leverage which prevents the firm from increasing tax shields we then examine the incentive of equityholders to increase the firm risk when debtholders hold the option to swap a perpetual coupon bond with short term debt we find that this option mitigates equityholders risk shifting incentives compared to standard short term debt this restructuring option deters debtholders expropriation it increases leverage and it reduces the loss in tax shields due to asset substitution

gender inequalities in regional development perrons d 1995 gender inequalities in regional development reg studies 29 465 476 gender inequality is a universal phenomenon but there are cross national and regional variations in its extent different degrees of gender inequality in employment in the european union are identified and explained in terms of a synthesis of ideas drawn from the literature on welfare regimes and regulation theory the structure and degree of involvement of women in paid employment also varies within and between regions and these regional variations in gender inequality require further explanation a number of approaches drawing on historical explanations gender contracts and forms and degrees of patriarchy are examined although these approaches reject the idea of economic determinism the evolution of the regional economic structures especially in relation to gender inequality in employment seems to play an important role recently there has been a widening of regional inequalities in the uk associated with the dev

the financial and operating performance of newly privatized firms an international empirical analysis this study compares the pre and postprivatization financial and operating performance of 61 companies from 18 countries and 32 industries that experience full or partial privatization through public share offerings during the period 1961 to 1990 our results document strong performance improvements achieved surprisingly without sacrificing employment security specifically after being privatized firms increase real sales become more profitable increase their capital investment spending improve their operating efficiency and increase their work forces furthermore these companies significantly lower their debt levels and increase dividend payout finally we document significant changes in the size and composition of corporate boards of directors after privatization the last fifteen years have witnessed a significant global shift away from state socialism towards entrepreneurial capitalism one of the most important and visible aspects of this trend has been the enthusiasm with which governments of all political persuasions have sold their state owned enterprises soes to private investors in hopes that the generally unsatisfactory economic performance of these firms can be improved by the discipline of private ownership this denationalization process given its current title of privatization by the conservative government of margaret thatcher in

productive efficiency in public and private firms abstract this paper compares the degree of x inefficiency which emerges as a consequence of the imposition of the optimal incentive contracts in public and private firms using a straightforward principal agent model with two possible states of the world it establishes the rather surprising result that in the good state of the world public ownership always results in a higher degree of productive efficiency

interactions between investment timing and management effort under asymmetric information costs and benefits of privatized firms abstract in this paper we examine the interactions between investment timing and management effort in the presence of asymmetric information between the owner and the manager where the manager has an informational advantage we find that investment timing is later under asymmetric information than under full information implying a decrease in the value of equity option however in order to minimize any distortion under underinvestment management effort is greater under asymmetric information than under full information we show that there are trade offs in the efficiencies of investment timing and management effort under asymmetric information these results fit well with the findings of past empirical studies concerning the costs and benefits of privatized firms

working in public and private firms abstract we develop a theoretical framework for comparing incentives labor productivity and the allocation of effort in public versus private enterprises we incorporate socializing an activity which yields utility for workers and affects a firm s output into a multitask model of work organization we establish the two following results first the optimal workers compensation policy displays a larger incentive intensity in the private firm than in the public firm second labor productivity in the private firm may be higher or lower than in the public firm both results fit well with the findings of empirical work

a more general theory of commodity bundling this paper extends the standard model of bundling as a price discrimination device to allow products to be substitutes and for products to be supplied by separate sellers whether integrated or separate firms have an incentive to introduce a bundling discount when demand for the bundle is elastic relative to demand for stand alone products product substitutability typically gives an integrated firm a greater incentive to offer a bundle discount relative to the model with additive preferences while substitutability is often the sole reason why separate sellers wish to offer inter firm discounts when separate sellers coordinate on an inter firm discount they can use the discount to overturn product substitutability and relax competition

bundling strategies when products are vertically differentiated and capacities are limited we consider a seller who owns two capacity constrained resources and markets two products components corresponding to these resources as well as a bundle comprising the two components in an environment where all customers agree that one of the two components is of higher quality than the other and that the bundle is of the highest quality we derive the seller s optimal bundling strategy we demonstrate that the optimal solution depends on the absolute and relative availabilities of the two resources as well as upon the extent of subadditivity of the quality of the products the possible strategies that can arise as equilibrium behavior include a pure components strategy a partial or full spectrum mixed bundling strategy and a pure bundling strategy where the latter strategy is optimal when capacities are unconstrained these conclusions are contrary to findings in the prior literature on bundling that demonstrated the unambiguous dominance of the full spectrum mixed bundling strategy thus our work expands the frontier of bundling to an environment with vertically differentiated components and limited resources we also explore how the bundling strategies change as we introduce an element of horizontal differentiation wherein different types of customers value the available components differently

on the investment uncertainty relationship in a real options model abstract it appears to be widely accepted in the real options literature that an increase in uncertainty should have an inhibiting effect on investment our article demonstrates that the notion of a negative uncertainty investment relationship is not always correct we show that in certain situations an increase in uncertainty can actually increase the probability of investing and thereby have a positive impact on investment

the effect of mean reversion on investment under uncertainty abstract mean reverting processes are appropriate for most real option investment models yet geometric brownian motion gbm processes are generally used for tractability hassett and metcalf j econom dyn control 19 1995 1471 1488 argue that using a gbm process is justified because mean reversion has two opposing effects it brings the investment trigger closer and also reduces the conditional volatility thereby lowering the likelihood of reaching the trigger and the overall effect on investment should be negligible for most reasonable parameter values this paper extends the hassett and metcalf model by incorporating a third factor the effect of mean reversion on systematic risk the main result is that mean reversion in general does have a significant impact on investment moreover this effect could be either positive or negative depending on various factors such as project duration cost of investing interest rate etc thus it is generally inappropriate to use the gbm process to approximate a mean reverting process

a probabilistic approach to pricing a bundle of products or services the authors propose a probabilistic approach to optimally price a bundle of products or services that maximizes seller s profits their focus is on situations in which consumer decision making is o

the effect of uncertainty on investment timing in a real options model abstract this paper examines the effect of uncertainty on investment timing in a canonical real options model we show that the critical value of a project that triggers the exercise of the investment option exhibits a u shaped pattern against the volatility of the project this is due to the two countervailing risk and return factors in effect we further show that such a u shaped pattern is inherited by the expected time to exercise the investment option thus for relatively safe projects greater uncertainty shortens the expected exercise time and thus enhances investment this is in sharp contrast to the negative investment uncertainty relationship commonly found in the extant literature finally we show that the positive investment uncertainty relationship is more likely for high growth projects than for low growth projects

on the asset substitution problem in their seminal paper modigliani and miller 11 12 demonstrate that if capital markets are perfect and investment policy is held constant the market value of the firm is independent of its financial decisions furthermore if capital markets are perfect stockholders have incentive to choose the investment policy which maximizes the market value of the firm see 6 motivated by this assumption the firm has been viewed as a black box namely as one homogeneous unit whose clear objective is to maximize its market value however in a growing body of recent literature see 1 2 7 9 13 and 14 researchers recognize that the firm in an imperfect capital market is a collection of groups whose interests can and do conflict jensen and meckling 9 study the roles of three important groups the owner manager the stockholders and the bondholders focusing on the potential costs resulting from divergence of interests among them they provide a theory of optimal capital structure in terms of reducing the costs of these conflicts

dollars and dreams a reduced middle class alternative explanations we decompose annual earnings into hours of work and hourly earnings and analyze male female differences in earnings inequality using canadian data our results indicate that the larger female inequality in earnings is due to a greater inequality in the

on pricing of multiple bundles of products and services this paper considers the pricing decision faced by a seller of bundles composed of a service and an associated product offered to customers on a subscription basis using a two part tariff scheme an optimal pricing policy that maximizes the profit of a firm is obtained using a dynamic programming approach and it is found that in the long run there is an optimal number of customers associated to each bundle due to managerial purposes two suboptimal fixed price policies are derived and compared to the optimal pricing policy the conditions under which it is profitable for the firm to expand its offer from one to two bundles is studied finally it is concluded that introducing a fee for subscribed customers to deter the switching from one bundle to the other increases the profitability of the firm

evaluation of firm s loss due to incomplete information in real investment decision abstract we investigate the effect of incomplete information in a model where a start up with a unique idea and technology pioneers a new market but will eventually be expelled from the market by a large firm s subsequent entry we evaluate the start up s loss due to incomplete information about the large firm s behavior we clarify conditions under which the start up needs more information about the large firm the proposed method of evaluating the loss due to incomplete information could also be applied to other real options models involving incomplete information

optimal bundling and pricing under a monopoly contrasting complements and substitutes from independently valued products we develop an analytical model of contingent valuations and address two questions of import to a monopolist i should a given pair of complements or substitutes be sold separately pure components together pure bundling or both mixed bundling and at what prices ii how do optimal bundling and pricing strategies for complements and substitutes differ from those for independently valued products we find that the combination of marginal cost levels and the degree of complementarity or substitutability determines which of the three bundling strategies is optimal complements and substitutes should typically be priced higher than independently valued products

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

finite project life and uncertainty effects on investment abstract this paper revisits the important result of the real options approach to investment under uncertainty which states that increased uncertainty raises the value of waiting and thus decelerates investment typically in this literature projects are assumed to be perpetual however in today s economy firms face a fast changing technology environment implying that investment projects are usually considered to have a finite life the present paper studies investment projects with finite project life and we find that in contrast with the existing theory investments may be accelerated by increased uncertainty it is shown that this particularly happens at low levels of uncertainty and when project life is short

optimal exercise of jointly held real options a nash bargaining approach with value diversion this paper provides a two stage decision framework in which two or more parties exercise a jointly held real option we show that a single party s timing decision is always socially efficient if it precedes bargaining on the terms of sharing however if the sharing rule is agreed before the exercise timing decision is made then socially optimal timing is attained only if there is a cash payment element in the division of surplus if the party that chooses the exercise timing can divert value from the project then the first best outcome may not be possible at all and the second best outcome may be implemented using a contract that is generally not optimal in the former cases our framework contributes to the understanding of a range of empirical regularities in corporate and entrepreneurial finance

mixed bundling of two independently valued goods this paper develops analytical results and insights for the mixed bundling problem of pricing a product line consisting of two component goods with valuations distributed uniformly and independently in 0 a1 and 0 a2 respectively with a1 a2 and a bundle of the two goods this setting has previously been considered analytically intractable by deriving component good prices as exact algebraic functions of the optimal bundle price i reduce the multiproduct pricing problem to a univariate nonlinear optimization problem in the bundle price when the two component goods are sufficiently asymmetric in valuations the optimal solution is partial mixed bundling one component good is not sold separately for which i derive exact conditions and optimal prices an exact analytical solution is also given for mixed bundling of two information goods component goods with zero marginal costs for the general case i derive a closed form approximation of the optimal bundle price pb 0 5724w1 0 5695w2

gaussian demand and commodity bundling in an important and widely cited essay adams and yellen 1976 examine the use of package selling as a price discrimination device they consider a monopolist producing two goods with constant unit costs and facing buyers with diverse tastes the marginal utility of a second unit of either good is assumed to be zero for all buyers the two goods are independent in demand for all buyers so that any buyer s reservation price for the first unit of either good is independent of the market price of the other thus the maximum amount any buyer would pay for a bundle consisting of one unit of each good is the sum of the two reservation prices and buyers are completely described by the values of those two prices 2 resale markets are assumed away in order to obtain comparative results for alternative pricing strategies the distribution of reservation prices in the adams yellen framework is assumed to be bivariate normal implications of gaussian demand are explored pure bundling is shown to operate by reducing buyer diversity thus facilitating the capture of consumers surplus it generally makes buyers worse off than unbundled sales it is more profitable if average reservation prices are high enough mixed bundling combines advantages of both pure bundling and unbundled sales and it is generally strictly more profitable than either bundling which treats goods symmetrically seems most attractive under symmetric reservation price distributions i am indebted to severin borenstein for superb research assistance to the ford motor company for research support through a grant to m i t and to the harvard economics department for housing me as a visiting scholar while most of this research was performed of course only i can be held responsible for this essay s shortcomings 1 the first clear recognition of this possibility seems to have been by stigler 1968 but also see burstein 1960 2 paroush and peles 1981 relax the assumption that consumers purchase at most one unit of each good but they consider only two types of buyers both with linear demand functions they retain the assumption that demands are independent for all buyers telser 1979 and phillips 1981 use different frameworks to analyze bundling policies spence 1980 explores the relation between bundling across commodities as here and bundling multiple units of the same

optimal bundling strategies under heavy tailed valuations we develop a framework for the optimal bundling problem of a multiproduct monopolist who provides goods to consumers with private valuations that are random draws from a distribution with heavy tails we show that in the vickrey auction setting the buyers prefer separate provision of the goods to any bundles we also provide a complete characterization of the optimal bundling strategies for a monopolist producer who provides goods for profit maximizing prices for products with low marginal costs the seller s optimal strategy is to provide goods separately when consumers valuations are heavy tailed and in a single bundle when valuations are thin tailed these conclusions are reversed for goods with high marginal costs for simplicity we use a specific class of independent and identically distributed random variables but our results can be generalized to include dependence skewness and the case of nonidentical one dimensional distributions

strategic entry in a triopoly market of firms with asymmetric cost structures abstract this paper examines the strategic investment timing decision in a triopoly market comprising firms with asymmetric cost structures we present three novel results first in the case where there are relatively small cost asymmetries between firms and a relatively small first mover advantage the firm with the lowest cost structure is not always the first investor in other cases the firm with the lowest cost structure is the first investor second an increase in volatility increases the possibility that a firm without the lowest cost structure is the first investor finally even in the three asymmetric firm model we show that the first investor threshold is larger in a triopoly than in a duopoly although it is smaller in a duopoly than in a monopoly

regulation asymmetric information and auditing this article analyzes a model of a regulated firm that is better informed about its cost function than is the regulator by auditing at a cost however the regulator is assumed to be able to observe the realized cost of the firm if the regulator finds that the firm had misrepresented its costs at the time at which prices were set he can order a refund to consumers in the optimal policy the regulator audits when the firm reports for pricing purposes that its costs will be high and orders a refund when the auditfinds that realized costs are lower than anticipated given the original report a separation result that obtains for an important case indicates that the initial pricing decision is independent of the auditing decision the auditing decision however depends on the price that was initially set the optimal auditing strategy is characterized and the nature of the welfare gains are identified the methodology used in the analysis involves the characterization of an equilibrium of a revelation game with an ex post observable

real options and preemption under incomplete information abstract this paper introduces incomplete information and preemption into an equilibrium model of firms facing real investment decisions the optimal investment strategy may lie anywhere between the zero npv trigger level and the optimal strategy of a monopolist depending on the distribution of competitors costs and the implied fear of preemption our model implies that the equity returns of firms which hold real options and are subject to preemption will contain jumps and positive skewness

devaluating projects and the investment uncertainty relationship abstract sarkar 2000 on the investment uncertainty relationship in a real options model journal of economic dynamics and control 24 219 225 analyzes the investment uncertainty relationship in a real options model demonstrating that the widely accepted conclusion that uncertainty harms investment can be reversed wong 2006 the effect of uncertainty on investment timing in a real options model journal of economic dynamics and control forthcoming confirms this point showing that more uncertainty can reduce the expected time to exercise the investment option this paper deals with such an issue and attempts to integrate both sarkar s and wong s analysis for risk neutral investors we show that uncertainty can favor investment only if projects devaluate over time this conclusion does not hold in a capm framework where we demonstrate that the relationship uncertainty investment can be positive a even when the investment threshold increases with uncertainty and b in the case of projects negatively correlated with the market portfolio

to bundle or not to bundle commodity bundling is studied in an environment where the dispersion of valuations unambiguously decreases when two or more goods are sold as a bundle only bundling is more likely to dominate separately selling the goods if marginal costs are low relative to the average valuation or if the distribution of valuations is very peaked around the mean

economic perspectives on privatization despite being one of the most fundamental issues in political economy the question of the appropriate boundary between public and private enterprise received relatively little attention in mainstream economic analysis until quite recently in the 1980s however programs of ownership reform were started in many developed and developing countries dramatic though some of these policies have been they are likely to be overshadowed in the 1990s by even greater privatization in the reforming socialist economies the opening sections of this paper are organized around three broad and interrelated questions how does ownership matter for the efficiency of enterprise performance what is the role for privatization in financing public debts and deficits what are the distributional and political implications of privatization finally we examine privatization in practice in three countries britain chile and poland

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

optimal product bundling with dependent valuations the price of independence abstract in this paper we investigate the tactical problem of pricing a bundle of products when the underlying valuations of the bundle components are dependent we use copula theory to model the joint density of reservation prices and provide analytical derivations for the prices under different bundling strategies and sharp bounds for the profit function we discover that when only the bundle is offered and the marginal costs are relatively small the seller is better off by bundling products that have a negative association between their valuations while the converse is true when the marginal costs are relatively high we also show that the net benefit of offering a full product line containing both the bundle and the components decreases for mild to strong associations between the component valuations compared to offering just the bundle finally we analyze how the typical literature assumption of independence of reservation prices impacts the seller s profitability when in fact the valuations are dependent and find that this gap in profitability which we call the price of independence can be arbitrarily large

the impacts of uncertainties in a real options model under incomplete information abstract this paper examines the impact with respect to the uncertainty of the underlying state variable profit uncertainty on the real options model in a situation of incomplete information profit uncertainty has not incorporated into the real options model under incomplete information in that the underlying state variable is not formulated as the stochastic process see e g bernardo a e chowdhry e b 2002 resources real options and corporate strategy journal of financial economics 63 211 234 we extend the model developed by bernardo and chowdhry to formulate the underlying state variable as the stochastic process we conclude that profit uncertainty has the same type of impact on the real options value and its triggers both under complete and incomplete information

dynamic and targeted bundle pricing of two independently valued products abstract bundling is when two or more products are offered as a single unit and at a price lower than the sum of the individual prices of the products we study a multi segment market in which a retailer aims to clear the inventory of an item by bundling it with a second product which is independently valued we investigate the question of how dynamic and segment specific bundle pricing impacts retailer s revenue we develop a revenue model that integrates the dynamic and segment specific aspects of the pricing decisions and present a computational study to analyze their revenue impact relative to a price promotion for the individual item only the computational results indicate that the bundle offers are most effective when the initial inventory of the item under consideration is high the results also demonstrate that dynamic pricing is beneficial when the initial inventory of the item is low an additional revenue improvement is observed when the price of the bundle is dynamically optimized in the computational study segment specific pricing is observed to have no direct impact on revenue when prices are static segment specific and dynamic pricing however can bring about substantial revenue improvements that are an increasing function of the initial inventory level of the item we consider the correlation in consumers valuations of the bundled products and show that dynamically priced and segment specific bundle offers yield a robust revenue performance mitigating the potentially revenue diminishing impact of positive correlation in consumers valuations of the products

dynamic investment and capital structure under manager shareholder conflict abstract this paper investigates the interactions between the investment and financing decisions of a firm under manager shareholder conflicts arising from asymmetric information in particular we extend the manager shareholder conflict problem in a real options model by incorporating debt financing we show that manager shareholder conflicts over investment policy increase not only the investment and default triggers but also coupon payments which lead to a decrease in the equity value moreover given the presence of manager shareholder conflicts debt financing increases investment and decreases total social welfare as a result there is a trade off between the efficiency of investment and total social welfare with debt financing these results fit well with the findings of previous empirical work in this area

asymmetric information and overinvestment in quality in a standard adverse selection world asymmetric information about product quality leads to quality deterioration in the market suppose that a higher investment level makes the realization of high quality more likely then if consumers observe the investment but not the realization of product quality before purchase they can infer the probability distribution of high and low quality that may be put on the market we uncover two effects that may lead the firm to overinvest in quality compared to a market with full information first an adverse selection effect according to which a sufficiently large investment can avoid adverse selection and second an efficiency effect according to which a larger investment reduces the probability of having in the market low quality products that are not socially valuable

profitability of product bundling using copulas to model the stochastic dependence of values this article establishes new general conditions for the profitability of product bundling a multiproduct monopolist generally achieves higher profit from mixed bundling than from separate selling if consumer values for two of its products are negatively dependent are independent or have sufficiently limited positive dependence the profitability of monopoly bundling also extends to situations where a multiproduct firm competes with a single product rival

top management compensation and capital structure the interrelationship between top management compensation and the design and mix of external claims issued by a firm is studied the optimal managerial compensation structures depend on not only the agency relationship between shareholders and management but also the conflicts of interests which arise in the other contracting relationships for which the firm serves as a nexus we analyze in detail the optimal management compensation for the cases when the external claims are 1 equity and risky debt and 2 equity and convertible debt in addition to the role of aligning managerial incentives with shareholder interests managerial compensation in a levered firm also serves as a precommitment device to minimize the agency costs of debt the optimal management compensation derived has low pay performance sensitivity with convertible debt instead of straight debt the corresponding optimal managerial compensation has high pay to performance sensitivity a negative relationship between pay performance sensitivity and leverage is derived our results provide a reconciliation of the puzzling evidence of jensen and murphy 1990 with agency theory other testable implications include 1 a relationship between the risk premium in corporate bond yields and top management compensation structures and 2 the announcement effect of adoption of executive stock option plans on bond prices the model yields implications for management compensation in banks and federal deposit insurance reform our results explain the dynamics of top management compensation in firms going through financial distress and reorganization

wage polarisation in the us and the flexibility debate the proportion of workers earning low wages in the american economy declined from 1963 through 1979 since 1979 both the low wage and the high wage shares of employment have increased leading to wage polarization analysis of current population survey data indicates that this occurred for both men and women for men this condition has been exacerbated by a secular stagnation in real median wages these empirical developments in the distribution of labor income are analyzed in detail and discussed in light of theoretical debates about employers attempts to increase labor flexibility under the pressure of declining profits copyright 1990 by oxford university press

strategic investment timing under asymmetric access charge regulation in telecommunications in a liberalized telecommunications market an incumbent has several advantages over any entrant an asymmetric access charge regulation for two such asymmetric firms stimulates competitive investment we show that an entrant with a cost disadvantage has an incentive to invest as a leader under an asymmetric access charge regulation these results fit well with the findings of previous empirical work moreover we also investigate the effects of an asymmetric access charge regulation on competitive investment strategies

multiproduct monopoly commodity bundling and correlation of values through what selling strategy can a multiproduct monopolist maximize his profits when his knowledge about individual consumers preferences is limited one possibility extensively studied in the context of a single good monopoly is to use quantity dependent pricing as a means of discriminating among customers with differing tastes see for example oi 1971 and maskin and riley 1984 an alternative technique for price discrimination first suggested by stigler 1968 and analyzed further by adams and yellen 1976 is for the monopolist to package two or more products in bundles rather than selling them separately through a series of examples adams and yellen illustrate that bundling can serve as a useful price discrimination device even when all consumers willingnesses to pay for each of the goods individually are unaffected by whether they are also consuming the other product a typical example is illustrated in figure i adapted from figure iv in adams and yellen where there are two goods three consumers ab c who consume at most one unit of each good with reservation values for each good that are independent of whether the other good is consumed and zero costs of production there a bundle offered at a price of 100 fully extracts all potential surplus which would be impossible pricing the goods independently unfortunately though these authors do not provide any general characterization of the circumstances in which bundling is actually a multiproduct monopolist s optimal strategy their examples however such as figure i create the impression that the profitable use of bundling

robust portfolio optimization with copulas abstract conditional value at risk cvar is widely used in portfolio optimization as a measure of risk cvar is clearly dependent on the underlying probability distribution of the portfolio we show how copulas can be introduced to any problem that involves distributions and how they can provide solutions for the modeling of the portfolio we use this to provide the copula formulation of the cvar of a portfolio given the critical dependence of cvar on the underlying distribution we use a robust framework to extend our approach to worst case cvar wcvar wcvar is achieved through the use of rival copulas these rival copulas have the advantage of exploiting a variety of dependence structures symmetric and not we compare our model against two other models gaussian cvar and worst case markowitz our empirical analysis shows that wcvar can asses the risk more adequately than the two competitive models during periods of crisis

investment timing asymmetric information and audit structure a real options framework abstract this paper examines investment timing by the manager in a decentralized firm in the presence of asymmetric information in particular we incorporate an audit technology in the agency model developed by grenadier and wang 2005 investment timing agency and information journal of financial economics 75 493 533 the implied investment trigger in the agency problem with auditing is larger than in the full information problem and smaller than in the agency problem without auditing nevertheless the audit technology does not necessarily reduce inefficiency in the total social welfare

privatization and efficiency differentiating ownership effects from political organizational and dynamic effects this paper argues that the private public ownership factor should be differentiated from other factors that also influence the effect of privatization on efficiency this is empirically confirmed in a longitudinal study of 24 spanish firms for which several political and organizational factors are found to influence the estimated effects of privatization on efficiency the analysis of the timing of the effects reveals a strong significance for post privatization years 5 6 negative and 7 8 positive this suggests that the negative effect of these factors is transitional being eventually offset by the positive effects of the change to private ownership 2000 elsevier science b v all rights reserved jel classification l33

interactions of corporate financing and investment decisions the effects of agency conflicts abstract we examine interactions between flexible financing and investment decisions in a model with stockholder bondholder conflicts over investment policy we find that financial flexibility encourages the choice of short term debt thereby dramatically reducing the agency costs of under and overinvestment however the reduction in agency costs may not encourage the firm to increase leverage since the firm s initial debt level choice depends on the type of growth options in its investment opportunity set the model has a number of testable predictions for the joint choice of leverage and maturity and how these choices interact with a firm s growth opportunities

default and liquidation timing under asymmetric information abstract we consider a dynamic model in which shareholders delegate the running of a firm to a manager who observes private information about the firm s running and liquidation costs we analytically derive the optimal compensation scheme contingent on the firm s cost structure information asymmetries can change the high cost firm s bankruptcy choice and timing most notably even if the liquidation value is higher than the face value of debt the high cost firm can choose default rather than liquidation to reduce the manager s information rent this can lead to the counterintuitive result that the debt value increases beyond the face value as the firm approaches default and that it jumps upward at the default time information asymmetries accelerate negative liquidation and delay positive liquidation whereas they accelerate default the optimal leverage ratio of the asymmetric information case becomes higher than that of the symmetric information case because more debt mitigates the loss due to information asymmetries our results can potentially account for many empirical findings

real options in strategic investment games between two asymmetric firms abstract this paper examines strategic investment games between two firms that compete for optimal entry in a project that generates uncertain revenue flows under asymmetry on both the sunk cost of investment and revenue flows of the two competing firms we investigate the value of real investment options and strategic interaction of investment decisions compared to earlier models that only allow for asymmetry on sunk cost our model demonstrates a richer set of strategic interactions of entry decisions we provide a complete characterization of pre emptive dominant and simultaneous equilibriums by analyzing the relative value of leader s and follower s optimal investment thresholds in a duopoly market with negative externalities a firm may reduce loss of real options value by selecting appropriate pre emptive entry when one firm has a dominant advantage over its competitor both the dominant firm and dominated firm enter at their respective leader s and follower s optimal thresholds when the pre emptive thresholds of both firms happen to coincide the two firms enter simultaneously under positive externalities firms do not compete to lead

the impact of cash flows and firm size on investment the international evidence abstract this paper examines the degree to which cash flow availability influences firm investment in six oecd countries in particular we are interested in the extent to which the reliance on internal funds is affected by firm size since there is general agreement that smaller firms have less access to external capital markets and thus should be more affected by the availability of internal funds earlier work has concluded that the documented positive relationship between cash flow and investment is evidence of the existence of financial constraints we first examine all firms regardless of size in each country and we find that the amount of corporate investment is affected by internal resources in all six countries that is internal financing affects firm investment we then repeat the analysis segmenting the sample using three measures of firm size contrary to our a priori expectations we find that the cash flow investment sensitivity is generally highest in the large firm size group and smallest in the small firm size group we deduce that the explanations for these findings are grounded in managerial agency considerations and in the greater flexibility enjoyed by large firms in timing their investments thus we conclude that the degree of sensitivity of a firm s investments to its cash flows cannot be interpreted as an accurate measure of its access to capital markets as do kaplan s zingales l 1997 the quarterly journal of economics 169 215 since small firms are known to have less access to external markets