cost uncertainty and the rate of investment abstract this paper examines the effect of cost and price uncertainty on the optimal rate of investment by firms within a general equilibrium framework former works which have studied this issue like hartman 1972 and abel 1983 1984 1985 have come to the conclusion that this effect is positive since increased price uncertainty raises expected profitability but these studies assume a fixed discount rate which is equivalent to assuming that consumers are risk neutral this paper shows that if consumers are risk averse the effect of uncertainty may be reversed and investment may be depressed when price or cost uncertainty is increased

cores of inventory centralization games abstract consider a set of n stores with single item and single period demands assume an option of centralized ordering and inventory with holding and penalty costs only in this case a cooperative inventory centralization game defines allocations of the cost we examine the conditions under which such an inventory centralization game has a nonempty core we prove the existence of nonempty core for demands with symmetric distributions and the existence of nonempty core for joint multivariate normal demand distribution we establish the equivalency of four different nonempty core conditions for the newsboy problem and demonstrate their efficacy for discrete independent and identically distributed iid demands journal of economic literature classification numbers c44 c62 c71

the causes of preference reversal observed preference reversal cannot be adequately explained by violations of independence the reduction axiom or transitivity the primary cause of preference reversal is the failure of procedure invariance especially the overpricing of low probability high payoff bets this result violates regret theory and generalized nonindependent utility models preference reversal and a new reversal involving time preferences are explained by scale compatibility which implies that payoffs are weighted more heavily in pricing than in choice copyright 1990 by american economic association

collaborative replenishment in the presence of intermediaries in complex supply chains downstream buyers would often replenish individually from intermediaries instead of directly dealing with original manufacturers although collaborative replenishment from intermediaries might generate benefits significant cost reductions could be achieved when direct replenishments from manufacturers are considered this paper constructs a general model to study collaborative replenishment in multi product chains with alternative sources of supply i e manufacturers and intermediaries a collaborative organization determines the optimal choices of replenishment sources on behalf of its members to minimize collective costs we introduce a class of cooperative games associated with these situations and give sufficient conditions for their concavity we investigate the choice of allocation rule and its effect on supply chain efficiency when buyers strategically participate in the collaborative organization we prove that the shapley value coordinates the supply chain i e it makes complete participation the best strategy for buyers even under asymmetric information this setting is compared with an alternative structure where buyers can only collaborate in source specific replenishment organizations that purchase all requested products either from intermediaries or manufacturers although there are always participation strategies that result in minimum collective cost it is impossible to find allocation rules for source specific replenishment organizations that always motivate the buyers to choose such strategies

a note on competitive investment under uncertainty uncertainty over future output prices or input costs can affect investment by a riskneutral firm in two opposing ways first it can increase the value of the marginal unit of capital which leads to more investment this only requires that the stream of future profits generated by the marginal unit be a convex function of the stochastic variable by jensen s inequality the expected present value of that stream is increased this result was demonstrated by richard hartman 1972 and later extended by andrew abel 1983 and others in their models constant returns to scale and the substitutability of capital with other factors ensure that the marginal profitability of capital is convex in output price and input costs even with fixed proportions however this convexity can result from the ability of the firm to vary output so that the marginal unit of capital need not be utilized at times when the output price is low or input costs are high if investment is irreversible and can be postponed a second effect of uncertainty is to create an opportunity cost of investing now rather than waiting for new information to arrive before committing resources this increases the full cost of investing in a marginal unit of capital which reduces investment 2 hence the net effect of uncertainty on irreversible investment depends on the size of this opportunity cost relative to the increase in the value of the marginal unit of capital the sign of the net effect is significant because of its possible policy implications pindyck 1988 and giuseppe bertola 1989 developed models in which a firm faces a downward sloping demand curve and found the net effect to be negative ricardo caballero 1991 has recently studied investment by an individual firm facing a stochastically shifting demand curve he shows that as returns to scale become constant and the elasticity of demand faced by the firm rises this opportunity cost of investing now rather than waiting approaches zero thus in the limit of constant returns and an infinitely elastic demand curve an increase in uncertainty tends to raise rather than decrease current investment even if that investment is irreversible it is important to stress that caballero s limiting result treats the firm in isolation and describes the effect of a meanpreserving increase in price uncertainty and not an increase in industry wide demand uncertainty this note shows that in a competitive market the key interactions between irreversibility and uncertainty occur at the industry level and can only be understood by making price and industry output endogenous 3 doing so restores the positive opportunity cost associated with irreversible investment in addition caballero s result is based on a model with convex adjustment costs an innovative aspect of the model is that these costs can be asymmetric thereby allowing for partial or complete irreversibility complete irreversibility corresponds to a cost of massachusetts institute of technology cambridge ma 02139 this work was supported by the national science foundation under grant no ses 8618502 and by mit s center for energy policy research my thanks to julio rotemberg and especially ricardo caballero for very helpful comments and discussions 1then the marginal profit of capital at each time t in the future is max o pt ct where ct is variable cost thus a unit of capital represents a set of all options on future production which are worth more the greater the variance of pt or ct 2for a detailed discussion of this point and a survey of the recent literature on irreversibility and its implications for investment and market evolution see pindyck 1991 3studies that make price endogenous include steven lippman and richard rumelt 1985 avinash dixit 1989 1991 and john leahy 1990

monetary policy synchronization in the asean 5 region an exchange rate perspective in light of the long standing vision of economic and monetary integration in the asean association of southeast asian nations region and the importance of coordinating monetary policies to achieve it the objective of this article is to assess the monetary policy synchronization among the founding members of the asean that is indonesia malaysia the philippines singapore and thailand due to the importance of exchange rate movements to monetary policies we approach this issue from a currency exchange rate perspective specifically multivariate trend cycle decomposition is employed to investigate common trends and common cycles among the exchange rates of these countries during the period 1976 2012 our analysis reveals that the real exchange rates of malaysia the philippines singapore and thailand share common cycles in the short term and have common trends in the long term but the indonesian currency does not share these relationships thus our results augur well for the synchronization of mo

the newsvendor game has a nonempty core we settle an open conjecture regarding the newsvendor game we prove that its core is always non empty for all possible joint distributions of the random demands we give sufficient conditions under which the core is a singleton or it contains non negative elements

the cost allocation issue in joint replenishment abstract joint replenishment for several products to achieve a lower inventory logistics cost has been a topic of extensive studies less attention has been paid to the issue of deciding how the joint replenishment costs should be allocated across the individual products ideally when items are ordered together one would require a stable cost allocation such that no subset of products subsidizes another subset when part of each product s ordering cost is product specific and part can be shared with other products like in a 3pl setting of anily and haviv it has been shown that even when a stable allocation exists such an allocation might be difficult to compute in addition usually the components of ordering costs are partially determined using estimates and accounting discretion this paper provides two main insights for determining an appropriate cost allocation it provides the means to test how sensitive a stable cost allocation is to a range of cost parameter values then in a computational study it is shown how to obtain a stable cost allocation without excessive computation

permanent and transitory oil volatility and aggregate investment in malaysia abstract this paper investigates the relation between aggregate investment and oil volatility and its permanent and transitory components for a developing country malaysia in the paper the components generalized autoregressive conditional heteroskedasticity cgarch model is utilized to decompose conditional oil volatility into permanent oil volatility and transitory oil volatility respectively reflecting fundamental driven and random shifts in oil volatility they are expected to exert differential effects on aggregate investment adopting a vector autoregression var framework to allow feedback effects between aggregate investment and its determinants the paper documents evidence supporting the adverse effects of conditional oil volatility permanent oil volatility and transitory oil volatility on aggregate investment and real output interestingly contrary to the findings for the developed markets us and oecd the real effects of permanent oil volatility tend to be stronger these findings are reasonably robust to variable specification and measurements in the var system hence there is an indication that heightened oil volatility accounts for the slumps in malaysia s aggregate investment after the asian financial crisis

buyers pricing behavior for risky alternatives encoding processes and preference reversals numerous studies have examined individuals minimum selling prices or certainty equivalents for lotteries as measures of preference but few have examined maximum buying prices because every transaction involves a buyer as well as a seller buyers pricing behavior is of interest in its own right two prospect theory based descriptive models of maximum buying prices the integration and segregation models are developed from different assumptions about cognitive encoding processes the models were tested experimentally using an incentive compatible cash payoff scheme in which maximum buying prices for bets and choices between bets were elicited from subjects surprisingly observed maximum buying prices were far below expected values even for bets with probabilities of winning near 1 0 this suggests buyers are strongly influenced by loss aversion and that the conventional assumption that the buying price for a risky alternative is a reduction in the alternative s payoffs fails to describe behavior instead it appears subjects predominately employed a segregation encoding process in which the buying price was encoded separately from the bet s payoffs and treated as a sure loss however an additional result was not explained adequately by either encoding model buying prices were less risk averse than choices for 3 expected value bets creating preference reversals of the standard kind lichtenstein and slovic 1971 but more risk averse for 100 expected value bets creating reverse preference reversals casey 1991 implications for the scale compatibility principle tversky et al 1988 are discussed two theoretical approaches are outlined which offer promise in the development of a unified model of price judgments and choice preferences under risk

stochastic linear programming games with concave preferences abstract we study stochastic linear programming games a class of stochastic cooperative games whose payoffs under any realization of uncertainty are determined by a specially structured linear program these games can model a variety of settings including inventory centralization and cooperative network fortification we focus on the core of these games under an allocation scheme that determines how payoffs are distributed before the uncertainty is realized and allows for arbitrarily different distributions for each realization of the uncertainty assuming that each player s preferences over random payoffs are represented by a concave monetary utility functional we prove that these games have a nonempty core furthermore by establishing a connection between stochastic linear programming games linear programming games and linear semi infinite programming games we show that an allocation in the core can be computed efficiently under some circumstances

distributed consensus in noncooperative inventory games this paper deals with repeated nonsymmetric congestion games in which the players cannot observe their payoffs at each stage examples of applications come from sharing facilities by multiple users we show that these games present a unique pareto optimal nash equilibrium that dominates all other nash equilibria and consequently it is also the social optimum among all equilibria as it minimizes the sum of all the players costs we assume that the players adopt a best response strategy at each stage they construct their belief concerning others probable behavior and then simultaneously make a decision by optimizing their payoff based on their beliefs within this context we provide a consensus protocol that allows the convergence of the players strategies to the pareto optimal nash equilibrium the protocol allows each player to construct its belief by exchanging only some aggregate but sufficient information with a restricted number of neighbor players such a networked information structure has the advantages of being scalable to systems with a large number of players and of reducing each player s data exposure to the competitors

the driving forces of the level and the growth rate of real per capita income in indonesia we investigate the driving forces behind the level and the growth rate in real per capita gross domestic product gdp in indonesia the ultimate reasons and the proximate causes underlying indones

panel data evidence of the impact of exchange rate uncertainty on private investment in south east asia this article examines the impact of real exchange rate uncertainty on the private investment in south east asia using panel data from four countries of the region namely indonesia malaysia the philippines and thailand annual time series data from 1972 to 2001 is used before carrying out the estimation the time series properties of the data are diagnosed and an error correction model is developed and estimated the model is estimated using both the fixed effects and the random effects estimators the estimated results from both the estimations suggest that the real exchange rate uncertainty had a negative effect on the private investment in that region

cooperation in service systems we consider a number of servers that may improve the efficiency of the system by pooling their service capacities to serve the union of the individual streams of customers this economies of scope phenomenon is due to the reduction in the steady state mean total number of customers in the system the question we pose is how the servers should split among themselves the cost of the pooled system when the individual incoming streams of customers form poisson processes and individual service times are exponential we define a transferable utility cooperative game in which the cost of a coalition is the mean number of customers or jobs in the pooled system we show that despite the characteristic function is neither monotone nor concave the game and its subgames possess nonempty cores in other words for any subset of servers there exist cost sharing allocations under which no partial subset can take advantage by breaking away and forming a separate coalition we give an explicit expression for all infinitely many nonnegative core cost allocations of this game finally we show that except for the case where all individual servers have the same cost there exist infinitely many core allocations with negative entries and we show how to construct a convex subset of the core where at least one server is being paid to join the grand coalition

the cost allocation problem for the first order interaction joint replenishment model we consider an infinite horizon deterministic joint replenishment problem with first order interaction under this model the setup transportation reorder cost associated with a group of retailers placing an order at the same time equals some group independent major setup cost plus retailer dependent minor setup costs in addition each retailer is associated with a retailer dependent holding cost rate the structure of optimal replenishment policies is not known thus research has focused on optimal power of two pot policies following this convention we consider the cost allocation problem of an optimal pot policy among the various retailers for this sake we define a characteristic function that assigns to any subset of retailers the average time total cost of an optimal pot policy for replenishing the retailers in the subset under the assumption that these are the only existing retailers we show that the resulting transferable utility cooperative game with this characteristic function is concave in particular it is a totally balanced game namely this game and any of its subgames have nonempty core sets finally we give an example for a core allocation and prove that there are infinitely many core allocations

inventory centralization games with price dependent demand and quantity discount consider a distribution system consisting of a set of retailers facing a single period price dependent demand of a single product by taking advantage of the risk pooling effect and the quantity volume discount provided by suppliers or third party carriers the retailers may place joint orders and keep inventory at central warehouses before demand realization and allocate inventory among themselves after demand realization to reduce their operating costs under rather general assumptions we prove that there is a stable allocation of profits among the retailers in the sense that the resulting inventory centralization game has a nonempty core we also show how to compute an allocation in the core

ssb and weighted linear utility as expected utility with suspicion we show that a suspicious subjective expected utility seu maximizer i e one who treats potential consequences of states as information useful in assessing the probability of those states may under reasonable circumstances act as though he were maximizing either weighted linear utility or skew symmetric bilinear ssb utility seu with suspicion therefore explains at least as many empirical violations of seu theory as do these and similar models we give examples to illustrate how several important types of seu violations may seem to arise when suspicion is present

prospect theory mental accounting and differences in aggregated and segregated evaluation of lottery portfolios if individuals have to evaluate a sequence of lotteries their judgment is influenced by the presentation mode experimental studies have found significantly higher acceptance rates for a sequence of lotteries if the overall distribution was displayed instead of the set of lotteries itself mental accounting and loss aversion provide an easy and intuitive explanation for this phenomenon in this paper we offer an explanation that incorporates further evaluation concepts of prospect theory our formal analysis of the difference in aggregated and segregated portfolio evaluation demonstrates that the higher attractiveness of the aggregated presentation mode is not a general phenomenon as suggested in the literature but depends on specific parameters of the lotteries the theoretical findings are supported by an experimental study in contrast to the existing evidence and in line with our theoretical results we find for specific types of lotteries an even lower acceptance rate if the overall distribution is displayed

investment in new activities and the welfare cost of uncertainty abstract recent literature has shown that trade distortions are associated with first order costs stemming from the induced drop in the formation of new activities we demonstrate that uncertainty may induce similar welfare costs and that these costs apply also to a closed economy this argument is illustrated in romer s model of a dependent economy where foreign direct investment is needed to enable the importation of capital goods and intermediate products used in domestic production we show that knightian uncertainty inhibits the formation of new activities leading to first order losses whereas risk aversion alone leads to second order losses

stability and monotonicity in newsvendor situations this study considers a supply chain that consists of n retailers each of them facing a newsvendor problem and a supplier groups of retailers might increase their expected joint profit by joint ordering and inventory centralization however we assume that the retailers impose some level of stock that should be dedicated to them in this situation we show that the associated cooperative game has a non empty core afterwards we concentrate on a dynamic situation where several model cost parameters and the retailers dedicated stock levels can change we investigate how the profit division might be affected by these changes we focus on four monotonicity properties we identify several classes of games with retailers where some of the monotonicity properties hold moreover we show that pairs of cooperative games associated with newsvendor situations do not necessarily satisfy these properties in general when changes in dedicated stock levels are in concern

pooling of spare parts between multiple users how to share the benefits companies that maintain capital goods e g airplanes or power plants often face high costs both for holding spare parts and due to downtime of their technical systems these costs can be reduced by pooling common spare parts between multiple companies in the same region but managers may be unsure about how to share the resulting costs or benefits in a fair way that avoids free riders to tackle this problem we study several players each facing a poisson demand process for an expensive low usage item they share a stock point that is controlled by a continuous review base stock policy with full backordering under an optimal base stock level costs consist of penalty costs for backorders and holding costs for on hand stock we propose to allocate the total costs proportional to players demand rates our key result is that this cost allocation rule satisfies many appealing properties it makes all separate participants and subgroups of participants better off it stimulates growth of the pool it can be easily implemented in practice and it induces players to reveal their private information truthfully to obtain these game theoretical results we exploit novel structural properties of the cost function in our s 1 s inventory model

capacity allocation and scheduling in supply chains we consider a multiple product supply chain where a manufacturer receives orders from several distributors if the orders cannot all be met from available production capacity then the manufacturer allocates that capacity and a set of resubmittable orders among the distributors the distributors may share their allocated capacity among themselves before submitting revised orders finally the manufacturer schedules the revised orders to minimize its cost we consider three practical coordination issues first we estimate the benefit to the manufacturer from considering scheduling costs and constraints in making capacity and order allocation decisions second we estimate the additional profit that the distributors achieve when they share their allocated capacity third we estimate the value of coordination between the manufacturer and the distributors our work is among the first to consider all three issues simultaneously we model scheduling costs and constraints within the manufacturer s capacity allocation problem we model the distributors capacity sharing problem as a cooperative game that has properties that are unique within cooperative game theory finally we develop optimal algorithms for all the models defined by the three coordination issues our exact evaluation of decisions about the appropriate coordination level improves managers ability to make those decisions

real options delay vs pre emption do industrial characteristics matter this paper presents an empirical study of the channels of influence from uncertainty to fixed investment suggested by real options theory using panel data from the confederation of british industry cbi industrial trends survey we report ols estimates of the impact of uncertainty on investment where the regressors are augmented by cross sectional averages of the dependent variable and of the individual specific regressors as recently suggested by pesaran pesaran m h 2006 estimation and inference in large heterogeneous panels with a multifactor error structure econometrica 74 967 1012 the cross industry pattern of results is checked for consistency with the pattern predicted by real options theory using a specially constructed data set of industrial characteristics we find that irreversibility is able to predict the pattern detected but only when combined with a measure of the information advantage of delay there is also evidence for expansion options effects industries with high r d and advertising intensities tend to have positive uncertainty effects

industry wide versus firm specific uncertainty and investment british company panel data evidence this paper presents evidence on the prediction that the impacts of firm specific and industry wide uncertainty on investment will be different results show that these work in opposing directions and that the effect of industry specific uncertainty is stronger in concentrated industries

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

large newsvendor games we consider a game called newsvendor game where several retailers who face a random demand can pool their resources and build a centralized inventory that stocks a single item on their behalf profits have to be allocated in a way that is advantageous to all the retailers a game in characteristic form is obtained by assigning to each coalition its optimal expected profit we consider newsvendor games with possibly an infinite number of newsvendors we prove in great generality results about balancedness of the game and we show that in a game with a continuum of players under a nonatomic condition on the demand the core is a singleton for a particular class of demands we show how the core shrinks to a singleton when the number of players increases

modeling cooperation on a class of distribution problems in this paper we study models of cooperation between the nodes of a network that represents a distribution problem the distribution problem we propose arises when over a graph a group of nodes offers certain commodity some other nodes require it and a third group of nodes neither need this material nor offer it but they are strategically relevant to the distribution plan the delivery of one unit of material to a demand node generates a fixed profit and the shipping of the material through the arcs has an associated cost we show that in such a framework cooperation is beneficial for the different parties we prove that the cooperative situation arising from this distribution problem is totally balanced by finding a set of stable allocations in the core of an associated cooperative game in order to overcome certain fairness problems of these solutions we introduce two new solution concepts and study their properties

the impact of exchange rate uncertainty on the level of investment conventional wisdom has it that increasing price or exchange rate uncertainty will depress investment using the dixit pindyck model we find that there are situations where this will happen and situations where it does not there are threshold effects which allows us to identify when rising volatility would increase or decrease investment and also to identify which types of industries would gain and which would suffer from a move to fixed exchange rates this is important for monetary union in europe since it is likely that even if trade is insensitive to exchange rate volatility investment with its longer horizon will be affected textbook theories of investment under uncertainty present a rather oversimplified rule for a firm deciding whether to invest or not if the project s expected net present value npv is positive the firm invests otherwise it does not this implies that if the investment is reversible the firm will simply disinvest if the npv turns negative but if investment is irreversible then if a firm decides not to invest it will never invest this is not a realistic approach given uncertainty firms often find it convenient to wait rather than to commit themselves one way or another waiting is therefore a proper alternative to investing or not investing and firms will be confronted with an invest wait do not invest decision rather than an invest do not invest one dixit and pindyck 1994 have developed a model in which the option value of an investment project is evaluated to represent the value of waiting that option value then becomes part of the investment costs because once an irreversible investment is made the possibility of exercising this option to invest later on when better information is available has been lost thus the decision rule is still invest if npv 0 otherwise do not invest but the npv now represents the present value of the expected revenues less the value of the option to invest later less the present value of any other investment costs in this paper we extend the dixit pindyck model for varying degrees of uncertainty and price drift and specifically for the case where that uncertainty is caused by exchange rate volatility such an extension is important not only because it is a new development but also because we need to understand how monetary union will affect investment expenditures in europe for simplicity we assume the domestic prices are fixed and that the only uncertainty is in the exchange rate and hence the domestic value of foreign currency revenues that leaves us with various problems the first is to determine the threshold at which exchange rate price uncertainty is sufficient to affect investment adversely second under what conditions does that uncertainty actually reduce investment third do exchange rate misalignments or exchange rate volatility damage investment more we show that answers to such questions can be c55

investment in risky r d programs in the face of climate uncertainty we analyze how the socially optimal technology rd and that uncertainty in damages interacts with uncertainty in the returns to rd and r d that reduces the emissions to output ratio and argue that this is a good representation of r d into fossil fuel technologies for r d programs into non carbon technologies optimal investment is higher in riskier programs our empirical model indicates that the optimal investment in a risky program is about 3 1 2 times larger than in a program with certain returns for r d programs aimed at reducing emissions in fossil fuel based technologies our results show that qualitatively investment is higher in less risky programs under most uncertain damage scenarios our empirical model shows however that the risk profile of fossil fuel based r d programs generally has little quantitative impact on optimal investment the exception is that when the probability of a catastrophe inducing full abatement is very high investment is about twice as high in risky programs compared to programs with certain returns

predicting buyer seller pricing disparities numerous studies have shown that compensation demanded cd to give up a commodity often greatly exceeds willingness to pay wtp to obtain the same commodity even in incentive compatible experiments that penalize strategic misrepresentation observed cd wtp disparities are too large to be reconciled with traditional assumptions of economic rationality a prospect theory based behavioral framework for predicting cd and wtp is proposed which produces five distinct transaction encoding rules any one of which can in principle apply to a buyer or a seller according to this framework cd wtp gaps occur when buyers and sellers encode the prospective transaction differently and gaps can occur in multiple ways and vary in size depending on encoding the transaction encoding framework was tested in two experiments in experiment 1 model fits to subjects cd and wtp for lottery tickets were consistent with the hypothesis that buyers and sellers encode transaction problems differently moreover the quite large observed cd wtp gaps were explained fully by encoding when differences between buyers and sellers encoding processes were taken into account their estimated utility value and probability weighting functions did not differ the present framework and results show that the widely cited endowment effect is but one of several ways in which loss aversion can give rise to cd wtp gaps consistent with this broadened perspective experiment 2 demonstrated cd wtp gaps in the absence of an endowment effect and in the absence of rational economic causes the transaction encoding framework 1 provides a structured approach for predicting and testing the effects of a variety of task factors on pricing behavior and transaction outcomes and 2 reveals the useful property that in many cases the ratio cd wtp can be interpreted as a direct measure of the degree of loss aversion

on the sign of the investment uncertainty relationship understanding the effects of uncertainty over any decision variable has fascinated economists for a long time risk aversion and incomplete markets are likely to make the investment uncertainty relationship negative e g roger craine 1989 joseph zeira 1989 what happens in the absence of risk aversion and incomplete markets is however ambiguous richard hartman 1972 and andrew b abel 1983 1984 1985 found that in the presence of symmetric convex costs of adjustment mean preserving increases in price uncertainty raise investment of a competitive firm as long as the profit function is convex in prices on the other hand the recent literature on irreversible investment e g robert s pindyck 1988 giuseppe bertola 1988 has shown that increases in uncertainty lower investment all these results have been derived under either risk neutrality or complete markets intuition suggests that the explanation for such a difference lies with the asymmetric nature of adjustment costs in the irreversible investment case as compared with the symmetry of the adjustment cost mechanisms proposed by abel and hartman although this intuition is confirmed in this paper asymmetric adjustment costs are shown not to be sufficient to explain why the results differ in fact a more hidden but at least as important difference between these two literatures is that the former assumes perfect competition and constant returns to scale whereas the latter assumes either imperfect competition or decreasing returns to scale or both 2 the purpose of this paper is to highlight the role of the decreasing marginal return to capital assumption due to either imperfect competition or decreasing returns to scale or both in determining the effects of adjustment cost asymmetries on the sign of the response of investment to changes in uncertainty under risk neutrality for this the paper develops a simple model with a cost of adjustment mechanism general enough to consider both symmetric convexity and irreversibility as special cases one of the most important findings is the lack of robustness of the negative relationship between investment and uncertainty under asymmetric adjustment costs3 to changes in the degree of competition in fact when firms are nearly competitive the conclusion of hartman and of abel holds no matter how asymmetric adjustment costs are studying adjustment cost mechanisms has a central role in understanding the dynamics of investment and its business cycle implications but conclusive results about the sign of the instantaneous relationship between uncertainty and investment should not be department of economics columbia university new york ny 10027 i am grateful to giuseppe bertola prajit dutta glen hubbard anil kashyap richard lyons and the referees for their useful comments 1the financial literature on investment has considered risk aversion through a premium in the discount rate determined by the capm capital asset pricing model intertemporal capm or consumption capm however often this discount rate is left unchanged when studying the response of investment to uncertainty changes e g pindyck 1988 pp 974 5 thereby omitting the effect of changes in uncertainty on investment due to risk aversion and incomplete markets 2in the typical version of the irreversible investment problem there is no cost of upward adjustments thus imperfect competition and or decreasing returns to scale are required to bound the size of the firm 3in this paper asymmetric adjustment cost refers to the case in which it is more expensive to adjust downward than upward certainly the opposite case is a trivial extension of the case studied in this paper

cooperation between multiple news vendors with transshipments we study a situation with n retailers each of them facing a news vendor problem i e selling to customers over a finite period of time product with a short life cycle such as fashion groups of retailers might improve their expected joint profit by coordinating their orders followed by transshipments after demand realization is known we analyze these situations by defining a cooperative game called a general news vendor game for such a situation with n retailers we concentrate on whether it makes sense to cooperate by studying properties of general news vendor games our main result states that general news vendor games have non empty cores

exchange rate uncertainty and the level of investment in selected south east asian countries the effect of real exchange rate uncertainty on aggregate private investment in indonesia malaysia the philippines and thailand is examined using time series data from 1972 2000 since the use of non stationary time series data may produce spurious results the data series are tested for stationarity using the augmented dickey fuller and phillips perron tests after establishing the stationarity of the data series cointegration tests are performed the cointegration test results reject the hypothesis of no cointegration therefore an error correction model is developed and estimated the estimated results point to an inconclusive empirical relationship between real exchange rate volatility and aggregate private investment

exchange rates and investment in united states industry the path of the dollar has significantly influenced investment activity in u s industry the effects of both exchange rate levels and exchange rate volatility have been more pronounced in the 1980s than in the 1970s although aggregate investment data mask some of these relationships the effects of exchange rates on investment are most pronounced in the disaggregate data for manufacturing durable goods sectors and nonmanufacturing sectors these relationships also have changed over time in contrast to the conventional wisdom in the 1980s real dollar depreciations appreciations were likely to be associated with investment contractions expansions copyright 1993 by mit press

prospect theory and mean variance analysis the experimental results of prospect theory pt reveal suggest that investors make decisions based on change of wealth rather than total wealth that preferences are s shaped with a risk seeking segment and that probabilities are subjectively distorted this article shows that while pt s findings are in sharp contradiction to the foundations of mean variance mv analysis counterintuitively when diversification between assets is allowed the mv and pt efficient sets almost coincide thus one can employ the mv optimization algorithm to construct ptefficient portfolios the markowitz 1952a tobin 1958 mean variance mv rule is probably the most popular investment decision rule under uncertainty in economics and in finance and it is widely employed by both academics and practitioners the strength of the mv analysis is that in the case of normal return distributions the choice of any expected utility maximizing risk averse individual will be according to the mv rule 1 the mv framework is the foundation of the sharpe 1964 lintner 1965 capital asset pricing model capm which is a cornerstone of modern finance moreover the mv framework provides a very important practical procedure for the construction of efficient portfolios while standard economic theory and in particular mv analysis assume expected utility maximization and risk aversion in a breakthrough article kahneman and tversky 1979 show that the actual behavior of individuals systematically and consistently violates these

production inventory games a new class of totally balanced combinatorial optimization games in this paper we introduce a new class of cooperative games that arise from production inventory problems several agents have to cover their demand over a finite time horizon and shortages are allowed each agent has its own unit production inventory holding and backlogging cost cooperation among agents is given by sharing production processes and warehouse facilities agents in a coalition produce with the cheapest production cost and store with the cheapest inventory cost we prove that the resulting cooperative game is totally balanced and the owen set reduces to a singleton the owen point based on this type of allocation we find a population monotonic allocation scheme for this class of games finally we point out the relationship of the owen point with other well known allocation rules such as the nucleolus and the shapley value

optimal capital structure and investment with real options and endogenous debt costs we examine the joint optimization of financial leverage and irreversible capacity investment in a real options framework with risky debt and endogenous interest costs higher capacity ceteris paribus increases operating leverage and default probability but lowers ex post adjustment costs and generates larger tax shields a key insight is that financial leverage and capacity are substitutes in the debt market equilibrium we develop novel predictions about the effects of capital adjustment costs operating costs and uncertainty on optimal financial leverage and capacity that may potentially help explain ambiguous empirical results in the literature regarding the determinants of capital structure and investment received march 17 2016 editorial decision july 8 2017 by editor itay goldstein

shipment consolidation who pays for it and how much this paper examines the subject of cost allocation in a multiple product inventory system allowing for consolidation of shipments if we order multiple items using an economic order quantity eoq policy and consolidate shipments part of the ordering cost is shared and part is specific to each item we want to find the consolidation choice with optimal total cost and divide the cost fairly among the individual items such a fair division is central to a costing system in which no group of items subsidizes the others there are no free riders we use a cooperative inventory game to determine when this can be done this game is usually not concave so we want to know what consolidation combinations determine when this cost can be fairly divided using the core of the game we prove that consolidation of all the items is cheaper exactly if there are fair cost allocations core of the game is not empty which happens when the portion of the ordering cost common to all items is not too small we further show how sensitive the nonempty core result is to adjustments in the cost parameters and show how to determine a threshold value for the shared ordering cost which assures the existence of a fair cost allocation

implications of breach remedy and renegotiation design for innovation and capacity amanufacturer writes supply contracts with n buyers then the buyers invest in innovation and the manufacturer builds capacity finally demand is realized and the firms renegotiate the supply contracts to achieve an efficient allocation of capacity among the buyers the court remedy for breach of contract specific performance versus expectation damages affects how the firms share the gain from renegotiation and hence how the firms make investments ex ante the firms may also engage in renegotiation design inserting simple clauses into the supply contract to shape the outcome of renegotiation for example when a buyer grants a financial hostage to the manufacturer or is charged a per diem penalty for delay in bargaining the manufacturer captures the gain from renegotiation tradable options which grant buyers the right to trade capacity without intervention from the manufacturer return the gain from renegotiation to the buyers this paper proves that under surprisingly general conditions the firms can coordinate their investments with the simplest of supply contracts fixed quantity contracts this may require renegotiation design and certainly requires that the firms understand the breach remedy and set their contract parameters accordingly

consumer s surplus without apology the purpose of this paper is to settle the controversy surrounding consumer s surplus and by so doing to validate its use as a tool of welfare economics i will show that observed consumer s surplus can be rigorously utilized to estimate the unobservable compensating and equivalent variations the correct theoretical measures of the welfare impact of changes in prices and income on an individual i derive precise upper and lower bounds on the percentage errors of approximating the compensating and equivalent variations with consumer s surplus these bounds can be explicitly calculated from observable demand data and it is clear that in most applications the error of approximation will be very small in fact the error will often be overshadowed by the errors involved in estimating the demand curve the results in no way depend upon arguments about the constancy of the marginal utility of income consequently this paper supplies specific empirical criteria which can replace the apologetic caveats frequently employed by those who presently apply consumer s surplus moreover the results imply that consumer s surplus is usually a very good approximation to the appropriate welfare measures to preview below i establish the validity of these rules of thumb for a

real exchange rate uncertainty private investment in ldcs this paper examines empirically the link between real exchange rate uncertainty and private investment in developing countries using a large cross country time series data set the paper builds a garch based measure of real exchange rate volatility and finds that it has a strong negative effect on investment after controlling for other standard investment determinants and taking into account their potential endogeneity the effect of uncertainty is not uniform however there is some evidence of threshold effects so that uncertainty only matters when it exceeds some critical level in addition the negative effect of real exchange rate uncertainty on investment is significantly larger in economies that are highly open and in those with less developed financial systems

adjustment costs uncertainty and the theory of investment the case of non renewable natural resources abstract this paper examines the effects of mineral price and extraction cost uncertainty on the investment program of a competitive resource extracting industry that faces convex costs of adjustment the results show that depletion of mineral reserves will slow down if the marginal adjustment cost function is concave or linear whereas the effect will be ambiguous if the function is convex

choice under uncertainty problems solved and unsolved ffifteen years ago the theory of choice under uncertainty could be considered one of the success stories of economic analysis it rested on solid axiomatic foundations it had seen important breakthroughs in the analytics of risk risk aversion and their applications to economic issues and it stood ready to provide the theoretical underpinnings for the newly emerging information revolution in economics 1 today choice under uncertainty is a field in flux the standard theory is being challenged on several grounds from both within and outside economics the nature of these challenges and of our profession s responses to them is the topic of this paper

preference reversals the impact of truth revealing monetary incentives researchers vigorously debate the impact of incentives in preference reversal experiments do incentives alter behavior and generate economically consistent choices lichtenstein and slovic 1971 document inconsistencies reversals in revealed preference in gamble pairs across paired choice and individual pricing tasks the observed pattern is inconsistent with stable underlying preferences expressed with simple errors lichtenstein and slovic 1973 and grether and plott 1979 introduce incentives but aggregate reversal rates change little these results fostered numerous replications and assertions that models of non stable preferences are required to explain reversals contrary to this research we find that incentives can generate more economically consistent behavior our reevaluation of existing experimental data shows that incentives have a clear impact by better aligning aggregate choices and prices the effect is sufficiently large that with truth revealing incentives a stable preferences with error model not only explains behavior but fits the data as well as any model possibly could

inventory games with permissible delay in payments abstract meca et al 2004 studied a class of inventory games which arise when a group of retailers who observe demand for a common item decide to cooperate and make joint orders with the eoq policy in this paper we extend their model to the situation where retailer s delay in payments is permitted by the supplier we introduce the corresponding inventory game with permissible delay in payments and prove that its core is nonempty then a core allocation rule is proposed which can be reached through population monotonic allocation scheme under this allocation rule the grand coalition is shown to be stable from a farsighted point of view

more laboratory evidence on the disparity between willingness to pay and compensation demanded abstract recent experimental work showing a disparity between willingness to pay for and compensation demanded to give up lottery tickets is contrary to economists ideas about rationality presented here are the results of experiments in which subjects participate in second price auctions to indicate willingness to pay and compensation demanded for lottery tickets that have fixed odds of winning or losing money when the auction institution used has truthful revelation of preferences as the dominant strategy and that strategy is announced to subjects the difference between the measures of value decreases significantly the within subject comparison design provides a more discriminating measure of behavior than between subject comparison designs used previously

venture theory a model of decision weights several theories suggest that people replace probabilities by decision weights when evaluating risky outcomes this paper proposes a model called venture theory of how people assess decision weights it is assumed that people first anchor on a stated probability and then adjust this by mentally simulating other possible values the amount of mental simulation is affected by the absolute size of payoffs the extent to which the anchor deviates from the extremes of 0 and 1 and the level of perceived ambiguity concerning the relevant probability the net effect of the adjustment i e up or down vis i vis the anchor reflects the relative weight given in imagination to values above as opposed to below the anchor this in turn is taken to be a function of both individual and situational variables and in particular the sign and size of payoffs cognitive and motivational factors therefore both play important roles in determining decision weights assuming that people evaluate outcomes by a prospect theory value function kahneman and tversky 1979 and are cautious in the face of risk fourteen predictions are derived concerning attitudes toward risk and ambiguity as functions of different levels of payoffs and probabilities the results of three experiments are reported whereas only a subset of the model s predictions can be tested in experiment 1 all fourteen are tested in experiments 2 and 3 using hypothetical and real payoffs respectively several of the model s predictions are not supported in experiment 2 but almost all are validated in experiments 1 and 3 the failures relate to the exact nature of probability payoff interactions in attitudes toward risk and ambiguity for losses the theory and results are discussed in relation to other experimental evidence future tests of the theory alternative models of risky choice and implications of venture theory for explaining further phenomena

computing core allocations in cooperative games with an application to cooperative procurement abstract cooperative game theory defines several concepts for distributing outcome shares in a cooperative game with transferable utilities one of the most famous solution concepts is the core which defines a set of outcome allocations that are stable such that no coalition has an incentive to leave the grand coalition in this paper we propose a general procedure to compute a core element or to detect that no core allocation exists which is based on mathematical programming techniques the procedure proposed in this paper can be applied to a wide class of cooperative games where the characteristic function is given by the optimum objective function value of a complex optimization problem for cooperative procurement which is an example from the field of supply chain management where some literature on the core concept already exists we prove the applicability and provide computational results to demonstrate that games with 150 players can be handled

setting the right incentives for global planning and operations we study incentive issues seen in a firm performing global planning and manufacturing and local demand management the stochastic demands in local markets are best observed by the regional business units and the firm relies on the business units forecasts for planning of global manufacturing operations we propose a class of performance evaluation schemes that induce the business units to reveal their private demand information truthfully by turning the business units demand revelation game into a potential game with truth telling being a potential maximizer an appealing refinement of nash equilibrium moreover these cooperative performance evaluation schemes satisfy several essential fairness notions after analyzing the characteristics of several performance evaluation schemes in this class we extend our analysis to include the impact of effort on demand

transshipment of inventories among retailers myopic vs farsighted stability the author considers a model of a decentralized distribution system consisting of n retailers selling an identical product retailers face a stochastic demand and must order their initial inventory before this demand is realized after demand realization retailers decide how much of their unsold inventory or unsatisfied demand they want to share with other retailers this is followed by a transshipment of leftover inventories and distribution of the additional profit generated through inventory sharing the author addresses the following issue suppose that the retailers distribute the profit from inventory sharing according to an allocation rule that induces retailers to share their residuals in a way that maximizes the additional profit such as the shapley value but may not belong to the core is it likely that in this framework all retailers will jointly share their residuals and not form subcoalitions previous research has looked at this problem from a myopic viewpoint and concluded that the grand coalition is not stable unlike the prior work the author looks at stability in a farsighted sense that is retailers do not consider only their immediate payoffs but are also concerned with reactions of other retailers to their actions in a symmetric setting with identical additional unit revenues from transshipments generated by all retailers farsighted retailers always maximize their allocations by not defecting from the grand coalition the author also provides conditions when the same is true for nonidentical additional unit revenues