was the emergence of the international gold standard expected evidence from indian government securities abstract the emergence of the gold standard has for a long time been viewed as inevitable we analyze agents expectations using the spread between gold and silver bonds issued by the indian government we find that bimetallism was credible until france surprised markets by suspending domestic operation of bimetallism triggering a run away from silver thereafter markets began demanding a premium to hold silver bonds indicating their belief that silver would depreciate in the future as more countries moved on gold

option value empirical evidence from a case study of recreation and water quality a procedure for measuring option value and other preservation values of water quality is developed and applied to a case study area in the south platte river basin colorado benefits from water based recreation activities are the focus of the study the results provide an empirical test and confirmation of weisbrod s proposal that option value and other preservation values represent important social benefits and should be added to the aggregate consumer surplus of recreation activities to determine the total benefit of environmental amenities to society in the absence of such an estimate insufficient resources would be allocated by society to preservation of unique environments such as pristine mountain streams where mineral and energy development may irreversibly degrade water quality

supply side option value further discussion the literature on benefit cost analysis under uncertainty has devoted considerable attention to identifying conditions under which the sign of option value can be determined option value is the difference between an ex ante sure welfare measure based on expected utility functions known as option price and the expected value of welfare measures defined ex post for each state of nature previous investigations have shown that there is limited ability to specify analytically the sign of option value if uncertainty concerns the preferences of individuals then the sign of option value cannot be established without placing restrictions on preferences schmalansee 1972 anderson 1979 smith 1983 however bishop 1982 has demonstrated that if the uncertainty concerns the supply of the good in question with certain demand for the good then the sign of option value ov may be positive see also brookshire eubanks and randall 1983 since many valuation situations involve supply side risk bishop s discovery is of some rele

nonrenewable resource scarcity nonrenewable resource theory often is summarized by hotelling s rule this paper reviews theoretical extensions and empirical investigations of resource extraction models observed data are often inconsistent with the hotelling rule suggesting that other characteristics of nonrenewable resource supply including exploration heterogeneous ore quality technological progress and capital investment are important determinants of the dynamic behavior of resource prices given the persistent recurrence of concern about nonrenewable resource scarcity measures of nonrenewable resource scarcity and the empirical evidence for the time trends of those measures are reviewed finally the implications of nonrenewable resource scarcity for economic growth are examined

labor supply in the presence of taxes an alternative specification this paper estimates a model of married women s labor supply in the presence of progressive taxes the specification is based on a translog indirect utility function with normally distributed random preference parameters the application of roy s identity then leads to a distribution of labor supply that involves ratios of normals

arbitrary values good causes and premature verdicts abstract this paper offers an alternative interpretation of the conclusions kahneman and knetsch propose based on two contingent valuation cvm surveys the evaluation argues that while framing is important to cvm estimates the design implementation and empirical findings reported from these surveys do not support their judgments moreover with the exception of temporal embedding conventional economic descriptions of individual behavior can explain the response patterns that they suggest are at variance with standard value theory

understanding hurricane evacuation decisions under contingent scenarios a stated preference approach we conduct a stated preference analysis to understand the factors that individual households take into consideration to evacuate during hurricanes in designing the contingent scenarios for evacuation we randomly assign varying levels of hurricane characteristics wind speed lead time for landfall and the height of storm surge combined with different types of emergency management options voluntary versus mandatory evacuation order and a voucher with varying amounts to cover evacuation expenses findings indicate that individual households respond in a non linear fashion to the intensity of hurricanes when making evacuation decisions respondents are also more likely to evacuate when the storm surge reaches a certain threshold in terms of policy interventions mandatory evacuation orders are more effective to increase the likelihood of evacuation the potential intervention in the form of providing evacuation vouchers to assist households to cover their expenses e g for food water transportation and lodging also seems effective we discuss policy implications of our findings

labour supply estimation and public policy abstract economists devote considerable energies towards refining their econometric techniques to overcome difficulties connected with conducting empirical research despite advances in technique it is not clear whether further refinement in this direction is worthwhile for policy purposes it may be that no further amount of statistical adjustment of inadequate data will increase understanding and that better data is simply necessary to add to our knowledge but rarely is sufficient credit paid to new forms of data in short econometric technique is emphasized to the neglect of data innovation as if new data were merely lying about waiting for an ingenious suggestion for use this paper surveys advances of the last twenty five years in estimating labour supply for policy purposes with a view towards appreciating the relative contribution of both improvements in econometric technique as well as developments of new data after briefly detailing the key parameters which economists have sought to estimate we describe the early first generation research circa 1970 which is plagued by problems of unobservable variables measurement errors truncation and selectivity bias and non linear budget constraints second generation research constitute attempts to resolve one or more of these difficulties and the respective contribution of econometric technique and new data is acknowledged and assessed including the contribution of data generated by large scale social experiments in which participants are randomly assigned to different guaranteed income plans and their labour supply behaviour measured

the mispricing of u s treasury bonds a case study this article documents an apparent pricing anomaly involving 94 percent 30 year treasury bonds during the months of may and june 1986 during this period the price of the 94s rose sharply relative to the prices of other long term treasury bonds and created a potential arbitrage opportunity in addition owners of the 94 bonds were able to borrow at a zero interest rate bypledging their bonds detailed examination reveals that this relative pricing anomaly cannot be attributed to changes in the level or term structure of interest rates or to differences between the bonds with respect to liquidity taxation or duration

electricity outages in ghana are contingent valuation estimates valid african countries experience persistent and serious energy outages but while multiple valuation studies provide estimates of the costs of electricity outages in high income countries evidence is scarce for lower and middle income countries the few studies that assess the value of reliable energy supply rely on the contingent valuation method that is under wide scrutiny this paper aims to provide new estimates of households willingness to pay to reduce electricity outages for ghana and contributes to the debate on the validity of contingent valuation results for energy reliability our results suggest that households are willing to pay ghs 67 17 per month for reliable electricity supply equivalent to 7 of respondents income the results of tests for hypothetical bias wtp wta disparity and income effects suggest that the contingent valuation estimates from this study are robust and can support decision makers in prioritizing energy policies and investments

comparative reliability of the dichotomous choice and open ended contingent valuation techniques abstract the comparative reliability of dichotomous choice and open ended contingent valuation methods cvm is evaluated by resurvey of the same households 9 months after their original survey test retest correlations on willingness to pay are statistically significant at the 1 level and range from 0 57 for the dichotomous choice cvm to 0 62 for the open ended cvm the test retest correlations were not statistically different between dichotomous choice and open ended cvm a likelihood ratio test for temporal stability of each method s willingness to pay functions indicates stability half of the time for both methods

ex ante valuation of atmospheric visibility in a world incomplete markets for environmental goods ex ante planned expenditures rather than ex post realized outcomes explain the values which individuals attach to these goods we use the distance function to develop restrictions from a model of ex ante consumer behaviour involving these goods a contigent valuation approach is then employed to estimate policy relavant components of the ex ante economic values that recreationists attach to differing subjective probabilities of alternative atmospheric visibility levels at a wilderness location and at an urban location in oregon marginal valuations of probability changes are similar at the two sites marginal rates of time preference for resolving uncertainities vary between 10 and 50 and are inversely related to education existence value averages 10 of total value and evidence is mixed that site specific value act as surrogates for general environmental preferences

valuing non market goods using contingent valuation abstract contingent valuation is a technique being developed by economists for the valuation of environmental commodities not traded in markets this paper discusses the major problem areas associated with this method of value estimation these comprise bias strategic hypothetical and design biases the discrepancy between willingness to pay and compensation demanded the aggregation procedure the choice of question format and non use values some evidence from comparative studies is reported and comments made on the accuracy of contingent valuation answers finally the conditions under which contingent valuation seems to operate best are set out

arbitrage bounds in markets with noisy prices and the puzzle of negative option prices implicit in bonds abstract the term structure of interest rates has occupied economists for many years this is testimony to the importance of the term structure or equivalently valuation operator and to the difficulty of obtaining reliable estimates of it until recently it was not possible to reconcile the theoretical existence of a multiplicity of valuation operators in an incomplete bond market and the empirical nonexistence of even a single one mackay and prisman estimating valuation operators in incomplete market with noises can noise complete the market working paper 1996 tackle this problem in this paper an amendment to and a generalization of their methodology is presented the amendment preserves the linearity of valuation operators and allows use of efficient linear programming techniques further it facilitates an admissible consideration of the puzzle of negative option prices embedded in bonds the empirical results presented in this paper were obtained using data on extendable government of canada bonds the results indicate that although the gap between the lowest and the highest prices assigned to a cash flow by different valuation operators is significant it is not sufficient to resolve the above mentioned puzzle

valuation and management of wetland ecosystems we recently completed a study of wetland values in coastal louisiana that employed both willingness to pay and energy analysis based methodologies and were able to bracket a range of values within which we feel fairly confident the true value lies however a large amount of uncertainty remains our current estimates of the total prsent value of an average acre of natural wetlands in louisiana are us 2429 6400 per acre assuming an 8 discount rate to 8977 17000 per acre assuming a 3 discount rate at the lowest value the current annual rate of loss of louisiana wetlands 50 sq miles per year is worth about 77 million at the largest value it is worth about 544 million in this paper we a discuss the fundamental theoretical and practical problems underlying natural resources valuation b summarize our methods and findings for louisiana wetlands and c elaborate on some of the more recalcitrant problems attending applied natural resource valuation including discounting and dealing with uncertainty and imprecision the discount rate makes more difference in the final result than any other one factor and yet there is much disagreement about the appropriate approach to discounting natural resources we discuss the discounting problem as applied to natural resources and argue for lower discount rates for valuing renewable natural resources than apply for other aspects of the economy it now seems clear that no reasonable amount of effort will produce very precise estimates of wetland values and we suspect this is also the case for several other classes of natural resources we elaborate a wetlands asurance bonding system to address these problems

arbitrage and the expectations hypothesis this paper shows that all traditional forms of the expectations hypothesis can be consistent with the absence of arbitrage if markets are incomplete a key implication is that the validity of the expectations hypothesis is purely an empirical issue the expectations hypothesis cannot be ruled out on a priori theoretical grounds one of the oldest and best known models in finance is the expectations hypothesis of the term structure introduced by fisher 1896 more than a century ago the expectations hypothesis has become a standard framework for explaining how yields of different maturities are related and it provides an important empirical benchmark from a theoretical perspective however the expectations hypothesis is not generally viewed as a viable model of the term structure in particular cox ingersoll and ross 1981 show that the traditional expectations hypothesis is actually a set of mutually exclusive propositions and offer a proof that most forms of the expectations hypothesis admit arbitrage recently mcculloch 1993 and fisher and gilles 1998 present counterexamples to the cox et al proof showing that the traditional forms of the expectations hypothesis can be consistent with the absence of arbitrage they acknowledge however that their counterexamples are somewhat contrived and view them as economically implausible these results leave the impression that the expectations hypothesis is only consistent with the absence of arbitrage in pathological cases of little practical interest in this paper we argue that the expectations hypothesis is much more theoretically defensible than commonly believed an important point often overlooked is that the cox et al 1981 results are developed in an economic setting where bonds are redundant securities in the more realistic case where bond prices display security specific variation and there is mounting evidence of this traditional forms of the expectations hypothesis can hold quite generally without arbitrage only weak conditions guaranteeing the existence of an equivalent martingale measure need be satisfied for the various forms of the expectations hypothesis to hold without arbitrage a key

supply uncertainty option price and indirect benefit estimation both the original and many of the subsequent explanations of the concept of option price have been motivated by an assumption of an uncertain supply of the commodity involved 1 consequently it is surprising to find that all of the definitions of option price compare two states of the world which each have known or certain supply conditions paying the option price does not eliminate supply uncertainty as it has been described rather it changes the individual s conditions of access to the good or service from a certainty of no access to a certainty of complete access risk enters the problem only because these analyses assume the individual does not know whether he or she will desire access at the time the payment must be made since the analysis is in terms of planned consumption the reason for this demand uncertainty is sometimes explained by the fact that the consumption must take place in the future when other factors influencing demand may have changed 2 bishop 1982 appears to have been the first to draw attention to this omission of supply uncertainty and proposed a framework without demand uncertainty to demonstrate that there are conditions when option value i e the difference between option price and the expected consumer surplus would be unambiguously positive 3 while there have been a number of theo

on the valuation of uncertainty in welfare analysis thisarticle developsa general model of private and public choice under temporal uncertainty the model incorporatesthe effectsof ris k preferencesand the pros pect of future learning into both the individual and aggregate valuationsof public projects the analys isprovidesnew ins ightson individual valuation itsimplicationsfor benefit cos t analys isand the characterization of paretoefficiency under uncertainty it also resolves some of the confusion in the option value and quasioption value literature private and public decisions typically involve many sources of uncertainty including uncertainty about prices income technology environmental quality health etc temporal uncertainty is also common where some of the risk 1 getsresolved over time due to learning additionally private and public decisions often exhibit some form of irreversibility implying that current choicescan affect the ability of decision makers to be flexible and to adjust their future choices in response to forthcoming information when uncertainty and irreversibility are both present welfare analys isgainscomplexity and importance although considerable progress has been made since weisbrod s seminal article a better understanding of the roles of uncertainty and irreversibility in welfare analys improve our ability aseconomis ts to communicate the importance of risk in project evaluation to public decision makers

the sign and size of option value we adapt the theoretical state preference model to value nonmarket public goods under individual uncertainty about use illustrating with an assessment of willingness to pay to prevent acid rain lake damage in the northeast united states individual

trader rationality in the exercise of futures options abstract we examine the rationality of investor exercise behavior by analyzing two years tendered exercise notices for treasury bond futures options we conclude that exercise behavior is generally rational but document numerous failures to exercise as well as some exercises that should not have occured both at and prior to expiration the most frequent type of error is failing to exercise suggesting that traders do not monitor their positions with sufficient care finally we show that investors use information arriving after trading closes but before exchange imposed exercise deadlines in forming their exercise decisions

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

welfare effects of changes in environmental quality under individual uncertainty about use we adapt the theoretical state preference model to value nonmarket public goods under individual uncertainty about use illustrating with an assessment of willingness to pay to prevent acid rain lake damage in the northeast united states individual usage uncertainty is modelled via probabilities of participation in trout fishing changes in environmental quality are valued using a random utility model to explain yes no responses to a contingent valuation question we produce quantitative welfare measures individual fitted and simulated passiveand active use values individual expected consumer surplus option price option value and complete individual willingness topay loci

dynamic inconsistency in valuing environmental goods abstract intertemporal tradeoffs continue to intrigue both academics and policy makers this paper explores patterns of dynamic inconsistency in valuing environmental goods we develop a model that predicts an individual will value extended access to an environmental good less than avoiding delayed access if time and money are complementary this value disparity results in a low marginal rate of time preference for avoiding delayed access and a high rate for acquiring extended access using the contingent valuation method we find behavior partially consistent with predictions marginal rates of time preference are highly situation and individual specific

the relative pricing of high yield debt the case of rjr nabisco holdings capital corporation the authors derive and investigate empirically arbitrage pricing restrictions among three bonds of rjr nabisco holdings capital corporation the three rjr bonds are virtually identical in all respects except for the form in which interest is paid the authors document large and persistent errors in the market pricing of the three bonds over a two year period the cash paying bond was consistently more expensive than either the pay in kind or deferred coupon bonds the magnitude of the pricing errors is too large to be explained by market imperfections copyright 1993 by american economic association

supply uncertainty option price and option value this article develops a general model of private and public choice under temporal uncertainty the model incorporates the effects of risk preferences and the prospect of future learning into both the individual and aggregate valuations of public projects

validation of empirical measures of welfare change a comparison of nonmarket techniques since the passing of the flood control act of 1936 the attention of many resource economists has been directed towards measuring the benefits and costs of alternative uses of natural resources increasingly it has been recognized that the value of some of these uses is not explicitly determined through market transactions this has led to the focus of much attention upon the development of nonmarket methods to estimate the value of these uses in the 1940s the groundwork for the travel cost method was established by hotelling prewitt 1949 following this in the 1960s davis initiated the basic foundation for bidding methods davis 1963 which were later to be subsumed under the heading of contingent valuation methods brookshire randall and stoll 1980 schulze d arge and brookshire 1981 thayer 1981 both of these methods will be further discussed below in addition to these two methods a third approach the unit day value method has been recognized as acceptable but not preferred for the valuation of recreational uses of water and related land resources dwyer kelley and bowes 1977 u s water resources council 1979 given the existence of alternative methods of estimating the value of resource uses several obvious questions arise one of the first of these is under what circumstances is each method most appropriate existing literature has focussed sufficiently on this question and pointed out limitations of each especially the travel cost method and unit day value methods brookshire ives and schulze 1976 dwyer kelly and bowes 1977 freeman 1979 mcconnell 1975 randall ives and eastman 1977 schulze d arge and brook

are negative option prices possible the callable u s treasury bond puzzle market prices for callable treasury bonds often imply negative values for the implicit call option the author considers a variety of possible explanations for these negative values including the treasury s track record in calling bonds optimally tax related effects tax timing options and bond liquidity none of these factors accounts for the negative values although the costs of short selling may explain why these apparent arbitrage opportunities persist over time why these implicit call values become negative in the first place remains a puzzle copyright 1992 by university of chicago press

environmental issues and economic decisions in developing countries abstract this paper explains the key role of environmental economics in incorporating environmental concerns into decision making and in facilitating the more efficient management of natural resources as a step toward sustainable development it reviews concepts and techniques for valuation of environmental impacts for use in conventional cost benefits analysis as well as key related aspects including environmental impacts of economywide policies multicriteria analysis risk and uncertainty and discount rate issues several developing country case studies are summarized which cover a range of practical valuation methods the evidence presented suggests that the valuation techniques for determining use values may be applied successfully in appropriate cases but examples involving nonuse values are rare the use of multiobjective desicion methods also needs to be explored where economic valuation is not feasible

the tips treasury bond puzzle we show that the price of a treasury bond and an inflation swapped treasury inflation protected securities tips issue exactly replicating the cash flows of the treasury bond can differ by more than 20 per 100 notional treasury bonds are almost always overvalued relative to tips total tips treasury mispricing has exceeded 56 billion representing nearly 8 of the total amount of tips outstanding we find direct evidence that the mispricing narrows as additional capital flows into the markets this provides strong support for the slow moving capital explanation of arbitrage persistence

negative option values are possible the impact of treasury bond futures on the cash u s treasury market abstract this paper uses a unique financial instrument in the u s treasury market to study the price behavior of the put option embedded in the november 2009 14 callable u s treasury bond we find that beginning in august 1993 the estimated option value was persistently negative on nearly every day for the ensuing eight months we show that the anomalous pricing behavior arose because the underlying callable bond became the cheapest to deliver issue against u s treasury bond futures contracts hence this paper provides direct evidence that derivative assets can significantly distort pricing in the primary asset market

the econometrics of piecewise linear budget constraints a survey and exposition of the maximum likelihood method in this article maximum likelihood techniques for estimating consumer demand functions when budget constraints are piecewise linear are exposited and surveyed consumer demand functions are formally derived under such constraints and it is shown that the functions are themselves nonlinear as a result the econometric problems in estimating such functions are exposited and the importance of the stochastic specification is stressed in particular the specification of both unobserved heterogeneity of preferences and measurement error econometric issues in estimation and testing are discussed and the results of the studies that have been conducted to date are surveyed

an assessment of the empirical magnitude of option values for environment goods this paper provides an empirical assessment of the magnitude of option values relative to expected surplus using a model presented by larson and flacco 1992 option values and option prices are computed for both simulated data sets and actual estimates of recreation demands results indicate that option values engendered by price and income uncertainty are generally quite a small percent of expected surplus

evaluation of callable bonds finite difference methods stability and accuracy the purpose of this paper is to evaluate numerically the semi american callable bond by means of finite difference methods this study implies three results first the numerical error is greater for the callable bond price than for the straight bond price and too large for real applications secondly the numerical accuracy of the callable bond price computed for the relevant range of interest rates depends entirely on the finite difference scheme which is chosen for the boundary points thirdly the boundary scheme which yields the smallest numerical error with respect to the straight bond does not perform best with respect to the callable bond the callable bond is a straight coupon bond with the provision that allows the debtor to buy back or to call the bond for a specified amount the call price plus the accrued interest since the last coupon date at some time the call date s during the life of the bond three types of callable bonds can be observed in financial markets the american callable bond may be repurchased at any time on or before the final redemption day in contrast to the european or semi american counterparts which may only be called at one or several specific dates respectively in the case of semi american bonds the debtor gives the bondholder two months notice the callable bond can be viewed as a compound security which consists of an otherwise identical straight bond and of an embedded call option which is not traded and the price of which is therefore not observable the embedded call option which is written on the underlying straight bond can be viewed as being sold by the initial

valuing environmental functions tropical wetlands recent studies have suggested that tropical wetland systems may have a crucial economic role to play in development the following paper provides an overview of these benefits using the general framework of cost benefit analysis as the methodological approach to assessing wetland values an analysis of trade offs between conserving or converting tropical wetlands demonstrates that taking into account the opportunity cost of wetland loss leads to a lower level of conversion than would otherwise be the case finally the paper discusses the extensions and limitations of the production function approach as applied to valuing nonmarketed wetland benefits

a box cox double hurdle model of wildlife valuation the citizen s perspective abstract a stated preference approach is used to elicit the attitudes of the general public towards coyote conservation the payment vehicle is presented in a way that explicitly prompts respondents to adopt a citizen perspective rather than a consumer perspective when responding to the survey to deal with the large numbers of zero responses a box cox double hurdle specification is used to model separately individuals choices about whether to support conservation or not and their choice about the level of support the results show that simpler analyses that do not account explicitly for these two different decisions would lead to misleading conclusions in the study of nuisance wildlife the study uses primary data from prince edward island canada

tax induced clientele effects in the market for british government securities abstract this paper develops a new methods for measuring tax effects in bond markets and presents empirical results for british government securities the basic idea is to construct a least cost portfolio which for investors in a given tax bracket dominates a given bond a portfolio is said to dominate a bond if it provides cash flows which are at least as great in every period and has a lower price in effect our method calculates an upper bound on the value of a bond to investors in a given tax bracket the results demonstrate i the existence of clientele effects and ii the absence of an effective tax rate

environmental preservation and majority decisions in this paper we bring together the quasi option value literature with a majority rule community decision making scheme it is shown that the quasi option value is positive for a majority of voters if there exists a median voter who is dictatorial however the quasi option value can be negative for a majority or all community members given the standard assumptions of the literature for which the quasi option value for a single decision maker would always be positive but in some cases this leads to majority decisions in favor of the irreversible development of natural resources when future information is taken into account

adopt a hypothetical pup a count data approach to the valuation of wildlife the willingness to pay wtp for a coyote conservation program is estimated using a novel payment vehicle based on how many problem coyotes respondents would be willing to sponsor for a year this hypothetical scenario mimics an increasingly popular type of actual market data from a phone survey conducted in prince edward island are analyzed using count data models that consider different processes explaining zero responses and the level of positive responses this is particularly important in the case of coyotes often regarded as an economic bad estimates of wtp per coyote per year around 18 22 and annual wtp per contributor of about 46 57 are obtained

the econometrics of nonlinear budget sets traditional empirical analysis of consumer demand has usually made the assumption of linear budget sets that is the consumer is assumed to purchase any desired quantity at a constant price subject to a budget constraint the major exception to this framework is the analysis of demand when some goods are rationed 2 in the rationed case the price is constant up to a quantity limit in contrast to the rationed case here i consider the situation where the price varies with the amount of the good purchased empirical situations with nonconstant prices come readily to mind and of course they have received much recent attention from theorists since mirrlees 44 paper on optimal nonlinear taxation the following examples are meant to give a partial listing of cases when nonlinear budget sets occur i electricity prices many electric utilities engage in declining block pricing that is the marginal price of successive kwh s of electricity decrease at a given number of points determined by total demand thus the budget set is piecewise linear houthakker 36 was the first to propose an approach to this problem taylor 51 analyzes the problem at length and hausman kinnucin and mcfadden 31 use an instrumental variables estimator to provide consistent estimates of the demand function

labour market experience in female wage equations does the experience measure matter many studies have found estimated female wage and labour supply equations to be sensitive in some way to labour market experience although different studies yield different results and it seems there is still more to know about this key human capital variable this is especially so when separate information on individual womes s labour market experience is not available making it necessary to construct some measure of experience from other information this paper takes four such measures of labour market experience and investigates the effects of these upon the coefficients from an estimated wage equation as heckman s 1976 1979 two stage probit selection model is still widely used to test and correct for censoring bias the effect of different measures of experience upon the results from this procedure is also investigated

on welfare analysis under temporal uncertainty the implications of uncertainty for costbenefit analysis remain controversial one issue raised in the evaluation of welfare compensation tests has been the appropriate use of observable economic behavior in the measurement of agents willingnessto pay or willingness to receive in the context of surplus measure this question has received considerable attention in the analysis of the welfare impact of price changes under certainty e g willig 1976 chipman and moore 1980 hausman 1981 mckenzie and pearce 1982 moreover the introduction of uncertainty has raised a number of questions about the appropriateness of alternative welfare measures e g schmalensee 1972 1975 graham 1981 for example graham 1981 has argued that there is little basis to recommend either option price or expected surplus for a role of prominence in welfare analysis the issue rather is whether or not there exists a distribution of individual payments or receipts that maximizes aggregate willingness to pay and passes the pareto improvement test i e that leaves no individual worse off and makes at least one individual better off graham 1981 but in the implementation of the pareto improvement test how is the aggregate willingness topay supposed to be measured empirically more specifically what is the influence of uncertainty and its temporal resolution on the validity of agent surplus the welfare triangle given by the area between a compensated choice function and its corresponding price as a welfare measure some progress has been made in this direction by chavas bishop and segerson 1986 in the context of option price however as shown by graham 1981 while option price is the appropriate measure of benefits in situations involving similar individuals and collective risk it may not be the appropriate welfare measure in more general situations therefore there is a need to refine our understanding of how agent surplus can be used as a welfare measure in the general context of a potential pareto improvement test under temporal uncertainty the objective of this paper is to investigate how temporal uncertainty can affect the measurement of willingness to pay in general welfare compensation tests temporal uncertainty corresponds to the situation where new information becomes available over time which resolves at least part of current uncertainty facing economic agents this new information can influence future individual decisions as well as individual willingness to pay particular attention will be given here to the case where income compensation is conditional on the new information that will become available in the future and results in a more efficient allocation of risk among individuals this paper focuses on competitive agents e g households or firms for which welfare changes can be expressed in terms of price changes this includes the analysis of the welfare effects of various government pricing policies this also includes the evaluation of public projects based on the travel cost method which under a weak complementarity condition consists in using price changes of related private goods as an indirect means of measuring the value of a public project maler 1974 the analysis is presented in the context of a general two period model where the agents are uncertain about the state of the world as suggested by graham 1981 it is shown that the option price provides a lower bound on

the decline in idiosyncratic values of us treasury securities abstract unique features and market frictions can lead to idiosyncratic pricing for some us treasury securities this study uses a linear programming lp model to measure aggregate idiosyncratic pricing of t notes and t bonds from 1980 to 2016 we document an average idiosyncratic pricing of 0 11 per 100 par as compared to an average bid ask spread of 0 08 further idiosyncratic pricing declined dramatically from the early 1980s to the 2010s empirical evidence suggests that the 1986 tax reform act increasing issue sizes and improving market liquidity contribute to the decline at the individual security level we identify factors contributing to and mitigating idiosyncratic pricing

option value a conceptual overview the importance of nonuser benefits to the process of efficiently allocating natural environments was first emphasized by krutilla 15 a decade and a half ago one of the components of these nonuser benefits is option value originally introduced by weisbrod 23 as relevant for assets that might be difficult to reproduce option value has been the subject of considerable debate perhaps the simplest approach to explaining the meaning of option value is to use an example consider an individual who is uncertain whether he or she will consume the services of a particular asset in the future furthermore assume this individual is also uncertain whether the asset will be available in the future should he

a reexamination of the value of tax options this article reexamines the value of tax trading when the tax rate on long term realizations is less than that on short term realizations in particular the value of the option to realize long term capital gains and repurchase stock in order to increase one s tax basis and restart the option to realizefuture losses short term is examined empirically our estimate of the incremental value of restarting which is based on the results of simulations of several alternative tax trading policies over a large number of independent return sequences is generally much smaller than that reported by constantinides 1984 the incremental value of restarting is shown to depend critically on the particular pattern of realized returns and the assumed tax treatment of unrealized capital gains at the end of the simulation period the effects of stockprice volatility transaction costs portfolio offset rules and realization cutoff levels on the value of tax trading are also investigated

cost benefit analysis under uncertainty reply robert mendelsohn and william strang raise a number of issues which require clarification their misrepresentations of my results in several cases are easily corrected the analytical flaws in their own arguments are more difficult turning first to the issue of misrepresentations they incorrectly assert that i recommended the use of the maximum expected value of alternative contingent payment schemes as the measure of project benefits even a cursory reading of my introduction reveals that option price which does not maximize the expected value of revenue is the appropriate measure of benefit in situations involving similar individuals collective risk and certain costs despite their claims to the contrary i have not suggested that option price is an underestimate of the true value of project benefits option price is precisely the true value of project benefits in this case contradicting themselves in their first footnote they assert that i recommend the use of option price for cases involving certain costs and collective risks thus ignoring the crucial role of similar preferences other examples could be mentioned but it is perhaps sufficient to suggest that any reader wishing to know what i actually said would do well to review my paper the appropriate measure of benefits is the subject of the third section of my paper no mention is made in this general argument of expected value calculations similar preferences certain costs or any of the other special cases that are considered in the fourth section of my paper these special cases are exactly that situations in which the general answer because of the special circumstances takes a relatively simple form it is of course crucial not to forget the special circumstances when considering these results although mendelsohn and strang do not mention the distinction between collective and individual risks save for a passing reference in their first footnote this issue is central to the consideration of the appropriate measure of project benefits while the general procedure developed in my third section is compatible with any joint distribution of individual states option price measures the benefit to similar individuals of a project involving a collective risk when cost is certain expected value calculations on the other hand are only appropriate in situations involving individual risks these issues were examined in detail in my fourth section in dealing with the special case involving individual risks i argued that the magnitude of aggregate payments would be equal to the sum of the expected values of the individual payments with virtual certainty this was hardly a profound observation but it led to the result that if contingent payments are to be collected in such circumstances one should consider those payments that have the largest expected value since all contingent payment schemes including that associated with expected surplus involve the same difficulties of adverse selection moral hazard and so forth mendelsohn and strang in expressing the view that for the government to collect more revenue than the sum generated by the expected value of surplus the government must provide an additional service p 1098 fail to recognize that collecting the wrong contingent payments those associated with the surplus point involve the same difficulties as collecting the right contingent payments those associated with the fair bet point this mistake is not eliminated by their argument that when fair insurance is available the individual s willingness to pay locus becomes linear the presence of such a market makes it possible for an individual to trade a given payment liability in the market for contingent claims for another professor of economics duke university durham nc 27706

cost benefit analysis under uncertainty comment decision makers performing cost benefit analysis must often deal with the problem of how to aggregate the benefits across states of nature accruing from an uncertain public investment project option price and the expected value of consumer s surplus are two potential measures of these aggregate benefits 2 the expected value of surplus has been proposed because it is readily measured and because risk pooling paul samuelson william vickrey 1964 and risk spreading kenneth arrow and robert lind 1970 tend to encourage risk neutral behavior option price has been favored on the vague notion that people would be willing to pay something extra above expected surplus to preserve the opportunity to purchase a good burton weisbrod 1964 as daniel graham cogently argues in this review 1981 however option price is but one of an infinite number of contingent payment schemes the literature has provided no justification for focusing upon it as an ideal measure of benefits under individual risk graham further argues that policymakers ought to adopt the compensating contingent payment plan which maximizes expected revenue this maximum payment plan by definition is never less and will often exceed any other contingent payment scheme consequently graham argues that both the expected value of surplus and option price are underestimates of the true value of project benefits our purpose in this comment is twofold first we show the role of project and nonproject insurance in a model of individual risk and second we argue that option price not the maximum payment plan is the optimal rule when no fair insurance is available in section ii we show that if fair insurance is available against all risks all contingent payment plans yield identical revenue a similar result holds if insurance is available for nonproject risks and the effect of the project to an individual is small the arrow lind model in section iii we explore the case where either the project has a large uninsurable effect on the individual or there is no insurance against even nonproject risks we argue that the very phenomena moral hazard adverse selection and complexity that eliminate the market for private insurance also prevent the government from making otherwise desirable contingent payments if contingent payments are too costly the government s only remaining choice is to collect payments that are constant across states which makes option price the relevant measure of benefits

valuing amenity resources under uncertainty a skeptical view of recent resolutions abstract this paper questions colby and cory s recent characterization 1987 1988 1989 of the appropriate benefit measures to be used to value improvements in the quantity quality or conditions of access to environmental resources under uncertainty the paper uses graham s 1981 analysis of individual and aggregate welfare measurement under uncertainty to demonstrate the problems with colby and cory s recommendations it evaluates their classification of important research issues and summarizes in general terms the difficulties that arise in the practical implementation of the conceptual measures for benefits under uncertainty

the impact of consumer advocates on regulatory policy in the electric utility sector we examine the effect of consumer advocate participation in administrative procedures on regulatory policy we use a unique panel database of rate reviews conducted for us electric utilities from 1980 to 2007 to assess how state consumer advocates affect public utility commission decisions on utilities allowed financial returns and rate structures we find first that utilities experience fewer rate reviews in states with consumer advocates consistent with utilities strategically postponing requests for rate increases second after controlling for observed and unobserved state characteristics we find that pucs in states with consumer advocates permit returns on equity that are on average 0 45 percentage points lower than states without advocates equivalent to a 7 9 million 3 7 reduction in average utility operating income all else equal third consumer advocates are associated with lower residential rates relative to other customer classes our findings provide statistical support for the thesis that institutionalizing interest group representation in administrative procedures is one way for legislatures indirectly to influence agency determined policies

option value under income and price uncertainty abstract we present a rigorous examination of the sign of option value under income and price uncertainty we state and prove three theorems on the sign of option value when preferences are state independent if income is uncertain the sign of option value is opposite the sign of the income elasticity of the good in question the analysis of price uncertainty is in two parts one covers the case of own price uncertainty and the other the case where the price of some other good is uncertain in both cases the sign of option value is generally ambiguous

option value a general approach this article examines a potential bias if expected consumer surplus is used to measure the benefits of a price change under uncertainty this bias which is called option value may be positive or negative a general framework is developed for analyzing the determinants of the sign of option value and this framework is applied to three types of uncertainty income uncertainty quality uncertainty and uncertainty over consumer tastes in the first two cases option value has a determinate sign however in the last case option value may be positive negative or zero in an unpredictable fashion

the valuation of options on coupon bonds abstract we derive simple closed form expressions for european options on coupon bonds using the general equilibrium term structure framework of cox ingersoll and ross the properties of these options are very different from those implied by the black scholes model for example bond call and put values can move in the same direction as the value of the underlying bond changes this has important implications for hedging interest rate risk with bond options furthermore bond option values can be decreasing functions of interest rate volatility as well as their time to expiration we also examine the properties of american bond options

option value an exposition and extension this article examines the role of the discount rate in making decisions that will have significant implications for the environment the authors begin by providing a rationale for discounting in general and by describing the main factors that determine

requiem for option value as freeman 1984 accurately notes a lot of ink has been spilled over the concept of option value during the last two decades graham in his seminal 1981 article outlined the specific conditions under which option price is and more significantly is not an appropriate and relevant measure of value under demand uncertainty while graham s article demonstrates that option value is relevant only under restrictive assumptions regarding preferences and the nature of the uncertainty both the tone and contents of recent articles on the

measuring option prices from market behavior abstract option prices can be calculated from empirical demand models given knowledge of the utility theoretic structure implied by the demand specifications and the joint density of the random variables consumers face formulas for option price are given for three common weakly complementary demand specifications because it can be difficult to assess behavioral uncertainty and calculate option prices in practice knowledge of the sign of option value is important since it is a guide to the bias from ignoring this type of uncertainty the sign of option value is determined for sources of uncertainty that have proved elusive in previous treatments

arbitrage pricing transaction costs and taxation of capital gains abstract this paper examines one of the few cases of seemingly redundant securities sets of three government bonds with the same maturity date within the bounds on relative bond prices established by tax exempt investors in a market with proportional transaction costs the taxation of capital gains on the basis of realization has a significant impact on relative prices the empirical evidence supports the tax option effect discussed by constantinides and ingersoll but does not generally support the segmented tax clientele equilibrium discussed by schaefer

consumer capture of regulatory institutions the creation of public utility consumer advocates in the united states we examine the conditions under which state legislatures in the united states orga nized public utility consumers during the 1970s and 1980s by creating independent consumer advocates with resources and authority to intervene in public utility rate making procedures while economic factors notably utility fuel cost increases were important predictors state political conditions were estimated to have a larger impact on the probability of implemen tation we find that the pattern of adoption is consistent with the hypothesis that legislatures deploy institutions as a mechanism for insulating regulatory policies against future reform in general democrat controlled governments were significantly more likely to implement con sumer advocates when they were less certain about being re elected to office during this period we find also that the effect of political re election expectations was particularly acute for the creation of advocates representing solely residential consumers a relatively disorganized in terest group our results suggest that legislatures organize and publicly fund interest groups to protect supportive but vulnerable groups against adverse future political environments

a reexamination of option values implicit in callable treasury bonds abstract longstaff 1992 and edleson fehr and mason 1993 examine option values implicit in callable treasury bonds and report a significant puzzle implied option values are frequently negative using an alternative approach we reexamine this issue and find that implied option values are generally positive and in contrast to previous studies instances of option values sufficiently negative to overcome the bid ask spread are rare we explain the findings in other studies by showing that the method used may lead to the appearance of a negative option value when the true value is positive

the choice of a welfare measure under uncertainty use of option price as a welfare measure when conducting a benefit cost analysis under uncertainty is appropriate only if the project under consideration will have no impact on the allocation of risk among individuals use of the willingness to pay locus as a benefit measure is appropriate only if the project will result in an efficient allocation of risk a more general welfare measure is proposed maximum agreeable payment that correctly measures the benefits and costs of any project

the case of the negative nominal interest rates new estimates of the term structure of interest rates during the great depression throughout the 1930s and early 1940s u s treasury bonds and notes appeared to have negative nominal yields as they approached maturity but negative nominal interest rates are impossible in a world in which one can always hold cash the resolution to this puzzle is that treasury securities in addition to making coupon payments gave the owner the right to buy a new security on a future date this paper describes the institutional environment that led to the apparent negative nominal interest rates develops a method for valuing the exchange privilege and computes accurate measures of the yield to the coupon bearing component of these composite bond options these corrected bond and not yields are then used to calculate new estimates of the term structure of interest rates from 1929 to 1949

financial innovation and the role of derivative securities an empirical analysis of the treasury strips program the role that financial innovation plays in financial markets is very controversial to provide insight into this role we examine how market participants use the highly successful treasury strips program we find that investors use the option to create treasury derivative strips primarily to make markets more complete and take advantage of tax and accounting asymmetries although liquidity related factors help explain differences in the prices of treasury bonds and strips we find little evidence that the option to strip and reconstitute securities is used for speculative or arbitrage related purposes the role of financial innovation is a central issue for both policymakers and researchers in finance 1 critics argue that financial innovations often have no economic role beyond allowing some investors to take highly leveraged speculative or arbitrage related positions in contrast advocates argue that the introduction of new products makes financial markets more complete reduces frictions and transaction costs and leads to a more optimal allocation of risk in the economy to better understand the role played by financial innovation this paper examines how investors use the successful separate trading of registered interest and principal of securities strips program of the u s treasury this program allows investors to strip treasury notes and bonds to create separate discount bonds and to reconstitute previously stripped notes and