market and nonmarket influences on curriculum choice by college students many labor economists and other researchers have attempted to develop models of the workings of the market for college trained manpower this paper reviews this previous research on curriculum choice and then tests an alternative model with data on choices made by male baccalaureates across a wide spectrum of science and engineering curricula the influence of both methodology and the analytical framework on the identification of relevant variables is explored particular attention is then given to nonmarket influences typically assumed in previous studies not to play a significant role results for pooled and time series specifications provide some support for the hypothesis that curriculum choice follows labor market developments but they also suggest that abilities and interests may be important predictors

occupational choice an application to the market for public school teachers most previous work on occupational choice does not satisfactorily treat the potentially important effects of future demand conditions in contrast this paper develops and estimates a rational expectations model in which agents look beyond expected starting salaries and take explicit account of future demand conditions the empirical results demonstrate that future demand conditions are important determinants of the decision to acquire secondary school certification but are not important for the decision to acquire elementary school certification the paper concludes with a comparison of the dynamic properties of the rational expectations model and a cobweb specification

optimal control of a dual service rate m m 1 production inventory model we analyse a dual source production inventory model in which the processing times at a primary manufacturing resource and a second contingent resource are exponentially distributed we interpret the contingent source to be a subcontractor although it could also be overtime production we treat the inventory and contingent sourcing policies as decision variables in an analytical study and additionally allow the primary manufacturing capacity to be a decision variable in a subsequent numerical study our goal is to gain insight into the use of subcontracting as a contingent source of goods and whether it can fulfill real world managers expectations for improved performance we prove that a stationary non randomised inventory and subcontracting policy is optimal for our m m 1 dual source model and moreover that a dual base stock policy is optimal we then derive an exact closed form expression for one of the optimal base stocks which to our knowledge is the first closed form solution for a dual source model we use that closed form result to advantage in a numerical study from which we gain insight into how optimal capacity subcontracting and inventory policies are set and how effectively a contingent source can reduce total cost capacity cost and inventory cost we find that i the contingent source can reduce total cost effectively even when contingent sourcing is expensive and ii contingent sourcing reduces capacity cost more effectively than it does inventory cost

the effect of cohort size on earnings growth a reexamination of the evidence this study reexamines the effect of cohort size on earnings growth finis welch finds that individuals in larger cohorts experience depressed earnings conditions on entry into the labor market but that their earnings grow at faster rates than in smaller cohorts thus a large portion of the cohort size effect on earnings dissipates after a few years however using data almost identical to those of welch but estimating less restrictive models it is found here that cohort size not only depresses earnings at entry but also seems to slow down early career earnings growth the evidence suggests that earnings ini larger cohorts do not approach normal levels after at brief period in the labor force rather the negative cohort size effect on earnings appears to worsen with experience

pricing credit derivatives with rating transitions we present a model for pricing risky debt and valuing credit derivatives that is easily calibrated to existing variables our approach expands a classical term structure model to allow for multiple rating classes of debt the framework has two salient features 1 it uses a rating transition matrix as the driver for the default process and 2 the entire set of rating categories is calibrated jointly which allows arbitrage free restrictions across rating classes as a bond migrates among them we illustrate the approach by applying it to price credit sensitive notes that have coupon payments linked to the rating of the underlying credit

customer order information leadtimes and inventories we have an inventory to manage the scenario is standard in all respects save one instead of arriving unannounced customers provide advance warning of their demands how should we use this information and what is its effect on system performance the answers turn out to be strikingly simple there are very simple policies which perform effectively in some cases optimally also such demand leadtimes improve performance in precisely the same way that replenishment leadtimes degrade it

a discrete time approach to arbitrage free pricing of credit derivatives this paper develops a framework for modelling risky debt and valuing credit derivatives that is flexible and simple to implement and that is to the maximum extent possible based on observables our approach is based on expanding the heath jarrow morton term structure model to allow for defaultable debt rather than follow the procedure of implying out the behavior of spreads from assumptions concerning the default process we work directly with the evolution of spreads the risk neutral drifts in the resulting model possess a recursive representation that facilitates implementation and makes it possible to handle path dependence and early exercise features without difficulty the framework permits embedding a variety of specifications for default we present an empirical example of a default structure which provides promising calibration results

cohort size and the earnings growth of young workers this study used data from the 1968 75 current population surveys cps and the national longitudinal survey of young men nls to examine the effect of cohort size on earnings profiles in the us the elasticity of earnings growth with respect to cohort size was negative in each of the regressions analyzed indicating flatter earnings profiles and slower earnings growth for large cohorts a larger proportion of workers in large cohorts appear to choose occupations with less training content and flatter earnings profiles than workers in small cohorts in addition workers in large cohorts may find it advantageous to reduce their investments in training the negative effect of cohort size generally carried over to other schooling and gender groups only for the 2 lowest male schooling groups in the cps samples were the cohort size elasticities positive the cohort size elasticity displayed a larger negative effect for college graduates than for high school graduates or those with some college education the predicted earnings growth of college graduates is 11 6 less than that of high school graduates using the male cps parameter estimates 25 3 less with the female cps estimates and 6 less with the nls estimates these estimates are consistent with freemans finding that the longitudinal earnings profiles of college graduates have flattened relative to those of high school graduates in recent years since the initial earnings depression caused by cohort size widens with age as larger cohorts move along flatter earnings profiles the baby boom cohorts earnings levels may remain depressed throughout their careers on the other hand the smaller cohorts entering the labor market during the 1980s are likely to experience more favorable labor market conditions and faster earnings growth

markets for medical care and medical education an integrated long run structural approach this paper investigates the relationship between the market for medical care and the market for medical education within a standard supply and demand framework the capacity of medical schools is considered as an endogenous element within a complete structural system of the market for physicians services the parameters of the model are estimated using data from the postwar period the estimated system is then simulated both to compare it to alternative time series forecasting approaches and to examine the nature of earnings cycles in medicine the results of this exercise support the applicability of traditional economics to this sector of the economy

pricing convertible bonds abstract convertible bonds are an important segment of the corporate bond market although their pricing is compromised by the presence of complex option features and difficulty in measuring the risk factors needed as inputs to standard valuation models using a unique sample of pure u s convertible bonds devoid of other optionality we show that underpricing is affected mainly by the degree of underlying asset volatility and liquidity convertible bonds with a greater debt component more credit sensitive longer time to maturity and lower quality credit ratings are also found to be more underpriced the global financial crisis gfc is an episode with high underlying asset volatility and one subject to short selling constraints during this period there was deep convertible bond discounting which highlights the importance of market conditions and the temporal rather than systematic nature of the pricing errors

security design with status concerns abstract this paper provides a status based explanation for convertible securities an entrepreneur with status concerns inducing risk taking decides how to finance the firm and how to dynamically manage it solving analytically for the optimal security we find that it is substantially similar to a convertible security our model can explain why convertible securities are mainly issued by start ups and small firms as we show that their salient characteristics higher volatility and dynamic flexibility accentuate incentives to issue convertible securities we also provide analytical results relevant to quantifying how status concerns affect credit risk an established factor behind security choice

make to order policies for a stochastic lot sizing problem using overtime we address a stochastic single item production system in a make to order environment where customer orders receive a promised delivery date upon arrival capacity is reserved for the production of the item but can be extended by working overtime the problem consists of determining the optimal size of a production lot so that delivery promises are met on time at the expense of minimal average costs these include setup costs holding costs for orders that are finished before their promised delivery date and penalty costs for orders that are not satisfied on time and are therefore backordered also the use of capacity beyond the regularly available incurs overtime costs given that the optimal policy is likely to be too complex in most practical situations we propose four different strategies for obtaining production lot sizes three of the rules are based on the well known s s and r s policies for make to stock problems while the fourth strategy is motivated by a rule originally derived for a similar problem with unlimited production capacity an extensive numerical study indicates the conditions under which each lot sizing rule shows the best performance

production strategies for a stochastic lot sizing problem with constant capacity abstract this paper presents a single item capacitated stochastic lot sizing problem motibated by a dutch company operating in a make to order environment due to a highly fluctuating and unpredictable demand it is not possible to keep any finished goods inventory in response to a customer s order a fixed delivery date is quoted by the company the objective is to determine in each period of the planning horizon the optimal size of production lots so that delivery dates are met as closely as possible at the expense of minimal average costs these include set up costs holding costs for orders that are finished before their promised delivery date and penalty costs for orders that are not satisfied on time and are therefore backordered given that the optimal production policy is likely to be too complex in this situation attention is focused on the development of heuristic procedures in this paper two heuristics are proposed the first one is an extension of a simple production strategy derived by dellaert 5 for the uncapacitated version of the problem the second heuristic is based on the well known silver meal algorithm for the case of deterministic time varying demand experimental results suggest that the first heuristic gives low average costs especially when the demand variability is low and there are large differences in the cost parameters the silver meal approach is usually outperformed by the first heuristic in situations where the available production capacity is tight and the demand variability is low

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

occupational choice under uncertainty an econometric problem in estimating models of occupational choice is that the agents forecasts of future wages and occupational tenure are unobservable this paper solves the problem by assuming that agents have rational expectations and by considering the effects of arbitrage both within and between cohorts the solution consists of two time series regressions of the demand and supply functions of entrants into an occupation from these regressions one obtains estimates of the rate of return to education the direct cost of education and other parameters that influence the market the model was estimated with data from the market for lawyers 1 many occupations require the agent to acquire some schooling before he can practice how does the agent choose between two occupations that require different schooling periods since adam smith 17 book i chapter 10 economists have assumed that the agent decides by comparing the expected present value of incomes between the two occupations e g friedman and kuznets 7 schultz 15 becker 1 and mincer 10 see 13 for a survey of the literature while the decision rule is well known the problem of uncertain wages plagues empirical applications of models embodying the decision rule most empirical works rely on cross section data or short panel data sets thus the total wages over the lifetime of the agent are not observed the question of ex ante expectations cannot of course be known short term macroeconomic factors tend to confound estimates of costs and returns to education rosen 13 rosen also raised the question of dropouts that is agents may leave an occupation in which they practiced therefore the question of uncertain wages is complicated by the additional uncertainty of occupational tenure there was an important attempt to solve the problem of uncertain wages by richard freeman 3 4 5 freeman recognized that demand conditions in the market affected the supply of new students he argued that new entrants made their decisions to enter by comparing current wages in the relevant occupations since future conditions may change current wages may not be good predictors of future wages these systematic forecast errors lead to cycles in the supply of new entrants these cyclical models are known as cobweb models this paper also considers the problem of occupational choice under uncertainty an agent s decision problem based on maximizing expected discounted value of income is explicitly solved the result is a generalization of mincer s schooling model 10 i also close the model by positing a demand curve for the

a nested logit migration model with selectivity in this paper we specify a multiple choice migration model with selectivity we estimate this model using observations on individuals drawn from the 1971 census of venezuela there are two main innovations in this paper we apply a correction for the presence of selectivity in wage equations in the context of a multiple choice migration model and we apply a less restrictive technique for modelling multiple discrete choices than in previous studies we study the choices of individuals among 23 states of venezuela each individual is observed to have chosen one state so one wage is observable per person our hypothesis is that individuals choose where to locate on the basis of an evaluation of costs and benefits associated with choosing each state we measure the benefits associated with choosing a given state by means of the wage a person could earn in this state since we observe only one wage for each person we have to impute the unobserved wages for the states this person did not choose in order to study the role of wages in migration however it is possible that unobserved factors which affect both an individual s choice of location and his wages may result in sample selection bias if we try to estimate state specific wage equations by ols on the basis of the self selected samples we apply an estimator proposed by lee 1983 to estimate state specific wage equations free from sample selection bias the wage equations permit us to investigate whether individuals who choose particular states earn different wages from observationally identical individuals drawn from the population at random in the context of a developing country where internal migration flows are large evidence on the selectivity of migration will enhance our understanding of an important labor market adjustment mechanism evidence that people who choose particular locations earn more in those locations than would observationally identical individuals drawn at random from the population positive selection will suggest that migration decisions are made according to the principle of comparative advantage in modelling the choice of location we test whether subsets of states are more highly similar to each other than to other states unobserved similarities between states may arise because of similar amenities or economic conditions which are not otherwise explicitly controlled for in the model we implement the

pricing and hedging path dependent options under the cev process much of the work on path dependent options assumes that the underlying asset price follows geometric brownian motion with constant volatility this paper uses a more general assumption for the asset price process that provides a better fit to the empirical observations we use the so called constant elasticity of variance cev diffusion model where the volatility is a function of the underlying asset price we derive analytical formulae for the prices of important types of path dependent options under this assumption we demonstrate that the prices of options which depend on extrema such as barrier and lookback options can be much more sensitive to the specification of the underlying price process than standard call and put options and show that a financial institution that uses the standard geometric brownian motion assumption is exposed to significant pricing and hedging errors when dealing in path dependent options

an integrated model for hybrid securities we develop a model for pricing securities whose value may depend simultaneously on equity interest rate and default risks the framework may also be used to extract probabilities of default pd functions from market data our approach is entirely based on observables such as equity prices and interest rates rather than on unobservable processes such as firm value the model stitches together in an arbitrage free setting a constant elasticity of variance cev equity model to represent the behavior of equity prices prior to default a default intensity process and a heath jarrow morton hjm model for the evolution of riskless interest rates the model captures several stylized features such as a negative relation between equity prices and equity volatility a negative relation between default intensity and equity prices and a positive relationship between default intensity and equity volatility we embed the model on a discrete time recombining lattice making implementation feasible with polynomial complexity we demonstrate the simplicity of calibrating the model to market data and of using it to extract default information the framework is extensible to handling correlated default risk and may be used to value distressed convertible bonds debt equity swaps and credit portfolio products such as collateralized debt obligations cdos applied to the cdx indu credit default index industrials index we find the s p 500 index explains credit premia

cohort size and the academic labor market educational policymakers have long been concerned that baby booms and busts alternately cause shortages and surpluses in academic labor markets these concerns have been supported by models which purport to forecast the effects of change in cohort size on the academic labor market in this paper it is argued that policymakers should be more skeptical of such forecasts the basis for the argument is a detailed analysis of a model of the academic labor market for economists the inescapable conclusion is that forecasts from such models provide little if any support for policies designed to offset the impact of change in cohort size on the academic labor market

a two factor hazard rate model for pricing risky debt and the term structure of credit spreads this paper proposes a two factor hazard rate model in closed form to price risky debt the likelihood of default is captured by the firm s non interest sensitive assets and defaultfree interest rates the distinguishing features of the model are threefold first the impact of capital structure changes on credit spreads can be analyzed second the model allows stochastic interest rates to impact current asset values as well as their evolution finally the proposed model is in closed form enabling us to undertake comparative statics analysis compute parameter deltas of the model calibrate empirical credit spreads and determine hedge positions credit spreads generated by our model are consistent with empirical observations

black agricultural economists discussion the authors of these three papers have performed a valuable service by reviewing and analyzing the status of blacks who have chosen agricultural economics as their profession occupation the estimated number of black agricultural economists continues to be small relative to the total number 32 in 1970 41 in 1981 and 56 in 1983 during this period the estimated number of blacks holding ph d degrees has risen slightly from 17 54 in 1970 to 18 44 in 1981 and then to 25 45 in 1983 however the percentage of blacks with ph d degrees remains lower than the percentage for all agricultural economists which has exceeded 60 since 1976 strauss and tarr apparently data on the number of black female economists were not tabulated

pricing derivatives on financial securities subject to credit risk this article provides a new methodology for pricing and hedging derivative securities involving credit risk two types of credit risks are considered the first is where the asset underlying the derivative security may default the second is where the writer of the derivative security may default we apply the foreign currency analogy of jarrow and turnbull 1991 to decompose the dollar payoff from a risky security into a certain payoff and a spot exchange rate arbitrage free valuation techniques are then employed this methodology can be applied to corporate debt and over the counter derivatives such as swaps and caps the purpose of this article is to provide a new theory for pricing and hedging derivative securities involving credit risk two sources of credit risk are identified and analyzed the first is where the asset underlying the derivative security may default paying off less than promised this is the case for example with imbedded options on corporate debt the second is the credit risk introduced by the writer of the derivative security who may also default examples include over the counter writers of options on eurodollar futures swaps and swaptions for pricing derivative securities involving credit risk there are currently two approaches the first views these derivatives as contingent claims not on the financial securities themselves but as compound options on the assets underlying the financial securities this is the case for example with the pricing of imbedded options on corporate debt see merton 1974 1977 black and cox 1976 ho and singer 1982 chance 1990 and kim ramaswamy and sundaresan 1993 or the pricing of vulnerable options see johnson and stulz 1987 in practice however this valuation methodology is difficult to use first the assets underlying the financial security are often not tradeable and therefore their values are not observable this makes application of the theory and estimation of the relevant parameters problematic second as in the case of corporate debt all of the other liabilities of the firm senior to the corporate debt must first and simultaneously be valued this generates significant computational difficulties as a result this approach has not

valuing the treasury s capital assistance program the capital assistance program cap was created by the u s government in february 2009 to provide backup capital to large financial institutions unable to raise sufficient capital from private investors under the terms of the cap a participating bank receives contingent capital by issuing preferred shares to the treasury combined with embedded options for both parties the bank gets the option to redeem the shares or convert them to common equity with conversion mandatory after seven years the treasury earns dividends on the preferred shares and gets warrants on the bank s common equity we develop a contingent claims framework in which to estimate market values of these cap securities the interaction between the competing options held by the buyer and issuer of these securities creates a game between the two parties and our approach captures this strategic element of the joint valuation problem and clarifies the incentives it creates we apply our method to the 18 publicly held bank holding companies that participated in the supervisory capital assessment program the stress test launched together with the cap on average we estimate that compared to a market transaction the cap securities carry a net value of approximately 30 of the capital invested for a bank participating to the maximum extent allowed under the terms of the program we also find that the net value varies widely across banks we compare our estimates with abnormal stock price returns for the stress test banks at the time the terms of the cap were announced we find correlations between 0 78 and 0 85 depending on the precise choice of period and set of banks included these results suggest that our valuation aligns with shareholder perception of the value of the program prompting questions about industry reactions and the overall impact of the program this paper was accepted by wei xiong finance

bond pricing and the term structure of interest rates a discrete time approximation this paper studies the binomial approximation to the continuous trading term structure model of heath jarrow and morton 1987 the discrete time approximation makes the original methodology accessible to a wider audience and provides a computational proce dure necessary for calculating the contingent claim values derived in the continuous time paper this paper also extends and generalizes ho and lee s 1986 model to include multiple random shocks to the forward rate process and to include an analysis of continu ous time limits the generalization provides insights into the limitations of the existing empirical implementation of ho and lee s model

a brownian approximation of a production inventory system with a manufacturer that subcontracts this paper considers a production inventory problem where a manufacturer fulfills stochastic stationary demand for a single product from a finished goods inventory the inventory can be replenished by two production resources in house production and a subcontractor which both have finite capacity we construct a brownian approximation of the optimal control problem assuming that the manufacturer uses a dual base stock policy to control replenishment from the two sources and that her objective is to minimize average cost a closed form expression is obtained for one optimal base stock policy and an analytical expression is derived from which the other optimal base stock can be computed numerically we show conditions under which the objective is convex in capacity and the unique globally optimal capacity can be computed numerically we thus provide a tractable approximation to the two source problem which is generally intractable we demonstrate the accuracy of this approximation for an m m 1 model we also draw managerial insight from the brownian optimal base stock results into how the optimal base stock policies control the inventory distribution and under what conditions the contingent source is used to build inventory or to resolve backorders

predicted future earnings and choice of college major using data from the national longitudinal survey of young men the author of this paper examines the relationship between predicted future earnings for five broad fields of study and college students choice of major conditional logit models of major choice that incorporate alternative predicted earnings variables are specified and estimated the results indicate that holding family background characteristics constant individuals are likely to choose majors offering greater streams of future earnings rather than as some have argued majors with higher beginning earnings at the time of the choice it is also found that earnings profiles corrected for self selection bias have flattened for more recent graduates in business liberal arts and education the life cycle earnings in these disciplines appear to be more severely depressed than those in science and engineering

discrete time valuation of american options with stochastic interest rates we develop an arbitrage free discrete time model to price american style claims for which domestic term structure risk foreign term structure risk and currency risk are important this model combines a discrete version of the heath jarrow and morton 1992 term structure model with the binomial model of cox ross and rubinstein 1979 it converges weakly to the continuous time models in amin and jarrow 1991 1992 the general model is path dependent and can be implemented with arbitrary volatility functions to value claims with maturity up to five years the model is illustrated with applications to long dated american currency warrants and a cross rate swap from the quanto class article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

credit swap valuation this review of the pricing of credit swaps a form of derivative security that can be viewed as default insurance on loans or bonds begins with a description of the credit swap contract turns to pricing by reference to spreads over the risk free rate of par floating rate bonds of the same quality and then considers model based pricing the role of asset swap spreads as a reference for pricing credit swaps is also considered

default parameter estimation using market prices this article presents a new methodology for estimating recovery rates and the pseudo default probabilities implicit in both debt and equity prices in this methodology recovery rates and default probabilities are correlated and depend on the state of the macroeconomy this approach makes two contributions first the methodology explicitly incorporates equity prices in the estimation procedure this inclusion allows the separate identification of recovery rates and default probabilities and the use of an expanded and relevant data set equity prices may contain a bubble component which is essential in light of recent experience with internet stocks second the methodology explicitly incorporates a liquidity premium in the estimation procedure which is also essential in light of the large observed variability in the yield spread between risky debt and u s treasury securities and the illiquidities present in risky debt markets

the economics of medicare equilibrium within the medical community this paper partially fills a theoretical void by developing an integrated model of the various branches of the medical community a consistent and general framework is adopted to analyze equilibrium within the market for medical services under a stylized form of socialized medicine without invoking demand shifting the optimization problem faced by each agent is specified and the equilibrium is defined the effect of various parameter changes on the market for medical services is analyzed the predictions are not contradicted by the stylized facts

rationality and the decision to invest in economics in the study reported here we develop a theoretical model of occupational choice which is then specifically tailored to fit the market for economists over time economists typically assume that the world is relatively free of informational barriers and that agents carefully process vast amounts of information in making decisions this study reveals whether economists own occupational decisions are consistent with this world of rational calculating agents results suggest that tests for the internal consistency of rational expectations and our model of occupational choice cannot be rejected while the model provides a better explanation of the observed pattern of enrollments than does an alternative that assumes agents naively base decisions only on current wage conditions