labor market polarization the decline of routine work and technological change a quantitative analysis abstract a common hypothesis for labor market polarization is that technological progress has decreased the price of machines which are substitutable with middle skilled jobs and complementary to higher and lower skilled jobs i quantitatively evaluate this hypothesis in a dynamic general equilibrium model i find that the near constant elasticities of labor demand in the standard technology hypothesis and the observed dynamics of the price of machines are inconsistent with rapid polarization pre 2000 and its slower dynamics thereafter extending the model to allow for a separate investment sector requiring only high skilled workers generates a much closer fit to data

risk aversion in contests in a contest participants spend money or effort to increase their chances of winning a prize the authors examine primarily the following question could the timid the more risk averse have a better chance of winning in contests under limited liability the answer is always positive in the absence of limited liability there is no single answer whereas when the prize is shared as a function of effort the outcome is independent of the contestants risk aversion the authors also relate their results to self protection and examine some other implications of risk aversion copyright 1995 by royal economic society

on the structure of lost sales inventory models we provide a new approach to the structural analysis of the standard lost sales inventory system this approach is we think easier to work with than the original one we also derive new bounds on the optimal policy then we show that more variable demand leads to higher cost finally we extend the analysis to several important variations of the basic model

structural transformation the mismeasurement of productivity growth and the cost disease of services if workers self select into industries based upon their relative productivity in different tasks and comparative advantage is aligned with absolute advantage then the average efficacy of a sector s workforce will be negatively correlated with its employment share this might explain the difference in the reported productivity growth of contracting goods and expanding services instrumenting with defense expenditures i find the elasticity of worker efficacy with respect to employment shares is substantially negative albeit estimated imprecisely the estimates suggest that the view that goods and services have similar productivity growth rates is a plausible alternative characterization of growth in developed economies jel e23 e24 h56 j24 o41 o47 one of the strongest and seemingly most accurate characterizations of the process and problems of growth in advanced economies is william baumol s cost disease of services baumol s argument begun in papers as early as 1965 and continuing to this very day e g baumol and bowen 1965 baumol 1967 baumol blackman and wolff 1985 and baumol 2012 starts from the premise that productivity growth is inherently more difficult to achieve in the production of services than in the pro

computerizing industries and routinizing jobs explaining trends in aggregate productivity abstract complementarity across occupations and industries implies that the relative size of those with high productivity growth shrinks reducing their contributions toward aggregate productivity growth and thereby resulting in its slowdown this force especially the shrinkage of occupations with above average productivity growth through routinization was present since the 1980s through the end of the 1990s it was countervailed by the extraordinary productivity growth in the computer industry of which output became an increasingly more important input in all industries computerization it was only when the computer industry s productivity growth slowed that the negative effect of routinization on aggregate productivity became apparent

analysis of tailored base surge policies in dual sourcing inventory systems we study a model of a firm managing its inventory of a single product by sourcing supplies from two supply sources a regular supplier who offers a lower unit cost and a longer lead time than a second emergency supplier a practically implementable policy for such a firm is a tailored base surge tbs policy allon g van mieghem ja 2010 global dual sourcing tailored base surge allocation to near and offshore production management sci 56 1 110 124 to manage its inventory under this policy the firm procures a constant quantity from the regular supplier in every period and dynamically makes procurement decisions for the emergency supplier allon and van mieghem describe this practice as using the regular supplier to meet a base level of demand and the emergency supplier to manage demand surges and they conjecture that this practice is most effective when the lead time difference between the two suppliers is large we confirm these statements in two ways first we show the following analytical

optimal policies for a capacitated two echelon inventory system this paper demonstrates optimal policies for capacitated serial multiechelon production inventory systems extending the clark and scarf 1960 model to include installations with production capacity limits we demonstrate that a modified echelon base stock policy is optimal in a two stage system when there is a smaller capacity at the downstream facility this is shown by decomposing the dynamic programming value function into value functions dependent upon individual echelon stock variables we show that the optimal structure holds for both stationary and nonstationary stochastic customer demand finite horizon and infinite horizon results are included under discounted cost and average cost criteria

50th anniversary article option pricing valuation models and applications this paper surveys the literature on option pricing from its origins to the present an extensive review of valuation methods for european and american style claims is provided applications to complex securities and numerical methods are surveyed emphasis is placed on recent trends and developments in methodology and modeling

insider trading as a signal of private information there is substantial evidence that insider trading is present around corporate announcements and that this insider trading is motivated by private information using real estate investment trusts that choose to reappraise themselves as our sample we establish that the appraisals contain information but find no market response to the public announcement of this information in these appraisals we consider two possible explanations for this inconsistency the first that the appraisal information is not highlighted in earnings reports and hence remains unobserved and the second that insiders trade on the appraisal information in the time that elapses between the appraisal and its public announcement we find strong support for the second hypothesis with insiders buying selling after they receive favorable unfavorable appraisal news especially for negative appraisals we also find that positive negative appraisals and net insider buying selling elicit significant positive negative abnormal returns during the appraisal period article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

anomalies risk aversion economists ubiquitously employ a simple and elegant explanation for risk aversion it derives from the concavity of the utility of wealth function within the expected utility framework we show that this explanation is not plausible in most applications since anything more than economically negligible risk aversion over moderate stakes requires a utility of wealth function that is so concave that it predicts absurdly severe risk aversion over very large stakes we present examples of how the expected utility framework has misled economists and why we believe a better explanation for risk aversion must incorporate loss aversion and mental accounting

a new method of estimating risk aversion i show existing evidence on labor supply behavior places an upper bound on risk aversion in the expected utility model i derive a formula for the coefficient of relative risk aversion in terms of the ratio of the income elasticity of labor supply to wage elasticity and degree of complementarity between consumption and labor i bound the degree of complementarity using data on consumption choices when labor supply varies across states using labor supply elasticity estimates i find a mean estimate of 1 then show generating 2 requires that wage increases cause sharper labor supply reductions jel d81 j22

structural change in an open economy we study the importance of international trade in structural change our framework has both productivity and trade cost shocks and allows for non unitary income and substitution elasticities we calibrate our model to investigate south korea s structural change between 1971 and 2005 we nd that the shock processes propagated through the model s two main transmission mechanisms non homothetic preferences and the open economy explain virtually all of the evolution of agriculture and services labor shares and the rising part of the hump shape in manufacturing counterfactual exercises show that the role of the open economy is quantitatively important for explaining south korea s structural change

psychological factors and stock option exercise we investigate stock option exercise decisions by over 50 000 employees at seven corporations controlling for economic factors psychological factors influence exercise consistent with psychological models of beliefs employees exercise in response to stock price trends exercise is positively related to stock returns during the preceding month and negatively related to returns over longer horizons consistent with psychological models of values that include reference points employee exercise activity roughly doubles when the stock price exceeds the maximum price attained during the previous year

exercise behavior valuation and the incentive effects of employee stock options abstract we use a large database on eso exercises to document characteristics of exercise behavior and calibrate a utility based model for measuring how differences in exercise behavior are manifested in option values and incentives option values and incentives computed from the model calibrations are compared to those computed from models used to value tradable options our analysis provides guidance to both academics and practitioners about how differences in exercise behavior and model choice affect measures of eso values and incentives and underscores the importance of gaining a thorough understanding of the underlying economic forces that affect the behavior of eso holders

relative prices and investment rates abstract we construct a panel for the price of aggregate investment over consumption and report the following observations 1 relative price differences across countries are large over the entire sample period and this conclusion is not affected by excluding non tradable consumption goods 2 relative price dispersion has decreased during the sample period 3 relative price changes are not persistent across periods while average price levels are moreover the persistence in relative price levels is higher for countries at low relative prices we show that the relative price of investment is negatively correlated with investment rates in a cross section of countries the standard one sector growth model is a natural framework to study quantitatively the effects of barriers to capital accumulation since there is a very simple mapping between barriers to investment and relative prices in this environment we simulate a calibrated version of the model in which barriers follow a stochastic process common to all countries and estimated using relative price data and obtain statistics for investment rates that closely resemble what we observe in the data in particular the model accounts for 90 of the 1985 gini index of relative investment rates and the decline in investment rate dispersion over time the model has two limitations as a theory of development first it cannot account for the income disparity in the data unless we assume unmeasured capital with barriers affecting the broad measure of capital second even under these extreme assumptions the model cannot account for the evolution of income disparity over time

the subjective and objective evaluation of incentive stock options owners of incentive options invariably hold undiversified portfolios this paper derives a model for the subjective and objective values of such options the subjective value the value to the holder is less than the market value because the option is held in an undiversified portfolio and because it is exercised suboptimally from the market perspective the objective value is the cost to the firm of issuing the option and lies between the market and subjective values this value recognizes the suboptimal exercise but not the undiversified discount the model which is the black scholes model with modified parameters is simple to use

structural transformation and the deterioration of european labor market outcomes this paper examines hours worked in continental europe and the united states from 1956 to 2003 the empirical work establishes two results first hours worked in europe decline by almost 45 percent compared to the united states over this period second this decline is almost entirely accounted for by the fact that europe develops a much smaller market service sector than the united states a simple model of time allocation is used to understand these patterns i find that relative increases in taxes and technological catch up can account for most of the differences between the european and american time allocations over this period

are women more risk averse we find that single women exhibit relatively more risk aversion in financial decision making than single men using u s sample data we examine household holdings of risky assets to determine whether there are gender differences in financial risk taking as wealth increases the proportion of wealth held as risky assets is estimated to increase by a smaller amount for single women than for single men gender differences in financial risk taking are also influenced by age race and number of children greater financial risk aversion may provide an explanation for women s lower levels of wealth compared with men s jel j16 d81 g11

capital skill complementarity sectoral labor productivity and structural transformation abstract in the postwar u s economy labor productivity has been growing faster in the goods sector versus the service sector this paper argues that this sectoral labor productivity growth gap can largely be explained by the fact that capital intensity also increases faster in the goods sector i build a two sector neoclassical growth model in which capital substitutes low skilled labor but complements high skilled labor and the goods sector is more intensive in low skilled labor relative to the service sector as observed in the data as capital becomes more abundant relative to labor along economic growth low skilled labor is substituted by capital leading to faster growth of capital intensity and hence labor productivity in the goods sector using a calibrated model i find that two thirds of the sectoral labor productivity growth gap can be explained by capital accumulation and its interaction with capital skill complementarity

analysis of supply contracts with minimum total order quantity commitments and non stationary demands abstract in this paper we address a buyer supplier arrangement of particular importance total order quantity commitment toqc under the toqc contract that has been negotiated between the buyer and the supplier the former agrees to an obligation to procure a certain quantity of an item from the latter over the predetermined period of time additional quantity can be obtained maybe at a different price the optimal inventory replenishment policy is shown to be dual order up to levels under a given toqc and the optimal toqc is also demonstrated to be mathematically straightforward to obtain

are risk aversion and impatience related to cognitive ability is the way that people make risky choices or tradeoffs over time related to cognitive ability this paper investigates whether there is a link between cognitive ability risk aversion and impatience using a representative sample of the population and incentive compatible measures we conduct choice experiments measuring risk aversion and impatience over an annual time horizon for a randomly drawn sample of roughly 1 000 german adults subjects also take part in two different tests of cognitive ability which correspond to sub modules of one of the most widely used iq tests interviews are conducted in subjects own homes we find that lower cognitive ability is associated with greater risk aversion and more pronounced impatience these relationships are significant and robust to controlling for personal characteristics educational attainment income and measures of credit constraints we perform a series of additional robustness checks which help rule out other possible confounds

endogenous matching and the empirical determinants of contract form empirical work on contracts typically regresses contract choice on observed principal and agent characteristics if i some of these characteristics are unobserved or partially observed and ii there are incentives whereby particular types of agents end up contracting with particular types of principals estimated coefficients on the observed characteristics may be misleading we address this endogenous matching problem using a data set on agricultural contracts between landlords and tenants in early renaissance tuscany controlling for endogenous matching has an impact on parameters of interest and tenants risk aversion appears to have influenced contract choice

dynamic inventory management with total minimum order commitments and two supply options we study optimal policies for dual supply inventory systems where a firm commits to buying a total minimum quantity from both supplies or two separate total minimum quantities from each supply over a finite planning horizon the two supply options differ in their costs and lead times for the system under the joint commitment the optimal policy has a simple structure and can be fully characterized by three critical numbers in each period for the system under the separate commitments we show that the optimal order quantities in each period are monotonic in the starting inventory and the remaining commitments with bounded sensitivity moreover we establish convergence results on the optimal order quantities when the committed quantity from either supply approaches infinity these findings highlight the effects of order commitments on the optimal inventory policies on the basis of these results we develop a simple heuristic for the system under separate commitments and show numerically that it performs

sticks or carrots optimal ceo compensation when managers are loss averse this paper analyzes optimal executive compensation contracts when managers are loss averse we calibrate a stylized principal agent model to the observed contracts of 595 ceos and show that this model can explain observed option holdings and high base salaries remarkably well for a range of parameterizations we also derive and calibrate the general shape of the optimal contract that is increasing and convex for medium and high outcomes and that drops discontinuously to the lowest possible payout for low outcomes finally we identify the critical features of the loss aversion model that render optimal contracts convex

conformism and structural change using a simple multisector model of endogenous growth we show that commodity specific consumption externalities can be a source of structural change when the degrees of consumption externalities are different between goods each sector grows at a different rate however the aggregate economy exhibits balanced growth in that capital stock and expenditure grow at the same constant rate a three sector version of our model may reconcile kaldor s stylized facts with empirically plausible profiles of industrial structure transformation

myopic optimal policy for a multi period two delivery lead times stochastic inventory problem with minimum cumulative commitment and capacity abstract this paper studies a single product multi period stochastic inventory problem that imposes the lower and upper bounds on the cumulative order quantity during a planning horizon and allows two delivery lead times this model includes three features the first one is that a buyer purchases a fixed capacity from a supplier at the beginning of a planning horizon and the buyer s total cumulative order quantity during the planning horizon is constrained with the capacity the second one is that the buyer agrees to purchase the product at least a certain percentage of the purchased capacity during the planning horizon the third one is that the supplier allows the buyer to order the product with two delivery lead times we identify conditions under which a myopic ordering policy is optimal we also develop an algorithm to calculate the optimal capacity when the minimum cumulative order quantity commitment is a certain percentage of the capacity we then use the algorithm to evaluate the effect of the various parameters on the buyer s minimum expected total cost during the planning horizon our computation shows that the buyer would benefit from the commitments and two delivery lead times

wealth and executive compensation using new data on the wealth of swedish ceos i show that higher wealth ceos receive stronger incentives since high wealth excluding own firm holdings implies low absolute risk aversion this is consistent with a risk aversion explanation to examine whether wealth is likely to proxy for power i use lagged wealth typically measured before the ceo was hired and the results remain for one of two incentive measures also the wealth incentive result is not stronger for ceos likely to face limited owner oversight finally wealth is unrelated to pay levels and is hence unlikely to proxy for skill the compensation of chief executives of large listed companies is often largely in the form of risky instruments such as shares and options since share prices are affected by many factors outside management control this exposes ceos to risk according to standard agency theory the risk inherent in incentive compensation should reduce optimal incentives looking across firms the evidence that volatile stock prices reduce incentives in actual compensation has been mixed see e g aggarwal and samwick 1999 core and guay 2001 and prendergast 2002 for different views the importance of risk for incentives is thus in dispute 1 this paper takes another look at ceo incentives exploiting variation in risk aversion rather than risk decreasing absolute risk aversion implies that a wealthy ceo is less risk averse than a similar same coefficient of relative risk aversion but less wealthy ceo wealth should therefore proxy for risk aversion wealth may also be related to ceo skill and power obviously using wealth variation empirically hinges on having adequate data on individual wealth i use swedish tax filings to construct a proxy of wealth in sweden tax authorities provide data on aggregate yearly income

capital skill complementarity and balanced growth we construct a general equilibrium version of the krusell et al econometrica 68 1029 2000 model with capital skill complementarity we assume several sources of growth simultaneously exogenous growth of skilled and unskilled labour equipment specific technological progress skilled and unskilled labouraugmenting technological progress and hicks neutral technological progress we derive restrictions that make our model consistent with balanced growth a calibrated version of our model can account for the key growth patterns in the us data including those for capital equipment and structures skilled and unskilled labour and output but it fails to explain the long run behaviour of skilled labour wages and consequently the skill premium

the role of the structural transformation in aggregate productivity we investigate the role of sectoral differences in labor productivity in explaining the process of structural transformation the secular reallocation of labor across sectors and the time path of aggregate productivity across countries using a simple model of the structural transformation that is calibrated to the growth experience of the united states we measure sectoral labor productivity differences across countries productivity differences between rich and poor countries are large in agriculture and services and smaller in manufacturing moreover over time productivity gaps have been substantially reduced in agriculture and industry but not nearly as much in services in the model these sectoral productivity patterns generate implications that are broadly consistent with the cross country evidence on the structural transformation aggregate productivity paths and relative prices we show that productivity catch up in industry explains about 50 percent of the gains in aggregate productivity across countries while low relative productivity in services and the lack of catch up explains all the experiences of slowdown stagnation and decline observed across countries

desperation or desire the role of risk aversion in marriage i introduction attitudes toward risk are an important determinant of a vast array of decisions such decisions include ones with a big impact on life the choice of education the choice of career investment decisions and even when and if to get married or divorced most empirical studies of behavior implicitly assume risk preferences are identical across households such a research strategy undoubtedly results in appreciably different predictions of behavior than would occur if risk preferences are permitted to vary while an increasing number of surveys are asking respondents questions that allow for construction of a measure of interpersonal variation in risk that is based on economic theory there is still a paucity of empirical studies that explicitly investigate the impact of risk preferences on behavior 1 i use information on risk preferences from the national longitudinal survey of youth 1979 nlsy79 to predict how interpersonal variation in these preferences affects the time to marriage decision because of the uncertainty inherent in searching for a partner and the uncertainty of the future quality and state of the marriage itself risk attitudes likely directly impact the timing of marriage risk preference variables are constructed from a series of hypothetical gambles over lifetime income that were offered to respondents in the nlsy79 i examine how the risk preference variables affect the hazard rate into marriage and find that the more risk averse marry sooner l also exploit sibling data from the nlsy79 to examine the robustness of the empirical results by controlling for unobserved family effects that might be correlated with risk attitudes and find qualitatively similar results in addition i find that risk preferences affect the timing of marriage differentially for the sexes with a larger and more statistically significant effect of risk preferences on the hazard rate into marriage for men one possible explanation for this finding is that women value risk aversion as a desirable characteristic in a spouse to explore this possibility i analyze spouse characteristics by the risk aversion of the respondent i find that spouse quality in terms of education and other measurable traits is generally lower for more risk averse men than for more risk loving men this finding is in accordance with a prediction of a search model the reservation price is decreasing in risk aversion spouse quality of more risk averse women is usually but not always lower than for more risk loving women suggesting that the effect of a woman s own risk aversion on time to marriage may be more complex than suggested by a search model overall the results suggest that risk preferences have some causal influence on the timing of marriage whether it be from a supply side standpoint such as in the case of a basic search model or from a demand side standpoint where risk aversion is a desirable trait this article contributes to a sparse literature that employs empirical measures of risk aversion many of these studies ask how demographic characteristics affect risk attitudes 2 a few ask how these measures of risk aversion affect behaviors like the propensity to smoke or invest in risky assets 3 these studies are however cross sectional and do not employ survival analysis as does this article to my knowledge only two existing studies light and ahn 2008 schmidt 2008 employ an empirical measure of risk aversion to investigate the relationship between risk preferences and the marriage market schmidt focuses on fertility but also considers marital timing of employed women and light and abn focus on divorce timing the findings of both studies are consistent with mine 4 my study adds to schmidt s by considering all women and men and exploring the differences between the genders including a discussion of how spousal characteristics might differ by the risk aversion of respondents

the quantitative importance of openness in development this paper deals with a classic development question how can the process of economic development transition from stagnation in a traditional technology to industrialization and prosperity with a modern technology be accelerated lewis 1954 and rostow 1956 argue that the pace of industrialization is limited by the rate of capital formation which in turn is limited by the savings rate of workers close to subsistence we argue that access to capital goods in the world market can be quantitatively important in speeding up the transition we develop a parsimonious open economy model where traditional and modern technologies coexist a dual economy in the sense of lewis 1954 we show that a decline in the world price of capital goods in an open economy increases the rate of capital formation and speeds up the pace of industrialization relative to a closed economy that lacks access to cheaper capital goods in the long run the investment rate in the open economy is twice as high as in the closed economy and the per capita income is 23 higher jel o11 f43 o14

the rise of mass consumption societies this paper studies mechanisms behind the rise of mass consumption societies the development process depicted follows the flying geese pattern in which a series of industries take off one after another as productivity improves in these industries each consumer good becomes affordable to an increasingly large number of households which constantly expand the range of goods they consume this in turn generates larger markets for consumer goods which leads to further improvement in productivity for such virtuous cycles of productivity gains and expanding markets to occur income distribution should be neither too equal nor too unequal with too much equality the economy stagnates in a poverty trap with too much inequality the development stops prematurely

the exercise and valuation of executive stock options abstract in theory hedging restrictions faced by managers make executive stock options more difficult to value than ordinary options because they imply that exercise policies of managers depend on their preferences and endowments using data on option exercises from 40 firms this paper shows that a simple extension of the ordinary american option model which introduces random exogenous exercise and forfeiture predicts actual exercise times and payoffs just as well as an elaborate utility maximizing model that explicitly accounts for the nontransferability of options the simpler model could therefore be more useful than the preference based model for valuing executive options in practice

asset allocation and individual risk aversion 1992 asset allocation and individual risk aversion financial analysts journal vol 48 no 6 pp 32 37

capital labor substitution structural change and the labor income share abstract recent work has documented declines in the labor income share in the united states and beyond this paper documents that this decline was more pronounced in manufacturing than in services in the u s and in a broad set of other industrialized economies and shows that a model with cross sectoral differences in productivity growth and in the degree of capital labor substitutability is consistent with these trends we calibrate the model exploiting additional information on the pace of structural change from manufacturing to services on which the model also has predictions we then conduct a decomposition to establish the relative importance of several potential drivers of changes in factor income shares and structural change that have been proposed in the literature this exercise reveals that differences in the degree of capital bias of technical change across sectors combined with differences in substitution possibilities are key determinants of the observed patterns

structural change in a multisector model of growth we study a multi sector model of growth with differences in tfp growth rates across sectors and derive sufficient conditions for the coexistence of structural change characterized by sectoral labour reallocation and constant aggregate growth path the conditions are weak restrictions on the utility and production functions commonly applied by macroeconomists we present evidence from us two digit industries that is consistent with our predictions about structural change and successfully calibrate the historical shift from agriculture to manufacturing and services we show quantitatively that reasonable deviations from our conditions do not have a big impact on the properties of the model

on the optimal policy structure in serial inventory systems with lost sales we study a periodically reviewed serial inventory system in which excess demand from external customers is lost we derive elementary properties of the vector of optimal order quantities in this system in particular we derive bounds on the sensitivity or more mathematically the derivative of the optimal order quantity at each stage to the vector of the current inventory levels our analysis uses the concept of l natural convexity which was studied in discrete convex analysis and recently used in the study of single stage inventory systems with lost sales we also remark on how our analysis extends to models with capacity constraints and or backordering

beyond balanced growth balanced growth models are commonly used in macroeconomics because they are consistent with the well known kaldor facts regarding economic growth these models however are inconsistent with one of the most striking regularities of the growth process the massive reallocation of labour from agriculture into manufacturing and services this paper presents a simple model consistent with both the kaldor facts and the dynamics of sectoral labour reallocation

new policies for the stochastic inventory control problem with two supply sources we study an inventory system under periodic review in the presence of two suppliers or delivery modes the emergency supplier has a shorter lead time than the regular supplier but the unit price he offers is higher excess demand is backlogged we generalize the recently studied class of dual index policies veeraraghavan s a scheller wolf 2008 now or later dual index policies for capacitated dual sourcing systems oper res 56 4 850 864 by proposing two classes of policies the first class consists of policies that have an order up to structure for the emergency supplier we provide analytical results that are useful for determining optimal or near optimal policies within this class this analysis and the policies we propose leverage our observation that the classical lost sales inventory problem is a special case of this problem the second class consists of policies that have an order up to structure for the regular supplier here we derive bounds on the optimal order quantity from the emergency supplier in any period and use these bounds for finding effective policies within this class finally we undertake an elaborate computational investigation to compare the performance of the policies we propose with that of dual index policies one of our policies provides an average cost saving of 1 1 over the best dual index policy and has the same computational requirements another policy that we propose has a cost performance similar to the best dual index policy but its computational requirements are lower

capital skill complementarity and inequality in sweden income inequality increased in sweden during the 1980s and 1990s as did the returns to higher education the main conclusion of this study is that increased income inequality between highand low skilled workers is demand driven and is due to the presence of capital skill complementarity in production increased investments in new more efficient capital equipment along with a slowdown in the growth rate of skilled labor have raised the ratio of effective capital inputs per skilled worker which in turn has increased the relative demand and market return for skilled labor through the capital skill complementarity mechanism

can traditional theories of structural change fit the data two traditional explanations for structural changes are sector biased technological progress and non homothetic preferences this paper integrates both into an otherwise standard growth model and quantitatively evaluates them vis a vis time series the exercise identifies a set of puzzles for standard theories i the model cannot account for the steep decline in manufacturing and rise in services in the later data ii the standard model requires implausibly low elasticity of substitution across goods to match the consumption and output data and iii the behavior of consumption and output shares differs significantly from that of employment shares we argue that models that incorporate home production sector specific factor distortions and differences across sectors in the accumulation of human capital are promising avenues to amend the standard models jel o11 o14 o41

estimating the value of employee stock option portfolios and their sensitivities to price and volatility the costs associated with compiling data on employee stock option portfolios is a substantial obstacle in investigating the impact of stock options on managerial incentives accounting choice financing decisions and the valuation of equity we present an accurate method of estimating option portfolio value and the sensitivities of option portfolio value to stock price and stock return volatility that is easily implemented using data from only the current year s proxy statement or annual report this method can be applied to either executive stock option portfolios or to firm wide option plans in broad samples of actual and simulated ceo option portfolios we show that these proxies capture more than 99 of the variation in option portfolio value and sensitivities sensitivity analysis indicates that the degree of bias in these proxies varies with option portfolio characteristics and is most severe in samples of ceos with a large proportion of out of the money options however the proxies explanatory power remains above 95 in all subsamples

an empirical analysis of risk aversion and income growth risk aversion enters many theoretical models of human capital investment but attitudes toward risk have not been incorporated in empirical models of human capital investment this article develops a model of the joint investment in financial wealth and human wealth to show that human capital investment is an inverse function of the degree of relative risk aversion using data from the survey of consumer finances i find that wage growth is positively correlated with preferences for risk taking more educated individuals are also more likely to be risk takers thus risk taking explains a portion of the returns to education

structural change in an interdependent world a global view of manufacturing decline this paper presents a simple model of the world economy in which productivity gains in manufacturing are responsible for the global trend of manufacturing decline and yet in a cross section of countries faster productivity gains in manufacturing do not necessarily imply faster declines in manufacturing in doing so it aims to draw attention to the common pitfall of using the cross country evidence to test a closed economy model and argues for a global perspective in order to understand cross country patterns of structural change one needs a world economy model in which the interdependence across countries is explicitly spelled out jel f43 o11 o14 o19

risk aversion performance pay and the principal agent problem this paper calculates numerical solutions to the principal agent problem and compares the results to the stylized facts of ceo compensation the numerical predictions come from parameterizing the models of grossman and hart and of holmstrom and milgrom while the correct incentives for a ceo can greatly enhance a firm s performance providing such incentives need not be expensive for many parameter values ceo compensation need increase only by about 10 for every 1 000 of additional shareholder value for some values the amount is 0 003 cents

lower salaries and no options on the optimal structure of executive pay we estimate a standard principal agent model with constant relative risk aversion and lognormal stock prices for a sample of 598 us ceos the model is widely used in the compensation literature but it predicts that almost all of the ceos in our sample should hold no stock options instead ceos should have lower base salaries and receive additional shares in their companies for a typical value of relative risk aversion almost half of the ceos in our sample would be required to purchase additional stock in their companies from their private savings the model predicts contracts that would reduce average compensation costs by 20 while providing the same incentives and the same utility to ceos we investigate a number of extensions and modi cations of the standard model but nd none of them to be satisfactory we conclude that the standard principal agent model typically used in the literature cannot rationalize observed contracts one reason may be that executive pay contracts are suboptimal

long run implications of investment specific technological change an attempt is made to disentangle its effects from the more traditional hicksneutral form of technological progress the balanced growth path for the model is characterized and calibrated to u s national income and product account nipa data the quantitative analysis suggests that investment specific technological change accounts for the major part of growth jel e13 030 041 047

estimating risk preferences from deductible choice we develop a structural econometric model to estimate risk preferences from data on deductible choices in auto insurance contracts we account for adverse selection by modeling unobserved heterogeneity in both risk claim rate and risk aversion we find large and skewed heterogeneity in risk attitudes in addition women are more risk averse than men risk aversion exhibits a u shape with respect to age and proxies for income and wealth are positively associated with absolute risk aversion finally unobserved heterogeneity in risk aversion is greater than that of risk and as we illustrate has important implications for insurance pricing

coordinating inventory control and pricing strategies for perishable products we analyze a joint pricing and inventory control problem for a perishable product with a fixed lifetime over a finite horizon in each period demand depends on the price of the current period plus an additive random term inventories can be intentionally disposed of and those that reach their lifetime have to be disposed of the objective is to find a joint pricing ordering and disposal policy to maximize the total expected discounted profit over the planning horizon taking into account linear ordering cost inventory holding and backlogging or lost sales penalty cost and disposal cost employing the concept of l concavity we show some monotonicity properties of the optimal policies our results shed new light on perishable inventory management and our approach provides a significantly simpler proof of a classical structural result in the literature moreover we identify bounds on the optimal order up to levels and develop an effective heuristic policy numerical results show that our heuristic policy performs well in both stationary and nonstationary settings finally we show that our approach also applies to models with random lifetimes and inventory rationing models with multiple demand classes

risk preferences and the economics of contracts t he literature of risk aversion and risk preference is one of the richest sources of ad hoc assumptions concerning tastes n o significant behavior has been illuminated by assumptions of differences in tastes such theories have been a convenient crutch to lean on when the analysis has bogged down they give the appearance of considered judgement yet really have only been ad hoc arguments that disguise analytical failures george j stigler and gary s becker 1977 p 89

the risk preferences of u s executives in this paper i elicit risk attitudes of u s executives by calibrating a subjective option valuation model for option exercising data 1996 to 2008 yielding approximately 65 000 values of relative risk aversion rra for almost 7 000 executives the observed behavior is generally consistent with moderate risk aversion and a median mean rra close to one three values are validated for chief executive officers ceos by testing theory based predictions on the influence of individual characteristics on risk preferences such as gender marital status religiosity and intelligence senior managers such as ceos presidents and chairpersons of the boards of directors are significantly less risk averse than non senior executives rra heterogeneity is strongly correlated with sector membership and firm level variables such as size performance and capital structure alternative factors influencing option exercises are tested for their influence on rra values this paper was accepted by brad barber finance

can total factor productivity explain value added growth in services abstract this paper examines the factors responsible for generating the services led growth witnessed in the indian economy during 1980 2005 a sectoral growth accounting exercise shows that total factor productivity tfp growth was the fastest for services moreover this tfp increase was significant in accounting for service sector value added growth a growth model with agriculture industry and services as three principal sectors is calibrated to indian data using sectoral tfp growth rates the baseline model performs well in accounting for the evolution of value added shares and their growth rates but is unable to capture sectoral employment share trends the performance of the model with respect to value added shares improves when the post 1991 increase in service sector tfp growth following the inception of market based liberalization reforms is accounted for a modified version of the model with public capital can better track trends in sectoral employment shares