optimal flexibility configurations in newsvendor networks going beyond chaining and pairing we study the classical problem of capacity and flexible technology selection with a newsvendor network model of resource portfolio investment the resources differ by their level of flexibility where level k flexibility refers to the ability to process k different product types we present an exact set theoretic methodology to analyze newsvendor networks with multiple products and parallel resources this simple approach is sufficiently powerful to prove that i flexibility exhibits decreasing returns and ii the optimal portfolio will invest in at most two adjacent levels of flexibility in symmetric systems and to characterize iii the optimal flexibility configuration for asymmetric systems as well the optimal flexibility configuration can serve as a theoretical performance benchmark for other configurations suggested in the literature for example although chaining is not optimal in our setting the gap is small and the inclusion of scale economies quickly favors chaining over pairing we also demonstrate how this methodology can be applied to other settings such as product substitution and queuing systems with parameter uncertainty

the possibility of informationally efficient markets abstract a rational expectations equilibrium with positive demand for financial information does exist under fully revealing asset price contrary to a wide held conjecture whereas a continuum of investors is inconsistent with fully revealing equilibrium finitely many investors with average portfolios demand information in equilibrium if they can adjust portfolio size in an additive signal return model more information diminishes the expected excess return of a risky asset so that investors who only have a choice of portfolio composition or whose asset endowments strongly differ from the average portfolio are worse off under fully revealing price information market equilibria both with and without information acquisition are pareto efficient

a liquidity based model of security design we consider the problem of the design and sale of a security backed by specified assets given access to higher return investments the issuer has an incentive to raise capital by securitizing part of these assets at the time the security is issued the issuer s or underwriter s private information regarding the payoff of the security may cause illiquidity in the form of a downward sloping demand curve for the security the severity of this illiquidity depends upon the sensitivity of the value of the issued security to the issuer s private information thus the security design problem involves a tradeoff between the retention cost of holding cash flows not included in the security design and the liquidity cost of including the cash flows and making the security design more sensitive to the issuer s private information we characterize the optimal security design in several cases we also demonstrate circumstances under which standard debt is optimal and show that the riskiness of the debt is increasing in the issuer s retention costs for assets

single period multiproduct inventory models with substitution we study a single period multiproduct inventory problem with substitution and proportional costs and revenues we consider n products and n demand classes with full downward substitution i e excess demand for class i can be satisfied using product j for i j we first discuss a two stage profit maximization formulation for the multiproduct substitution problem we show that a greedy allocation policy is optimal we use this to write the expected profits and its first partials explicitly this in turn enables us to prove additional properties of the profit function and several interesting properties of the optimal solution in a limited computational study using two products we illustrate the benefits of solving for the optimal quantities when substitution is considered at the ordering stage over similar computations without considering substitution while ordering specifically we show that the benefits are higher with high demand variability low substitution cost low profit margins or low price to cost ratio high salvage values and similarity of products in terms of prices and costs

financial innovation and information the role of derivatives when a market for information exists we study the effects of financial innovation in a model of endogenous information acquisition we determine the conditions under which the introduction of a derivative written on an existing stock increases or decreases the incentive to purchase information we show that financial innovation produces some effects which hold across informational structures and others which differ the former coincide with the few empirical results that are robust in the literature effects on prices risk premia and volatility while the latter coincide with the ones that differ experiment by experiment effects on volume correlation between volume and volatility and market informational efficiency copyright 2002 oxford university press

multi resource investment strategies operational hedging under demand uncertainty abstract consider a firm that markets multiple products each manufactured using several resources representing various types of capital and labor and a linear production technology the firm faces uncertain product demand and has the option to dynamically readjust its resource investment levels thereby changing the capacities of its linear manufacturing process the cost to adjust a resource level either up or down is assumed to be linear the model developed here explicitly incorporates both capacity investment decisions and production decisions and is general enough to include reversible and irreversible investment the product demand vectors for successive periods are assumed to be independent and identically distributed the optimal investment strategy is determined with a multi dimensional newsvendor model using demand distributions a technology matrix prices product contribution margins and marginal investment costs our analysis highlights an important conceptual distinction between deterministic and stochastic environments the optimal investment strategy in our stochastic model typically involves some degree of capacity imbalance which can never be optimal when demand is known

allocation of flexible and indivisible resources with decision postponement and demand learning we consider a firm that uses two perishable resources to satisfy two demand types resources are flexible such that each resource can be used to satisfy either demand type resources are also indivisible such that the entire resource must be allocated to the same demand type this type of resource flexibility can be found in different applications such as movie theater complexes cruise lines and airlines in our model customers arrive according to independent poisson processes but the arrival rates are uncertain thus the manager can learn about customer arrival rates from earlier demand figures and potentially increase the sales by postponing the resource allocation decision we consider two settings and derive the optimal resource allocation policy for one setting and develop a heuristic policy for the other our analysis provides managerial insights into the effectiveness of different resource allocation mechanisms for flexible and indivisible resources

welfare improving asymmetric information in dynamic insurance markets this article presents a two period asymmetric learning model of insurance markets when information about past accidents is not shared by insurers asymmetries of information develop through time equilibrium contracts exist are payoff unique and display a realistic bonus malus pattern eliminating asymmetries through information sharing is welfare decreasing in contrast with past contributions on insurance and adverse selection when second period contract offers cannot be contingent on initial contract choice a strict increase in welfare is obtained through menus of contracts although initial contract choice is in itself worthless information

supply capacity acquisition and allocation with uncertain customer demands we study a class of capacity acquisition and assignment problems with stochastic customer demands often found in operations planning contexts in this setting a supplier utilizes a set of distinct facilities to satisfy the demands of different customers or markets our model simultaneously assigns customers to each facility and determines the best capacity level to operate or install at each facility we propose a branch and price solution approach for this new class of stochastic assignment and capacity planning problems for problem instances in which capacity levels must fall between some pre specified limits we offer a tailored solution approach that reduces solution time by nearly 80 over an alternative approach using a combination of commercial nonlinear optimization solvers we have also developed a heuristic solution approach that consistently provides optimal or near optimal solutions where solutions within 0 01 of optimality are found on average without requiring a nonlinear optimization solver

entropy and economic processes physics perspectives this paper is a contribution to the discussion on the relation between thermodynamics and economic theory with respect to thermodynamic constraints on the economy there are two diametrically opposite positions in this discussion one claims that the constraints are insignificant of no immediate practical importance for modelling and in the intermediate run do not limit economic activity and therefore need not be incorporated in the economic theory the other holds that thermodynamics tells us that there are practical limits to materials recycling which already puts bounds on the economy and therefore must be included in the economic models using the thermodynamic concept of entropy we show here that there are fundamental problems with both positions even in the long run entropy production associated with material dissipation need not be a limiting factor for economic development abundant energy resources from solar radiation may be used to recover dissipated elements with simple quantitative analysis we show that the rate of entropy production caused by human economic activities is very small compared to the continuous natural entropy production in the atmosphere and on the earth s surface further the societal entropy production is well within the range of natural variation it is possible to replace part of the natural entropy production with societal entropy production by making use of solar energy society consumes resources otherwise available for coming generations however future generations need not have less resources available to them than the present generation human industrial activities could be transformed into a sustainable system where the more abundant elements are industrially used and recycled using solar energy as the driving resource an economic theory fit to guide industrial society in that development must not disregard thermodynamics nor must it overstate the consequences of the laws of thermodynamics 2001 elsevier science b v all rights reserved

dynamic capacity management with substitution we examine a multiperiod capacity allocation model with upgrading there are multiple product types corresponding to multiple classes of demand and the firm purchases capacity of each product before the first period within each period after demand arrives products are allocated to customers customers who arrive to find that their product has been depleted can be upgraded by at most one level we show that the optimal allocation policy is a simple two step algorithm first use any available capacity to satisfy same class demand and then upgrade customers until capacity reaches a protection limit so that in the second step the higher level capacity is rationed we show that these results hold both when all capacity is salvaged at the end of the last demand period as well as when capacity can be replenished in the latter case an order up to policy is optimal for replenishment although finding the optimal protection limits is computationally intensive we describe bounds for the optimal protection limits that take little effort to compute and can be used to effectively solve large problems using these heuristics we examine numerically the relative value of strictly optimal capacity and dynamic rationing the value of perfect demand information and the impact of demand and economic parameters on the value of optimal substitution

financial market innovation and security design an introduction abstract the article describes in the context of theory and practice this special issue of the journal of economic theory on financial market innovation and security design the main focus is on security design in incomplete financial markets possibly with asymmetrically informed traders we first survey the general equilibrium literature which emphasizes the spanning role of securities we then provide a unified framework encompassing the literature that employs a cara guassian setting to study the impact of financial innovation on risk sharing and information aggregation journal of economic literature classification numbers g10 d52

inventory pooling under heavy tailed demand risk pooling has been studied extensively in the operations management literature as the basic driver behind strategies such as transshipment manufacturing flexibility component commonality and drop shipping this paper explores the benefit of risk pooling in the context of inventory management using the canonical model first studied in eppen eppen gd 1979 effects of centralization on expected costs in a multi location newsboy problem management sci 25 5 498 501 specifically we consider a single period multilocation newsvendor model where n different locations face independent and identically distributed demands and linear holding and backorder costs we show that eppen s celebrated result i e that the expected cost savings from centralized inventory management scale with the square root of the number of locations depends critically on the light tailed nature of the demand uncertainty in particular we establish that the benefit from pooling relative to the decentralized case in term

club membership and transboundary pollution evidence from the european union enlargement we set up a theoretical model in which a less developed country the ldc undertakes an activity that imposes negative transboundary pollution effects on a more developed country the mdc the mdc can effectively make a coasian payment in the form of direct environmental assistance but can also encourage good environmental citizenship through its influence over the prospect that the ldc will gain the benefits of membership into a particular international club we examine the strategic interactions between the ldc and the mdc in this regional environmental game and our comparative statics analysis explores how a change in the membership payoff will affect the environmental efforts and outcome of both countries our theoretical model also addresses the issue of the economic growth in the ldc as well as its environmental impacts in the region we also conduct empirical study and examine the evidence in the thirteen central and eastern european cee countries that joined the european union eu in the 21st century and investigate the impacts of eu membership on their environmental performance we find that there is a robust correlation between the degree of eu integration and pollution abatement from the ldc and we also observe that emissions of selected pollutants seem to follow a concave pattern relative to the national income both of which coincide with our theoretical discussions

a reexamination of the role of thermodynamics for environmental economics abstract as the discussion about the role of thermodynamics in environmental economics has not led to a conclusion yet a more fundamental approach seems to be necessary which also takes into consideration the relationship between economics and the natural sciences in general to this end value theory is chosen as a starting point because it is the centerpiece of every economic theory it is shown that neoclassical environmental economics suffers from serious deficiencies because of its value concept heedlessly copied from classical mechanics thermodynamics can be expected to be helpful to redress these defects because the economy can be thought of as a dissipative structure dependent on its environment the obvious way to integrate thermodynamics consists in the formulation of thermodynamic constraints to complement neoclassical environmental economics but this approach remains unsatisfactory because the neoclassical mechanical hardcore is incompatible with the entropy law and its implications evidently the neoclassical paradigm and its value concept have to be given up but the alternative of the energy theory of value must be rejected because its determinism cannot be reconciled with the richness of human behaviour as thermodynamic analogies offer no solution either there is a dilemma between the necessity and the apparent impossibility of adequately integrating thermodynamic concepts it turns out that a normative inconsistency is responsible which is due to the demand for intergenerational justice therefore the integration of thermodynamics into environmental economics hinges on a meta economic value decision if sustainability is adopted as the guiding principle the insights of thermodynamics call for a macro economic environmental policy setting absolute limits to the economy but this macro policy is incompatible with neoclassical economics so that a social reconstruction of economics based on a social theory of value becomes necessary in sum thermodynamics is important for environmental economics besides fulfilling a general heuristic function it also fulfils a decisive conceptual and an analytical function insofar as it helps to justify sustainability and to operationalize macro economic environmental policy

analytical and managerial implications of integrating product substitutability in the joint pricing and procurement problem abstract this paper studies the analytical and managerial implications of product substitutability on the joint pricing and procurement decisions we consider a single period model with two products an existing product and an improved new product that can substitute the demand for the existing product in case of a shortage demand for each product follows a general distribution with an expected value that is a linear function of the price of the new product while the price of the existing product is determined by the market it is necessary to determine the new product s price and the procurement quantities of both products so as to maximize the profits we analytically show that the expected profit function is unimodal and in the existence of substitution the expected total profit is higher the optimal price and the safety stock of the new product are higher and the optimal safety stock of the existing product is less using these properties an efficient algorithm is developed we also provide a numerical analysis to demonstrate that considering substitution in advance could increase the profitability by 58 and the new product price by 5 while decreasing the total procurement quantity by 15

optimal innovation of futures contracts this article presents a simple model of the innovation of new futures contracts by transaction volume maximizing futures exchanges in incomplete markets under uncertainty with mean variance preferences and proportional transactions costs we characterize the set of nash equilibria for a number of exchanges simultaneously or sequentially choosing contracts the optimal monopolistic contract design is shown to be pareto optimal an example shows the failure of pareto optimality for aparticularnash equilibrium likewise in a monopolistic multiperiod setting an example shows the failure of pareto optimality given an incentive for the exchange to induce turnover

information revelation and market incompleteness this paper introduces a theory of market incompleteness based on the information transmission role of prices and its adverse impact on the provision of insurance in financial markets we analyse a simple security design model in which the number and payoff of securities are endogenous agents have rational expectations and differ in information endowments and attitudes toward risk when markets are incomplete equilibrium prices are typically partially revealing while full relevation is attained with complete markets the optimality of complete or incomplete markets depends on whether the adverse selection effect the unwillingness of agents to trade risks when they are informationally disadvantaged is stronger or weaker than the hirshleifer effect the impossibility of trading risks that have already been resolved as new securities are issued and prices reveal more information when the hirshleifer effect dominates an incomplete set of securities is preferred by all agents and generates a higher volume of trade hirshleifer 1971 was the first to point out that revelation of information can reduce risksharing opportunities in insurance markets resulting in a welfare loss in this paper we build on hirshleifer s insight to develop a theory of endogenous market incompleteness we show that in an economy with asymmetric information in which agents learn from prices an incomplete financial structure may be optimal the reason is that less information is revealed by prices when markets are incomplete than in an otherwise identical economy with complete markets 1 paradoxically a greater degree of incompleteness may result in better risk sharing since the only risks that can be traded are those whose resolution is not common knowledge at the time of trade for the same reason incompleteness of markets may also foster a higher volume of trade the connection between security design asymmetric information trading volume and welfare in financial markets is a subtle one and it is important to isolate its various facets the efficacy of security markets in aggregating and transmitting private information depends on the characteristics of the financial structure and especially on the number of tradeable assets indeed within the rational expectations paradigm informational differences disappear in equilibrium generically when the price vector has

competition under capacitated dynamic lot sizing with capacity acquisition lot sizing and capacity planning are important supply chain decisions and competition and cooperation affect the performance of these decisions in this paper we look into the dynamic lot sizing and resource competition problem of an industry consisting of multiple firms a capacity competition model combining the complexity of time varying demand with cost functions and economies os scale arising from dynamic lot sizing costs is developed each firm can replenish inventory at the beginning of each period in a finite planning horizon fixed as well as variable production costs incur for each production setup along with inventory carrying costs the individual production lots of each firm are limited by a constant capacity restriction which is purchased up front for the planning horizon the capacity can be purchased from a spot market and the capacity acquisition cost fluctuates with the total capacity demand of all the competing firms we solve the competition model and establish the existence of a capacity equilibrium over the firms and the associated optimal dynamic lot sizing plan for each firm under mild conditions

in defense of health based standards abstract this paper explores the utilitarian ethical foundations underlying two standards for pollution control an efficiency standard and a health based standard the main point is that a health based standard can be defended quite easily on utilitarian grounds safety proponents need not be self serving irrational nor ignorant criticism of health based standards as too costly is not always persuasive since material consumption is not the only component of social welfare nor do consumption increases necessarily increase social welfare

optimal investment strategies for flexible resources considering pricing and correlated demands we study the optimal resource investment decision faced by a two product price setting firm that operates in a monopolistic setting and employs a postponed pricing scheme the firm has the option to invest in dedicated resources as well as a more expensive flexible resource that can satisfy both products while the resource investment decision is made under demand uncertainty pricing and resource allocation decisions are postponed to the time when demand curves are realized our analysis provides the structure of the firm s optimal resource investment strategy as a function of demand parameters and investment costs and shows that the flexible resource investment decision follows athreshold policy we also show that it can be optimal for the firm to invest in the flexible resource even when demand patterns are perfectly positively correlated the reason for flexible capacity investment in this case is financial rather than risk pooling on the other hand we show that it can be optimal for the firm not to invest in the flexible resource even when demand patterns are perfectly negatively correlated the flexible resource investment decision in this case depends on the profitability of the two products based on our analysis we provide principles on the firm s optimal resource investment decision

optimal security design how should new securities be designed traditional theories have little to say on this the literature on capital structure and general equilibrium theories with incomplete markets take the securities firms issue as exogenous this paper explicitly incorporates the transaction costs of issuing securities and develops a model where the instruments that are traded are chosen optimally and the economy s market structure is endogenous among other things it is shown that the firm s income stream should be split so that in every state all payoffs are allocated to the security held by the group that values them most this abstract was borrowed from another version of this item

the impact of budget constraints on flexible vs dedicated technology choice this paper studies the flexible versus dedicated technology choice and capacity investment decisions of a multiproduct firm under demand uncertainty in the presence of budget constraints the firm operates under a capital budget for financing the capacity investment and an operating budget which is uncertain in the capacity investment stage for financing the production we investigate how the tightening of the capital budget and a lower financial flexibility in the production stage the likelihood of having a sufficient operating budget shape the optimal technology choice we find that the dominant regime is one where dedicated technology should be adopted for a larger investment cost range and thus is the best response to the tighter capital budget whereas flexible technology is the best response to lower financial flexibility we identify the key roles that the capacity intensity the ratio of unit capacity cost to total unit capacity and production cost of each technology and the pooling value

optimality of incomplete markets abstract in a static exchange economy where the traders initial endowments are risky the optimality of the financial structure is studied when markets are incomplete only financial structures with the same number of assets are compared a market structure is optimal when in a particular economy it yields an allocation of risks which cannot be pareto dominated through the implementation of any other market structure in a linear gaussian setup the optimal market structures are shown to span an eigenspace of a matrix which combines the risk exposures of the participants in the market approximately weighted by a measure of their risk aversions journal of economic literature classification numbers d60 g10

resource flexibility with responsive pricing this article studies two types of flexibility used by firms to better respond to uncertain market conditions resource flexibility and responsive pricing we consider a situation in which a single flexible resource can be used to satisfy two distinct demand classes while the resource capacity must be decided based on uncertain demand functions the resource allocation as well as the pricing decision are made based on the realized demand functions we characterize the effects of two key drivers of flexibility demand variability and demand correlation assuming normally distributed demand curve intercepts demand variability creates opportunity costs and with fixed prices decreases the firm s profit we show that with the additional flexibility gained from responsive pricing the firm can maximize the benefits of favorable demand conditions and mitigate the effects of poor demand conditions ultimately profiting from variability positive demand correlation on the other hand remains undesirable under responsive pricing the optimal capacity of the flexible resource is always increasing in both demand variability and demand correlation this contrasts with the scenarios based on fixed prices highlighting the crucial difference that responsive pricing makes in the management of flexible resources we further quantify the value of flexibility for the firm and its customers by considering as a benchmark a firm relying on two dedicated resources the value of flexibility is most significant if the demand levels are highly variable and negatively correlated in such cases the firm benefits from demand variability due to responsive pricing while facing limited demand risk due to resource flexibility finally we endogenize the input price of the flexible resource by considering the pricing decision of the resource supplier

the instability of the adjusted and unadjusted environmental kuznets curves abstract we test the stability of the unadjusted and adjusted environmental kuznets curves ekcs our results provide evidence in favour of a theoretically funded adjusted ekc hypothesis in which the impact of per capita gdp on co 2 emissions is evaluated conditionally to the effects of the industry mix and of the energy supply infrastructure in this specification the shape of the gdp co 2 relationship appears quite sensitive to changes in the estimation period in the final part of the paper signs and dynamics of fixed effects of individual countries in different specifications are interpreted as measures of virtuous or vicious of environmental behaviour

sustainable development challenges to profession of agricultural economics fundamentally sustainable development is a notion of discipline disciplining our current consumption this sense of intergenerational responsibility is a new political principle a virtue that must now guide economic growth the industrial world has already used so much of the planet s ecological capital that the sustainability of future life is in doubt that can t continue brundtland page 5

adverse selection and security design this paper studies the problem of optimal security design by a privately informed entrepreneur in the context of a simple parametric model it is shown that the entrepreneur does not find it profitable to float an asset that affords her an informational advantage the reason is that with rational uninformed outside investors the entrepreneur faces adverse selection in the security market which prevents her from exploiting her position as an insider this is true whether or not she has market power in trading the asset consider a risk averse entrepreneur who is contemplating what security to issue the entrepreneur anticipates that during subsequent trading in the secondary market she will have private information on the payoff of her investment as well as on other risks in the economy the design of the asset is therefore influenced not only by a desire to share risk but also by informational considerations involving the potential for insider trading profits this paper studies the problem of optimal security design in the context of a simple parametric model with gaussian risks and cara utility trading in the secondary market is modelled via the static reduced form concept of rational expectations equilibrium in which uninformed outside investors use market prices to try to infer the private information of the entrepreneur or insider as she will sometimes be called it is shown that the entrepreneur does not find it profitable to float an asset that affords her an informational advantage an optimal asset entails a fully revealing rational expectations equilibrium and is perfectly correlated with the issuer s endowment risk the reason is that with rational outside investors the entrepreneur faces adverse selection in the security market which prevents her from exploiting her position as an insider she is better off foregoing her informational advantage and concentrating on her hedging motive alone in the particular setting described in the paper equity2 is an optimal asset since the entrepreneur has no privileged information regarding its payoff and it allows efficient risk sharing the issue of security design when prices have an informational role to play is just beginning to be researched closely related to this paper is the work of demange and laroque 1995 who use a competitive rational expectations model with noise traders to analyse the problem posed above except for some special cases however they are able to get only numerical results in comparison the present paper obtains partially revealing equilibria in a model in which all agents are rational furthermore demange and laroque

capacity decisions for high tech products with obsolescence abstract modern high tech products experience rapid obsolescence capacity investments must be recouped during the brief product lifecycle during which prices fall continuously we employ a multiplicative demand model that incorporates price declines due to both market heterogeneity and product obsolescence and study a monopolistic firm s capacity decision we investigate profit concavity and characterize the structure of the optimal capacity solution moreover for products with negligible variable costs we identify two distinct strategies for capacity choice demarcated by an obsolescence rate threshold that relates both to market factors and capacity costs finally we empirically test the demand model by analyzing shipping and pricing data from the pc microprocessor market

who benefits from transshipment exogenous vs endogenous wholesale prices this paper studies how transshipments affect manufacturers and retailers considering both exogenous and endogenous wholesale prices for a distribution system where a single manufacturer sells to multiple identical cost retailers we consider both the manufacturer being a price taker and the manufacturer being a price setter in a single period setup under multivariate normal demand distribution in the case of the manufacturer being a price taker we provide several analytical results regarding the effects of key parameters on order quantities and profits in the case of the manufacturer being a price setter we characterize the stackelberg game that arises and provide several insights into how the game dynamics are affected by transshipments specifically we find that risk pooling makes retailers order quantities less sensitive to the wholesale price set by the manufacturer hence in general the manufacturer benefits from retailers transshipments by charging a higher wholesale price while retailers are often worse off the paper captures the effect of demand correlation and the effect of the number of retailers throughout and it illustrates the findings by a numerical example we also provide an interactive web page for numerical experiments

private information and the design of securities the privileged information that the owners have on their firms may discourage rational financial investors and consequently may prevent the entrepreneurs from floating their company on the market the paper studies the validity of this argument in a model similar to that of grossman and stiglitz 8 an entrepreneur who contemplates issuing a new security faces a trade off between speculative gains which arise from his privileged information and an insurance motive associated with the insurance provided by the stock market we make explicit how this trade off depends on the fundamentals of the economy aggregate risk risk tolerance precision of the privileged information

the role of thermodynamics in the study of economic and ecological systems abstract economic theory has always maintained that economic value is generated solely within the economy where it is fully distributed among the factors of production before being consumed according to this theory the economy is an isolated system that does not need flows to pass across its boundaries in support of its steady state general equilibrium from a thermodynamic point of view this idea is unacceptable according to thermodynamic theory any open system which allows flows of matter and energy to cross its boundaries is capable of maintaining itself in steady state only because it transport value from its environment to restore the value that has been consumed within the system and dissipated drawing on the analogy with thermodynamics this paper replaces the traditional systemic analog of the economy which is the closed circular flow process with the steady flow process according to this analog any efficient economy is an open system both physically and economically requiring a flow of economic value to maintain its steady state in other words an economically isolated system has to be inefficient and is bound to misallocate and overuse environmental resources whether the economy behaves as an economically isolated inefficient or open efficient system is an empirical question however if real economies are economically open and efficient and environmental resources are abused due to the economy s unrestrained material growth parts of traditional economic theory espicially those related to benefit evaluation will have to be modified policy recommendations will be affected in any case because internalization the panacea of resource misallocations cannot be more than a temporary solution instead of opening the economy internalization encloses the harmed resource and saves it by abusing excessively other environmental resources

welfare effects of financial innovation in incomplete markets economies with several consumption goods abstract we show that in almost every incomplete markets economy with more than one consumption good and with sufficiently many uninsured states of nature at any general equilibrium of this economy it is possible to arbitrarily perturb the equilibrium utilities merely by introducing the appropriate asset making for example all agents worse off this result demonstrates that the examples given by hart on the optimality of equilibrium when the market structure is incomplete j econ theory11 1975 418 443 and others are actually general phenomena and is in sharp contrast to the intuition that innovation since it expands financial opportunities should benefit all agents journal of economic literature classification numbers d52 d60 g10

on the benefits of pooling in production inventory systems we study inventory pooling in systems with symmetric costs where supply lead times are endogenously generated by a finite capacity production system we investigate the sensitivity of the cost advantage of inventory pooling to various system parameters including loading service levels demand and production time variability and structure of the production system the analysis reveals differences in how various parameters affect the cost reduction from pooling and suggests that these differences stem from the manner in which the parameters influence the induced correlation between lead time demands of the demand streams we compare these results with those obtained for pure inventory systems where lead times are exogenous we also compare inventory pooling with several forms of capacity pooling

valuation adverse selection and market collapses we study a market for funding real investment where valuation meaning investors devoting resources to acquiring information about future payoffs creates an adverse selection problem unlike previous models more valuation is associated with lower market prices and so greater returns to valuation this strategic complementarity in the capacity to do valuation generates multiple equilibria with multiple equilibria the equilibrium without valuation is most efficient despite funding some unprofitable investments switches to valuation equilibria valuation runs look like credit crunches a large investor can ensure the efficient equilibrium only if it can precommit to a price and potentially only if subsidized

inventory management under price based and stockout based substitution abstract we examine a stochastic inventory and pricing problem for a firm that sells two vertically differentiated products the demands for the two products are determined by total random market size and the customers net utility from buying the two products which is determined by the products quality attributes the individual quality valuation unknown to the firm and the selling prices in case the preferred product is out of stock customers may be willing to buy a substitute instead if their net utility is non negative therefore we analyze an inventory and pricing model considering price based and stockout based substitution we show that the demand function is not continuous in price by decomposing the profit function into different price regimes we are able to derive closed form expressions for the stockout based substitution rates upward and downward substitution and the optimal inventory levels under exogenous pricing under endogenous pricing we find that the profit function is not necessarily unimodal however we show that a unique solution exists for the integrated price and inventory problem under price based substitution only numerical results reveal that not considering stockout based substitution i leads to lower profit margins for high quality products and ii may cause severe supply demand mismatches throughout the entire assortment finally we show the performance of two approximated pricing policies

the effect of remanufacturing on procurement decisions for resellers in secondary markets the role of remanufacturing as a competitive tool for firms has been reflected in a number of studies to show that remanufacturing can reduce the unit cost of production by reusing components however the fact that remanufacturing can be used as a strategic tool for serving secondary markets as well has not been acknowledged in the literature in this paper we study the use of remanufacturing as a tool to serve secondary markets specifically we model the case of a reseller who procures used products based on an older generation of technology from an advanced market and then uses one of two options a she can either resell a small fraction of these used products in a developing market where the technology is acceptable or b she can invest in the remanufacturing of these products and then sell them in the developing market at a higher price the main result of the paper is that using remanufacturing to serve secondary markets reduces the number of units procured from the advanced market for the reseller in addition we show based on certain cost structures that the reseller is always better off if she uses remanufacturing to a certain extent

a classification of the literature on the planning of substitutable products abstract a company s assortment of products and corresponding inventory levels are constrained by available resources such as production capacity storage space and capital to acquire the inventory thus customers may not always be able to find a most preferred product at the time of purchase this unsatisfied demand is often substituted with an alternative in the extant literature there have been an increasing number of studies that consider product substitution when planning product assortment inventory and capacity in conjunction with pricing in this paper we classify the literature on the planning of substitutable products published in the major om and marketing journals during the past thirty years 1974 2013 and present a comprehensive taxonomy of the literature one criterion is adopted to discuss modeling objectives and three major criteria are provided to define the nature of product substitution including substitution mechanism substitution decision maker and direction of substitutability we also identify research gaps to provide guidance for related research in the future

endogenous determination of the degree of market incompleteness in futures innovation abstract this paper studies the determination of the number of futures contracts created by an exchange we show that though the exchange can create the futures contracts costlessly if the investors have differential information there may be an upper bound on the number of contracts that the exchange is willing to create in a stylized economy we investigate what type of contracts and how many of these the exchange is willing to create journal of economic literature classification numbers d52 d82 g14

inventory decisions for substitutable products with stock dependent demand abstract we study a retailer s inventory policy for two products the products are substitutable and have inventory dependent demand so a higher inventory level of a product increases its sales we model the joint effect of demand stimulation and product substitution on inventory decisions by considering a single period stochastic demand setting we provide the first order optimality conditions for the profit maximizing order quantities and interpret them using marginal analysis we also consider two heuristic solutions that separately account for either demand stimulation or product substitution our numerical analysis reveals that the optimal policy by appropriately using sales information that quantifies substitution and demand stimulation can produce significantly higher profits the profit benefits are lessened under certain circumstances such as when the two products have similar critical fractile values suggesting that in such instances the heuristics may be used effectively

destructive interference in an imperfectly competitive multi security market abstract a general equilibrium framework is employed to illustrate how the advent of trading in new securities about which an insider has private information might cause a collapse of prevailing security markets roughly securities that allow the insider to hedge his portfolio risk interfere with one other and in some cases so much so that these securities cannot simultaneously trade in any equilibrium

a note on parental and child risk valuation the paper develops a model that allows the estimation of parent s valuation of own and child health in an endogenous risk framework where parents can employ multiple activities to protect themselves and their children from a health risk these risk reducing activities may differ in their effectiveness and their intensity of use we suggest how to estimate the parent s ex ante marginal willingness to pay for a reduction in the ambient level of health risk unencumbered by expected utility terms

coordinating the resource investment decision for a two market price setting firm abstract we study the capacity investment decision of a two product firm that is a price setter for both products the products are of varying complexities such that the resource that can be used to produce the higher level product can also be used to produce the lower level one but not vice versa although the firm needs to make its capacity investment decision under demand uncertainty it can utilize this limited downward resource flexibility in addition to pricing to more effectively match its supply with demand as an example consider a firm that owns a main plant satisfying both end product and intermediate product demand and a subsidiary satisfying the intermediate product demand only we formulate this decision problem as a two stage stochastic programming problem with recourse and analyze the impact of coordinated decision making when the resource flexibility is taken into account in the investment decision and demand correlation on the firm s optimal investment strategy our results offer managerial principles on the firm s optimal resource investment strategy

optimal production pricing and substitution policies in continuous review production inventory systems abstract we consider the optimal production pricing and substitution policies of a continuous review production inventory system with two products a high end product and a low end product each product has its associated customer stream however the demands for the low end product may be satisfied by the high end product we formulate the problem as a markov decision process and characterize the structure of the optimal control policy which specifies when to produce for each product when to use the high end product as a substitute and how to set the optimal prices we show that a base stock production policy is optimal however the optimal base stock level for each product depends on the inventory level of the other product and it features a monotonic property we also demonstrate that the optimal substitution policy is a rationing policy with the rationing level depending on the total inventory amount we find that the optimal prices can be either decreasing or increasing in the inventory levels depending on the forms of demand functions furthermore we utilize numerical experiments to investigate the impact of different system characteristics on the benefits of using substitution and dynamic pricing finally we investigate when the dynamic pricing strategy and the substitution strategy are complements or substitutes

dynamic capacity management with general upgrading this paper studies a capacity management problem with upgrading a firm needs to procure multiple classes of capacities and then allocate the capacities to satisfy multiple classes of customers that arrive over time a general upgrading rule is considered i e unmet demand can be satisfied using multistep upgrade no replenishment is allowed and the firm has to make the allocation decisions without observing future demand we first characterize the structure of the optimal allocation policy which consists of parallel allocation and then sequential rationing specifically the firm first uses capacity to satisfy the same class demand as much as possible then considers possible upgrading decisions in a sequential manner we also propose a heuristic based on certainty equivalence control to solve the problem numerical analysis shows that the heuristic is fast and delivers close to optimal profit for the firm finally we conduct extensive numerical studies to derive insights into the problem it is foun

strategic technology choice and capacity investment under demand uncertainty this paper studies the impact of competition on a firm s choice of technology product flexible or product dedicated and capacity investment decisions specifically we model two firms competing with each other in two markets characterized by price dependent and uncertain demand the firms make three decisions in the following sequence choice of technology technology game capacity investment capacity game and production quantities production game the technology and capacity games occur while the demand curve is still uncertain and the production game is postponed until after the demand curve is revealed we develop best response functions for each firm in the technology game and compare how a monopolist and a duopolist respond to a given flexibility premium we show that the firms may respond to competition by adopting a technology which is the same as or different from what the competitor adopts we conclude that contrary to popular belief flexibility is not always the best response to competition flexible and dedicated technologies may coexist in equilibrium we demonstrate that as the difference between the two market sizes increases a duopolist is willing to pay less for flexible technology whereas the decision of a monopolist is not affected further we find that a firm that invests in flexibility benefits from a low correlation between demands for two products but the extent of this benefit differs depending on the competitor s technology choice our results indicate that higher demand substitution may or may not promote the adoption of flexibility under competition whereas it always facilitates the adoption of flexibility without competition finally we show that contrary to intuition as the competitor s cost of capacity increases the premium a flexible firm is willing to pay for flexibility decreases

a model of competitive stock trading volume a model of competitive stock trading is developed in which investors are heterogeneous in their information and private investment opportunities and rationally trade for both informational and noninformational motives i examine the link between the nature of heterogeneity among investors and the behavior of trading volume and its relation to price dynamics it is found that volume is positively correlated with absolute changes in prices and dividends i show that informational trading and noninformational trading lead to different dynamic relations between trading volume and stock returns

optimal investment in product flexible manufacturing capacity this paper presents a model and an analysis of the cost flexibility tradeoffs involved in investing in product flexible manufacturing capacity flexible capacity provides a firm with the ability to respond to a wide variety of future demand outcomes but at the expense of the increased cost of acquiring flexible manufacturing capacity as compared with dedicated or nonflexible capacity we formulate the product flexible manufacturing capacity investment decision as a two stage stochastic program in the first stage the firm must make its investment decision in manufacturing capacity before the resolution of uncertainty in product demand in the second stage after demand for products are known the firm implements its production decisions constrained by the first stage investments the main contributions of this paper are threefold first we develop a model of the firm s flexible manufacturing investment decision that conceptually captures some of the key characteristics of this complex decision probl

the economic growth debate what some economists have learned but many have not one thing economists should have learned from the economic growth debate is the importance of defining the term growth by growth i mean quantitative increase in the scale of the physical dimensions of the economy i e the rate of flow of matter and energy through the economy from the environment as raw material and back to the environment as waste and the stock of human bodies and artifacts by development i mean the qualitative improvement in the structure design and composition of physical stocks and flows that result from greater knowledge both of technique and of purpose simply put growth is quantitative increase in physical dimensions development is qualitative improvement in non physical characteristics an economy can therefore develop without growing just as the planet earth has developed evolved without growing neoclassical growth models notwithstanding there is good evidence that neither the earth s surface nor the flux of solar energy grows at a rate equal to the rate of interest in fact they seem not to grow at all yet qualitative evolution occurred and continues to occur two general classes of limits to growth in the above defined sense can be further distinguished biophysical limits and ethicosocial limits in both cases it is growth not development that is limited there may or may not exist limits to development but that is another topic standard neoclassical economics was built on the assumption that the economy is far from both limits i e that it is always biophysically possible and ethicosocially desirable for aggregate product to grow as abramowitz l put it echoing pigou

optimal incomplete markets with asymmetric information abstract this paper provides a simple parametric framework for comparing alternative incomplete asset structures in a productive economy focusing on the role of assets in allocating risk and transmitting private information it characterizes asset structures that are constrained efficient in the sense that no other asset structure with the same number of securities leads to a pareto dominating allocation in equilibrium specifically a constrained efficient asset structure must be efficient with respect to both risk sharing and information transmission explicit optimality criteria are developed and used to evaluate innovation by volume maximising futures exchanges journal of economic literature classification numbers g14 d52 d82

information acquisition for capacity planning via pricing and advance selling when to stop and act this paper investigates a capacity planning strategy that collects commitments to purchase before the capacity decision and uses the acquired advance sales information to decide on the capacity in particular we study a profit maximization model in which a manufacturer collects advance sales information periodically prior to the regular sales season for a capacity decision customer demand is stochastic and price sensitive once the capacity is set the manufacturer produces and satisfies customer demand to the extent possible from the installed capacity during the regular sales period we study scenarios in which the advance sales and regular sales season prices are set exogenously and optimally for both scenarios we establish the optimality of a control band or a threshold policy that determines when to stop acquiring advance sales information and how much capacity to build we show that advance selling can improve the manufacturer s profit significantly we generate insights into how operating conditions such as the capacity building cost and market characteristics such as demand variability affect the value of information acquired through advance selling from this analysis we identify the conditions under which advance selling for capacity planning is most valuable finally we study the joint benefits of acquiring information for capacity planning through advance selling and revenue management of installed capacity through dynamic pricing

economic growth quality environmental sustainability and social welfare in china provincial assessment based on genuine progress indicator gpi abstract in order to devise scientific and sustainable development strategy it is vital to assess the quality of economic growth as a useful complement to traditional economic indicators gpi s most reputed virtue is its great improvement in evaluating environmental and social costs in this paper we estimate the gpi for all 31 provinces in mainland china from 1997 to 2016 gpi estimation is highly sensitive to income inequality climate change damage and depletion of non renewables we address contestable methodological assumptions associated with the three items which have been usually ignored in empirical studies we use the atkinson index in place of the gini index as a measure of income inequality we avoid the problematic duplicated counting of climate change damage and the unjustified cost escalation factor in depletion of non renewables our results show that first gpi per capita has recently declined in some provinces unveiling a threat to social welfare and sustainability second the relative threshold effect the progress of social welfare promotion is slower than the expansion of economic scale has been found in many provinces third resource consumption and environmental pollution especially water pollution and carbon emissions would generate substantial welfare losses

arbitrage short sales and financial innovation the authors describe a model of general equilibrium with incomplete markets in which firms can innovate by issuing arbitrary costly securities when short sales are prohibited firms behave competitively and equilibrium is efficient when short sales are allowed these classical properties may fail if unlimited short sales are allowed imperfect competition may persist even when the number of potential innovators is large if limited short sales are allowed perfect competition may obtain in the limit but equilibrium can be inefficient because of the presence of an externality the private benefits of innovation for firms differ from the social benefits copyright 1991 by the econometric society

linking daly s proposition to policymaking for sustainable development indicators and pathways abstract the statement that in the full world increasing the ultimate efficiency expressed as service throughput is the necessary condition for humanity to achieve high levels of well being within ecological limits is honoured as daly s proposition in this paper the purpose of this paper is to make daly s proposition effective guidance for policymaking related to sustainable development for this aim this paper puts forward the indicator ecological well being performance which is composed of the human development index and the ecological footprint to measure the ultimate efficiency furthermore by means of matrix analysis and factor decomposition analysis the respective pathways for countries at different stages of development to make the sustainable development transition were discussed the g20 countries were taken as the cases to conduct the research the empirical results show that improvements in well being and increases in throughput level are not necessarily positively related the relationship between the two depends on how countries control throughput levels and improve the ecological well being performance which also explains different performances on the sustainable development transition in a simple way this contribution provides new methods and criteria to track and evaluate national performance on sustainable development by referring to daly s original theories

long term substitutability between environmental and man made goods abstract substitutability between environmental and man made goods plays a major role in the sustainability debate the notion of substitutability covers a continuous spectrum with perfect substitutability at one end and poor substitutability at the other in this paper it is shown that if economic growth sustains a sharp distinction emerges between perfect and poor substitutability without any intermediate interpretation of substitutability if poor substitutability prevails environmental resources will eventually constitute the major part of total consumption value we relate our results to baumol s disease and assess the implications of this phenomenon for the compensation of environmental losses

flexible service capacity optimal investment and the impact of demand correlation we consider a firm that provides multiple services using both specialized and flexible capacity the problem is formulated as a two stage single period stochastic program the firm invests in capacity before the actual demand is known and optimally assigns capacity to customers when demand is realized sample applications include a car rental company s use of mid sized cars to satisfy unexpectedly high demand for compact cars and an airline s use of business class seats to satisfy economy class demand we obtain an analytical solution for a particular case when services may be upgraded by one class the simple form of the solution allows us to compare the optimal capacities explicitly with a solution that does not anticipate flexibility given that demand follows a multivariate normal distribution we analytically characterize the effects of increasing demand correlation on the optimal solution for the case with two customer classes the effects of demand correlation are intuitive increasing correlation induces a shift from flexible to dedicated capacity when there are three or more classes there are also adjustments to the resources not directly affected by the correlation change as correlation rises these changes follow an alternating pattern for example if the optimal capacity of one resource rises then the optimal capacity of the adjacent resource falls these results make precise conjectures based on numerical experiments that have existed in the literature for some time

competition in financial innovation this paper examines the incentives to innovate securities provided by frictionless competitive markets with short sales to entrepreneurs in economies with symmetric investor utilities we provide the conditions under which a rm s market value is maximized by a complete nancial structure that is when the mechanism that gives rise to market incompleteness is the one illustrated in the classical example of allen and gale 1991 the foundation for incompleteness in that case is derived from innovation costs and free riding among entrepreneurs for the class of preferences where an incomplete nancial structure maximizes the rms market values markets are incomplete with a probability of one even when innovation is cost free in this sense we provide an alternative to allen and gale s foundation for market incompleteness

are more risk averse agents more optimistic insights from a rational expectations model we analyze the link between pessimism and risk aversion we consider a model of partially revealing competitive rational expectations equilibrium with diverse information in which the distribution of risk aversion across individuals is unknown we show that when a high individual level of risk aversion is taken as a signal for a high average level of risk aversion more risk averse agents are more optimistic this correlation between individual risk aversion and optimism leads to a pessimistic consensus belief hence to an increase in the market price of risk risk sharing schemes and welfare implications are analyzed we show that agents welfare may increase upon the receipt of more precise information

incentives and commonality in a decentralized multiproduct assembly system in this paper we explore the impact of decentralized decision making on the behavior of multiproduct assembly systems specifically we consider a system where three components two product specific and one common are used to produce two end products to satisfy stochastic customer demands we study the system under both centralized and decentralized decision making in the decentralized system we prove that for any set of wholesale prices there exists a unique pareto optimal equilibrium in the suppliers capacity game we show that the assembler s optimal wholesale prices lie in one of two regions one leads to capacity imbalance and one does not we use these results to derive insights regarding the inefficiencies that decentralization can cause in such systems in particular several of our findings indicate that outsourcing the management of component supplies may inhibit the use of operational hedging approaches for managing uncertainty

pricing and operational recourse in coproduction systems coproduction systems in which multiple products are produced simultaneously in a single production run are prevalent in many industries such systems typically produce a random quantity of vertically differentiated products this product hierarchy enables the firm to fill demand for a lower quality product by converting a higher quality product in addition to the challenges presented by random yields and multiple products coproduction systems often serve multiple customer classes that differ in their product valuations furthermore the sizes of these classes are uncertain employing a utility maximizing customer model we investigate the production pricing downconversion and allocation decisions in a two class stochastic demand stochastic yield coproduction system for the single class case we establish that downconversion will not occur if prices are set optimally in contrast we show that downconversion can be optimal in the two class case even if prices are set optimally we consider the benefit of postponing certain operational decisions e g the pricing or allocation rule decisions until after uncertainties are resolved we use the term recourse to denote actions taken after uncertainties have been resolved we find that recourse pricing benefits the firm much more than either downconversion or recourse allocation do implying that recourse demand management is more valuable than recourse supply management special cases of our model include the single class and two class random yield newsvendor models

informed trading investment and welfare this article studies the welfare economics of informed stock market trading we analyze the effect of more informative prices on investment given that this dependence will itself be reflected in equilibrium prices while a higher incidence of informed speculation always increases firm value through a more informative trading process the effect on agents welfare depends on how revelation of information changes risk sharing opportunities in the market greater revelation of information that agents wish to insure against reduces their hedging opportunities on the other hand early revelation of information that is uncorrelated with hedging needs allows agents to construct better hedges