optimal shared savings contracts in supply chains linear contracts and double moral hazard in many supply chains consumption of indirect materials sold by a supplier to a customer for use in her production process can be reduced by efforts exerted by either party since traditional supply contracts provide no incentive for the supplier to exert such effort shared savings contracts have been proposed as a way to improve incentives in the channel leading to more efficient effort choices by the two parties such shared savings contracts typically combine a fixed service fee with a variable component based on consumption volume we formalize this situation using the double moral hazard framework in which both parties decide how much effort to exert by trading off the cost of their effort against the benefits that they will obtain from reduced consumption we also extend the double moral hazard framework to analyze a broader class of cost of effort functions than considered so far including the linear cost of effort functions commonly found in practice we show that the supplier can still always induce the optimal second best equilibrium with a linear shared savings contract under this broader class of functions however the behavior of the optimal contract as a function of the problem parameters becomes more complex we illustrate how small changes in the problem parameters can turn profits from being a well behaved to a poorly behaved function of the contract and provide some theoretical characterization of this phenomenon the practical significance of this is that simple linear contracts are sufficient in many double moral hazard contexts even for the broader class of functions we consider but care must be taken in selecting the optimal contract parameters

bankable permits for the control of environmental pollution abstract intertemporal trading of emission permits banking is often identified as one of three promising market mechanisms for controlling pollution along with averaging and trading surprisingly the efficiency properties of permit banking systems have not been investigated using a simple optimal control model this paper investigates firms incentives for banking or borrowing emission permits and compares the emission and output streams firms would choose with the socially optimal solution we find that in many cases firms will suboptimally choose excessive damage and output levels in early periods and correspondingly too few in later periods if given the opportunity to freely move emissions between time periods we propose a simple alternative trading scheme we term modified banking that counters this problem and should be no more difficult for an environmental authority to implement than a straigth banking system

optimal joint pricing and lot sizing with fixed and variable capacity this paper examines previously unexplored fixed and variable capacity problems of jointly determining an item s price and lot size for a profit maximizing firm facing constant but price dependent demands over a planning horizon we apply geometric programming to these constrained nonlinear maximization problems with nonconcave objective functions and obtain global optimal solutions using kuhn tucker condition marginal and sensitivity analyses we investigate model interactions provide managerial implications on the optimal capacity decisions and explore the postoptimal behavior of the price lot size and capacity expansion and reduction size some findings cast interesting insights different from previous just in time management studies without pricing consideration

when not all conflict is bad manufacturing marketing conflict and strategic incentive design researchers and managers broadly agree that coordination and harmony between manufacturing and marketing improve firm performance by eliminating suboptimal practices within the firm in this paper we present a contrasting view of the manufacturing marketing interface we model a duopoly in which the firms compete on price and quality dimensions the manufacturing and marketing managers within each firm are presented with conflicting incentives focused on cost minimization and revenue maximization respectively these managers bargain with each other before arriving at compromise decisions regarding price and quality while frequently encountered in practice this conflicting objectives puzzle is surprising because one expects that centralized coordination by the owners of the firm towards profit maximization would lead to higher profits in this paper we resolve the conflicting objectives puzzle and demonstrate that surprisingly the firm s resulting profits in this setting of conflict can be higher than those obtained when the decisions of the managers are perfectly coordinated we also analyze the equilibrium in incentive plans when the owners can choose between compromise and perfect coordination our results offer a new interpretation of manufacturing marketing conflict as a strategic tool that can enhance firm profits

investment decisions and transferable discharge permits an empirical study of water quality management under policy uncertainty the problem of investiment decisions for sources participating in transferable discharge permit tdp markets has not received much attention one way tdps offer potential savings is with their ability to influence development in a region static models have assessed the potential savings of tdps but do not explicitly consider investment decisions thus they do not capture this long run role nor that of policy uncertainty and tend to understate both the cost saving potential and the difficulty in achieving it this paper addresses both problems by emphasizing the temporal dimension of tdps a two period investment model investigates the magnitude of these potential savings and the effects of two types of policy uncertainty upon expected gains from permit trading

coordination of internal supply chains in vertically integrated high tech manufacturing organizations htmos abstract this paper uses economic mechanisms to coordinate supply chains within high tech manufacturing organizations htmos it models the one shot initial production and allocation decisions involved in the production and marketing of new technologies these decisions are driven by the economic objectives of the firm and of the employees with private information the experts it analyzes and compares the efficiency of three coordination policies centralized command and control centralized revelation and decentralized revelation it shows that decentralized policies introduce an additional cost and it proposes rules of thumb for coordinating supply chains within firms that use many experts

an economic analysis of scrappage this article examines the impact of policies aimed at encouraging the retirement of older high polluting vehicles such as the cash for clunkers policy endorsed by president george bush in 1992 the analysis assesses the likely benefits and costs of vehicle scrappage programs i also address the interaction of a scrappage program with other ongoing policies such as improved inspection and maintenance finally the simulation for los angeles suggests plausible design values for a scrappage program

target pricing demand side versus supply side approaches abstract the practice of target pricing has been a key factor in the success of japanese manufacturers in the more commonly known demand side approach the target price for the supplier equals the manufacturer s market price less a percent margin for the manufacturer but no cost improvement expenses are shared in the supply side approach cost improvement expenses are shared and the target price equals the supplier s cost plus a percent margin for the supplier using a general oligopoly and cournot duopoly models we characterize the equilibrium and optimal policy for each approach under various conditions we find that sharing cost reduction expenses allows the manufacturer using the supply side approach to attain competitive advantage in the form of increased market share and higher profit particularly in industrial conditions where margins are thin and price sensitivities are high

does the minimum lot size program affect farmland values empirical evidence using administrative data and regression discontinuity design in taiwan this study empirically assesses the causal effect of the minimum lot size program on farmland values in taiwan a unique dataset of 4 032 parcels of farmland drawn from administrative foreclosure auction profiles between 2000 and 2008 and regression discontinuity design were applied to cope with the endogeneity issue of land use regulations the results of the parametric and nonparametric estimations indicate that the minimum lot size program significantly increases farmland value by approximately 18 and 15 respectively moreover the program effect is more pronounced for farmland located in urban suburban areas in the absence of a tax effect and externality resulting from non agricultural activities the significant program effect on farmland values is likely to result from the effect of the program on farmland s option value for future development

leadtime reduction in a q r inventory system an agency perspective abstract we examine the problem of designing and implementing a continuous review q r inventory system from an agency perspective in which the agent s effort influences the item s replenishment leadtime our results are as follows if the agent is risk neutral a linear or quadratic contract achieves first best for a risk averse agent with an exponential utility function assuming a normal leadtime distribution we determine the optimal linear contract extensive numerical experiments suggest that ignoring the possible influence of the agent on the replenishment leadtime can be costly but that the cost penalty of ignoring agency can be significantly reduced by a simple contract

road transport externalities during the last decade much progress has been made in defining measuring the external costs of transport as the cost of tolling equipment falls the set of realistic policy options to internalise these externalities will continue to grow this will determine the research and policy agenda we make three points firstly empirical work is still necessary to better identify marginal external costs including congestion accident and environmental costs secondly any assessment of policy options should treat externalities simultaneously the use of pricing instruments and emissions standards are discussed within this framework thirdly we emphasise the role of government designing the optimal road pricing institutions requires consideration of horizontal and vertical tax competition while double dividend arguments are central to the question of securing public support

an interim evaluation of sulfur dioxide emissions trading ide iv of the 1990 clean air act amendments established the first large scale long term environmental program to rely on tradable emissions permitscalled allowances in this program to control pollution this program was designed to cut acid rain by reducing sulfur dioxide so2 emissions from electric generating plants to about half their 1980 level beginning in 1995 it is of interest both as a response to an important environmental issue and as a landmark experiment in environmental policy this experiment comes at a particularly important time since emission trading is under serious consideration with strong u s backing for use to deal with global climate change by curbing emissions of carbon dioxide co2 the economic stakes in climate change surpass those in acid rain by several orders of magnitude intergovernmental panel on climate change 1996 this article summarizes the results to date of our ongoing empirical analysis of compliance costs and allowance market performance under the u s acid rain program

spatial heterogeneity contract design and the efficiency of carbon sequestration policies for agriculture abstract in this paper we develop methods to investigate the efficiency of alternative contracts for carbon c sequestration in cropland soils taking into account the spatial heterogeneity of agricultural production systems and the costs of implementing more efficient contracts we describe contracts being proposed for implementation in the united states and other countries that would pay farmers for adoption of specified practices per hectare contracts we also describe more efficient contracts that would pay farmers per tonne of soil c sequestered and we show how to estimate the costs of implementing these more efficient contracts in a case study of a major agricultural region in the united states we confirm that the relative inefficiency of per hectare contracts varies spatially and increases with the degree of spatial heterogeneity the results also show that per hectare contracts are as much as five times more costly than per tonne contracts a degree of inefficiency similar to that found in assessments of command and control industrial emissions regulations measurement costs to implement the per tonne contracts are found to be positively related to spatial heterogeneity but are estimated to be at least an order of magnitude smaller than the efficiency losses of the per hectare contract for reasonable error levels this finding implies that contracting parties could afford to bear a significant cost to implement per tonne contracts and achieve a lower total cost than would be possible with the less efficient per hectare contracts

land leasing and local government behaviour in china evidence from beijing since 2004 two auction mechanisms listing auctions and tender auctions have played a dominant role in land lease arrangements for real estate development in beijing listing auctions in land markets are similar to general english auctions where bidders offer the highest price to win however in tender auctions winners are determined by the bidding price and the bidder s financial capability and reputation based on granted land parcels from 2006 to 2012 in beijing this paper attempts to examine the price differences between the two auctions and the role of land auction in urban development and price stabilisation we find that land policy in beijing which aims to stabilise land prices and to provide low price residences has been integrated with urban development planning in terms of spatial and density pattern land leasing in beijing is not only a land policy but also a part of the strategy framework of local development

fiscal federalism and interjurisdictional externalities new results and an application to us air pollution abstract the economics of fiscal federalism has identified two book end departures from first best provision of a public good local governments may respond to local conditions but ignore inter jurisdictional spillovers alternatively central governments may internalize spillovers but impose uniform incentives ignoring local heterogeneity we provide a simple model that demonstrates that the choice of pricing policy also depends crucially on a third factor the shape of marginal costs of providing the public good if marginal costs are convex then marginal abatement cost elasticities will be higher around the local policies this increases the deadweight loss of those policies relative to the centralized policy ceteris paribus if they are concave then the opposite is true using a detailed simulation model of the us electricity sector we then empirically explore these tradeoffs for us air pollution we find that us states acting in their own interest lose about 31 5 of the potential first best benefits whereas the second best uniform policy loses only 0 2 of benefits the centralized policy outperforms the state policy for two reasons first inter state spillovers are simply more important that inter state heterogeneity in this application second because of the convexity of the marginal cost functions elasticities are much lower over the range relevant to the centralized policy dampening the distortions

influence of soil conservation on farm land values worldwide concern for the loss of agricultural soil has led many governments to establish programs to slow the loss of soil from farms mcconnell 1983 has shown however that in the absence of externalities farmer decisions on investment to reduce onfarm soil loss can be socially optimal and concludes p 188 as follows increasing soil loss does not imply that farmers ignore physical production relations if farmers know that the soil base affects farm resale value they will conserve it it suggests that the impact of soil depth on the value of farms be investigated earlier rausser 1980 reached a similar conclusion suggesting that land values which fail to reflect soil quality encourage the farmer to ignore his long run impact on the resource two recent studies failed to find clear cut relationships between soil erosion and farm land prices ervin and mill 1985 942 in a cross section study of farm land prices in page county iowa concluded the group of variables measuring past and future erosion damages and conservation structures did not exhibit large and reliable effects gardner and barrows 1985 studied the capitalization of the value of soil conservation practices into farm land prices in southwestern wisconsin and concluded p 946 the most reasonable conclusion is the most obvious conservation

environmental benefits from marketable discharge permits or an ecological vs economical perspective on marketable permits abstract economists typically extol the virtues of marketable discharge permits based on their ability to obtain a given environmental standard at least cost previous empirical studies of marketable permits have quantified the benefits from the use of permits relative to a command and control system in terms of cost savings occasionally the benefits of a permit system are described by noting that the efficiency of such systems would allow improved environmental quality relative to a command and control system for the same cost that is the increased efficiency resulting from a permit system would allow environmental regulators to tighten emission standards resulting in less pollution while still holding costs at their initial level this paper presents a simple conceptual model that examines the potential emission savings from a marketable permit system the conceptual model is empirically implemented with data on abatement costs for light duty vehicles in california the emission saving potential is directly compared with the cost saving potential although cost savings from a marketable permit system in this context are found to be relatively modest on the order of 1 to 10 the emission savings potential is found to be much larger estimates of the emission savings possibilities range from about 7 to 65

coordination mechanisms of supply chain systems supply chain management scm has become an important management paradigm as supply chain members are often separate and independent economic entities a key issue in scm is to develop mechanisms that can align their objectives and coordinate their activities so as to optimize system performance in this paper we provide a review of coordination mechanisms of supply chain systems in a framework that is based on supply chain decision structure and nature of demand this framework highlights the behavioral aspects and information need in the coordination of a supply chain the identification of these issues points out several directions of future research in this area

price determinants of foreclosed urban land foreclosure proceedings are the primary cause of real estate auction sales in the us given the added legal constraints and risk associated with foreclosure proceedings it is an empirical question as to whether the resulting prices are a function of the usual underlying factors of physical characteristics locational benefits and neighbourhood effects which motivate normal market sale pricing using a hedonic pricing model common in the analysis of market sale prices we find systematically determined price behaviour which replicates market pricing

competitive and cooperative inventory policies in a two stage supply chain we investigate a two stage serial supply chain with stationary stochastic demand and fixed transportation times inventory holding costs are charged at each stage and each stage may incur a consumer backorder penalty cost e g the upper stage the supplier may dislike backorders at the lower stage the retailer we consider two games in both the stages independently choose base stock policies to minimize their costs the games differ in how the firms track their inventory levels in one the firms are committed to tracking echelon inventory in the other they track local inventory we compare the policies chosen under this competitive regime to those selected to minimize total supply chain costs i e the optimal solution we show that the games nearly always have a unique nash equilibrium and it differs from the optimal solution hence competition reduces efficiency furthermore the two games equilibria are different so the tracking method influences strategic behavior we show that the system optimal solution can be achieved as a nash equilibrium using simple linear transfer payments the value of cooperation is context specific in some settings competition increases total cost by only a fraction of a percent whereas in other settings the cost increase is enormous we also discuss stackelberg equilibria

marketing production decisions in an industrial channel of distribution this paper presents a model that considers the interface between marketing and production decisions in a channel of distribution of industrial goods comprised of a manufacturer and a distributor the key issue investigated is the nature of the coordination within the channel in light of an unstable pattern of seasonal demand the investigation which focuses on dynamic issues considers production activities such as product delivery and inventory policy and their link to marketing strategies such as pricing policies the focus here is on the dynamic nature of the coordinational aspects of the various policies for example the following questions are addressed what is the distributor s pricing strategy throughout the season what is the nature of the contractual price in the channel under what conditions should the distributor carry no inventory throughout the seasonal period under what conditions should the manufacturer carry no inventory what is the impact of the seasonal parameters and differing h

adaptation to an irrigation water restriction imposed through local governance abstract we estimate how farmers adapted to a water restriction imposed through local governance the restriction imposed a uniform quota on water use with a 5 year allocation and allowed trading of the quota within the restricted area our analysis exploits unique micro level data on irrigated water use irrigated acreage and crops we use a difference in differences econometric strategy that also includes farmer time fixed effects to estimate the response to the restriction where we exploit water rights between 2 and 5 miles of the policy boundary as a control group results indicate that farmers reduced water use by 26 due to the policy with most of the response due to reductions in water use intensity on the same crops rather than through reductions in irrigated acreage or changes in crops the results imply that the short run welfare impact of the policy was smaller than a policy that reduces irrigated acreage

an investigation of the equal commission rate policy for a multi product salesforce for a multi product sales force the policy of paying commissions as an equal percentage of realized gross margins is shown to be in general nonoptimal from the firm s profit maximization point of view for a homogeneous salesforce the nonoptimality results from the fact that earlier research while taking into account the effect of commission rates on a salesperson s allocations of total time to the multiple products has not incorporated the effect of commission rates on salesperson s total selling time resulting from his her trading off income vs total time to maximize utility the equal commission rate policy is however optimal for the cases of i salesperson with a fixed total selling time and a minimum income requirement and ii fair income salesperson whose total selling time is merely a function of income and not based on rate of change of income as in the utility maximization case if the salesforce is heterogeneous e g different salespersons have differing sales responses to selling time this makes the equal commission rate policy to be in general nonoptimal even for the restrictive cases i and ii it is suggested that the commission rates be set higher for products with greater elasticities relating quantities sold to selling times the common practice of paying commissions as a percentage of total dollar sales rather than gross margins is shown to be optimal under certain assumptions

the net benefits of incentive based regulation a case study of environmental standard setting economists interested in environmental safety and health regulation have long argued that decentralized incentive based or ib policies are more efficient than centralized command and control or cac approaches see charles schultze 1977 for instance these arguments generally have been based on the assumption that ib policies will accomplish the same goals as their cac counterparts but at less cost to society however some of those touting ib policies have overlooked an important point environmental workplace or even productsafety standards typically take the form of maximum permissible concentrations of harmful substances so that compliance only requires that all monitoring points or samples register readings below these critical levels for this reason ib policies typically assign a shadow price of zero to improvements that exceed the standard s while more crude cac policies generally result in overcontrol beyond the standards if there is no value to this overcontrol cac policies will not improve at all on ib approaches and will indeed be more expensive if however reduced concentrations below the level of the standards bring with them further improvements in health or the environment cac approaches will produce greater benefits than ib approaches thus a fair comparison between the two necessitates that any additional benefits associated with cac policies be offset against the cost advantages enjoyed by their ib counterparts although this possibility has been recognized by others scott atkinson and t h tietenberg 1982 for instance it is little appreciated and its empirical significance has never been ascertained that is our purpose here we do so by developing data on the costs and benefits of controlling a common air pollutant total suspended particulates or tsp in baltimore by comparing the tsp levels likely under both ib and cac approaches we are able to estimate the marginal costs and benefits associated with a variety of alternative air quality standards which take the form of maximum permissible concentrations this in turn allows us to determine the net benefits arising from the two kinds of regimes in the next section we present a simple conceptual framework for our analysis section ii describes the estimation of the costs and benefits of our hypothesized air pollution controls in baltimore section iii presents our somewhat surprising findings and section iv discusses those findings and their potential significance for regulation in the real world

decentralizing cross functional decisions coordination through internal markets a firm faces many problems that are inherently cross functional to solve them successfully requires the coordinated actions of many functional representatives acting in a decentralized setting functional managers however respond to their own individual incentives and may consequently fail to maximize the overall profits of the firm we examine this issue in a setting in which the output of early actions limits the range of later actions and we propose an incentive scheme that allows the system to be successfully decentralized our mechanism is based on linear transfer prices for the intermediate output that are implemented through an internal market a market maker buys the output from one function and sells it to another she is not obliged to sell at the same price at which she bought and may set prices solely to provide incentives we illustrate the flexibility of the scheme by applying it to several models in the operations management literature

salesforce compensation plans in environments with asymmetric information in this paper we present a theory of salesforce compensation plans to provide insights into why it may be advantageous for a profit maximizing firm to offer members of its salesforce the opportunity to choose from a menu of compensation plans although such contractual arrangements are not commonly used in the industry they have been introduced and implemented by firms such as ibm and st regis paper as in our previous work on salesforce compensation plans basu lal srinivasan and staelin basu a k r lal v srinivasan r staelin 1985 salesforce compensation plans an agency theoretic perspective marketing sci 4 fall 267 291 we use an agency theory framework in this paper we relax the assumptions of information symmetry and salesforce homogeneity and show the conditions under which it is optimal to offer a menu of compensation plans we also show that even when these assumptions are relaxed there are situations where offering a single plan characterized by basu lal srinivasan and staelin basu a k r lal v srinivasan r staelin 1985 salesforce compensation plans an agency theoretic perspective marketing sci 4 fall 267 291 is still optimal insights gained from the analyses are discussed in the context of an existing compensation scheme

voluntary compliance with market based environmental policy evidence from the u s acid rain program the u s acid rain program implemented a nationwide market for electric utilities sulfur dioxide so2 emissions and included voluntary compliance possibilities for nonaffected sources i observe significant voluntary participation albeit with small impact on the so2 market mostly from sources with counterfactual emissions below their allowance allocations an ex post analysis suggests that costs from the resulting higher emissions outweigh savings from shifts in emissions reductions from high cost affected sources to low cost nonaffected sources further utilities voluntary participation is well explained by economic variables which provides new evidence of cost effective compliance strategies and low transaction costs

coordinating supply chains with competition capacity allocation in semiconductor manufacturing abstract this paper motivated by the experiences of a major us based semiconductor manufacturer presents an integrated model of incentive problems arising in forecasting and capacity allocation our model involves multiple product managers and multiple manufacturing managers who forecast the means of their respective demand and capacity distributions a central coordinator is responsible for allocating capacities to product lines when these distributions are unknown to the central coordinator and capacity is scarce the managers misrepresent their forecasts a product manager inflates his forecast to gain a greater allocation of the capacity a manufacturing manager deflates his forecast to cover for the uncertainties in production we propose a game theoretic model and design a mechanism a bonus scheme for all managers and an allocation rule to allocate realized capacity to the product managers that elicits truthful reporting by all managers the results herein show that the structure of the truth eliciting bonus schemes is rather simple with easily calculable parameters we also show that large classes of allocation rules including the current allocation practice of the firm are manipulable a bonus is often required for elicitation of truthful information we synthesize the implications of our results for the practitioners

allocating spending between advertising and information technology in electronic retailing this study examines coordination issues that occur in allocating spending between advertising and information technology it in electronic retailing electronic retailers run the risk of overspending on advertising to attract customers but underspending on it thus resulting in inadequate processing capacity at the firm s website in this paper we present a centralized joint marketing it model to optimally allocate spending between advertising and it and we discuss an uncoordinated case where marketing and it make suboptimal advertising and capacity decisions we show how these decisions can be coordinated either by reducing the value of a customer session or by designing an optimal processing contract between marketing and it both the coordination methods can be implemented with only local knowledge of the it function yet they generate a solution that almost matches the quality of the centralized solution we extend our basic model to consider demand uncertainty lagged advertising effects and uncertainties in the lead time to acquire it capacity with demand uncertainty electronic retailers should reduce spending on advertising and increase it capacity if there is potential for a demand upswing and the cost of it capacity is relatively low the value of a customer session should be further reduced when uncertainties exist this is required to share the risk of excess or inadequate it capacity

reducing incremental costs associated with the delegation of incentive contracting decisions an analysis of planning and control decisions in a manufacturing setting in the presence of moral hazard abstract we compare and contrast two specific regimes involving the centralization and delegation of the incentive contracting decision in manufacturing organizations in the centralization regime a single individual simultaneously makes the allocation of demand to production facilities and determines the incentive compensation scheme for the managers at the facilities under the delegation regime the demand allocation is decided upon initially by a superior and the incentive contracting decision is subsequently made by a subordinate who is neither of the two managers in charge of the production facilities using the principal agent paradigm which assumes that the managerial efforts are unobservable we demonstrate that the centralization regime performs no worse than the delegation regime for situations where strategic or other requirements necessitate firms to opt for the delegation of the incentive contracting decision we propose a heuristic that significantly increases the likelihood of mimicking the allocation and contracting decisions made under the centralized regime

risk information and incentives in telecom supply chains supply chain management involves the selection coordination and motivation of independently operated suppliers the central planner s perspective in operations management translates poorly to vertically separated chains where suppliers recurrently seem to object to benevolent information sharing and centralized decision rights seen from the supplier s perspective such resistance may very well be rational a downstream assembly line disclosing reliable information on actual and forecasted sales puts itself at a disadvantage when bargaining on share of chain profits in this paper we use a minimal agency model to contrast known optimal mechanisms with the actual practice in the telecommunications industry a three stage supply chain under stochastic demand and varying coordination and information asymmetry is modeled a two period investment production game addresses the information sharing and specific investment problem in the telecom industry the observed price quantity contracts under limited commitment are shown to be inadequate under realistic asymmetric information assumptions more a result of gradually evolving changes in bargaining power than coordination efforts the upstream urge to coordinate may further deteriorate performance in terms of our model c 2003 elsevier science b v all rights reserved

the empirical properties of two classes of designs for transferable discharge permit markets abstract previous work by atkinson and lewis j environ econ manag 1 237 250 1974 and anderson et al an analysis of alternative policies for attaining and maintaining a short term no2 standard mathtech inc princeton n j 1979 has indicated the tremendous cost advantages to be achieved by moving from a policy based on emission standards to one based on marketable emission permits as tietenberg land econ 56 391 416 1980 points out however neither of the major permit designs treated in the literature are optimal from all points of view this has triggered a search for alternative permit designs which while they may not minimize compliance costs have sufficient other virtues as to make them attractive on other grounds the purpose of this paper is to examine within the context of an empirical mathematical programming model the air quality emission and cost consequences of two classes of the permit designs which can be implemented in the absence of information on control costs this case study involves particulate control in st louis

information sharing in a long term supply chain relationship the role of customer review strategy in this paper we study the practice of forecast sharing and supply chain coordination with a game theoretical model we find that in a one shot version of the game forecasts are not shared truthf

fishing quota markets abstract in 1986 new zealand responded to the open access problem by establishing the world s largest individual transferable quota itq system using a 15 year panel dataset from new zealand that covers 33 species and more than 150 markets for fishing quotas we assess trends in market activity price dispersion and the fundamentals determining quota prices we find that market activity is sufficiently high in the economically important markets and that price dispersion has decreased we also find evidence of economically rational behavior through the relationship between quota lease and sale prices and fishing output and input prices ecological variability and market interest rates controlling for these factors our results show a greater increase in quota prices for fish stocks that faced significant reductions consistent with increased profitability due to rationalization overall this suggests that these markets are operating reasonably well implying that itqs can be effective instruments for efficient fisheries management

asymmetric information incentives and intrafirm resource allocation this paper considers the question how should a firm allocate a resource among divisions when the productivity of the resource in each division is known only to the division manager obviously if the divisions as represented by their managers are indifferent among various allocations of the resource the headquarters can simply request the division managers to reveal their private information on productivity knowing that the managers have no incentive to lie the resource allocation problem can then be solved under complete or at least symmetric information this aspect is a flaw in much of the recent literature on this topic i e there is nothing in the models considered which makes divisions prefer one allocation over another thus although in some cases elaborate allocation schemes are proposed and analyzed they are really unnecessary in the model we develop a division can produce the same output with less managerial effort if it is allocated more resources and effort is costly to the manager we further assume that this effort is unobservable by the headquarters so that it cannot infer divisional productivity from data on divisional output and managerial effort given these assumptions we seek an optimal resource allocation process our results show that certain types of transfer pricing schemes are optimal in particular if there are no potentially binding capacity constraints on production of the resource then an optimal process is for each division to choose a transfer price from a schedule announced by the headquarters division managers receive a fixed compensation minus the cost of the resource allocated to them at the chosen transfer price resources are allocated on the basis of the chosen transfer prices if there is a potentially binding constraint on resource production a somewhat more complicated but similar scheme is required

simultaneity in the market for housing characteristics abstract the nature of simultaneity in the markets for housing characteristics is examined simultaneity is found to arise in the implicit markets for individual characteristics because of the presence of nonlinearity in the market hedonic price function for housing however this simultaneity is not the kind discussed by s rosen j political econ 82 34 55 1974 between firm supplies and household demands as a result the rosen suggestion of identifying demand with firm supply shifters is inappropriate among the alternative approaches to identification the most desirable involve use of data over two or more markets in which residence for a given household is exogenous to the choice of housing

percentage rent contracts between co stores abstract high rental rates and space scarcity in popular retail areas are encouraging retailers to share available space creating co stores co stores with complementary products enjoy a boost in foot traffic thus higher sales when the space is owned by one a common practice for retailers is to engage in a revenue sharing agreement we study the optimal design of a percentage rent contract between two co stores each having his her own random sales dependent on effort levels of both retailers since the effort level exerted by a retailer is often unverifiable it results in a double moral hazard problem we show that a linear percentage rent which is composed of a sales share and a based rent achieves the second best effort levels the landlord may also find it optimal to set a fixed rent by setting the sales share to zero with cobb douglas sales and power disutility of effort functions we obtain closed form expressions for the optimal contract we show that the landlord charges a high sales share for a tenant with low demand externality and a high sales scale the landlord is better off renting out space to a small but high revenue generating retailer rather than one generating larger traffic but with lower sales scale when the landlord s externality potential is low but he is successful in generating sales optimal sales share is low but the base rent is high the percentage rent can increase the landlord profit by up to 13 compared to the conventional fixed rent

on manufacturing marketing incentives stereotypically marketing is mainly concerned about satisfying customers and manufacturing is mainly interested in factory efficiency using the principal agent agency paradigm which assumes that the marketing and manufacturing managers of the firm will act in their self interest we seek incentive plans that will induce those managers to act so that the owner of the firm can attain as much as possible of the residual returns one optimal incentive plan can be interpreted as follows the owner subcontracts to pay the manufacturing manager a fixed rate for all capacity he delivers each marketing manager receives all of the returns from his product in turn all managers pay a fixed fee to the owner under this plan the marketing managers will often complain about the stock level decisions even though these levels are announced in advance under a revised plan the owner can eliminate such complaints by delegating the stocking decisions to the respective marketing managers without any loss this plan is interpreted as requiring the owner to make a futures market for manufacturing capacity paying the manufacturing manager the expected marginal value for each unit of capacity delivered receiving the realized marginal value from the marketing managers and losing money on average in the process

multiple lot sizing and value of probabilistic information in production to order of an uncertain size abstract a make to order batch manufacturer knows that an order for items with some particular specifications is forthcoming but does not yet know the exact size of the order due to production lead times work needs to start immediately but some units produced may fail to meet required tolerances that is the yield of each batch is random each new run involves a costly setup and each unit attempted involves material and other variable costs if a subjective probability distribution for the order size can be formed the following related questions arise 1 a what is the optimal run size 2 b when should production stop to answer these questions this paper formulates a new model whose main new feature is the ability to handle uncertain demand within a multiple lot sizing setting it is proved that the optimal policy for this scenario is one of control limit stop if and only if the stock of good units is larger than some critical value a computer program was developed for solving the problem for binomial yields and optimal policies for several examples are reported due to the effort required to form and communicate probabilistic forecasts a common practice is to express a forecast as a single number corresponding perhaps to the mean or median of the unarticulated distribution we compute the extra profit expected from forming and using probabilistic forecasts we also show how to compute the profit s variance for any policy

linking advertising and quantity decisions in the single period inventory model abstract the single period problem spp also known as the newsboy or news vendor problem is to find the order quantity which maximizes the expected profit in a single period probabilistic demand framework interest in the spp remains unabated and many extensions to it have been proposed in the last decade an important aspect of the spp is the effect of advertising on sales in this paper we extend the spp to a case in which advertising leads to increases in sales we assume that the mean demand is increasing and concave in advertising expenditure and address three cases of demand variance as a function of advertising expenditure 1 demand has constant variance 2 demand has constant coefficient of variation and 3 demand has an increasing coefficient of variation we deal with two objectives a maximizing the expected profit and b maximizing the probability of achieving a target profit we provide closed or near closed form solutions to the problem under uniform exponential and normal demand distributions we illustrate the results using numerical examples and provide some insights into the effect of advertising

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

salesforce incentives market information and production inventory planning salespeople are the eyes and ears of the firms they serve they possess market knowledge that is critical for a wide range of decisions a key question is how a firm can provide incentives to its salesforce so that it is in their interest to truthfully disclose their information about the market and to work hard many people have considered this question and provided solutions perhaps the most well known solution is due to gonik 1978 who proposed and implemented a clever scheme designed to elicit market information and encourage hard work the purpose of this paper is to study gonik s scheme and compare it with a menu of linear contracts a solution often used in the agency literature in a model where the market information possessed by the salesforce is important for the firm s production and inventory planning decisions

product warranties and double moral hazard this article explores a model of warranties in which moral hazard problems play a key role the goal is to understand the important characteristics of warranties including their provision of incomplete insurance and the relationship between product quality and coverage we analyze a model in which buyers and sellers take actions that affect a product s performance since these actions are not cooperatively determined an incentives problem arises we characterize the optimal warranty contract and undertake comparative statics to determine the predicted correlation of warranty coverage and product quality

nonlinear budget constraints and consumer demand an application to public programs for residential housing abstract this study presents a methodology for exploiting the nonlinear hedonic nature of housing prices to estimate the compensated demands of households for particular housing attributes the methodology is employed to provide hicksian benefit measures of a particular housing subsidy program typical of those undertaken recently in developing countries

contracting over multiple parameters capacity allocation in semiconductor manufacturing abstract this paper is a generalization of mallik and harker mallik s harker p t 2004 coordinating supply chains with competition capacity allocation in semiconductor manufacturing european journal of operational research 159 330 347 that presented an integrated model of incentive problems arising in forecasting and capacity allocation in that model multiple product managers and multiple manufacturing managers forecast the means of their respective demand and capacity distributions and a central coordinator allocates capacities based on these forecasts a mechanism that elicits truthful information from the managers was the main contribution of that paper the objective of this paper is to generalize our previous results to multiple statistics reporting this work assumes that the central coordinator can ask the managers to report multiple statistics mean and variance for example about their respective distributions we propose a game theoretic model and design a mechanism a bonus scheme and an allocation rule that elicits truthful reporting of all statistics by all managers it turns out that the structure of the optimal bonus schemes are rather simple with easily calculable parameters we also show that a large class of allocation rules are manipulable a bonus is often required for elicitation of truthful information we compare our results of multiple statistics reporting with those from mallik and harker 2004 we also characterize under what conditions the reporting of the extra information is of limited use

marketing production coordination in channels of distribution abstract in this paper we analyze the effects of functional horizontal decentralization by a channel member on the performance of an industrial channel of distribution we use the model of eliashberg j steinberg r 1987 management science 33 981 1000 which describes a channel of distribution consisting of a manufacturer and a value adding distributor we allow the distributor to decentralize decision making between his marketing and production functions our results show that functional decentralization at the distributor level increases the price sensitivity of the distributor concerning the price he faces from the manufacturer causes a shift in the distributor s demand curve increases the distributor s inventory activities in terms of both quantity and time frame and under certain conditions increases the manufacturer s inventory as expected the decentralized distributor has a less coordinated pricing policy vis a vis the production policy using numerical means we show that functional decentralization can improve the overall channel profitability i e for both manufacturer and distributor this counter intuitive result suggests that in our non repeated perfect information game setting functional decentralization can yield a pareto dominant equilibrium outcome where both the distributor and manufacturer are better off even though it is only the distributor who is changing his organizational decision making

supply chain choice on the internet internet companies extensively use the practice of drop shipping where the wholesaler stocks and owns the inventory and ships products directly to customers at retailers request under the drop shipping arrangement the supply chain benefits from risk pooling because the inventory for multiple retailers is stocked at the same location the wholesalers another more traditional channel alternative on the internet is one in which retailers stock and own the inventory these two supply chain structures which predominate on the internet result in different inventory risk allocation stocking decisions and profits for channel members moreover the two channel alternatives can be combined into a dual strategy whereby the retailer uses local inventory as a primary source and relies on drop shipping as a backup we model the dual strategy as a noncooperative game among the retailers and the wholesaler analyze it and obtain insights into the structural properties of the equilibrium solution to facilitate development of recommendations for practicing managers finally we characterize situations in which each of three channels is preferable by specifying appropriate ranges of critical parameters including demand variability the number of retailers in the channel wholesale prices and transportation costs

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

tradeable permits for pollution control when emission location matters what have we learned our knowledge about tradeable permit approaches to pollution control has grown rapidly in the two decades in which they have received serious analytical attention not only have the theoretical models become more focused and the empirical work more detailed but we have now had over a decade of experience with them in the u s this article draws upon economic theory empirical studies and actual experience with implementation to summarize what we have learned about applying tradeable permits to air pollution control in the special circumstance where the spatial aspects of the problem are a prime consideration

dynamic business share allocation in a supply chain with competing suppliers this paper studies a repeated game between a manufacturer and two competing suppliers with imperfect monitoring we present a principal agent model for managing long term supplier relationships using a unique form of measurement and incentive scheme we measure a supplier s overall performance with a rating equivalent to its continuation utility the expected total discounted utility of its future payoffs and incentivize supplier effort with larger allocations of future business we obtain the vector of the two suppliers ratings as the state of a markov decision process and we solve an infinite horizon contracting problem in which the manufacturer allocates business volume between the two suppliers and updates their ratings dynamically based on their current ratings and the current performance outcome our contributions are both theoretical and managerial we propose a repeated principal agent model with a novel incentive scheme to tackle a common but challenging incentive problem in a multiperiod s