a generalized measure of riskiness this paper proposes a generalized measure of riskiness that nests the original measures pioneered by aumann and serrano aumann r j r serrano 2008 an economic index of riskiness j political econom 116 5 810 836 and foster and hart foster d p s hart 2009 an operational measure of riskiness j political econom 117 5 785 814 the paper introduces the generalized options implied measure of riskiness based on the risk neutral return distribution of financial securities it also provides asset allocation implications and shows that the forward looking measures of riskiness successfully predict the cross section of 1 3 6 and 12 month ahead risk adjusted returns of individual stocks the empirical results indicate that the generalized measure of riskiness is able to rank equity portfolios based on their expected returns per unit of risk and hence yields a more efficient strategy for maximizing expected return of the portfolio while minimizing its risk this paper was accepted by wei xiong finance

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

capm and apt like models with risk measures abstract the paper deals with optimal portfolio choice problems when risk levels are given by coherent risk measures expectation bounded risk measures or general deviations both static and dynamic pricing models may be involved unbounded problems are characterized by new notions such as strong compatibility between prices and risks surprisingly the lack of bounded optimal risk and or return levels arises for important pricing models black and scholes and risk measures var cvar absolute deviation etc bounded problems present a market price of risk and generate a pair of benchmarks from these benchmarks we introduce apt and capm like analyses in the sense that the level of correlation between every available security and some economic factors explains the security expected return the risk level non correlated with these factors has no influence on any return despite the fact that we are dealing with risk functions beyond the standard deviation

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

substitution between unemployment insurance and workers compensation abstract this paper extends the literature on post injury duration of absence from work by developing a model that incorporates substitution between unemployment insurance benefits and workers compensation a theoretical analysis is presented in which the worker maximizes expected utility over four possible states of nature the model is tested empirically using pooled cross section and time series data at the two digit industry level the main findings support the predictions of the model an increase in workers compensation benefits increases the average duration of accidents with an elasticity of 0 9 1 4 while an increase in unemployment insurance payments reduces the average duration of accidents with an elasticity of 0 5 0 7

optimal investment under ambiguous technology shocks abstract this paper analyzes the behavior of a firm facing an ambiguous technology shock and the effects of the attitude toward ambiguity on optimal capital investment using the smooth ambiguity model of klibanoff et al 2005 although it seems intuitive that an increase in ambiguity aversion always reduces the optimal capital investment this is not necessarily true because the shape of the production function plays a key role in determining the effect under some conditions we show that the optimal amount of capital investment increases decreases in ambiguity aversion if the production function is substitute complement and that this result is counterintuitive when the production function is substitute furthermore our main results hold if we assume the maxmin preferences in ghirardato et al 2004

parametric replenishment policies for inventory systems with lost sales and fixed order cost in this paper we consider a single item inventory system with lost sales and fixed order cost we numerically illustrate the lack of a clear structure in optimal replenishment policies for such systems however policies with a simple structure are preferred in practical settings examples of replenishment policies with a simple parametric description are the s s policy and the s nq policy besides these known policies in literature we propose a new type of replenishment policy in our modified s s policy we restrict the order size of the standard s s policy to a maximum this policy results in near optimal costs furthermore we derive heuristic procedures to set the inventory control parameters for this new replenishment policy in our first approach we formulate closed form expressions based on power approximations whereas in our second approach we derive an approximation for the steady state inventory distribution as a result the latter approach could be used for inventory systems with different objectives or service level constraints the numerical experiments illustrate that the heuristic procedures result on average in 2 4 percent and 1 8 percent cost increases respectively compared to the optimal replenishment policy therefore we conclude that the heuristic procedures are very effective to set the inventory control parameters

on the stock control performance of intermittent demand estimators the purpose of this paper is to assess the empirical stock control performance of intermittent demand estimation procedures the forecasting methods considered are the simple moving average single exponential smoothing croston s method and a new method recently developed by the authors of this paper we first discuss the nature of the empirical demand data set 3000 stock keeping units and we specify the stock control model to be used for experimentation purposes performance measures are then selected to report customer service level and stock volume differences the out of sample empirical comparison results demonstrate the superior stock control performance of the new intermittent demand forecasting method and enable insights to be gained into the empirical utility of the other estimators

bargaining and waiting until recently the final word on bargaining with full information had been rubinstein s 1982 seminal work which concluded that an agreement will be reached immediately and the first mover will have the advantageous share rubinstein s model was one of alternating offers made at fixed time intervals many variations of the model have emerged and until recently they mainly focus on asymmetric information with some having the uninformed agent making all the offers the conclusion from examining these variations is that the equilibrium is highly sensitive to the exact specification of the institutional structure in more recent work perry and reny 1990 perry and reny 1993 sakavics 1993 and nickerson sadanand and sadanand 1994 endogenize the structure of the bargaining by allowing the order and timing of play to be determined endogenously the first three papers endogenous structure models deal with the full information setting and the last is an asymmetric information model 2 in addition to the exogenously given minimum reaction time for responding to offers made by the other player the endogenous structure models introduce the important innovation of an exogenous waiting time a time between a player s offer and his next offer they also allow players to make simultaneous offers which sakovics later disallows the findings in this recent literature are rather startling i the waiting time has a profound impact the longer the time the greater the share the player can command 3 ii the consequence of simultaneous offers is multiple equilibria when the reaction time is zero a continuum of shares lying between the two unique rubinstein shares can result and additional continua of shares arise with delayed agreement when the reaction times are positive iii equilibrium paths are almost exclusively characterized by simultaneous offers in this paper we examine the question of simultaneous offers and reconcile the conflict between the infrequency of simultaneous offers in real life bargaining and their prevalence in the endogenous structure models we

optimal r q inventory policies with poisson demands and lost sales discounted and undiscounted cases abstract we consider a continuous review r q inventory system with poisson demands and at most one order outstanding the replenishment lead time is either constant or exponentially distributed demands not covered immediately from inventory are lost costs include a linear order cost with a fixed cost per order and a fixed cost per unit lost sale as regards inventory holding costs the cost of capital often constitutes a major part this paper focuses on these interest related holding costs in the undiscounted case holding costs are linear and inventory performance is measured by the long run average total cost incurred per unit time in the discounted case the performance measure is the expected present value of the ordering and lost sales costs the cost associated with capital tied up in inventory is accounted for by an appropriate discount rate we formulate an exact model and design a policy iteration algorithm for the discounted case results on the form of an optimal replenishment policy are derived and the model is compared to a previously derived model for the undiscounted case numerical experiments are used to evaluate the difference between the optimal solutions with and without discounting the effect of a stochastic lead time on this difference is also considered by comparing solutions with constant and exponential lead times in general the differences seem to be fairly small but exceptional cases exist when the service level is low

deductible contracts against fraudulent claims evidence from automobile insurance insurance fraud is now recognized as a significant resource allocation problem in many markets the object of this study is to verify how straight deductible contracts may affect the equilibrium level of falsification in automobile insurance this type of contract is observed in many markets even if it is not optimal under costly state falsification a higher deductible may create incentives to fraud or cheat particularly when the insured anticipates that the claim has a small probability of being audited to verify this proposition we estimate a loss equation for which one of the determinants is the amount of the deductible using a data set of claims filed for damages following an automobile accident with twenty insurance companies in quebec in 1992 because we have access only to reported losses a higher deductible also implies a lower probability of reporting small losses to isolate the fraud effect related to the presence of a deductible in the contract we jointly estimate a loss equation and a

reputation and imperfect information abstract a common observation in the informal literature of economics and elsewhere is that is multistage games players may seek early in the game to acquire a reputation for being tough or benevolent or something else but this phenomenon is not observed in some formal game theoretic analyses of finite games such as selten s finitely repeated chain store game or in the finitely repeated prisoners dilemma we reexamine selten s model adding to it a small amount of imperfect or incomplete information about players payoffs and we find that this addition is sufficient to give rise to the reputation effect that one intuitively expects

insurance with multiple insurers a game theoretic approach this paper studies the set of pareto optimal insurance contracts and the core of an insurance game our setting allows multiple insurers with translation invariant preferences we characterise the pareto optimal contracts which determines the shape of the indemnities closed form and numerical solutions are found for various preferences that the insurance players might have determining associated premiums with any given optimal pareto contract is another problem for which economic based arguments are further discussed we also explain how one may link the recent fast growing literature on risk based optimality criteria to the pareto optimality criterion and we show that the latter is much more general than the former one which according to our knowledge has not been pointed out by now further we extend some of our results when model risk is included i e there is some uncertainty with the risk model and or the insurance players make decisions based on divergent beliefs about the underlying risk these robust optimal contracts are investigated and we show how one may find robust and pareto efficient contracts which is a key decision making problem under uncertainty

an examination of the market for favors and votes in congress this paper examines the strategies that horse traders and power brokers adopt in trading favors to pass legislation although the favors that they trade are generally impossible to observe the paper develops a model that allows tests of favor trading with data from the senate vote on the byrd amendment to the 1990 clean air act i conduct such a test the test provides evidence that on this vote i favor trading occurred ii the coalition leaders practiced price discrimination and iii the coalition leaders did not collude with each another

optimal dynamic reinsurance policies under a generalized denneberg s absolute deviation principle abstract this paper studies the optimal dynamic reinsurance policy for an insurance company whose surplus is modeled by the diffusion approximation of the classical cramer lundberg model we assume the reinsurance premium is calculated according to a proposed mean cvar premium principle which generalizes denneberg s absolute deviation principle and expected value principle moreover we require that both ceded loss and retention functions are non decreasing to rule out moral hazard under the objective of minimizing the ruin probability we obtain the optimal reinsurance policy explicitly and we denote the resulting treaty as the dual excess of loss reinsurance this form of the optimal treaty is new to the literature and lends support to the fact that reinsurance contracts in practice often involve layers it also demonstrates that reinsurance treaties such as the proportional and the standard excess of loss which are typically found to be optimal in the dynamic reinsurance model need not be optimal when we consider a more general optimization model we also consider other generalizations including i allowing the insurer to manage its business through both reinsurance and investment and ii n piecewise mean cvar premium principle in the former case we not only show that the dual excess of loss reinsurance policy remains optimal but also demonstrate that investing in stock can further enhance insurer s financial stability with lower ruin probability for the latter case we establish that the optimal reinsurance treaty can have at most n layers which is also more consistent with practice

two sided coherent risk measures and their application in realistic portfolio optimization by using a different derivation scheme a new class of two sided coherent risk measures is constructed in this paper different from existing coherent risk measures both positive and negative deviations from the expected return are considered in the new measure simultaneously but differently this innovation makes it easy to reasonably describe and control the asymmetry and fat tail characteristics of the loss distribution and to properly reflect the investor s risk attitude with its easy computation of the new risk measure a realistic portfolio selection model is established by taking into account typical market frictions such as taxes transaction costs and value constraints empirical results demonstrate that our new portfolio selection model can not only suitably reflect the impact of different trading constraints but find more robust optimal portfolios which are better than the optimal portfolio obtained under the conditional value at risk measure in terms of diversification and typical performance ratios

partial vertical integration under market uncertainty abstract this paper shows that partial vertical integration arises in a market environment with risk averse producers cost and demand uncertainties and production lag

california s 2004 workers compensation reform costs claims and contingent workers the large excess fraction of difficult to diagnose injuries that occur on a monday was originally thought to reflect employees use of workers compensation to cover weekend injuries evidence has

insurance fraud and optimal claims settlement strategies abstract we examine the optimal claims settlement strategy for a liability insurer when claimants can permanently misrepresent their losses by engaging in costly claims falsification in this environment claims auditing is not a possible deterrent to fraud and the settlement strategy consists of an indemnification profile that relates the insurance payment to the claimed amount of loss the optimal indemnification profile is shown to involve systematic underpayment of claims at the margin as a means to deter loss exaggeration with the extent of underpayment limited by expected litigation costs and potential bad faith claims the key testable implication of the theory is that the extent of underpayment should be greater for classes of claims for which loss exaggeration is easier empirical analysis of insurance settlements for bodily injury liability in automobile accidents confirms this prediction this suggests that liability insurers optimally choose claims payment strategies to lessen a claimant s i

asymptotic optimality of order up to policies in lost sales inventory systems we study a single product single location inventory system under periodic review where excess demand is lost and the replenishment lead time is positive the performance measure of interest is the long run average holding cost and lost sales penalty cost for a large class of demand distributions we show that when the lost sales penalty becomes large compared to the holding cost the relative difference between the cost of the optimal policy and the best order up to policy converges to zero for any given cost parameters we establish a bound on this relative difference numerical experiments show that the best order up to policy performs well yielding an average cost that is within 1 5 of the optimal cost when the ratio between the lost sales penalty and the holding cost is 100 we also propose a heuristic order up to level using two newsvendor expressions in our experiments the cost of this order up to policy is 2 52 higher on an average than the best order up to policy

optimal selling strategies when to haggle when to hold firm a seller encountering risk neutral buyers one at a time should if commitments are feasible quote a single take it or leave it price to each this strategy is superior to any other for finite or infinite buyer populations whether there is learning or the distribution of buyer prices is known at the outset with one object for sale or many although haggling may offer advantages in terms of price discrimination these gains are more than offset by the losses it generates by encouraging buyers to refuse purchases at high prices

inventory cost rate functions with nonlinear shortage costs this article considers five cost rate models for inventory control each summarizing the expected holding and shortage costs per period as a function of the inventory position all models have linear holding costs and shortage cost coefficients of dimension unit period unit and period the latter two coeficients may be the shadow costs of a fill rate and a ready rate service constraint respectively one of the cost rate models is a new suggestion intended to facilitate modeling of periodic review inventory systems if and only if conditions on the demand process are presented for which the cost rate is quasi convex in the inventory position the typical sufficient condition requires that the cumulative demand distribution be logconcave a condition that is met by most demand distributions commonly used in the inventory literature the results simplify optimization and extend the known optimality of s s and nq r policies to cost structures common in applications and to the presence of typical service constraints as a prerequisite for the study a series of new monotonicity results are derived for compound renewal processes

capital asset pricing model capm with drawdown measure the notion of drawdown is central to active portfolio management conditional drawdown at risk cdar is defined as the average of a specified percentage of the largest drawdowns over an investment horizon and includes maximum and average drawdowns as particular cases the necessary optimality conditions for a portfolio optimization problem with cdar yield the capital asset pricing model capm stated in both single and multiple sample path settings the drawdown beta in the capm has a simple interpretation and is evaluated for hedge fund indices from the hfrx database in the single sample path setting drawdown alpha is introduced similarly to the alpha in the classical capm and is evaluated for the same hedge fund indices both drawdown beta and drawdown alpha are used to prioritize hedge fund strategies and to identify instruments for hedging against market drawdowns

optimal ordering policies for periodic review systems with replenishment cycles in this paper we consider inventory models for periodic review systems with replenishment cycles which consist of a number of periods by replenishment cycles we mean that an order is always placed at the beginning of a cycle we use dynamic programming to formulate both the backorder and lost sales models and propose to charge the holding and shortage costs based on the ending inventory of periods rather than only on the ending inventory of cycles since periods can be made any time units to suit the needs of an application this approach in fact computes the holding cost based on the average inventory of a cycle and the shortage cost in proportion to the duration of shortage for the backorder model and remedies the shortcomings of the heuristic or approximate treatment of such systems hadley and whitin analysis of inventory systems prentice hall englewood cliffs nj 1963 we show that a base stock policy is optimal for the backorder model while the optimal order quantity is a function of the on hand inventory for the lost sales model moreover for the backorder model we develop a simple expression for computing the optimal base stock level for the lost sales model we derive convergence conditions for obtaining the optimal operational parameters

vertical integration in a spatial setting inplications of the successive monopoly distortion abstract we extend earlier analyses of spatial markets to a vertical setting in which firms at both the upstream and downstream level face transportation costs and sunk cost investments depending on the costs of integration and the size of the successive monopoly distortion loss vertical integration may be partial total or not at all

quasi fixed cyclic production schemes for multiple products with stochastic demand abstract in this paper we present an approach to generate cyclic production schemes for multiple products with stochastic demand to be produced on a single production unit this scheme specifies a fixed and periodic production sequence called a cycle where each product may occur more than once in the sequence in order to stabilize the cycle length alternative control strategies are introduced these strategies keep the cycle length close to a target length by means of adding idle time to the cycle cutting production short or overproduction on basis of the selected control strategy as well as a base stock policy target inventory levels are determined for each production run in the cycle demand can be backlogged but a certain service level is required setup times are sequence dependent and the storage is capacitated employing the developed strategies we investigate the tradeoff between stability of cycle length and total cost induced by the production schedule in a computational study based on both real world data and random test instances

separating moral hazard from adverse selection and learning in automobile insurance longitudinal evidence from france the identification of information problems in different markets is a challenging issue in the economic literature this paper performs tests of residual asymmetric information in the french automobile insurance market for the 1995 1997 period this market is characterized by the presence of a regulated experiencerating scheme bonus malus contract choices are strongly associated with the bonus malus of policyholders we have access to longitudinal survey data with dynamic information both on claims and accidents we propose a causality test to distinguish pathways through which a positive correlation arises between contract choice and accidents we find evidence of moral hazard among a sub group of policyholders with significant driving experience 5 15 years we distinguish this moral hazard estimate from adverse selection and learning policyholders with less experience have a combination of learning and moral hazard whereas no residual information problem is found for policyholders with more than 15 years of experience

analysis of order up to level inventory systems with compound poisson demand abstract we analyse a single echelon single item inventory system where the demand and the lead time are stochastic demand is modelled as a compound poisson process and the stock is controlled according to a continuous time order up to out level policy we propose a method for determining the optimal out level for cost oriented inventory systems where unfilled demands are backordered we first establish an analytical characterization of the optimal out level the actual calculation is based on a numerical procedure the accuracy of which can be set as highly as desired by means of a numerical investigation we show that the method is very efficient in calculating the optimal out level we compare our results with those obtained using an approximation proposed in the literature and we show that there is a significant difference in accuracy for slow moving items our work allows insights to be gained on stock control related issues for both fast and slow moving stock keeping units skus

optimal dividend and capital injection problem in the dual model with proportional and fixed transaction costs in this paper we consider the dividend payments and capital injections control problem in a dual risk model such a model might be appropriate for a company that specializes in inventions and discoveries which pays costs continuously and has occasional profits the objective is to maximize the expected present value of the dividends minus the discounted costs of capital injections this paper can be considered as an extension of yao et al 2010 we include fixed transaction costs incurred by capital injections in this paper this leads to an impulse control problem using the techniques of quasi variational inequalities qvi this optimal control problem is solved numerical solutions are provided to illustrate the idea and methodologies and some interesting economic insights are included

vertical integration scale distortions partial integration and the direction of price change two new features are introduced in a standard model of forward vertical integration by an intermediate good monopolist into a contestable downstream industry first u shaped average costs replace constant returns in the downstream industry second the effect of subjecting the monopolist to the pressure of upstream entry is explored it is found that monopoly pricing of the intermediate good can distort the scale as well as the input proportions of the downstream firms either distortion leads to integration but here integration may be partial rather than full prices rise with partial integration when there is no upstream entry but prices fall when upstream entry is free

workers compensation and moral hazard in tunisia abstractmoral hazard is a problem of asymmetric information that plays a central role in numerous contractual relationships and may lead to suboptimal resource allocation both ex ante and ex post moral hazard problems in workers compensation wc have been extensively analysed in developed countries the main objective of this paper is to test the presence of ex post moral hazard in the tunisian context to our knowledge this is the first analysis on this topic in a developing country tunisia it is particularly important to study moral hazard problems in developing countries since the negative impacts of such problems could be exacerbated in the developing world dionne and st michel 1991 have developed a methodology for testing for the presence of ex post moral hazard in the context of a more generous wc regime in quebec the tunisian institutional context that we study is similar to that prevailing in quebec that is in 1995 there was a significant increase in the generosity of the wc regime

portfolio selection under distributional uncertainty a relative robust cvar approach robust optimization one of the most popular topics in the field of optimization and control since the late 1990s deals with an optimization problem involving uncertain parameters in this paper we consider the relative robust conditional value at risk portfolio selection problem where the underlying probability distribution of portfolio return is only known to belong to a certain set our approach not only takes into account the worst case scenarios of the uncertain distribution but also pays attention to the best possible decision with respect to each realization of the distribution we also illustrate how to construct a robust portfolio with multiple experts priors by solving a sequence of linear programs or a second order cone program

risk and value based management for non life insurers under solvency constraints abstract the aim of this paper is to study optimal risk and value based management decisions regarding a non life insurer s investment strategy by maximizing shareholder value based on preference functions while simultaneously controlling for the ruin probability we thereby extend previous work by deriving analytical solutions and by explicitly accounting for the policyholders willingness to pay depending on their risk sensitivity based on the insurer s reported solvency status which will be of great relevance under solvency ii we further investigate the impact of the risk free interest rate non linear dependencies between assets and liabilities distributional assumptions as well as reinsurance one main finding is that the consideration of default risk driven premiums is vital for optimal management decisions since e g the target ruin probability implying a higher shareholder value differs for various risk sensitivities of the policyholders furthermore in the present setting proportional reinsurance increases shareholder value only for non risk sensitive policyholders

on the dual risk model with parisian implementation delays in dividend payments abstract in this paper we study the dual compound poisson risk process which is suitable for a business that pays expenses at a constant rate over time and earns random amount of income at random times in contrast to the usual dividend barrier strategy e g avanzi gerber and shiu 2007 in which any overshoot over a pre specified barrier is paid immediately to the company s shareholders as a dividend it is assumed that dividend is payable only when the process has stayed above the barrier continuously for a certain amount of time d known as the parisian implementation delay in dassios and wu 2009 under such a modification the laplace transform of the time of ruin and the expected discounted dividends paid until ruin are derived motivated by the erlangization technique e g asmussen avram and usabel 2002 of approximating a fixed time using an erlang distribution we also analyze the case where the delay d is replaced by an erlang random variable numerical illustrations are given to study the effect of parisian implementation delays on ruin related quantities and to demonstrate the good performance of erlangization interestingly unlike the traditional barrier strategy it is found that the optimal dividend barrier maximizing the expected discounted dividends does depend on the initial surplus level

hardball and the soft touch the economics of optimal insurance contracts with costly state verification and endogenous monitoring costs abstract we examine an environment of costly state verification in which insureds possess private information about the magnitude of an insurable loss insurers can verify the actual loss suffered only by incurring a positive resource cost and insureds may verification and may lead to more generous settlements optimal insurance contracts are shown to mitigate the incentives to evade by a combination of incentives which include the overpayment of easily monitored losses and undercompensation for claims exhibiting higher verification costs

the multi sourcing location inventory problem with stochastic demand abstract this paper deals with a multi period location inventory optimization problem in a multi echelon supply chain network characterized by an uncertain demand and a multi sourcing feature the aim of the paper is to propose a generic modeling approach to integrate key features of the inventory planning decisions made under a reorder point order up to level s s policy with the location allocation design decisions to cope with demand uncertainty given the hierarchical structure of the problem a two stage stochastic mathematical model that maximizes the total expected supply chain network profit is proposed this optimization model is intractable due to its non linearity therefore a linear approximation is proposed and a sample average approximation approach is used to produce near optimal solutions numerical experiments are conducted to validate the proposed modeling and solution approaches the results show the efficiency of the linear approximation of the s s policy at the strategic level to produce robust design solutions under uncertainty they underline the sensitivity of the design solution to the demand type and the impact of the inventory holding costs and backorder costs especially under non stationary processes

the design of an optimal insurance policy almost every phase of economic behavior is affected by uncertainty the economic system has adapted to uncertainty by developing methods that facilitate the reallocation of risk among individuals and firms the most apparent and familiar form for shifting risks is the ordinary insurance policy previous insurance decision analyses can be divided into those in which the insurance policy was exogenously specified see john gould jan mossin and vernon smith and those in which it was not see karl borch 1960 and kenneth arrow 1971 1973 in this paper the pioneering work of borch and arrow the derivation of the optimal insurance contract form from the model is synthesized and extended

competitive equilibrium convergence in a posted offer market with extreme earnings inequities abstract we present the results of five laboratory posted offer experiments in which the competitive equilibrium model predicts that all exchange profits are received by one side of the market thus defining a boundary condition price converges to the prediction more slowly when buyers rather than sellers receive the exchange surplus apparently due to the increased market power of sellers in this trading mechanism a model of the seller s decision in this market is developed to explain this result we also observe costly signalling and tacit collusion in our experiments

moral hazard insurance claims and repeated insurance contracts the paper develops a simple model of repeated automobile insurance contracts providing a framework for analyzing changes in aggregate insurance data in periods of changes that affect driver incentives experience rating of premiums gives drivers an incentive to exert effort to avoid accidents ex ante moral hazard and an incentive to hide accidents ex post moral hazard the empirical analysis using data from the competitive insurance markets in ontario and alberta over a period of major legislative changes in ontario suggests that much of the recent decline in accidents in ontario was due to an increased incentive to hide accidents jel classification d 12 d82 hasard moral reclamations d assurance et contrats d assurance renouveles le texte developpe un modele simple de contrats d assurance automobile renouveles fournissant un cadre d analyse des donnees d assurance agregees dans des periodes de changement qui affectent les incitations des chauffeurs un regime de primes cotees selon l experience donne aux chauffeurs une incitation a faire des efforts pour eviter les accidents hasard moral ex ante et une incitation a cacher qu il y a eu accident hasard moral ex post l analyse empirique utilisant les donnees recueillies dans les marches d assurance con currentiels de l ontario et de l alberta pour une periode au cours de laquelle il y a eu des changements legislatifs majeurs en ontario suggere qu une bonne partie du declin des accidents enregistre en ontario a ete attribuable a une incitation accrue a cacher les accidents

predation reputation and entry deterrence abstract economists often argue that predatory practices are irrational since there exist cheaper or more certain means to gain or maintain a monopoly our gametheoretic equilibrium analysis suggests that if a firm is threatened by several potential entrants then predation may be rational against early entrants even if it is costly when viewed in isolation because it yields a reputation which deters other entrants asymmetric information plays a crucial role in our analysis since it provides the rationale for entrants to base their expectations of the firm s future behavior on its past actions the analysis also suggests methods to treat general reputational phenomena

nash equilibria of over the counter bargaining for insurance risk redistributions the role of a regulator this paper proposes a way to optimally regulate bargaining for risk redistributions we discuss the strategic interaction between two firms who trade risk over the counter in a one period model novel to the literature we focus on an incomplete set of possible risk redistributions this keeps the set of feasible contracts simple we consider catastrophe and longevity risk as two key examples the reason is that the trading of these risks typically occurs over the counter and that there are no given pricing functions if the set of feasible strategies is unconstrained we get that all nash equilibria are such that no firm benefits from trading a way to avoid this is to restrict the strategy space a priori in this way a nash equilibrium that is interesting for both firms may exist the intervention of a regulator is possible by restricting the set of feasible strategies for instance a firm has to keep a deductible on its prior risk we characterize optimal regulation by means of nash bargaining solutions

bargaining with the president a simple game and new evidence i employ a simple game to suggest the effects of information and expectations on bargaining strategies and responses i make use of members predispositions in order to identify actors likely to be bargaining using administration headcounts i show that while very few members misrepresent their preferences during the coalition building process those who do represent a large proportion of the administration s core supporters make their misrepresentations unsystematic to avoid a costly reputation and convert more readily than those who are not strategic considerations drive conversion among bluffing members while identification with the administration determines conversion among other members compromise generates few conversions a conservative estimate of bluffing suggests that the conversion of bluffers decided more than half the administration s critical votes i speculate about a model to account for the observed bluffing

the design of an optimal insurance policy note in an article in this review arthur raviv 1979 examines pareto optimal insurance policies when an insurer incurs settlement costs c induced by indemnity i for loss x raviv s main result is that a necessary and sufficient condition for the pareto optimal deductible to equal zero is c i 0 this implies that deductible policies give the best tradeoff between risk sharing and economizing on costly claim settlements since in practice these costs are significant the theorem is of considerable importance among others this has been recognized by robert townsend 1979 michael brennan and ray solanki 1981 david mayers and clifford smith 1981 gur huberman mayers and smith 1983 harris schlesinger 1981 and stuart turnbull 1983 the theorem is correct but raviv s proof is not in this note a corrected proof for the theorem is given the corrected proof is important in itself because it allows for a generalization to a greater variety of transactions costs than has previously been considered see my 1984 paper for details section i develops the setting for the problem and the notation to be subsequently used raviv s error and the corrected proof are presented in section ii

the welfare state as provider of accident insurance in the workplace efficiency and distribution in equilibrium the welfare state provides universal insurance for workers against accidents in the workplace in equilibrium this insurance does not generate adverse safety incentives to firms noninternalized insurance makes workers sort themselves nonoptimally to firms and choose higher individual effort levels to prevent accidents as compared to insurance schemes that are internalized in the market welfare state insurance may therefore generate higher safety levels than perfect experience rating not lower an optimal income taxation scheme in the welfare state implies progressive taxation the optimal tax level increases with the extent of the welfare state copyright 1995 by royal economic society

risk management strategies via minimax portfolio optimization recent extreme economic developments nearing a worst case scenario motivate further examination of minimax linear programming approaches for portfolio optimization risk measured as the worst case return is employed and a portfolio from maximizing returns subject to a risk threshold is constructed minimax model properties are developed and parametric analysis of the risk threshold connects this model to expected value along a continuum revealing an efficient frontier segmenting investors by risk preference divergence of minimax model results from expected value is quantified and a set of possible prior distributions expressing a degree of knightian uncertainty corresponding to risk preference determined the minimax model will maximize return with respect to one of these prior distributions providing valuable insight regarding an investor s risk attitude and decision behavior linear programming models for financial firms to assist individual investors to hedge against losses by buying insurance and a model for designing variable annuities are proposed

workers compensation moral hazard and the composition of workplace injuries this paper provides evidence that workers compensation insurance wc affects not only the occurrence but also the composition of reported injuries in our theoretical approach wc is the source of two interrelated moral hazard problems underprovision of accident preventing efforts by the insured worker ex ante moral hazard and false reporting of injuries ex post moral hazard our model predicts that under certain assumptions the impact of wc benefits is stronger on the probability of reporting a difficult to diagnose injury than on the probability of reporting an injury that is easy to diagnose panel data on 9 800 workers in the quebec construction industry over each month of the period 1977 86 combining administrative data from the quebec construction board with data from the quebec workers compensation board are used for the estimates the parameters of the model are estimated using a threealternative logit kernel hybrid multinomial probit mnp framework with individual random effects our results confirm our theoretical pre

unemployment insurance and the duration of workplace accidents the social cost of workplace accidents is large in a typical year in the united states from one third to one half as many working days are lost to work injuries as are lost to unemployment see krueger 1988 recently economists have paid more attention to the economic issues involved in occupational safety and health osh in particular they have investigated the different effects of government intervention in this area for example it has been found that in general safety regulations and their enforcement had little impact on the incidence of workplace accidents there also seems to be a consensus that an increase in the generosity of workers compensation wc benefits is associated with an increase in both the frequency and the duration of wc claims for workplace accidents in this connection some researchers have raised a potentially important issue the possibility of substitution between wc and unemployment insurance ui in most countries wc is more generous than ui in terms of wage replacement and there may therefore be an incentive for workers about to be laid off to try to benefit from wc instead of ul2 workers suffering from a workplace accident may also be tempted to take action in order to obtain a longer period of recovery compensated by wc these two types of moral hazard are likely to be particularly important when injuries are hard todiagnose e g low back injuries and in industries where the level of unemployment is such that many workers may expect to be unemployed and to receive ui benefits after their recovery the construction industry in canada may be considered such an industry since climate constraints mean that many workers are unemployed during winter time fortin and lanoie 1992 were the first authors to investigate these issues in particular from quebec aggregate data at the industry level they found

spare parts management linking distributional assumptions to demand classification spare parts are known to be associated with intermittent demand patterns and such patterns cause considerable problems with regards to forecasting and stock control due to their compound nature that renders the normality assumption invalid compound distributions have been used to model intermittent demand patterns there is however a lack of theoretical analysis and little relevant empirical evidence in support of these distributions in this paper we conduct a detailed empirical investigation on the goodness of fit of various compound poisson distributions and we develop a distribution based demand classification scheme the validity of which is also assessed in empirical terms our empirical investigation provides evidence in support of certain demand distributions and the work described in this paper should facilitate the task of selecting such distributions in a real world spare parts inventory context an extensive discussion on parameter estimation related difficulties in this area is also provided

coordinated replenishment strategies in inventory distribution systems in this paper we study the impact of coordinated replenishment and shipment in inventory distribution systems we analyze a system with multiple retailers and one outside supplier random demand occurs at each retailer and the supplier replenishes all the retailers in traditional inventory models each retailer orders directly from the supplier whenever the need arises we present a new centralized ordering policy that orders for all retailers simultaneously the new policy is equivalent to the introduction of a warehouse with no inventory that is in charge of the ordering allocation and distribution of inventory to the retailers under such a policy orders for some retailers may be postponed or expedited so that they can be batched with other retailers orders which results in savings in ordering and shipping costs in addition to the policy we propose for supplying inventory to the retailers we also consider three other policies that are based on these well known policies in the literature a can order policy b echelon inventory policy and c fixed replenishment interval policy furthermore we create a framework for simultaneously making inventory and transportation decisions by incorporating the transportation costs or limited truck capacities we numerically compare the performance of our proposed policy with these policies to identify the settings in which each policy would perform well

good deals and benchmarks in robust portfolio selection abstract this paper deals with portfolio selection problems under risk and ambiguity the investor may be ambiguous with respect to the set of states of nature and their probabilities both static and discrete or continuous time dynamic pricing models are included in the analysis risk and ambiguity are measured in general settings the considered risk measures contain as particular cases the usual deviations and the coherent and expectation bounded measures of risk four contributions seem to be reached firstly necessary and sufficient optimality conditions are given secondly the portfolio selection problem may be frequently solved by linear programming linked methods despite the fact that risk and ambiguity cannot be given by linear expressions thirdly if there is a market price of risk then there exists a benchmark that creates a robust capital market line when combined with the riskless asset the global risk of every portfolio may be divided into systemic and specific moreover if there is no ambiguity with respect to the states of nature only their probabilities are uncertain then classical capm formulae may be found fourthly some recent pathological findings for ambiguity free analyses also apply in ambiguous frameworks in particular there may exist arbitrage free markets such that the ambiguous agent can guarantee every expected return with a maximum risk bounded from above by zero i e the capital market line risk return becomes vertical for instance in the non ambiguous black and scholes model this property holds for important risk measures such as the absolute deviation or the cvar nevertheless in ambiguous settings adequate increments of the ambiguity level will allow us to recover capital market lines consistent with the empirical evidence the introduction of ambiguity may overcome several caveats of many important pricing models

risk aversion in the theory of expected utility with rank dependent probabilities expected utility with rank dependent probability theory is a model of decision making under risk where the preference relations on the set of probability distributions is represented by the mathematical expectation of a utility function with respect to a transformation of the probability distributions on the set of outcomes this paper defines based on g teaux differentiability measures of risk aversion for such preferences which characterize the relation more risk averse and applies these measures to the analysis of unconditional and conditional portfolio choice problems

operating characteristics of the s 1 s inventory system with partial backorders and constant resupply times in this paper we consider an s 1 s inventory system with poisson demand and constant resupply times an arriving customer facing stockout will either backorder or withdraw its order expressions describing steady state operating characteristics of the system and the expected total cost rate are developed furthermore the behavior of the expected total cost rate as the function of the relevant parameters is explored

a note on partial vertical integration a simple model is constructed to show how partial vertical integration may emerge as an equilibrium market structure in a world characterized by rationing differences in the reservation prices of buyers and in the risk attitudes of buyers and sellers the buyers with the high reservation prices turn out to be vertically integrated

periodic review lost sales inventory models with compound poisson demand and constant lead times of any length in almost all literature on inventory models with lost sales and periodic reviews the lead time is assumed to be either an integer multiple of or less than the review period in a lot of practical settings such restrictions are not satisfied we develop new models allowing constant lead times of any length when demand is compound poisson besides an optimal policy we consider pure and restricted base stock policies under new lead time and cost circumstances based on our numerical results we conclude that the latter policy which imposes a restriction on the maximum order size performs almost as well as the optimal policy we also propose an approximation procedure to determine the base stock levels for both policies with closed form expressions

a multiechelon inventory model with fixed replenishment intervals this paper develops a new model for studying multiechelon inventory systems with stochastic demand for the model we assume that each site in the system orders at preset times according to an order up to policy that delivery times are deterministic and that the demand processes are stochastic with independent increments we introduce a new scheme for allocating stock in short supply which we call virtual allocation and which permits significant tractability we exercise the model on a set of test problems for two echelon systems to get insight into the structure of good policies the primary findings are that both the central warehouse upper echelon and the retail sites lower echelon should hold safety stock but that most of the safety stock should be at the retail sites consequently the central warehouse will stock out with high probability furthermore we show that the virtual allocation rule is near optimal for the set of test problems

claimholder incentive conflicts in reorganization the role of bankruptcy law when a firm is financial distress in most cases a set of mutually advantageous reorganization plans exist this article shows that the bankruptcy code by providing rules governing the negotiation process yields a unique solution to the reorganization process in addition the structure imposed by the code mitigates the holdout problem created by the individual claimant s divergent incentives article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

satisficing measures for analysis of risky positions in this work we introduce a class of measures for evaluating the quality of financial positions based on their ability to achieve desired financial goals in the spirit of simon simon h a 1959 theories of decision making in economics and behavioral science amer econom rev 49 3 253 283 we call these measures satisficing measures and show that they are dual to classes of risk measures this approach has the advantage that aspiration levels either competing benchmarks or fixed targets are often much more natural to specify than risk tolerance parameters in addition we propose a class of satisficing measures that reward diversification finding optimal portfolios for such satisficing measures is computationally tractable moreover this class of satisficing measures has an ambiguity interpretation in terms of robust guarantees on the expected performance because the underlying distribution deviates from the investor s reference distribution finally we show some promising results for our approach compared to traditional methods in a real world portfolio problem against a competing benchmark

economic effects of workers compensation in the united states private insurance and the administration of compensation claims using a sample of workers compensation claims from new york this article investigates 1 the probability that the claimant and insurer will negotiate a settlement rather than adjudicate the claim 2 the size of the settlement if settlement occurs 3 the size of the award if the claim is adjudicated and 4 factors determining the extent of the insurers claim adjustment efforts the findings show that insurer adjustment activities increase settlement probability and that a 24 25 discount rate is required to equate lump sum settlements with the benefit stream paid by an adjudicated award

workers compensation and moral hazard two types of moral hazard have been determined the first type is related to self prevention activities affecting probabilities of accidents the second type relates to the agent s activities whenever the accident occurs the authors objective consists of presenting an empirical measure of the significance of this second type of moral hazard in the workers compensation market the main challenge in isolating moral hazard consists of dividing into two parts the total variation in recovery time with respect to changes in insurance coverage 1 the variation of consumption corresponding to a given level of information and 2 the variation of consumption due to greater asymmetrical information the methodology used in this study separates these two variations copyright 1991 by mit press

worst case value at risk and robust portfolio optimization a conic programming approach classical formulations of the portfolio optimization problem such as mean variance or value at risk var approaches can result in a portfolio extremely sensitive to errors in the data such as mean and covariance matrix of the returns in this paper we propose a way to alleviate this problem in a tractable manner we assume that the distribution of returns is partially known in the sense that onlybounds on the mean and covariance matrix are available we define the worst case value at risk as the largest var attainable given the partial information on the returns distribution we consider the problem of computing and optimizing the worst case var and we show that these problems can be cast as semidefinite programs we extend our approach to various other partial information on the distribution including uncertainty in factor models support constraints and relative entropy information

auditing claims in the insurance market with fraud the credibility issue abstract this paper characterizes the equilibrium of an insurance market where opportunist policyholders may file fraudulent claims we assume that insurance policies are traded in a competitive market where insurers cannot distinguish honest policyholders from opportunists the insurer policyholder relationship is modelled as an incomplete information game in which the insurer decides to audit or not the market equilibrium depends on whether insurers can credibly commit or not to their audit strategies we show that a no commitment equilibrium results in a welfare loss for honest individuals which may even be so large that the insurance market completely shuts down we also show that transferring monitoring costs to a budget balanced common agency would mitigate the commitment problem

managing inventory with multiple products lags in delivery resource constraints and lost sales a mathematical programming approach this paper develops an order up tos inventory model that is designed to handle multiple items resource constraints lags in delivery and lost sales without sacrificing computational simplicity mild conditions are shown to ensure that the expected average holding cost and the expected average shortage cost are separable convex functions of the order up to levels we develop nonparametric estimates of these costs and use them in conjunction with linear programming to produce what is termed the lp policy the lp policy has two major advantages over traditional methods first it can be computed in complex environments such as the one described above and second it does not require an explicit functional form of demand something that is difficult to specify accurately in practice in two numerical experiments designed so that optimal policies could be computed the lp policy fared well differing from the optimal profit by an average of 2 20 and 1 84 respectively these results compare quite favorably with the errors incurred in traditional methods when a correctly specified distribution uses estimated parameters our findings support the effectiveness of this mathematical programming technique for approximating complex real world inventory control problems

robust portfolio optimization with copulas abstract conditional value at risk cvar is widely used in portfolio optimization as a measure of risk cvar is clearly dependent on the underlying probability distribution of the portfolio we show how copulas can be introduced to any problem that involves distributions and how they can provide solutions for the modeling of the portfolio we use this to provide the copula formulation of the cvar of a portfolio given the critical dependence of cvar on the underlying distribution we use a robust framework to extend our approach to worst case cvar wcvar wcvar is achieved through the use of rival copulas these rival copulas have the advantage of exploiting a variety of dependence structures symmetric and not we compare our model against two other models gaussian cvar and worst case markowitz our empirical analysis shows that wcvar can asses the risk more adequately than the two competitive models during periods of crisis

three types of ambiguity for each of three types of ambiguity we compute a robust ramsey plan and an associated worst case probability model ex post ambiguity of type i implies endogenously distorted homogeneous beliefs while ambiguities of types ii and iii imply distorted heterogeneous beliefs martingales characterize alternative probability specications and clarify distinctions among the three types of ambiguity we use recursive formulations of ramsey problems to impose local predictability of commitment multipliers directly to reduce the dimension of the state in a recursive formulation we transform the commitment multiplier to accommodate the heterogeneous beliefs that arise with ambiguity of types ii and iii our formulations facilitate comparisons of the consequences of these alternative types of ambiguity

worst case value at risk of nonlinear portfolios portfolio optimization problems involving value at risk var are often computationally intractable and require complete information about the return distribution of the portfolio constituents which is rarely available in practice these difficulties are compounded when the portfolio contains derivatives we develop two tractable conservative approximations for the var of a derivative portfolio by evaluating the worst case var over all return distributions of the derivative underliers with given first and second order moments the derivative returns are modelled as convex piecewise linear or by using a delta gamma approximation as possibly nonconvex quadratic functions of the returns of the derivative underliers these models lead to new worst case polyhedral var wpvar and worst case quadratic var wqvar approximations respectively wpvar serves as a var approximation for portfolios containing long positions in european options expiring at the end of the investment horizon whereas wqvar is suitable for portfolios containing long and or short positions in european and or exotic options expiring beyond the investment horizon we prove that unlike var that may discourage diversification wpvar and wqvar are in fact coherent risk measures we also reveal connections to robust portfolio optimization this paper was accepted by dimitris bertsimas optimization

flexibility premium of emissions permits abstract investments in abatement technology are often characterised by irreversibility and significant implementation lags whereas emissions permits can be traded at any time as such abatement and emissions permit trading systems are hardly perfect substitutes we formally study the flexibility of emissions permits and propose a unified framework to rationalise the impact of both investment divestment lags and irreversibility in relation to the price of emissions permits using option pricing concepts we reformulate the technology adoption problem in terms of the technology s characteristics irreversibility and implementation lags and offer a conceptual quantification of the flexibility premium of emissions permits

sequential bargaining with incomplete information this paper describes a simple two person two period bargaining game and solves it using the concept of perfect bayesian equilibrium in which the actions of each player convey information which is used by his opponent the paper examines the effects of changes in bargaining costs the size of the contract zone and the length of the bargaining process on such aspects of the solution as the probability of impasse and the likelihood of concessions the combination of information transfer and the lack of pre commitment embodied in perfectness yields many surprising results common perceptions about the effects of parameter changes on bargaining processes are suspect and should be checked in the particular game being discussed

robust and pareto optimality of insurance contracts the optimal insurance problem represents a fast growing topic that explains the most efficient contract that an insurance player may get the classical problem investigates the ideal contract under the assumption that the underlying risk distribution is known i e by ignoring the parameter and model risks taking these sources of risk into account the decision maker aims to identify a robust optimal contract that is not sensitive to the chosen risk distribution we focus on value at risk var and conditional value at risk cvar based decisions but further extensions for other risk measures are easily possible the worst case scenario and worst case regret robust models are discussed in this paper which have been already used in robust optimisation literature related to the investment portfolio problem closed form solutions are obtained for the var worst case scenario case while linear programming lp formulations are provided for all other cases a caveat of robust optimisation is that the optimal solution may not be unique and therefore it may not be economically acceptable i e pareto optimal this issue is numerically addressed and simple numerical methods are found for constructing insurance contracts that are pareto and robust optimal our numerical illustrations show weak evidence in favour of our robust solutions for var decisions while our robust methods are clearly preferred for cvar based decisions

beyond arbitrage good deal asset price bounds in incomplete markets one often wants to value a risky payoff by reference to prices of other assets rather than by exploiting full fledged economic models however this approach breaks down if one cannot find a perfect replicating portfolio we impose weak economic restriction to derive usefully tight bounds on asset prices in this situation the bounds assume that investors would want to buy assets with high sharpe ratios good deals as well as pure arbitrage opportunities we show how to calculate the price bounds in one period multiperiod and continuous time contexts we show that the multiperiod problem can be solved recursively as a sequence of one period problems we calculate bounds in option pricing examples including infrequent trading and an option written on a nontraded event and we use the bounds to explore the economic significance of option pricing predictions we find that much variation in s p 500 index option prices over time and across strike prices fits within the bounds

on the empirical performance of t s s heuristics the periodic t s s policies have received considerable attention from the academic literature determination of the optimal parameters is computationally prohibitive and a number of heuristic procedures have been put forward however these heuristics have never been compared in an extensive empirical study such an investigation on 3055 skus is carried out in this paper our study provides insights into the performance of t s s heuristics also in relation to demand forecasting the results show that naddor s heuristic is best able to minimize the total cost however the normal and power approximations achieve more efficient solutions in that backorder volumes are smaller at the same inventory levels indicating the potentially superior performance of these methods if the balancing of holding and backorder costs can be improved the results also show that for all heuristics the sba variant of the croston forecasting method significantly outperforms croston as well as single exponential smoothing ses

is honesty the best policy curtailing insurance fraud through optimal incentive contracts an incentive contracting approach is used to characterize optimal contracts when insured individuals possess private information about their losses and are able to misrepresent permanently their loss magnitudes by engaging in the falsification of claims we demonstrate that efficient agreements necessarily induce some falsification but that the extent of such claims inflation is mitigated partially by an indemnification schedule that overcompensates small losses while overpaying larger ones the differential costs of generating insurance claims through falsification provide an avenue by which the heterogencous insureds can credibly signal their underlying losses and are exploited in an optimal contract to implement loss contingent insurance payments

bargaining and the right to remain silent this paper analyzes a class of alternating offer bargaining games with one sided incomplete information for the case of no gap if sequential equilibria are required to satisfy the additional restrictions of stationarity monotonicity pure strategies and no free screening we establish the silence theorem when the time interval between successive periods is made sufficiently short the informed party never makes any serious offers in the play of alternating offer bargaining games a class of parametric examples suggests that the time interval required to assure silence is not especially brief as a byproduct of the analysis we also prove under the same set of assumptions a uniform version of the coase conjecture when the time interval between successive periods is made sufficiently short the initial serious offer by either party in an alternating offer bargaining game must be less than e times the highest possible buyer valuation for an entire family of distribution functions