why is the market for long term care insurance so small abstract long term care represents one of the largest uninsured financial risks facing the elderly in the united states we present evidence of supply side market failures in the private long term care insurance market in particular the typical policy purchased exhibits premiums marked up substantially above expected benefits it also provides very limited coverage relative to the total expenditure risk however we present additional evidence suggesting that the existence of supply side market failures is unlikely by itself to be sufficient to explain the very small size of the private long term care insurance market in particular we find enormous gender differences in pricing that do not translate into differences in coverage and we show that more comprehensive policies are widely available if seldom purchased at similar loads to purchased policies this suggests that factors limiting demand for insurance are also likely to be important in this market our evidence also sheds light on the likely nature of these demand side factors

contract enforcement and trade liberalization in mexico s footwear industry abstract the wave of formal legal system reforms sweeping developing countries provides only a partial solution to the problem of enforcing agreements between firms informal institutions govern the majority of interfirm transactions economic reform also necessitates changes in these institutions this paper examines the evolution of contract enforcement in the mexican footwear industry as trade barriers were removed in the closed economy geographic agglomeration of manufacturing allowed the manufacturers trade associations to maintain information about the behavior of retailers and gave retailers strong incentives to maintain reputations by providing an alternative source for procurement trade liberalization weakened the power of manufacturers

testing for asymmetric information in insurance markets the first goal of this paper is to provide a simple and general test of the presence of asymmetric information in contractual relationships within a competitive context we also argue that insurance data are particularly well suited to such empirical investigations to illustrate this claim we use data on contracts and accidents to investigate the extent of asymmetric information in the french market for automobile insurance using various parametric and nonparametric methods we find no evidence for the presence of asymmetric information in this market

relaxations of approximate linear programs for the real option management of commodity storage the real option management of commodity conversion assets gives rise to intractable markov decision processes mdps in part because of the use of high dimensional models of commodity forward curve evolution as commonly done in practice focusing on commodity storage we identify a deficiency of approximate linear programming alp which we address by developing a novel approach to derive relaxations of approximate linear programs we apply our approach to obtain a class of tractable alp relaxations also subsuming an existing method we provide theoretical support for the use of these alp relaxations rather than their associated approximate linear programs applied to existing natural gas storage instances our alp relaxations significantly outperform their corresponding approximate linear programs our best alp relaxation is both near optimal and competitive with albeit slower than state of the art methods for computing heuristic policies and lower bounds on the value of commodity storage but is m

price adjustment in long term contracts the case of coal in two recent papers i examined the effects of relationship specific investment on the duration of contracts negotiated between electric utilities and coal suppliers that work demonstrated that when relationshipspecific investment is important for a cost minimizing supply relationship contracts are frequently utilized that specify ex ante the terms and conditions of trade over many future years in this article i examine the characteristics of the price adjustment provisions specified in these long term coal contracts i utilize a sample of about 250 coal contracts to analyze the structure of formal price adjustment provisions in coal contracts in order to determine the factors that affect initial negotiated contract prices and to examine actual transaction price behavior over time there has been much recent theoretical work as well as some related empirical work that has focused on the benefits of long term contracts when relationship specific investments are important 2 there has also been some theoretical work that focuses on the contractual arrangements that may be chosen to mitigate opportunism problems and guard against

asset pricing in multiperiod securities markets the intertemporal models developed in this paper have been stimulated by the capital asset pricing model capm of sharpe and lintner and the role of factor structure in ross arbitrage pricing theory apt suppose that some one dimensional stochastic process s provides a sufficient statistic for aggregate consumption then a heuristic dynamic programming argument shows that s market wealth and the wealth derivative of the value function for any agent are all locally perfectly correlated it follows from merton s work that there is a linear relationship between the local mean return on a security and the local covariance of that return with the return on the market portfolio the formal development uses martingale representation and martingale projection to obtain an intertemporal capm the history of a scalar brownian motion plays the role of a sufficient statistic we motivate the assumption of a sufficient statistic for aggregate consumption by considering a countable set of securities whose payoffs have an approximate factor structure where the factor components are in the information set generated by an n dimensional brownian motion and the idiosyncratic components are weakly correlated the approximate factor structure on the security payoffs implies that the rates of return have locally an approximate factor structure the role of the market portfolio can now be played by a set of n well diversified portfolios

stochastic convenience yield and the pricing of oil contingent claims this paper develops and empirically tests a two factor model for pricing financial and real assets contingent on the price of oil the factors are the spot price of oil and the instantaneous convenience yield the parameters of the model are estimated using weekly oil futures contract prices from january 1984 to november 1988 and the model s performance is assessed out of sample by valuing futures contracts over the period november 1988 to may 1989 finally the model is applied to determine the present values of one barrel of oil deliverable in one to ten years time

exact arbitrage well diversified portfolios and asset pricing in large markets abstract for a market with an atomless continuum of assets we formulate the intuitive idea of a well diversified portfolio and present a notion of exact arbitrage strictly weaker than the more conventional notion of asymptotic arbitrage and necessary and sufficient for the validity of an apt pricing formula our formula involves essential risk one based on a specific index portfolio constructed from factors and factor loadings that are endogenously extracted to satisfy an optimality property involving a finite number of factors we illustrate how our results can be translated to markets with a large but finite number of assets

should we be worried about the green paradox announcement effects of the acid rain program this paper presents the first empirical test of the green paradox hypothesis according to which well intended but imperfectly implemented environmental policies may lead to detrimental outcomes due to supply side responses we use the introduction of the acid rain program in the u s as a case study the theory predicts that owners of coal deposits expecting future sales to decline would supply more of their resource between the announcement of the acid rain program and its implementation moreover the incentive to increase supply would be stronger for owners of high sulfur coal this would all else equal induce an increase in sulfur dioxide emissions using data on prices heat input and sulfur content of coal delivered to u s power plants we find strong evidence of a price decrease and of an increase in the sulfur premium some indication that the amount of coal used might have increased and no evidence of fuel switching towards higher sulfur coal overall our evidence suggests that while the mechanism indicated by the theory might be at work market conditions and concurrent regulation largely prevented a green paradox from arising these results have implications for the design of climate policies

a theory of contracts with limited enforcement we present a theory of contracts under costly enforcement in the context of a dynamic relationship between an uninformed buyer and a seller who is privately informed on his persistent cost at the outset public enforcement relies on remedies for breach private enforcement comes from severing relationships we first characterize aggregate enforcement constraints ensuring that trading partners do not breach contracts unduly whether a long term contract is enforceable does not depend on the distribution of penalties for breach between the buyer and the seller while under complete information the optimal contract would remain stationary non stationarity might arise under asymmetric information enforcement constraints are time dependent and easier to satisfy as time passes indeed a high cost seller may be tempted to trade high volumes at high prices at the beginning of the relationship before breaching the contract later on yet such take the money and run strategy becomes less attractive as time passes and can be prevented with backloaded payments the optimal contract thus goes through two different phases first quantities and prices increase at the inception of the relationship later on the contract looks more stationary the public and private sides of enforcement plays different roles in determining the length of the earlier phase of contracting long run screening distortions encapsulate the quality of enforcement offering de facto a link between the quality of the legal system and contractual performances

efficient adaptation in long term contracts take or pay provisions for natural gas to mitigate the inflexibility of long term contracting for natural gas parties will look for terms that minimize the need for costly adjudication while maintaining incentives for appropriate adaptation the authors examine the incident of take or pay provisions in contracts between natural gas producers and pipelines from this perspective they argue that take obligations can be viewed as a mechanism for effecting appropriate incentives for contractual performance and show that efficient breach considerations define an optimal take percentage as a function of characteristics of the transaction these incentives are distorted by regulated price ceilings which cause the adoption of take obligations in excess of optimal levels the findings refute the common perception that take or pay provisions are just an artifact of wellhead price regulation and serve no useful purpose in the absence of regulation 20 references 1 figure 1 table

valuation of commodity based swing options in the energy markets in particular the electricity and natural gas markets many contracts incorporate flexibility of delivery options known as swing or take or pay options subject to daily as well as periodic constraints these contracts permit the option holder to repeatedly exercise the right to receive greater or smaller amounts of energy we extract market information from forward prices and volatilities and build a pricing framework for swing options based on a one factor mean reverting stochastic process for energy prices that explicitly incorporates seasonal effects we present a numerical scheme for the valuation of swing options calibrated for the case of natural gas

electricity trading and negative prices storage vs disposal electricity cannot yet be stored on a large scale but technological advances leading to cheaper and more efficient industrial batteries make grid level storage of electricity surpluses a natural choice because electricity prices can be negative it is unclear how the presence of negative prices might affect the storage policy structure known to be optimal when prices are only nonnegative or even how important it is to consider negative prices when managing an industrial battery for fast storage a storage facility that can both be fully emptied and filled up in one decision period we show analytically that negative prices can substantially alter the optimal storage policy structure e g all else being equal it can be optimal to empty an almost empty storage facility and fill up an almost full one for more typical slow grid level electricity storage we numerically establish that ignoring negative prices could result in a considerable loss of value when negative prices occur more than 5 of the t

electricity swing option pricing by stochastic bilevel optimization a survey and new approaches abstract we demonstrate how the problem of determining the ask price for electricity swing options can be considered as a stochastic bilevel program with asymmetric information unlike as for financial options there is no way for basing the pricing method on no arbitrage arguments two main situations are analyzed if the seller has strong market power he she might be able to maximize his her utility while in fully competitive situations he she will just look for a price which makes profit and has acceptable risk in both cases the seller has to consider the decision problem of a potential buyer the valuation problem of determining a fair value for a specific option contract and anticipate the buyer s optimal reaction to any proposed strike price we also discuss some methods for finding numerical solutions of stochastic bilevel problems with a special emphasis on using duality gap penalizations

the effect of land tenure governance on technical efficiency evidence from three provinces in eastern china this study aims to identify the mechanisms through which land tenure governance affects the technical efficiency of grain production in an integrated framework and to examine the impacts of the public governance village self governance and relational governance of land tenure on the technical efficiency of contracted land and rented in land farm level survey data collected from liaoning jiangxi and jiangsu provinces covering the years of 2014 and 2015 is used for the empirical analysis the findings indicate that i public governance associated with land certification significantly increases the technical efficiency of grain production ii village self governance and administrative land reallocations can serve as substitutes for the land rental market in optimizing the distribution of land resources and improving technical efficiency and iii compared to multi year transfer contracts both annual and open ended transfer contracts have negative impacts on technical efficiency

disentangling the theories of firm boundaries a path model and empirical test theories on the motivation underlying firm boundaries have recently sparked renewed debate what best explains whether a firm relies on market control or hierarchical control to secure required resources how do the characteristics of the resources come into play in this study we consider a comprehensive path model of the governance mode decision for sourcing technological know how by integrating different perspectives on firm boundaries including transaction cost economics a resource based view and an options perspective we link characteristics of the technology i e uniqueness barriers to imitation commercial uncertainty technological dynamism to the perceived threat of opportunism the potential for sustainable advantage and the pursuit of a licensing agreement vis a vis the outright acquisition of the firm that possesses the desired know how we use structural equation modeling to analyze 127 sourcing arrangements our results show that technological dynamism and barriers to imitation indirectly influence the governance mode decision by increasing the perceived threat of opportunism commercial uncertainty directly influences the governance mode and decreases the likelihood of an acquisition vis a vis a licensing agreement although uniqueness and barriers to imitation are also positively associated with the perceived potential for sustainable advantage the potential for sustainable advantage had no direct effect on governance mode implications and suggestions for further research are offered

preference heterogeneity and insurance markets explaining a puzzle of insurance the textbook approach to insurance markets emphasizes the role of private information about risk in determining who purchases insurance in the classic adverse selection model of michael rothschild and joseph stiglitz 1976 individu als with higher expected claims buy more insur ance than those with lower expected claims who may be out of the market entirely this basic prediction of asymmetric information models of a positive correlation between insurance cov erage and accident occurrence has been shown to be robust to a variety of extensions to the stan

non contractible investments and vertical integration in the mexican footwear industry abstract this paper examines patterns of integration among manufacturers and retailers using data from a survey of footwear manufacturers in mexico the property rights framework developed in papers by grossman and hart 1986 j polit econ 94 691 and hart and moore 1990 j polit econ 98 1119 is differentiated from the standard empirical transactions cost framework in the context of this industry the most relevant distinction between the two frameworks is that the property rights framework addresses both the benefits and costs of integration while the transactions cost framework focuses only on variation in the benefits of integration we show that the costs of integration are highest where the retailer s non contractible investment has an important effect on the overall profits from the relationship consistent with the property rights framework the data suggest that integration is less likely in these circumstances

contract duration and relationship specific investments empirical evidence from coal markets this paper examines the importance of specific relationship investments in determining the duration of coal contracts negotiated between coal suppliers and electric utilities data for 277 coal contracts are used to perform the analysis the results provide strong support for the view that buyers and sellers make longer commitments to the terms of future trade at the contract execution stage and rely less on repeated bargaining when relationship specific investments are more important

transaction cost economics past present and future oliver williamson is the founder and chief developer of transaction cost economics tce in this brief essay on the occasion of his nobel memorial prize i offer a partial discussion of williamson s contributions by first summarizing some of the accomplishments of tce past and then sketching some of the opportunities for tce future most of the topics in both sections tce past and tce future start with a quotation from williamson s early work that i think still speaks volumes today that is while fellow travelers and successors have acted on one set of williamson s insights helping to produce the accomplishments of tce past another collection of williamson s insights has gone relatively unremarked creating some of the opportunities for tce future

supplier performance in vertical alliances the effects of self enforcing agreements and enforceable contracts the paper examines the significance of enforceability and adaptability in governing vertical alliances and their performance ramifications for suppliers literature on supplier relations suggests that suppliers are skeptical of close ties with their buyers helper 1991 helper and sako 1995 such skepticism persists in spite of the fact that buyers are writing longer enforceable contracts with fewer suppliers in this context the paper develops a transaction cost economics tce based model that distinguishes between the verifiable and nonverifiable aspects of governance attributes of safeguards incentive intensity and adaptability in explaining supplier performance variations the paper argues that the following factors prove valuable for suppliers 1 the adaptive and collaborative orientation fostered by the original equipment manufacturer s oem s credible commitment to the exchange and by information sharing on the part of the supplier 2 the presence of certain nonverifiable safeguards and 3 the incentives inherent in target pricing these assertions have been tested using data from the home appliance industry results indicate that information sharing together with 1 oem dependence and 2 target pricing does indeed enhance supplier performance also results suggest that while nonverifiable safeguards can help verifiable safeguards do not have a positive association with supplier interests under certain conditions then suppliers can venture into closer relationships with buyers and benefit

an empirical investigation of oliver williamson s organization of work oliver williamson argues that the attributes of the employment contract like intermediate transactions in general are essentially driven by the specificity of assets in the case of the organization of work it is the particular attributes of labour that determines the transaction costs of any given governance structure the paper presents a stylized account of the transaction cost model of the efficient organization of work stressing an underlying tension and ambiguity in the transaction cost framework the paper exploits a unique dataset to test for the first time with british data williamson s transaction cost predictions concerning the nature of employment contracts williamson tacitly assumes that asset specificity is exogenous in general however there is evidence in the literature that labour specificity is endogenous to employment contracts the paper endeavours to demonstrate that there is empirical evidence to suggest that specialized labour is indeed endogenous in the transaction cost mode

value of an option to purchase electric power the case of uncertain consumption abstract large manufacturers and corporations often purchase options on power to protect themselves against unanticipated price increases this paper analyzes the impact of uncertainty in power consumption by a corporation on the value of an option to purchase electric power because there is no economically viable method to store power these options are exercised to satisfy immediate consumption needs only the amount exercised may differ from the maximum amount contracted which in turn alters the payoffs that accrue to the option contract we apply a monte carlo methodology to show that consumption uncertainty may substantively lower the price of an option contract under different conditions

presidential address antitrust restrictions on single firm strategies this article offers an overview of selected developments in the law and economics of antitrust regulation of single firm strategies the strategy generating the most cases historically is resale price maintenance here the law has moved sharply in both canada and the u s towards more solid economic foundations yet a gap between the law and economics remains the economics of resale price maintenance is reviewed within a framework that is much simpler and more general than the existing literature the law on a second strategy predatory pricing represents in my view a success story for the influence of economic theory in spite of the absence of a single accepted theory of predatory pricing the remaining single firm strategies are concerned largely with the exclusion by a dominant firm of rivals from a market i review with application to cases the two most basic questions concerning exclusionary strategies are exclusionary anticompetitive contracts ever entered into voluntarily by market participants on the other hand is complete or substantial foreclosure of a market through exclusionary strategies necessarily anticompetitive cette allocution presidentielle a l association canadienne d economique presente une vue d ensemble des developpements dans le droit et l economie de la reglementation antitrust sur les strategies d une firme unique la loi sur la strategie qui genere historiquement le plus de cas le maintien du prix de revente a change dramatiquement au canada et aux etats unis et derive vers une politique qui a des assises economiques solides mais il reste un ecart entre le droit et l economie on reexamine l economie du maintien du prix de revente a l aide d un cadre d analyse qui est a la fois plus simple et plus general que ce qui existe dans la litterature specialisee la loi pour ce qui est d une seconde strategie prix d eviction est a mon avis une grande reussite pour la science economique malgre l absence d une seule theorie du prix d eviction generalement acceptee un troisieme ensemble de strategies concerne l exclusion de ses rivaux d un marche par la firme dominante l auteur reexamine avec un recours extensif aux cas les deux questions de base pour ce qui est des strategies d exclusion est ce que les participants sur un marche entrent jamais volontairement dans un arrangement contractuel qui exclut et est anticoncurrentiel d autre part est ce que la saisie complete ou substantielle d un marche par des man uvres d exclusion est necessairement anticoncurrentielle

evolution of the u s natural gas industry in response to changes in transaction costs the u s natural gas industry traditionally had producers interstate pipelines and distributors linked together via bilateral long term contracts recently the federal energy regulatory commission has encouraged buyers and sellers to deal directly with each other leading first to a spot market and marketers then to market hubs and a slight trend back to longer term contracts marketers and pipelines have consolidated to take advantage of economies of scope and systems effects which larger networks provide we use transaction cost economics to explain the evolution of exchange relationships with open access to transportation and the unbundling of transportation and storage from sales

multiple dimensions of private information evidence from the long term care insurance market we demonstrate the existence of multiple dimensions of private information in the long term care insurance market two types of people purchase insurance individuals with private information that they are high risk and individuals with private information that they have strong taste for insurance ex post the former are higher risk than insurance companies expect while the latter are lower risk in aggregate those with more insurance are not higher risk our results demonstrate that insurance markets may suffer from asymmetric information even absent a positive correlation between insurance coverage and risk occurrence the results also suggest a general test for asymmetric information

how to deliver foreign aid the case of projects governed by the spanish international agency summary international agencies use two alternative modes of governance to deliver international aid projects under bilateral agreements with recipient governments in house or through incumbent ngos through the lenses of institutional and transaction cost economics this article examines 95 international aid projects delivered in morocco and ecuador by the spanish international agency finding that those projects delivered in house present different features than those projects outsourced through incumbent ngos specifically international aid projects delivered in house involve important investments in specific assets are much more complex and can turn the public agency into a hostage of its own disbursement

short term variations and long term dynamics in commodity prices in this article we develop a two factor model of commodity prices that allows meanreversion in short term prices and uncertainty in the equilibrium level to which prices revert although these two factors are not directly observable they may be estimated from spot and futures prices intuitively movements in prices for long maturity futures contracts provide information about the equilibrium price level and differences between the prices for the short and long term contracts provide information about short term variations in prices we show that although this model does not explicitly consider changes in convenience yields over time this short term long term model is equivalent to the stochastic convenience yield model developed in gibson and schwartz 1990 we estimate the parameters of the model using prices for oil futures contracts and apply the model to some hypothetical oil linked assets to demonstrate its use and some of its advantages over the gibson schwartz model

optimal commodity trading with a capacitated storage asset this paper considers the so called warehouse problem with both space and injection withdrawal capacity limits this is a foundational problem in the merchant management of assets for the storage of commodities such as energy sources and natural resources when the commodity spot price evolves according to an exogenous markov process this work shows that the optimal inventory trading policy of a risk neutral merchant is characterized by two stage and spot price dependent basestock targets under some assumptions these targets are monotone in the spot price and partition the available inventory and spot price space in each stage into three regions where it is respectively optimal to buy and inject do nothing and withdraw and sell in some cases of practical importance one can easily compute the optimal basestock targets the structure of the optimal policy is nontrivial because in each stage the merchant s qualification of high selling and low buying commodity prices in general depends on the merchant s inventory availability this is a consequence of the interplay between the capacity and space limits of the storage asset and brings to light the nontrivial nature of the interface between trading and operations a computational analysis based on natural gas data shows that mismanaging this interface can yield significant value losses moreover adapting the merchant s optimal trading policy to the spot price stochastic evolution has substantial value this value can be almost entirely generated by reacting to the unfolding of price uncertainty that is by sequentially reoptimizing a model that ignores this source of uncertainty

advantageous selection in insurance markets this article reverses the standard conclusion that asymmetric information plus competition results in insufficient insurance provision risk tolerant individuals take few precautions and are disinclined to insure but they are drawn into a pooling equilibrium by the low premiums created by the presence of safer more risk averse types taxing insurance drives out the reckless clients allowing a strict pareto gain this result depends on administrative costs in processing claims and issuing policies as does the novel finding of a pure strategy partial pooling subgame perfect nash equilibrium in the insurance market copyright 2001 by the rand corporation

integrated optimization of procurement processing and trade of commodities we consider the integrated optimization problem of procurement processing and trade of commodities in a multiperiod setting motivated by the operations of a prominent commodity processing firm we model a firm that procures an input commodity and has processing capacity to convert the input into a processed commodity the processed commodity is sold using forward contracts while the input itself can be traded at the end of the horizon we solve this problem optimally and derive closed form expressions for the marginal value of input and output inventory we find that the optimal procurement and processing decisions are governed by price dependent inventory thresholds we use commodity markets data for the soybean complex to conduct numerical studies and find that approximating the joint price processes of multiple output commodities using a single composite output product and using the approximate price process to determine procurement and processing decisions is near optimal compared to a myopic spread option based heuristic the optimization based dynamic programming policy provides significant benefits under conditions of tight processing capacities and high price volatilities finally we propose an approximation procedure to compute heuristic policies and an upper bound to compare the heuristic against when commodity prices follow multifactor processes

the british electricity experiment the privatization of the electricity supply industry esi in britain which began 1990 is in itself an unremarkable event much of the esi is privately owned in several european countries and in the united states and the u k privatization program has embraced utilities since 1984 when british telecom was privatized the thing that is remarkable about recent policy toward the industry is the radical nature of the regulatory reform accompanying privatization a vertically integrated administered generation and transmission structure was replaced overnight on march 31 1990 by one that is deintegrated and market based generation and transmission have been separated and there has been an attempt to establish competition in generation a number of countries have been moving gradually in the direction of encouraging competition but nowhere else have such dramatic changes been implemented so quickly

the market for tradable renewable energy credits abstract as states seek to foster the development of renewable energy resources some have introduced renewable portfolio standards rpss which require retailers of electricity to derive a specified amount of their energy supply from renewable energy resources rpss in texas arizona wisconsin and nevada allow for or require the use of tradable renewable energy credits the price of such credits is expected to reflect the cost premium for generating electricity from renewable resources relative to the market price of conventionally generated electricity using the market to trade renewable energy credits exposes buyers and sellers to risks of imperfect information poor performance and opportunism these risks can be managed through contractual arrangements and regulatory requirements pertaining to property rights in credits pricing term of the contract and assurance of performance

instabilities of strategic alliances an internal tensions perspective the instabilities of strategic alliances have been examined in the literature through a number of theoretical approaches alliance instabilities refer to major changes or dissolutions of alliances that are unplanned from the perspective of one or more partners although the literature identifies certain characteristics of strategic alliances that may lead to their unplanned dissolution the extent of our understanding of this subject appears to be fragmented and incomplete in this article we propose a comprehensive framework for adequately understanding alliance instabilities based on the notion of internal tensions we suggest that strategic alliances are sites in which conflicting forces develop and which can be viewed as being constituted by three key pairs of competing forces namely cooperation versus competition rigidity versus flexibility and short term versus long term orientation this tensions framework helps us in explaining the intrinsic vulnerability of alliances in terms of a wide range of internal contradictions and enables us to examine in an integrated manner the incidence dynamics and eventual dissipation of the inherent instabilities we discuss the interrelationships among the different internal tensions and their impacts on different types of strategic alliances we also examine the termination of alliances through mergers acquisitions and dissolution finally we suggest ways to empirically test the various ideas and propositions developed here and indicate directions for further research

interruptible electricity contracts from an electricity retailer s point of view valuation and optimal interruption we consider interruptible electricity contracts issued by an electricity retailer that allow for interruptions to electric service in exchange for either an overall reduction in the price of electricity delivered or for financial compensation at the time of interruption we provide a structural model to determine electricity prices based on stochastic models of supply and demand we use stochastic dynamic programming to value interruptible contracts from the point of view of an electricity retailer and describe the optimal interruption strategy we also demonstrate that structural models can be used to value contracts in competitive markets our numerical results indicate that in a deregulated market interruptible contracts can help alleviate supply problems associated with spikes of price and demand and that competition between retailers results in lower value and less frequent interruption

valuation of storage at a liquefied natural gas terminal the valuation of the real option to store liquefied natural gas lng at the downstream terminal of an lng value chain is an important problem in practice because the exact valuation of this real option is computationally intractable we develop a novel and tractable heuristic model for its strategic valuation that integrates models of lng shipping natural gas price evolution and inventory control and sale into the wholesale natural gas market we incorporate real and estimated data to quantify the value of this real option and its dependence on the throughput of an lng chain the type of price variability the type of inventory control policy employed and the level of stochastic variability in both the shipping model and the natural gas price model used in addition we develop an imperfect information dual upper bound to assess the effectiveness of our heuristic and find that our method is near optimal our approach also has potential relevance to value the real option to store other commodities in facilities located downstream from a commodity production or transportation stage such as petroleum and agricultural products chemicals and metals or the real option to store the input used in the production of a commodity such as electricity

a transaction costs analysis of innovations in the organization of pharmaceutical r d abstract this paper uses transaction costs economics to analyze the increasing importance of vertical disintegration of r d by large pharmaceutical and chemical firms first it discusses three characteristics of the research based pharmaceutical industry then it shows that market failures related to long term joint venture r d contracts between firms and university laboratories are less significant than appears at first and may account for their striking increase over the past fifteen years

mitigating contractual hazards unilateral options and contract length in this article we consider the ways in which the desire for efficient low cost adaptation to change influences the tradeoff between the design and duration of long term contractual relationships we examine the distortions in contract terms occasioned by nonprice competition for natural gas in the presence of wellhead price regulation deviations from optimal contract incentives significantly raise the cost of being bound to long term agreements and shorten the duration of contracts the approach we adopt suggests a method for empirically assessing the efficiency of alternative contracting practices and legal standards

buyer investment export variety and intrafirm trade abstract this paper studies a model of buyer investment and its effect on the variety and vertical structure of international trade a distinction is made between two types of buyer investment flexible and specific which differ in the ability of a buyer to match with a seller the interaction of buyer investment with the entry and pricing incentives of suppliers are analyzed it is shown that i there can be multiple equilibria in the variety of products traded and ii less product variety is associated with more intrafirm trade the possibility of multiple equilibria is consistent with the observation that some similar economies such as taiwan and south korea differ substantially in their export varieties to the u s a cross country empirical analysis confirms the negative correlation between export variety and intrafirm trade

valuation of path dependent contingent claims with multiple exercise decisions over time the case of take or pay hull and white 1993 introduced a method to extend lattice based contingent claim val uation techniques to problems with path dependent payoffs this paper builds upon their method in the process of valuing two types of commodity purchase contracts that ex hibit a form of timing flexibility not previously analyzed in the literature the techniques demonstrated take advantage of characteristics of claims that simplify incorporation of path dependencies possible uses for the methods demonstrated include the valuation of port folios of mortgages capital projects where intensity of use affects productivity ofthe asset and capital projects with storage characteristics

endogenous information adverse selection and prevention implications for genetic testing policy we examine public policy toward the use of genetic information by insurers individuals engage in unobservable primary prevention and have access to different prevention technologies thus insurance markets are affected by moral hazard and adverse selection individuals can choose to take a genetic test to acquire information about their prevention technology information has positive decision making value that is individuals may adjust their behavior based on the result of the test however testing also exposes individuals to uncertainty over the available insurance contract so called classification risk which lowers the value of information in our analysis we distinguish between four different policy regimes determine the value of information under each regime and associated equilibrium outcomes on the insurance market we show that the policy regimes can be pareto ranked with a duty to disclose being the preferred regime and an information ban the least preferred one

financial and operational decisions in the electricity sector contract portfolio optimization with the conditional value at risk criterion abstract the restructuring of electricity markets around the world have caused increased volatility and uncertainty of the price power as a result providers of power now face increased uncertainty and risk in the operational and financial decisions related to procurement providers must seek optimal ways to deliver the required volume of power to retailers and end users while managing risk we consider a mixed integer programming model for a power providing agent that jointly considers the problem of selecting custom electricity contracts and finding the optimal procurement strategy of meeting contract obligations under spot price uncertainty a two stage stochastic integer programming sip model with a conditional value at risk cvar constraint to incorporate risk aversion is developed computational results are presented that demonstrates the cvar approach and the results are compared with a corresponding expected cost minimization approach the sip model with cvar will allow acceptance of contracts at lower prices compared to an approach based on a corresponding risk neutral model as a hedge against uncertainty and mis specified arbitrage

genetic adverse selection evidence from long term care insurance and huntington disease abstract individual personalized genetic information is increasingly available leading to the possibility of greater adverse selection over time particularly in individual payer insurance markets we use data on individuals at risk for huntington disease hd a degenerative neurological disorder with significant effects on morbidity to estimate adverse selection in long term care insurance we find strong evidence of adverse selection individuals who carry the hd genetic mutation are up to 5 times as likely as the general population to own long term care insurance this finding is supported both by comparing individuals at risk for hd to those in the general population and by comparing across tested individuals in the hd risk population with and without the hd mutation

competitive insurance markets with two unobservables i study a screening game in a competitive insurance market in which insurance customers differ with respect to both accident probability and degree of risk aversion it is shown that indifference curves of customers may cross twice thus the single crossing property does not hold when differences in risk aversion are sufficiently large firms cannot use policy deductibles to screen high risk customers types may be pooled in equilibrium or are separated by raising premiums above actuarially fair levels this leads to excessive entry of firms in equilibrium

playing for keeps pay and performance in the nba i introduction a basic insight of agency theory is that properly designed incentive contracts can align the interests of agents with those of the principal and recent empirical work shows that workers do indeed respond to financial incentives 1 contractual incentives however are not the only force motivating workers workers also have incentives to vary effort at different points of their contract cycle to increase effort just before a new contract is signed to lock in a more lucrative deal and then reduce it after a multi year contract is secured these types of contract related incentives create clear moral hazard problems but have received little empirical attention the motivating hypothesis in this paper is that imperfect information and multi year contracts create an implicit incentive for workers to strategically alter effort over the contract cycle in the year prior to signing the contract their contract year workers may exert above average effort to convince employers that they are high quality and thus raise long term compensation once the contract is signed however workers may exert less effort because wages are effectively independent of contemporaneous performance an empirical difficulty is that this moral hazard may be obscured by two factors a selection effect may lead only high quality workers to receive contracts and career concerns may provide additional incentives and dampen the post contract decline 2 this paper employs a unique dataset for professional basketball players in the national basketball association nba from 1988 to 2002 to examine the contract related incentive effects the data include contract information year signed length of contract and value of contract for every active player in 2000 and performance measures points scored rebounds assists etc throughout each player s career contract related incentive effects are estimated from changes in individual performance over the contract cycle if performance systematically improves just before signing a new contract and falls afterward some of the fluctuation is likely due to contract related incentives i also examine the traditional link between pay and past performance which is necessary for these types of incentives to be relevant the critical advantage of this data is the detailed information on individual performance individual contract status and individual pay 3 in contrast previous work on individual incentives for example lazear 2000 paarsch and shearer 2000 and shearer 2004 studied changes infirmwide compensation plans while the empirical literature on executive pay and performance for example murphy 1985 1986 jensen and murphy 1990 gibbons and murphy 1992 kaplan 1994 and hall and liebman 1998 typically examined the link between individual pay and firm performance the individual level data constructed here have the critical variation across individuals which is needed to identify the impact of these contract related incentive effects the empirical work begins with a test of the link between pay and performance which is necessary for contract related incentives to be operational not surprisingly better performers in the nba are rewarded with higher salaries and longer contracts more relevant to the incentive issue players are strongly rewarded for improvements in performance in their contract year a one point increase in a player s scoring average for example is associated with an annual salary increase of over 300 000 this link provides the crucial motivation for the hypothesis that players will exert additional effort in their contract year to lock in the better contracts that they expect to follow the data then provide strong evidence of contract related incentive effects as overall performance does in fact improve relative to a player s long run average in the contract year and then declines after a long run contract is signed

contracting between firms empirical evidence abstract we analyze contracts between a large buyer and her suppliers we find that contracts with critical product suppliers contain more clauses that address moral hazard primarily through monitoring if holdup concerns are larger there are more contractual protections against it over time contracts with the same supplier include additional provisions that address moral hazard through monitoring this dynamic effect is strongest for service contracts where observability and verifiability are initially lower our findings indicate that contracts become more complete over time and provide support to incomplete contracting models that argue that contracts become more complete as contracting costs decrease jel classification d86 k12 l24

oligopsony power asset specificity and hold up evidence from the broiler industry in this article we look for empirical evidence of hold up in broiler industry production contracts by using the cross sectional national survey of broiler growers first we focus on the problem of under investment and hypothesize that the degree of agent s grower s under investment systematically depends on the principal s integrator s market power and the level of asset specificity second we provide an indirect test of hold up by looking at the grower contract payoffs as a function of the frequency of the housing facilities upgrade requests and the principal s market power the results show moderate empirical support for the presence of hold up

electricity swing options behavioral models and pricing abstract electricity swing options are supply contracts for power which give the owner the right to change the required delivery on short time notice it gives more flexibility than fixed base load or peak load contracts the name option is a bit misleading since it gives the owner multiple exercise rights at many different time horizons with exercise amounts on a continuous scale we look at the problem to determine a rational ask price for such a contract from the viewpoint of the contract seller the pricing of these contracts differs drastically from the pricing of financial options first peculiar properties arise from the non storability of the underlying the energy and therefore the impossibility to hedge with the underlying hedging is only possible with some future contracts second the behavior of the owner plays an important role based on some behavioral model for the option holder we develop a game theoretic model which allows to identify the equilibrium price besides some theoretical results we present some numerical results which clarify the dependence of the asked price on the amount of flexibility offered in the swing option

adverse selection in insurance markets policyholder evidence from the u k annuity market in this paper we investigate the importance of adverse selection in insurance markets we use a unique data set consisting of all annuity policies sold by a large u k insurance company since the early 1980s to analyze mortality differences among individuals who purchased different types of policies we find systematic relationships between ex post mortality and annuity policy characteristics such as whether the annuity will make payments to the estate in the event of an untimely death and whether the payments from the annuity rise over time these mortality patterns are consistent with the presence of asymmetric information in the annuity market we find no evidence of substantive mortality differences however across annuities of different size even though models of insurance market equilibrium with asymmetric information would predict such differences we also find that the pricing of various features of annuity contracts is consistent with the self selection patterns we find in mortality rates our results therefore suggest that selection may occur across many specific features of insurance contracts and that the absence of selection on one contract dimension does not preclude its presence on others this highlights the importance of considering the detailed features of insurance contracts when testing theoretical models of asymmetric information

optimal oil production and the world supply of oil abstract we study the optimal oil extraction strategy and the value of an oil field using a multiple real option approach the numerical method is flexible enough to solve a model with several state variables to discuss the effect of risk aversion and to take into account uncertainty in the size of reserves optimal extraction in the baseline model is found to be volatile if the oil producer is risk averse production is more stable but spare capacity is much higher than what is typically observed we show that decisions are very sensitive to expectations on the equilibrium oil price using a mean reverting model of the oil price where the equilibrium price is also a random variable oil production was cut during the 2008 2009 crisis and we find that the cut in production was larger for opec members for countries facing a lower discount rate and for countries whose governments finances are less dependent on oil revenues however the net present value of a country s oil reserves would be increased significantly by 100 in the most extreme case if production was cut completely when prices fall below the country s threshold price if several producers were to adopt such strategies world oil prices would be higher but more stable

intertemporal arbitrage pricing theory it is shown that the arbitrage pricing theory holds in each infinitesimal period of a continuous trading model under the assumption that dividend payoffs are functionals of factor and idiosyncratic uncertainty this generalizes the one period model s result that the arbitrage pricing theory holds under the assumption that price changes in a given period satisfy a factor structure since instantaneous returns in a multiperiod model are endogenously determined the theory is derived under assumptions that may be viewed as restricting more primitive characteristics of the economy than the assumptions made for the one period model article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

gas storage valuation applying numerically constructed recombining trees abstract the liberalization of european natural gas markets forces market participants to base their decisions on market prices for owners and operators of natural gas storage facilities it is therefore necessary to take market prices into account for their decisions in this framework this paper provides a new approach for the valuation of natural gas storage facilities using stochastic dynamic programming on multinomial recombining trees the optimal storage strategy and value are determined for this we i estimate the deterministic and random impacts on natural gas prices ii simulate gas prices considering the results of the first step iii construct numerically the recombining tree using the simulation results iv determine the optimal storage strategy and value besides the determination of the optimal storage value and operation schedule the value quantiles are calculated via the quantiles relevant risk measures like value at risk and conditional value at risk are determined

the seeds of dissolution discrepancy and incoherence in buyer supplier exchange in this research we examine a novel mechanism of interorganizational relationship dissolution incoherence in a partner s behavior we propose that the discrepancy between an exchange partner s opportunistic behavior and the focal firm s expectations may create a state of incoherence and uncertainty and that this effect can be damaging to the exchange even when the partner s behavior is better than expected using nearly 500 longitudinal confidential reports of industrial buyers and sellers we find supportive evidence that 1 the net effect of the discrepancy is initially positive when behavior is better than expected but becomes rapidly negative thereafter and 2 the net effect of the discrepancy is always negative when behavior is worse than expected thus these effects will generally damage the exchange even as the partner tries to improve the relationship this gives insight into why exchange relationships that hit a downward spiral can be difficult if not impossible to salvage we also show that the dysfunctional consequences of discrepancy are mitigated through exchange structures such as the magnitude of dependence on an organizational partner the development phase of the relationship and the presence of bilateral idiosyncratic investments implications for theory and the management of interorganizational relationships are developed

uk gas markets the market price of risk and applications to multiple interruptible supply contracts we employ the schwartz and smith schwartz e and j smith 2000 short term variations and long term dynamics in commodity prices management science 46 893 911 model to explore the dynamics of the uk gas markets we discuss in detail the short term and long term market prices of risk borne by the market players and how deviations from expected cyclical storage affect the short term market price of risk finally we illustrate an application of the model by pricing interruptible supply contracts that are currently traded in the uk

a simple approach to arbitrage pricing theory the following sections are included introductionarbitrage pricingdiscussionreferencesdiscussion notes on the arbitrage pricing theorypure arbitrage pricing theoryapproximate arbitrage and the aptapproximate factor modelsthe competitive equilibrium version of the aptconclusionnotereferences this abstract was borrowed from another version of this item

an empirical examination of information barriers to trade in insurance this paper uses direct evidence to evaluate whether asymmetric information is a barrier to trade in the largest market for private insurance in the world life insurance we report several findings that seem difficult to reconcile with the conventional theory of insurance under asymmetric information we conjecture that sellers may know their costs of production better than consumers in this market as in those for most other products

corporate environmentalism and environmental statutory permitting abstract studies have shown that despite infrequent inspections and low penalties for statutory violations a large fraction of firms comply with environmental restrictions what then motivates compliance i investigate this question by focusing on the length of time it takes environmental agencies to process and issue new source construction permits pursuant to clean air act regulations and new industrial discharge permits pursuant to clean water act regulations i find that plants or firms with fewer instances of noncompliance receive permits for major projects more quickly in addition i find that permit delays are sensitive to economic conditions as well such as local area unemployment as far as voluntary pollution control behavior is concerned i find that regulators that issue permits for plant modifications focus primarily on statutory compliance but when permitting new plant construction where there is no plant compliance history to go on voluntary pollutant releases do matter

reference variables factor structure and the approximate multibeta representation the arbitrage pricing theory apt implies that if asset returns have a factor structure then an approximate multibeta representation holds with respect to the factors as reference variables this paper assumes that asset returns satisfy a factor structure and derives a condition under which the approximate multibeta representation holds with respect to a set of reference variables which may not be the factors this condition is that the regression matrix of the reference variables on the factors is nonsingular implications for the testability of the apt are also discussed

natural gas contracts in an emerging competitive market natural gas is being viewed by many as the fuel of the 1990s and beyond because of its environmental qualities relatively low cost and significant domestic resource base however in the fall of 1991 a group of electric utility executives met with then deputy secretary of energy henson moore and asserted that an inability to obtain long term gas contracts meant that supplies are unreliable and construction of gas fueled generating stations is being discouraged this study was requested by the deputy secretary to address the issues surrounding long term gas contracts and supply reliability the relationship between supply reliability and contracts is explained in terms of the number of buyers and sellers in a market with the appropriate state regulatory policies utilities can contract for gas and obtain reliable supplies at competitive market prices public utility commissioners are encouraged to permit utilities a free choice in signing gas contracts but to allow only competitive market prices to be reflected in allowable fuel costs

optimal mandates and the welfare cost of asymmetric information evidence from the u k annuity market much of the extensive empirical literature on insurance markets has focused on whether adverse selection can be detected once detected however there has been little attempt to quantify its welfare cost or to assess whether and what potential government interventions may reduce these costs to do so we develop a model of annuity contract choice and estimate it using data from the u k annuity market the model allows for private information about mortality risk as well as heterogeneity in preferences over different contract options we focus on the choice of length of guarantee among individuals who are required to buy annuities the results suggest that asymmetric information along the guarantee margin reduces welfare relative to a first best symmetric information benchmark by about 127 million per year or about 2 percent of annuitized wealth we also find that by requiring that individuals choose the longest guarantee period allowed mandates could achieve the first best allocation however we estimate that other mandated guarantee lengths would have detrimental effects on welfare since determining the optimal mandate is empirically difficult our findings suggest that achieving welfare gains through mandatory social insurance may be harder in practice than simple theory may suggest

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

choice of contracts in the british national health service an empirical study following major reforms of the british national health service nhs in 1990 the roles of purchasing and providing health services were separated with the relationship between purchasers and providers governed by contracts using a mixed multinomial logit analysis we show how this policy shift led to a selection of contracts that is consistent with the predictions of a simple model based on contract theory in which the characteristics of the health services being purchased and of the contracting parties influence the choice of contract form the paper thus provides evidence in support of the practical relevance of theory in understanding health care market reform

diversification and equilibrium in securities markets abstract diversification is the strategy of investing small fractions of wealth in each of a large number of securities and thereby reducing risk the basic argument in support of diversification is an appeal to the law of large numbers a portfolio in which an investor s wealth is invested in equal fractions in each ofnsecurities with i i d returns has a return that converges to a riskless return asnincreases indefinitely any risk averse investor would prefer the limit riskless return to the return of any portfolio in this paper we use the space ba of all finitely additive signed measures on the set of natural numbers the index set for securities to model the set of portfolios from which an investor may choose this portfolio space contains arbitrary finite portfolios and a nontrivial portfolio which is the limit of the sequence of portfolios having the fraction of wealth 1 ninvested in each ofnsecurities we identify a class of portfolios which we call perfectly diversified these portfolios are described by purely finite additive measures in a perfectly diversified portfolio wealth invested in each individual security is a negligible fraction of the total wealth of the portfolio we show that the return of every perfectly diversified portfolio of securities with uncorrelated returns is riskless it is shown that modeling of the portfolio space as the space ba makes possible a rigorous derivation of a general equilibrium version of the arbitrage pricing theorem apt the apt provides a good illustration of the implications of diversification for equilibrium prices of securities journal of economic literatureclassification numbers d52 g20

complementarity and evolution of contractual provisions an empirical study of it services contracts an increasing volume of business activity appears to be occurring via alliances or other interfirm arrangements in which complex contracts are featured yet there has been relatively little study of contract design in the strategy or management literatures the economics literature on contracting has been extensive but it has been less concerned with learning and evolution phenomena in which strategy and organization scholars are deeply interested in this paper we investigate the relationship between two types of contractual provisions that are important in high technology contracts or contracts for which environmental uncertainty or technological complexity are significant namely contingency planning and task description previous research suggests that contracts can vary significantly in the degree of detail with which such key provisions are written and that they are each subject to learning in this paper we find evidence from a sample of 386 contracts that contingency planning and task description behave as complements in contractual design we argue that this complementarity reflects patterns of learning to contract we also find that repeated exchange between two firms leads to greater effort at contingency planning in subsequent contracts a finding that is also consistent with learning effects but not with frequently made claims that contracts and trust are substitutes

using the binomial model for the valuation of real options in computing optimal subsidies for chinese renewable energy investments abstract for the valuation and implementation of renewable energy investments the issue of providing private investors with a financial incentive to accelerate their investment is frequently a critical component we apply this principle to the chinese context this paper focuses on using the binomial model to compute the required subsidy that would incentivize investors to optimal immediate exercise of the american style option embedded at the launching phase of the projects for chinese renewable energy investments in addition this paper also aims at contrasting the binomial model with the more laborious monte carlo simulation previously used to evaluate the proper subsidy by using the same data but a different method and reducing the number of uncertain factors to one it is suggested these two methods have similar outcomes but the binomial method requires substantially less computation and is more self explanatory this paper thus provides government with an easy to implement alternative way to compute the required subsidy

adverse selection with endogenous information in insurance markets abstract models of adverse selection assume that risk type is known to the consumer but not to the insurer many analyses suggest that information has zero social value and negative prior value why then would consumers become informed what is the incentive to gather information and why does adverse selection arise we show that the private value of information is non negative only if insurers cannot observe consumers information status or if consumers can conceal their informational status we examine the existence and characterization of equilibria under different configurations of information costs and benefits finally we examine some welfare implications of the endogenous information model for public policy regarding genetic testing and for state regulations concerning hiv testing

implementing supplier codes of conduct in global supply chains process explanations from theoretic and empirical perspectives western buying companies impose supplier codes of conduct scc on their suppliers in developing countries however many suppliers cannot fully comply with scc and some of them even cheat in scc in this research we link contract characteristics price pressure production complexity contract duration to the likelihood of supplier s commitment to scc through a mediating process how the buying companies govern their suppliers our structural equation model analysis shows that the hierarchy relational norms governance is a perfect mediator of contract characteristics effects on the likelihood of supplier s commitment the market governance an insignificant one the managerial implications are provided for successfully implementing scc in global supply chains

the value of genetic information in the life insurance market abstract this paper analyzes the effects of additional information in a life insurance market under adverse selection individuals have an incentive to acquire information about their risk type if their informational status cannot be observed by insurers in aggregate however the existence of a testing opportunity has an effect on the equilibrium premium we describe the conditions under which from an ex ante standpoint all individuals gain all lose or in which some gain and some lose from the existence of the test

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

modeling and valuing make up clauses in gas swing contracts abstract in the last 10 years thanks to the worldwide energy liberalization process the birth of competitive gas markets and the recent financial crisis traditional long term swing contracts in europe have been supplemented in a significant way by make up clauses which allow postponing the withdrawal of gas to future years when it could be more profitable this introduces more complexity in the pricing and optimal management of swing contracts this paper is devoted to a proper quantitative modelization of one type of make up clause in a gas swing contract more in detail we succeed in building an algorithm to price and optimally manage the make up gas allocation among the years and the gas taking in the swing subperiods within the years we prove that this problem has a quadratic complexity with respect to the number of years the algorithm can be adapted to different instances of make up clauses as well as to some forms of carry forward clauses then as an example we show the algorithm at work on a 3 year contract and we present a sensitivity analysis of the price and of the make up policy with respect to various parameters relative both to the price dynamics and to the swing contract to the authors knowledge this is the first time that such a quantitative treatment of make up clauses appears in literature

licensing duration in foreign markets a real options perspective licensing can be considered an initial trial of a foreign market before a firm fully commits to it through other investment modes the length of trial has great importance because licensing duration represents part of the licensing agreement when it is too short the firm may not acquire the necessary experience and knowledge of the foreign market but if it is too long the firm misses optimal expansion timing arguing that licensing can be considered as a european style real option with a fixed holding period we develop and test a model of the determinants of licensing duration in foreign markets empirical results based on a sample of firms in various countries show that uncertainty and threat of competitive pre emption in the foreign market are related to shorter duration of the technology licensing agreements we also find that irreversibility of the impending investment moderates the relationships between uncertainty and duration specifically market and technology uncertainties in the foreign market induce shorter contracts under low levels of irreversibility

the use of genetic testing information in the insurance industry an ethical and societal analysis of public policy options informed by a search of the literature about the usage of genetic testing information gti by insurance companies this paper presents a practical ethical analysis of several distinct public policy options that might be used to govern or constrain gti usage by insurance providers as medical research advances and the extension to the human genome project 2016 https en wikipedia org wiki human genome project write moves to its fullness over the next decade such research efforts will allow the full synthesis of human dna to be connected to predictive health dispositions as testing costs fall there will be ever more pressure for citizens to disclose gti genetic testing information is integral to future medical care because it can be used to better assess individually tailored medical therapies as well as to allow a more informed risk analysis by the insurance industry which in some countries such as the usa underwrites a majority of citizen medical expenses as discussed in this examination the revelation of people s uniquely personal gti to insurers has enormous societal implications the major contribution of the paper is to offer policy makers and concerned citizens a nuanced articulation of the basic options to regulate gti with a special consideration for ethical fairness and equity as genetic based medicine blossoms and pressures to reduce healthcare costs increase there will be an ever greater impetus for countries to revisit their genetic testing policies organizations and policy makers striving to create gti oversights perceived to be both fair and effective need to be aware of the ethical perspectives discussed in this paper

how much should we pay for interconnecting electricity markets a real options approach abstract an interconnector is an asset that gives the owner the option to transmit electricity between two locations in financial terms the value of an interconnector is the same as a strip of real options written on the spread between power prices in two markets we model the spread based on a seasonal trend mean reverting gaussian process and mean reverting jump process and express the value of these real options in closed form the valuation tool is applied to five pairs of european neighboring markets to value a hypothetical one year lease of the interconnector using different assumptions about the seasonal component of the spread and different liquidity caps which proxy for the depth of the interconnected power markets we derive no arbitrage lower bounds for the value of the interconnector in terms of electricity futures contract and find that depending on the depth of the market the jumps in the spread can account for between 1 and 40 of the total value of the interconnector the two markets where an interconnector would be most resp least valuable are germany and the netherlands resp france and germany finally we provide rules of thumb to interpret the different interconnector values

why are different services outsourced to different countries the tradability revolution in services has led to a dramatic expansion of offshore outsourcing of services allowing firms to take advantage of lower production costs in foreign countries however production costs alone cannot explain the location determinants of offshore outsourcing of services in this paper we argue that minimizing transaction costs is also an important determinant of the location of offshore outsourcing of services we empirically analyze characteristics of services and characteristics of foreign countries that may impact on transaction costs in an outsourcing relationship and hence determine where services will be outsourced offshore we derive measures of service characteristics routineness complexity and interactiveness based on the tasks required to provide them further we posit that there are interaction effects between service and country characteristics using bureau of economic analysis data on us service outsourcing across 11 types of services to 31 countries between 1992 and 2005 we find that 1 services that are more routine less complex or less interactive are outsourced more to foreign countries 2 services are outsourced more to countries with higher institutional quality and greater cultural proximity 3 non routine complex and interactive services are outsourced relatively more to countries with a better institutional quality

an optimal multiple stopping approach to infrastructure investment decisions abstract the energy and material processing industries are traditionally characterized by very large scale physical capital that is custom built with long lead times and long lifetimes however recent technological advancement in low cost automation has made possible the parallel operation of large numbers of small scale and modular production units amenable to mass production these units can be more rapidly deployed but they are also likely to have a much quicker turnover such a paradigm shift motivates the analysis of the combined effect of lead time and lifetime on infrastructure investment decisions in order to value the underlying real option we introduce an optimal multiple stopping approach that accounts for operational flexibility delay induced by lead time and multiple finite infinite future investment opportunities we provide an analytical characterization of the firm s value function and optimal stopping rule this leads us to develop an iterative numerical scheme and examine how the investment decisions depend on lead time and lifetime as well as other parameters furthermore our model can be used to analyze the critical investment cost that makes small scale short lead time short lifetime alternatives competitive with traditional large scale infrastructure