real option valuation of power transmission investments by stochastic simulation abstract network expansions in power markets usually lead to investment decisions subject to substantial irreversibility and uncertainty hence investors need valuing the flexibility to change decisions as uncertainty unfolds progressively real option analysis is an advanced valuation technique that enables planners to take advantage of market opportunities while preventing or mitigating losses if future conditions evolve unfavorably in the past many approaches for valuing real options have been developed however applying these methods to value transmission projects is often inappropriate as revenue cash flows are path dependent and affected by a myriad of uncertain variables in this work a valuation technique based on stochastic simulation and recursive dynamic programming called least square monte carlo is applied to properly value the deferral option in a transmission investment the effect of option s maturity the initial outlay and the capital cost upon the value of the postponement option is investigated finally sensitivity analysis determines optimal decision regions to execute postpone or reject the investment projects

the effectiveness of bank capital adequacy regulation a theoretical and empirical approach the aim of this paper is to analyse how banking firms set their capital ratios that is the rate of equity capital over assets in order to study this isue two theoretical models are developed both models deal with the existence of an optimal capital ratio the first one for firms not affected by capital adequacy regulation the second one for firms which are the models have been tested by estimating a disequilibrium model using data of spanish savings banks

optimizing the level of renewable electric r d expenditures using real options analysis abstract one of the primary objectives of the united states federal non hydro renewable electric r d program is to promote the development of technologies that have the potential to provide consumers with stable and secure energy supplies in order to quantify the benefits provided by continued federal renewable electric r d this paper uses real option pricing techniques to estimate the value of renewable electric technologies in the face of uncertain fossil fuel prices within the real options analysis framework the current value of expected future supply from renewable electric technologies net of federal r d expenditures is estimated to be 30 6 billion of this value 86 can be attributed to past federal r d efforts and 14 can be attributed to future federal r d efforts assuming continued federal r d funding at 300 million yr in addition real options analysis shows that the value of renewable electric technologies increases as current and future r d funding levels increase this indicates that the current level of federal renewable electric r d funding is sub optimal

economic and environmental effects of peak regulation using coal fired power for the priority dispatch of wind power in china abstract wind curtailment is currently one of the major challenges in china s renewable energy development technical solutions to wind curtailment could include more flexible power sources storage and grid facilities these however are long term solutions due to physical economic and institutional constraints we argue that an effective short term solution could be the full utilization of the technical potential of the existing power system particularly by using china s dominant coal fired power capacity to provide peak regulation services for the priority dispatch of wind power this paper assesses the economic and environmental effects of this approach to this end four scenarios are developed scenario i full wind curtailment and average dispatch of coal fired power scenario ii no wind curtailment and average dispatch of coal fired power scenario iii no wind curtailment and optimal dispatch of coal fired power and scenario iv partial wind curtailment and optimal dispatch of coal fired power the economic and environmental effects under the four scenarios are then computed using the gams program based on the load curve on a typical spring day for a coal fired power plant and a wind farm in china s northeastern harbin city the results of our research show that whilst scenario iv has the best economic effects scenarios iii and iv have the best environmental effects scenario iv is considered the optimal solution as more economic benefits could be realized at the expense of smaller wind curtailment drawing on these results it is recommended to amend the renewable energy law to allow a small proportion of renewable energy curtailment to enhance the flexibility of the existing coal fired power units to advance energy efficient power dispatch approach and to incentivise coal fired power to provide peak regulation services for renewable energy

evaluation and optimization of feed in tariffs abstract feed in tariff program is an incentive plan that provides investors with a set payment for electricity generated from renewable energy sources that is fed into the power grid as of today fit is being used by over 75 jurisdictions around the world and offers a number of design options to achieve policy goals the objective of this paper is to propose a quantitative model by which a specific fit program can be evaluated and hence optimized we focus on payoff structure which has a direct impact on the net present value of the investment and other parameters relevant to investor reaction and electricity prices we combine cost modeling option valuation and consumer choice so as to simulate the performance of a fit program of interest in various scenarios the model is used to define an optimization problem from a policy maker s perspective who wants to increase the contribution of renewable energy to the overall energy supply while keeping the total burden on ratepayers under control numerical studies shed light on the interactions among design options program parameters and the performance of a fit program

feed in tariffs with minimum price guarantees and regulatory uncertainty abstract the feed in tariff fit program is a popular policy for incentivizing new renewable energy projects because it establishes a long term contract with renewable energy investors this paper presents a novel model to analyze a fit contract with a minimum price guarantee i e a price floor regime from an investor s perspective the results show that a perpetual guarantee only induces investment for prices below the price floor when offering a risk free investment opportunity in contrast the finite guarantee may induce investment even when the revenue from the guarantee is lower than the investment cost when an investor faces a scenario with regulatory uncertainty a higher and more likely reduction in the price floor induces earlier investment for all cases investors postpone an investment decision when market conditions present a higher price volatility

the joint production of confidence endogenous regulation and nineteenth century commercial bank clearinghouses during the nineteenth century deposits increased relative to bank notes c ausing increased information asymmetry problems in banking this pape r describes how bank clearinghouses lowered these costs by monitoring bank activities and establishing mechanisms of managerial control i n effect regulating bank behavior such actions enforced the loca l one to one exchange rate between deposits and specie clearinghouse s increased regulation during financial panics creating and enforcin g a risk sharing device loan certificates for addressing panic rela ted information problems this paper concludes that the market s capacity to control bank managers depends on the banking product mix and more generally on information costs copyright 1987 by ohio state university press

economic dispatch savings in the coal fired power sector an empirical study of china abstract the current equal share dispatch approach has often been criticized for its negative influence on the electricity system operation in china which worsens the energy security environmental sustainability and affordability problems to provide references for the on going electricity market reform this study employs an optimization model to quantify the economic dispatch savings in the coal fired power sector key findings are summarized as follows 1 the heat rates of 2803 coal generators in china range from 273 91 gce kwh to 348 38 gce kwh units in 2014 and the great differences among these generators at different geographical areas exhibit the necessity for economic dispatch 2 5 67 of the coal used for power generation could be saved from economic dispatch in a provincial level the monetary value of which can reduce the average electricity price by 0 0058 yuan kwh in 2014 3 three major political and economic challenges hinder the transition from the current dispatch mode to economic dispatch namely the insufficient running hours for cost recovery limited cross border trading due to electricity over supply and local protectionism and the political economy problems from generators of different ownership types

a real options valuation of chinese wind energy technologies for power generation do benefits from the feed in tariffs outweigh costs abstract in order to assess the viability of wind energy projects in china this paper takes a real options approach by accounting for flexibility over deployment of the technology in response to a stochastic non renewable energy cost the difference between the latter and the r d enhanced cost of renewable energy operation may be thought of as a benefit from using wind on the other hand the chinese government provides feed in tariffs to encourage further adoption of wind which should be included as a cost this work thus shows that there is substantial options value to china s wind energy program which is bolstered if the cost of carbon dioxide emissions is internalized moreover by varying the rate of feed in tariffs the model may be used to show plausible ranges for the feed in tariffs which could be a useful policy insight furthermore the study hypothesizes that with the likelihood of renewable energy to replace non renewable energy wind power in china can potentially reduce co2 emissions by approximately 6 4 by 2020 comparing to the 2005 level and highlights the significant role of wind power in china s emission targets and energy security this is a relevant paper especially given the importance of a sustainable energy transition for china more generally using the real options approach from a policy perspective could provide insights about the viability of renewable energy programs and robustness of feed in tariffs rates

growth opportunities and risk taking by financial intermediaries we show that growth opportunities which cannot be converted to cash under conditions of financial distress gz are a critical determinant of an intermediary s choice of risk financial institutions in which gz is a low proportion of total assets will be much more likely to engage in go for broke behavior the model leads to a reevaluation of the effectiveness of several traditional remedies for dealing with banks that take excessive risks such as raising insurance premiums intervening before capital is depleted and restricting investment options the model also has implications about a new approach to the examination of financial intermediaries the insuring agencies are painfully aware that when a bank is at or near insolvency it has an incentive to take greater risks stanley silverberg 1984 p 100 director of research at the federal deposit insurance corporation has observed that under such conditions it is generally in the interest of managers and owners to gamble in an effort to recoup if the bank rolls the dice and loses the fdic typically bears the loss of course bank shareholders like shareholders in other limited liability corporations have an incentive to take larger gambles than if their activities were financed entirely by equity what distinguishes go for broke behavior however is that a firm in go for broke mode will be willing to play with dice loaded against it go for broke behavior occurs when a firm chooses an operating strategy that will lower the expected value of its assets a firm in go for broke mode causes a loss to society since it will allocate resources to uses that have a lower expected return than the opportunity cost of funds in this paper we examine the conditions under which a bank has an incentive to adopt go for broke behavior and the challenge faced by regulators in controlling such behavior we show that weakly capitalized banks with negligible opportunities for profitable growth pose the greatest threat and that traditional supervisory remedies are least effective against such banks

warrant exercise and bond conversion in competitive markets abstract we develop a theory of warrants held by competitive warrantholders not constrained to exercise their warrants as one block the theory also applies to convertible bonds held by competitive bondholders not constrained to convert their bonds as one block we prove that the warrant bond price in each of the competitive equilibria is less than or equal to the price in an economy with the block constraint and for at least one competitive equilibrium the warrant bond price equals the warrant bond price in the block constrained economy we illustrate the paths of competitive warrant exercise and bond conversion and conclude that under realistic assumptions they can be long

exchange rate management intertemporal tradeoffs exchange rate management is possible only if the government pursues consistent monetary and fiscal policies the authors constructa model in which the real consequences of exchange rate management depend on the precise time pattern of these policies the authors study the constraints on feasible policies and the comparative dynamics of disinflation by means of exchange rate targeting theoretical results are consistent with exchange rate managed disinflation attempts in argentina chile and israel copyright 1987 by american economic association

risk the financial market and macroeconomic equilibrium growing recognition of the importance of stock market phenomena to the real economy underscores the need for models linking exogenous uncertainty asset market performance and the rest of the economy in an optimizing framework without certainty equivalence this paper constructs a three agent model with continuous time stochastic variables uncertain private production and government expenditure and forward looking rational agents the growth rate of output physical capital accumulation financial asset returns and uncertain inflation are determined as functions of the exogenous uncertainty in the economy analysis of the model finds that increased risk associated with government policy often reverses in an explainable way the conventional comparative static predictions of nonstochastic macro models

the pecking order of segmentation and liquidity injection policies in a model of contagious crises we study a two country setting in which leveraged investors generate fire sale externalities leading to financial crises and contagion governments can affect the incidence of financial crisis and the degree of contagion by injecting public liquidity and additionally by segmenting the countries liquidity markets we show that segmentation allows a country to avoid contagion and fend off mild financial crises caused by a small shock to its liquidity demand at the cost of exposing it to more severe financial crises caused by a large shock we derive a pecking order result whereby segmentation is a second best measure that coordinated governments should use only when tax capacity constrains them from injecting liquidity even when segmentation is welfare enhancing it should be applied to public liquidity alone never restricting the free flow of private liquidity across countries uncoordinated governments tend to use segmentation excessively

risky debt investment incentives and reputation in a sequential equilibrium the agency relationship of corporate insiders and bondholders is modeled as a dynamic game with asymmetric information the incentive effect of risky debt on the investment policy of a levered firm is studied in this context in a sequential equilibrium of the model a concept of reputation arises endogenously resulting in a partial resolution of the classic agency problem of underinvestment the incentive of the firm to underinvest is curtailed by anticipation of favorable rating of its bonds by the market this anticipated pricing of debt is consistent with rational expectations pricing by a competitive bond market and is realized in equilibrium some empirical implications of the model for bond rating debt covenants and bond price response to investment announcements are explored

the optimal size of a bank costs and benefits of diversification abstract this paper provides a theory of diversification and financial structure of banks it shows that by diversifying the bank portfolio and financing it with debt the bank can commit to a higher level of monitoring by linking the benefits of diversification to the costs the paper derives an optimal size of the bank which is bounded the costs of diversification lie in the higher overload costs with which the banker is faced by monitoring more projects the benefits of diversification lie in increasing the bank s owner s incentives to monitor the lenders

the international transmission of financial shocks the case of japan one of the more dramatic financial events of the late 1980s and early 1990s was the surge in japanese stock prices that was immediately followed by a very sharp decline of more than 50 percent while the unprecedented fluctuations in japanese stock prices were domestic financial shocks the unique institutional characteristics of the japanese economy produce a framework that is particularly suited to the transmission of such shocks to other countries through the behavior of the japanese banking system the large size of japanese bank lending operations in the united states enables us to use u s banking data to investigate the extent to which this domestic japanese financial shock was transmitted to the united states as well as to identify a supply shock to u s bank lending that is independent of u s loan demand we find that binding risk based capital requirements associated with the decline in the japanese stock market resulted in a decline in commercial lending by japanese banks in the united states that was both economically and statistically significant this finding has added importance given the severe real estate loan problems currently faced by japanese banks how japanese bank regulators decide to resolve these problems will have significant implications for credit availability in the united states as well as in other countries with a significant japanese bank presence

investment timing and optimal capacity choice for small hydropower projects this paper presents a method for assessing small hydropower projects that are subject to uncertain electricity prices we present a real options based method with continuous scaling and we find that there is a unique price limit for initiating the project if the current electricity price is below this limit it is never optimal to invest but above this limit investment is made according to the function for optimal size the connection between the real option and the physical properties of a small hydropower plant is dealt with using a spreadsheet model that performs a technical simulation of the production in a plant based on all the important choices for such a plant the main results of the spreadsheet are simulated production size and the investment costs which are in turn used for finding the value of the real option and the price limit the method is illustrated on three different norwegian small hydropower projects

optimal bank regulation and fiscal capacity financial regulation is synchronized across countries despite the fact that countries vary widely in their ability to bail out their banking sector in the event of a nancial crisis this paper addresses the question of whether countries with dierent scal capacity should optimally have dierent ex ante minimum bank capital requirements in an environment with endogenously in complete markets and overinvestment because of moral hazard and pecuniary externalities i show that countries with larger scal capacity should have lower ex ante minimum bank capital require ments this result is the opposite of what one may expect given that countries with larger scal capacity often have stronger moral hazard i also show that in addition to a minimum bank capital requirement regulators in countries with strong moral hazard which are countries with a concen trated nancial sector and large scal capacity should impose a limit on the amount of liquidity pledged by nancial institutions in a crisis state this would entail restricting the amount of put options cds contracts sold by nancial institutions among other measures

how does the stock market view bank regulatory capital forbearance policies during the subprime crisis the fdic has shown once again laxity in resolving and closing insolvent institutions ronn and verma 1986 call the tolerance level below which a bank closure is triggered the regulatory policy parameter we derive a model in which we make this parameter stochastic and bank specific to infer the stock market view of the regulatory capital forbearance value for 565 u s listed banks during 1990 to 2012 the countercyclical forbearance fraction in capital most substantial in recessions could represent 17 on average of the market valuation of bank equity and could go as high as 100

is the international convergence of capital adequacy regulation desirable the merit of international convergence of bank capital requirements in the presence of divergent closure policies of diierent central banks is examined the lack of a complementary variation between minimum bank capital requirements and regulatory forbearance leads to a spillover from more forbearing to less forbearing economies and reduces the competitive advantage of banks in less forbearing economies linking the central bank s forbearance to its alignment with domestic bank owners it is shown that in equilibrium a regression toward the worst closure policy may result the central banks of initially less forbearing economies also adopt greater forbearance i analyze the joint design of two bank regulatory mechanisms minimum capital requirements which are an ex ante mechanism to prevent bank failures and closure policy which is an ex post mechanism to manage the cost of bank failures at the heart of the paper is a simple but fundamental point ex post policies affect ex ante incentives and hence the design of an ex ante mechanism must take into account any feedback from the ex post policies the optimal design of capital requirements is thus tied to the extent of forbearance exercised by the central bank s closure policy this warrants a closer scrutiny of the merits of creating a level playing eld in capital requirements across countries as proposed and

where the wind blows assessing the effect of fixed and premium based feed in tariffs on the spatial diversification of wind turbines abstract feed in tariffs fit are among the most important policy instruments to promote renewable electricity production the fixed price fit ffit which guarantee a fixed price for every unit of produced electricity and the premium based fit pfit which pay a premium on top of the market price are commonly implemented in the eu costs for balancing intermittent electricity production may be significantly higher with ffit than with pfit and ffit do not provide any incentive to produce electricity when marginal production costs are high in contrast pfit do provide strong incentives to better match renewable power output with marginal production costs in the system the purpose of this article is to assess the effects of the two tariff schemes on the choice of wind turbine locations in an analytical model we show that both the covariance between wind power supply and demand as well as between the different wind power locations matter for investors in a pfit scheme high covariance with other intermittent producers causes a decrease in market prices and consequently in revenues for wind power investors they are therefore incentivized to diversify the locations of wind turbines to decrease the covariance between different wind power production locations in an empirical optimization model we analyze the effects of these two different schemes in a policy experiment for austria the numerical results show that under a pfit scheme 1 spatial diversification is incentivized 2 the covariance of wind power production with marginal electricity production costs increases and 3 the variances of the wind power output and of residual load decrease if wind power deployment attains 10 of total national electricity consumption

evaluation of r d investments in wind power in korea using real option abstract in recent years many countries put an emphasis on the development and deployment of renewable energy to cope with the global environmental crisis such as depletion of fossil energy climate convention to control emissions of greenhouse gases among the various new and renewable energy sources the korean government selected wind power energy as one of the core areas for r d investments in this paper we evaluate the economic value of the investment in wind power energy r d in korea and optimal deployment timing of wind power technology by using the real option approach the real option model adopted in this paper assumes that a decision maker has a compound option to abandon deployment or continue the r d as a result by using empirical data of korea it is found that there exists a considerable amount of positive economic value of investments in wind power energy r d

choice of nuclear power investments under price uncertainty valuing modularity this work aims at examining how to compare two investment projects in the electricity market the first project is a flexible sequence of small nuclear power plants whereas the second is a nuclear power plant of large capacity we measure the option value generated by the modularity of the first project given the uncertain future competitive price of electricity using a realistic calibration of the model we show that the option value of modularity has a sizeable effect on the optimal dynamic strategy of the producer in particular in terms of the optimal timing of the decision to invest in the first module

exchange rate determination and asset prices in a stochastic small open economy abstract this paper constructs a stochastic general equilibrium model of a small open economy consisting of risk averse optimizing agents the stochastic processes describing the rate of monetary growth government expenditure private production and the foreign price level are taken to be exogenous determining all asset risks and returns and the equilibrium stochastic process describing the domestic inflation rate and the exchange rate the model is used to examine the effects of the means and variances of policy shocks on the equilibrium and the determinants of the foreign exchange risk premium

the regulator s trade off bank supervision vs minimum capital abstract we develop a simple model of banking regulation with two policy instruments minimum capital requirements and the supervision of domestic banks the regulator faces a trade off high capital requirements cause a drop in the banks profitability whereas strict supervision reduces the scope of intermediation and is costly for taxpayers we show that a mix of both instruments minimises the costs of preventing the collapse of financial intermediation once we allow for cross border banking the optimal policy is not feasible if domestic supervisory effort is not observable our model predicts a race to the bottom in capital requirement regulation therefore countries are better off by harmonising regulation on an international standard

monetary randomness and investment abstract this paper develops a neoclassical model in which the behavior of the money supply affects investment by affecting the real distribution of asset returns investment depends on wealthholders demand for capital a stochastic money growth rule influences portfolio choice by affecting the distribution of the inflation rate the variance of inflation matters to wealthholders because of the existence of assets with returns that are not indexed to changes in the price level money and bonds which are contracted in nominal terms in a rational expectations environment asset demands will thus be sensitive to the distribution of the money growth rate our principle conclusion is that an increase in the variance of the money growth rate lowers investment which complements tobin s 1965 result that an increase in the mean stimulates capital accumulation the paper also represents a step toward incorporating an asset market into a macroeconomic model in a manner which takes account of lucas 1976 criticism of econometric policy evaluation all variables in the model including asset return distributions are functions of technology preferences and the money supply rule further expectations are rational

the effects of closure policies on bank risk taking abstract this paper models bank closure policy for a risk averse bank that enjoys flat rate deposit insurance we find that increasing the level of net worth at which banks are closed can increase or decrease induced risk aversion as well as increase the likelihood that marginally healthy banks would be subject to extreme moral hazard these result suggest that more timely closure policies should be imposed in conjunction with greater monitoring of bank portfolio risk and with restrictions on risk taking for marginally healthy banks in addition we find that changes in closure policy can increase or decrease desired leverage and that this effect depends on the degree of correlation among asset returns

low or no subsidy proposing a regional power grid based wind power feed in tariff benchmark price mechanism in china abstract the chinese government plans to adopt a low or no subsidy policy mechanism on renewable energy power development in the future to achieve a balance between reducing financial burden on the government and ensuring profitability of investors as well as to account for the regional differences in china a novel regional wind power grid feed in tariff benchmark price mechanism by net present value npv method and real option ro method is proposed in this paper the results voice support on the appropriateness of gradually decreasing the wind feed in tariff fit benchmark price to as low as the coal fired fit the proposed fit price level is presented as a price range on the basis of a guaranteed internal rate of return irr falls in between 8 to 15 for wind power investors the results indicate that the current fit price should be readjusted and redistributed although the fit price in central and south china grids is recommended to be relatively high the npv of wind farm project value in six regional grids are at the same level

fiscal policy inflation and the accumulation of risky capital the effect of government policies on the level of investment and inflation has become a major concern of policy makers in a number of industrial countries proposals to raise the level of business investment have included overall tax cuts tax incentives to spur investment and a reduction in the level of government spending this paper presents a theoretical apparatus to explore the relationships between fiscal policy government debt inflation and capital accumulation it develops a one sector growth model embodying a stochastic production function and government fiscal policy atomistic agents in the economy choose consumption levels and allocate their wealth between risky capital and risky government debt to maximize expected discounted utility over an infinite horizon fiscal policy by affecting asset yields affects the composition of portfolios the price of government bonds and the accumulation of capital the model is used to answer three general questions 1 does the level of government expenditure affect the rate of capital accumulation and inflation in steady state 2 does the mode of government finance when the choice is between an income tax and deficit finance affect these magnitudes 3 what is the effect of uncertainty in the productivity of capital on growth the analysis relates to several areas of literature 1 the analysis of the relationship between capital accumulation and debt 2 the theory of the demand for government debt 3 considerations of the effect of income taxation on risk bearing and 4 the analysis of capital accumulation under uncertainty 1 the effects on output and the capital stock of the government s expenditure decision and its decision to finance its expenditure by taxation or debt issue are explored in two major bodies of economic theory the literature on the burden of the debt as developed by modigliani 1961 diamond 1965 and phelps and shell 1969 for example implies that policies which increase the value of outstanding government debt will tend to lower the level of the capital stock by displacing capital with public debt in private wealth the theory of money and growth as represented by tobin 1965 and sidrauski 1967b also implies that government debt displaces capital but specifically recognizes the role of capital gains on government debt

supervising cross border banks theory evidence and policy this paper analyses the distortions that banks cross border activities such as foreign assets deposits and equity can introduce into regulatory interventions we find that while each individual dimension of cross border activities distorts the incentives of a domestic regulator a balanced amount of cross border activities does not necessarily cause inefficiencies as the various distortions can offset each other empirical analysis using bank level data from the recent crisis provides support to our theoretical findings specifically banks with a higher share of foreign deposits and assets and a lower foreign equity share were intervened at a more fragile state reflecting the distorted incentives of national regulators we discuss several implications for the supervision of cross border banks in europe thorsten beck radomir todorov and wolf wagner

optimal government finance policy and exchange rate management in a stochastically growing open economy abstract optimal monetary policy is analyzed in a stochastic small open economy consisting of risk averse representative agents the analysis shows how optimal monetary policy should be directed toward an optimal interest rate target this target which maximizes the intertemporal utility of the representative agent is determined by balancing off the marginal gains of a higher interest rate on increased growth and the future consumption it generates against the marginal losses stemming from a reduction in the holdings of real money balances the paper shows how an appropriately set monetary growth rate eliminates the need for continuous intervention in the exchange market

bank size and risk taking under basel ii this paper discusses the relationship between bank size and risk taking under pillar i of the new basel capital accord using a model with imperfect competition and moral hazard we find that small banks and hence small borrowers may profit from the introduction of an internal ratings based irb approach if this approach is applied uniformly across banks however the banks right to choose between the standardized and the irb approaches unambiguously hurts small banks who are pushed towards higher risk taking due to fiercer competition this may even lead to higher aggregate risk in the economy

the politics of government decision making a theory of regulatory capture the paper develops an agency theoretic approach to interest group politics and shows the following 1 the organizational response to the possibility of regulatory agency politics is to reduce the stakes interest groups have in regulation 2 the threat of producer protection leads to low powered incentive schemes for regulated firms 3 consumer politics may induce uniform pricing by a multiproduct firm 4 an interest group has more power when its interest lies in inefficient rather than efficient regulation where inefficiency is measured by the degree of informational asymmetry between the regulated industry and the political principal congress

the transmission of disturbances under alternative exchange rate regimes with optimal indexing the paper develops a general stochastic macroeconomic model that can be used to study the international transmission of disturbances under four alternative exchange rate systems uniform flexible exchange rates uniform fixed exchange rates and two versions of two tier exchange rates the analysis makes two general points first one cannot assume stability of structure when assessing the consequences of alternative exchange rate regimes for example the slope of the aggregate supply curve and the rationally formed expectations in the asset markets can respond dramatically to the government s choice of exchange rate regime second exchange rate regimes that provide full insulation from foreign disturbances may nevertheless be inferior to other regimes in terms of their ability to maximize social welfare

banking across borders abstract the international linkages between banks play a crucial role in today s global economy existing models explain these links largely on the basis of portfolio theory in which banks diversify lending these models have found limited empirical support and do not speak to several relevant dimensions of the data they do not explain heterogeneity in the degree to which banks operate through foreign affiliates fund their activities abroad or matter for local lending in foreign countries this paper proposes a complementary theory of banking across borders that is based on elements of international trade theory in the model banking across borders arises because countries differ in their relative factor endowments and in the efficiency of their banking sectors based on these differences the pattern of foreign bank asset and liability holdings emerges endogenously this parsimonious model provides a rationale for the observed heterogeneity in foreign bank activities and is consistent with key patterns in the data

overall review of renewable energy subsidy policies in china contradictions of intentions and effects abstract china is vast abundant and particularly plentiful in energy sources due to which it has obtained remarkable achievements on economy however its energy structure is too simple to support the sustainable development of economy as coal still contributes to the majority of energy consumption in china as a consequence renewable energy law was enacted in 2005 and chinese government announced a series of policies to boom renewable energy industry subsidy policy is one of the major forms of these policies this paper aims to present these subsidy policies and to analyze their effects according to relative data in energy industry 2005 2013 to find out the deficiencies and enlighten possible policy improvements the original intentions and abstracts of 5 different levels of subsidy related policies are summarized and the effects in reality are attentively analyzed it can be concluded that subsidy policies have different short term effect on different renewable energies and they all show some negative effect to a certain extent 6 core problems are summarized in this paper and remedy strategies are suggested

principal agent problems in s l salvage new legislation and traditional fdic insolvency resolution procedures transform and intensify the principal agent problems most responsible for the fslic mess these problems explain counterproductive constraints on the governance and operating policies of the agency responsible for rescuing and salvaging assets in insolvent thrifts the rtc the constraints slow insolvency resolution increase interim financing costs and undermine rtc recovery of asset value operationalizing its task as preserving evanescent and economically misconceived franchise values the rtc allows insolvents to seek financing on an unconsolidated basis initiates bidding for one institution at a time holds back seriously troubled assets and recruits an overly narrow range of bidders although the federal savings and loan insurance corporation fslic is officially defunct its corporate corpse lives on in two successor institutions its deposit insurance business has been taken over by the savings association insurance fund saif while its liquidation or salvage business has been assigned to the resolution trust corporation rtc both saif and rtc have the same stockholder principals federal taxpayers also both are operated by the federal deposit insurance corporation fdic nevertheless their governing structures differ markedly and in a perverse way to maximize net returns from salvage experience suggests the theory that a salvage or value recovery operation requires the aggressive operating flexibility of an automobile junkyard in a junkyard essentially everything in the salvor s inventory is open for inspection stripping and sale to anyone at any time hardto market hulks are compacted into scrap metal i e pooled and shipped out on what can be compared to a bulk sales or auction basis on a strict timetable the yard either owns or transacts with a fleet of tow trucks and has enough operating capital to bring in new wrecks as they appear this paper argues that unlike a private salvor the rtc is saddled with the additional objective of slowing down official recognition of the full size of fslic s losses to this end the financial institutions reform recovery and enforcement act firrea underfunds the rtc requires delayed sales of residential properties ostensibly to promote the availability of affordable housing and creates a superfluous five person rtc oversight board whose incentives are to deprive rtc decisionmakers of desirable operating flexibility the rtc oversight board creates an appearance of improved accountability to taxpayers that runs exactly opposite to its true economic effects three of the

level playing fields in international financial regulation we analyze the desirability of level playing fields in international financial regulation in general level playing fields impose the standards of the weakest regulator upon the best regulated economies however they may be desirable when capital is mobile because they counter a cherry picking effect that lowers the size and efficiency of banks in weaker economies hence while a laissez faire policy favors the better regulated economy level playing fields are good for weaker regulators we show that multinational banking mitigates the cherry picking effect and reduces the damage that a level playing field causes in the better regulated economy

taxation risk taking and growth a continuous time stochastic general equilibrium analysis with labor leisure choice abstract this paper investigates the equilibrium relationship between taxation portfolio choice risk taking and capital accumulation specifically it examines how taxes affect risk taking and capital accumulation we extend the existing literature by relaxing two crucial assumptions in modelling risk taking behavior i that the investment opportunity set is fixed and ii that there is no distinction between attitudes towards risk and behavior towards intertemporal substitution we extend the investment opportunity set of individuals through optimally determined human capital and distinguish intertemporal substitution from attitudes towards risk via a recursive utility function in the presence of these extensions the paper successfully derives a closed form solution to the stochastic growth model with stochastic wage income

deposit insurance and subsidized recapitalizations the 2007 2009 financial crisis saw a vast expansion in deposit insurance guarantees around the world and yet our understanding of the design and consequences of deposit insurance schemes is in its infancy we provide a new rationale for the provision of deposit insurance in our model the banking sector exhibits both adverse selection and moral hazard which implies that the social benefits of bank monitoring must for incentive reasons be shared between depositors and banks consequently socially too few deposits are made in equilibrium deposit insurance or equivalently bank recapitalization corrects this market failure we find that deposit insurance should be funded not by banks or depositors but out of general taxation the optimal level of deposit insurance varies inversely with the quality of the banking system hence when the soundness of the financial sector is uncertain governments should consider supporting deposit insurance schemes and undertaking subsidized recapitalizations

a two part feed in tariff for intermittent electricity generation abstract as electricity generation from intermittent energy sources wind sun tides is gaining momentum it becomes increasingly important to price these electricity sources efficiently conventional flat feed in tariffs ignore the heterogeneity of these sources taking into account the degree of substitutability or complementarity of these sources with respect to each other and with respect to stochastic demand variations this paper derives optimal pricing instruments composed of a feed in tariff fit and a capacity augmentation tariff cat an empirical analysis looks at wind and solar farms operating in ontario in order to determine the optimal use of fit cat pricing the magnitude of optimal price differentiation turns out to be economically significant furthermore the emergence of grid scale electricity storage underscores the need to price energy and capacity separately

optimal bank reorganization policies and the pricing of federal deposit insurance optimal dynamic regulatory policies for closing ailing banks and for deposit insurance premia are derived as functions of the rate of flow of bank deposits and interest rate on deposits the economy s risk free interest rate and the regulators bank audit administration costs under competitive conditions the threshold assets to deposits ratio below which a bank should be optimally closed is shown to be greater than or equal to one optimal deposit insurance premia and probabilities of bank closure are shown to be nondecreasing in the bank s risk on investment and nonincreasing in the bank s current assets to deposits ratio should regulatory agencies close reorganize an ailing federally insured financial institution if so when the recent record rate of failures of savings and loans associations s ls has renewed the urgency of this question the regulatory agencies are empowered but not required to reorganize financial institutions that are statutorily insolvent i e have zero or negative regulatory net worth recently regulators have in many instances permitted insolvent financial institutions to remain in operation 2 also while debating on the increase of the proposed funding of the federal deposit insurers the u s congress argued whether it would be desirable and if so when to close more s ls thus when regulators should close a troubled financial institution has become a major question of bank regulatory policy while the existing academic literature provides powerful insights into the structure and pricing of the insurers liability this literature offers very little guidance regarding the timing of bank reorganizations 3 indeed to the best of our knowledge the value of the federal

interest rates and monetary policy this article conducts a thorough intertemporal analysis of nominal interest rate based monetary policy its main contribution is to show how such a policy can have different effects depending on the assumptions made about the saving and borrowing behaviour of firms we consider two cases i consumers are savers and firms are borrowers and ii both consumers and firms are borrowers the nation as a whole is borrowing from abroad in one case we confirm conventional wisdom but in the other case we find there may be unexpected and surprising results moreover our analysis has important implications for both inflation and nominal exchange rate targeting policies

top management compensation and capital structure the interrelationship between top management compensation and the design and mix of external claims issued by a firm is studied the optimal managerial compensation structures depend on not only the agency relationship between shareholders and management but also the conflicts of interests which arise in the other contracting relationships for which the firm serves as a nexus we analyze in detail the optimal management compensation for the cases when the external claims are 1 equity and risky debt and 2 equity and convertible debt in addition to the role of aligning managerial incentives with shareholder interests managerial compensation in a levered firm also serves as a precommitment device to minimize the agency costs of debt the optimal management compensation derived has low pay performance sensitivity with convertible debt instead of straight debt the corresponding optimal managerial compensation has high pay to performance sensitivity a negative relationship between pay performance sensitivity and leverage is derived our results provide a reconciliation of the puzzling evidence of jensen and murphy 1990 with agency theory other testable implications include 1 a relationship between the risk premium in corporate bond yields and top management compensation structures and 2 the announcement effect of adoption of executive stock option plans on bond prices the model yields implications for management compensation in banks and federal deposit insurance reform our results explain the dynamics of top management compensation in firms going through financial distress and reorganization

resolving the agency problems of external capital through options this paper investigates the role of stock options in resolving the agency problems of external capital as originally identified by jensen and meckling 1976 these problems are precipitated by managerial incentives a to consume excessive non pecuniary benefits or perquisites beyond the optimal level for sole ownership and b to engage in risk shifting in productive decisions so as to transfer wealth from external capital contributors these incentive problems can be resolved through a strategy that judiciously combines call and put options retained by the owner manager and external financiers respectively the resolution of the agency problems through this mechanism provides an economic rationale for the existence of managerial stock options and convertible debt the work by jensen and meckling 7 has brought more realism to the theory of the firm in their paper jm address agency problems in the context of a firm which is viewed as a nexus of contracts among various factors of production the contractual relationships involve incentive conflicts arising from the pursuit of self interest by limiting themselves to an entrepreneur or owner manager who retains complete control of the firm jm have demonstrated that financing through the issuance of common stock or debt to outsiders engenders costs these costs are precipitated in part by the manager s propensity to consume nonpecuniary benefits or perquisites perks by employing certain resources in excess of their optimal usage 1 and by his propensity to engage in high risk investment projects so as to transfer wealth from bondholders to stockholders 2

charter value minimum bank capital requirement and deposit insurance pricing in equilibrium abstract this paper shows that leaving insolvent banks with large enough charter values open can be optimal and derives normative bank closure reorganization policies based on the liquidation value of assets and the charter value the charter value of a bank is broadly defined as the value that would be foregone due to a closure our simulations of risk taking show that an optimal forbearance for an insolvent bank with a large enough charter value alleviates the moral hazard problem this is because increasing the risk raises the probability of losing the charter value although it generates a moral hazard gain

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

optimal and time consistent exchange rate management in an overlapping generations economy abstract this paper analyzes exchange rate management in a simple overlapping generations model this framework is used to evaluate alternative policies in terms of their implications for the welfare of individuals in the economy and for generating seigniorage when the chief concern is to provide a desirable store of value a policy of fixing the exchange rate does better when shocks are primarily of domestic origin while floating becomes more desirable when foreign shocks predominate the same is true when the government is concerned with maximizing total expected seigniorage although more intervention is typically desirable when generating seigniorage is the major objective when seigniorage concerns are paramount and when the monetary authority cannot establish a reputation for conducting monetary policy in a way that makes the currency a desirable store of value a national currency may not be viable in the absence of exchange controls such controls may be justified in this situation

interest rates and monetary policy uncertainty abstract this paper analyzes a model in which optimizing households are uncertain about monetary policy and learn about it over time in this model the variance of changes in nominal and ex post real interest rates increases with the variance of the household s predictive distribution over money growth a positive relation between unexpected changes in nominal interest rates and the money stock results from monetary policy uncertainty finally if money growth covaries negatively with real wealth an increase in monetary policy uncertainty increases the expected real rate of interest and decreases the nominal rate of interest

equity bonds and bank debt capital structure and financial market equilibrium under asymmetric information this paper proposes a model of financial markets and corporate finance with asymmetric information and no taxes where equity issues bank debt and bond financing coexist in equilibrium the relationship banking aspect of financial intermediation is emphasized firms turn to banks as a source of investment mainly because banks are good at helping them through times of financial distress this financial flexibility is costly since banks face costs of capital themselves which they attempt to minimize through securitization to avoid this intermediation cost firms may turn to bond or equity financing but bonds imply an inefficient liquidation cost and equity an informational dilution cost we show that in equilib rium the riskier firms prefer bank loans the safer ones tap the bond markets and the ones in between prefer to issue both equity and bonds this segmentation is broadly consistent with stylized facts

optimal taxation of capital income in general equilibrium with infinite lives this paper analyzes the optimal tax on capital income in general equilibrium models of the second best agents have infinite lives and utility functions which are extensions from the koopmans form the population is heterogeneous the important property of the models is the equality between the social and the private discount rates in the long run i find that the optimal tax rate is zero in the long run for a special case of additively separable utility functions i then determine the tax rates along the dynamic path and conditions that are sufficient for the local stability of the steady state

investment incentives debt and warrants abstract this paper models and characterizes investment incentive problems associated with debt financing the decision problem of residual claimants is explicity formulated and their investment policies are characterized the paper also analyzes the use of conversion features and warrants to control distortionary incentives these claims reverse the convex shape of levered equity over the upper range of the firm s earnings and this mitigates the incentive to take risk it is shown that under certain conditions such claims can be constructed to restore net present value maximizing incentives and simultaneously meet the financing requirements of the firm

subordinated debt market discipline and bank risk this paper demonstrates that subordinated debt subdebt thereafter regulation can be an effective mechanism for disciplining banks by reducing the chance that managers of distressed banks can take value destroying actions to benefit themselves subdebt regulation may encourage banks to lower asset risk moreover subdebt regulation and bank capital requirements can be complements for alleviating the banks moral hazard problems to make subdebt regulation effective regulators may need impose ceilings on the interest rates of subdebt prohibit collusion between banks and subdebt investors and require subdebt to convert into the issuing bank s equity when the government provides assistance to the bank

optimal monetary growth with accommodating fiscal policy in a small open economy abstract this paper emphasizes how the choice of the optimal monetary growth rate in a small open economy under perfect capital mobility depends upon the accommodating policy chosen to maintain the overall budget constraint in the economy when this occurs through lump sum taxation the optimal monetary growth rate is shown to be the distorted friedman monetary rule if the adjustment occurs through the income tax rate the optimal monetary growth rate involves a phelps type tradeoff between the income tax rate and the inflation tax rate the framework is suited for analyzing optimal macroeconomic policy in general and the latter part of the paper considers an optimal monetary fiscal package

optimal feed in tariff for solar photovoltaic power generation in china a real options analysis abstract the feed in tariff policy is widely used to promote the development of renewable energy china also adopts feed in tariff policy to attract greater investment in solar photovoltaic power generation this study employs real options method to assess the optimal levels of feed in tariffs in 30 provinces of china the uncertainties in co 2 price and investment cost are considered a method that integrates the backward dynamic programming algorithm and least squares monte carlo method is used to solve the model the results demonstrate that the feed in tariffs of 30 provinces range from 0 68 rmb kwh to 1 71 rmb kwh and the average level is 1 01 rmb kwh on this basis we find that the levels of sub regional feed in tariff announced in 2013 are no longer appropriate and should be adjusted as soon as possible we have also identified the implications of technological progress and carbon emission trading schemes as well as the importance of strengthening electricity transmission it has been suggested that the chinese government takes diverse measures including increasing research and development investment establishing and improving a nationwide carbon emission trading scheme and accelerating the construction of electricity transmission infrastructure to reduce the required feed in tariff and promote the development of solar photovoltaic power generation

risk based assessment of the cost efficiency and the effectivity of renewable energy support schemes certificate markets versus feed in tariffs the introduction of renewable energy sources in the electricity generation mix has the potential to reduce power sector s emissions and countries dependence on imported oil climate change concerns and highly volatile oil prices have attracted governments interest and support to sustain investments in renewable energy capacity and different support policies have been implemented in many countries around the world this paper analyzes the effects of investors risk aversion on the performance of support schemes the analysis compares two policy options a feed in tariff mechanism with a certificate market system results show that while a tariff mechanism could obtain better results than a certificate market its performance is strictly dependent on regulator choices a certificate market instead permits to obtain the desired level of renewable energy market share with good cost efficiency as long as investors risk aversion is moderate moreover discounting future cash flows with higher social discount rates further benefits a certificate system making it preferable to feed in tariffs

optimal design of feed in tariffs to stimulate renewable energy investments under regulatory uncertainty a real options analysis feed in tariffs fits are widely used as policy instruments to promote investments in renewable energy sources res while fits are often regarded as the most effective res support scheme regulators around the world continuously review their fit schemes in the light of budget constraints and evolving policy goals we assess the impact of adjustments to fit schemes by quantifying the relationship between fit levels i e the guaranteed amount paid per quantity of electricity produced and the propensity to invest in res through a regime switching model we quantify the impact of regulatory uncertainty induced by regulators considering moves from a fit scheme to a more market oriented regulatory regime our focus is on market independent fixed fits the dominant scheme in europe receiving increasing attention globally we find that res investment projects under market independent fixed fit schemes become now or never decisions and derive fit thresholds required to induce investment we show that uncertainty regarding future regulatory regimes delays or even reduces investment activity for fit levels near electricity market prices and high probabilities of an imminent regime switch

valuing chinese feed in tariffs program for solar power generation a real options analysis newhuadu business school research fund china sustainable energy program g 1305 18257 national social science foundation of china 12zd059 ministry of education 10gbj013

optimal wage indexation foreign exchange intervention and monetary policy this paper deals with the design of optimal monetary policy and with the interaction between the optimal degrees of wage indexation and foreign exchange intervention the model is governed by the characteristics of the stochastic shocks which affect the economy and by the information set that individuals possess because of cost of negotiations nominal wages are assumed to be precontracted and wage adjustments follow a simple indexation rule that links wage changes to observed changes in price the use of the price level as the only indicator for wage adjustments may not permit an efficient use of available information and may result in welfare loss the analysis specifies the optimal set of feedback rules that should govern policy aiming at the minimization of the welfare loss these feedback rules determine the optimal response of monetary policy to changes in exchange rates interest rates and foreign prices the adoption of the optimal set of feedback rules results in the complete elimination of the welfare cost arising from the simple indexation rule and from the existence of nominal contracts since optimal policies succeed in the elimination of the distortions issues concerning the nature of contracts and the implications of specific assumptions about disequilibrium positions become inconsequential the analysis then proceeds to examine the interdependence between the optimal feedback rules and the optimal degree of wage indexation it is shown that a rise in the degree of exchange rate flexibility raises the optimal degree of wage indexation one of the key conclusions is the proposition that the number of independent feedback rules that govern a policy must equal the number of independent sources of information that influence the determination of the undistorted equilibrium thus it is shown that with a sufficient number of feedback rules for monetary policy there may be no need to introduce wage indexation it is also shown that an economy that is not this abstract was borrowed from another version of this item

impact of climate policy uncertainty on the adoption of electricity generating technologies this paper presents a real options model where multiple options are evaluated simultaneously so that the effect of the individual options on each other is accounted for we apply this model to the electricity sector where we analyze three typical technologies based on fossil fuel fossil fuel with carbon capture and renewable energy respectively in this way we can analyze the transition from co2 intensive to co2 neutral electricity production in the face of rising and uncertain co2 prices in addition such a modelling approach enables us to estimate precisely the expected value of perfect information i e the willingness of investors and producers to pay for information about the correct co2 price path as can be expected the expected value of information rises with increasing co2 price uncertainty in addition the larger the price uncertainty the larger are the cumulative co2 emissions over the coming century the reason for this is that the transition to less co2 intensive technologies is increasingly postponed with rising co2 price uncertainty by testing different price processes geometric brownian motion versus jump processes with different jump frequencies we can also make useful recommendations concerning the importance of policy predictability we find that it is better to have climate change policies that are stable over a certain length of time and change abruptly than less abrupt but more frequently changing policies less frequent fluctuations reduce the expected value of information and result in smaller cumulative co2 emissions