bluuebunny/crossref_metadata_2025 huggingface dataset:
Systemic Risk in Financial Systems
Authors: Eisenberg Larry , Noe Thomas H.
Published: December 2003

We consider default by firms that are part of a single clearing mechanism. The obligations of all firms within the system are determined simultaneously in a fashion consistent with the priority of debt claims and the limited liability of equity. We first show, via a fixed-point argument, that there always exists a “clearing payment vector” that clears the obligations of the members of the clearing system; under mild regularity conditions, this clearing vector is unique. Next, we develop an algorithm that both clears the financial system in a computationally efficient fashion and provides information on the systemic risk faced by the individual system firms. Finally, we produce qualitative comparative statics for financial systems. These comparative statics imply that, in contrast to single-firm results, even unsystematic, nondissipative shocks to the system will lower the total value of the system and may lower the value of the equity of some of the individual system firms.
Design for the Environment: A Quality-Based Model for Green Product Development
Authors: Chen Chialin
Published: December 2003

Green product development, which addresses environmental issues through product design and innovation as opposed to the traditional end-of-pipe-control approach, is receiving significant attention from customers, industries, and governments around the world. In this paper we develop a quality-based model for analyzing the strategic and policy issues concerning the development of products with conflicting traditional and environmental attributes. On the demand side of the problem, we use the framework of conjoint analysis to structure the preferences of the ordinary and green customers. On the supply side, we apply the theories in optimal product design and market segmentation to analyze the producer's strategic decisions regarding the number of products introduced and their prices and qualities. On the policy side, we evaluate the effects of environmental standards on the economic and environmental consequences of green product development. By jointly considering the interactions among the customers' preferences, the producer's product strategies, and the environmental standards imposed by governments, we present some interesting findings that can be used to manage and regulate the development of green products. Two major findings show that green product development and stricter environmental standards might not necessarily benefit the environment.
Generating Scenario Trees for Multistage Decision Problems
Authors: Høyland Kjetil , Wallace Stein W.
Published: December 2003

In models of decision making under uncertainty we often are faced with the problem of representing the uncertainties in a form suitable for quantitative models. If the uncertainties are expressed in terms of multivariate continuous distributions, or a discrete distribution with far too many outcomes, we normally face two possibilities: either creating a decision model with internal sampling, or trying to find a simple discrete approximation of the given distribution that serves as input to the model. This paper presents a method based on nonlinear programming that can be used to generate a limited number of discrete outcomes that satisfy specified statistical properties. Users are free to specify any statistical properties they find relevant, and the method can handle inconsistencies in the specifications. The basic idea is to minimize some measure of distance between the statistical properties of the generated outcomes and the specified properties. We illustrate the method by single- and multiple-period problems. The results are encouraging in that a limited number of generated outcomes indeed have statistical properties that are close to or equal to the specifications. We discuss how to verify that the relevant statistical properties are captured in these specifications, and argue that what are the relevant properties, will be problem dependent.
Sequential Testing in Product Development
Authors: Thomke Stefan , Bell David E.
Published: December 2003

A fundamental problem in managing product development is the optimal timing, frequency, and fidelity of sequential testing activities that are carried out to evaluate novel product concepts and designs. In this paper, we develop a mathematical model that treats testing as an activity that generates information about technical and customer-need related problems. An analysis of the model results in several important findings. First, optimal testing strategies need to balance the tension between several variables, including the increasing cost of redesign, the cost of a test as function of fidelity, and the correlation between sequential tests. Second, a simple form of our model results in an EOQ-like result: The optimal number of tests (called the Economic Testing Frequency or ETF) is the square root of the ratio of avoidable cost and the cost of a test. Third, the relationship between sequential tests can have an impact on optimal testing strategies. If sequential tests are increasing refinements of one another, managers should invest their budgets in a few high-fidelity tests, whereas if the tests identify problems independently of one another it may be more effective if developers carry out a higher number of lower-fidelity tests. Using examples, the implications for managerial practice are discussed and suggestions for further research undertakings are provided.
Modeling a Phone Center: Analysis of a Multichannel, Multiresource Processor Shared Loss System
Authors: Akşin O. Zeynep , Harker Patrick T.
Published: December 2003

This paper presents a model for the study of operations at an inbound call center. The call center is modeled as a multiclass processor shared loss system, where the interacting effects of human, telecommunication, and information technology resources are explicitly incorporated. Product form solutions and approximations for this type of system are provided along with expressions for performance measures like blocking and reneging. Some structural properties of system throughput are analyzed in an effort to pave the way for future optimization studies dealing with the design and management of phone centers.
Entrepreneurs, Contracts, and the Failure of Young Firms
Authors: Azoulay Pierre , Shane Scott
Published: December 2003

Although economic theory has emphasized that moral hazard and hold-up problems influence the design of contracts, very little is known about the process by which explicit contracts are established and the effect of contractual arrangements on firm performance. This paper attempts to demonstrate that firms are selected for survival on the basis of contracting efficiency. Based on a statistical analysis of 170 new franchise contracts and interviews with the founders of 16 of these new franchise systems, we show that new franchise chains that adopt exclusive territories are more likely to survive over time than chains that do not. Moreover, successful and failed entrepreneurs possess different information about how to design contracts. These entrepreneurs undertake “contractual experiments” based on the information they possess. Those whose experiments prove to be more consistent with economic theory are rewarded for their superior information with survival.
The Long-Run Stock Price Performance of Firms with Effective TQM Programs
Authors: Hendricks Kevin B. , Singhal Vinod R.
Published: December 2003

This paper documents the long-run stock price performance of firms with effective Total Quality Management (TQM) programs. The winning of quality awards is used as a proxy for effective TQM implementation. We compare stock price performance of award winners against various matched control groups for a five-year implementation period and a five-year postimplementation period. During the implementation period there is no difference in the stock price performance, but during the postimplementation period award winners significantly outperform firms in the various control groups. Depending on the control group used, the mean outperformance ranges from 38% to 46%. Our results clearly indicate that effective implementation of TQM principles and philosophies leads to significant wealth creation. Furthermore, our results should alleviate many of the concerns regarding the value of quality award systems. Overall, these systems are valuable in terms of recognizing TQM firms and promoting awareness of TQM.
March Madness and the Office Pool
Authors: Kaplan Edward H. , Garstka Stanley J.
Published: December 2003

March brings March Madness, the annual conclusion to the U.S. men's college basketball season with two single elimination basketball tournaments showcasing the best college teams in the country. Almost as mad is the plethora of office pools across the country where the object is to pick a priori as many game winners as possible in the tournament. More generally, the object in an office pool is to maximize total pool points, where different points are awarded for different correct winning predictions. We consider the structure of single elimination tournaments, and show how to efficiently calculate the mean and the variance of the number of correctly predicted wins (or more generally the total points earned in an office pool) for a given slate of predicted winners. We apply these results to both random and Markov tournaments. We then show how to determine optimal office pool predictions that maximize the expected number of points earned in the pool. Considering various Markov probability models for predicting game winners based on regular season performance, professional sports rankings, and Las Vegas betting odds, we compare our predictions with what actually happened in past NCAA and NIT tournaments. These models perform similarly, achieving overall prediction accuracies of about 58%, but do not surpass the simple strategy of picking the seeds when the goal is to pick as many game winners as possible. For a more sophisticated point structure, however, our models do outperform the strategy of picking the seeds.
Pricing Discrete Barrier and Hindsight Options with the Tridiagonal Probability Algorithm
Authors: Tse Wai Man , Li Leong Kwan , Ng Kai Wang
Published: December 2003

This paper develops an algorithm to calculate the Brownian multivariate normal probability subject to any preset error tolerance criteria. The algorithm is founded upon the computational simplicity of the tridiagonal structure of the inverse of the Brownian correlation matrix. Compared with existing pricing technologies without the “barrier too close” problem, our calculation method can produce a more accurate and efficient analytic evaluation of barrier options monitored at discrete instants with well- or ill-behaved barrier levels, or discrete hindsight options, for a reasonably large number of monitorings.
One Size Does Not Fit All Projects: Exploring Classical Contingency Domains
Authors: Shenhar Aaron J.
Published: December 2003

Not many authors have attempted to classify projects according to any specific scheme, and those who have tried rarely offered extensive empirical evidence. From a theoretical perspective, a traditional distinction between radical and incremental innovation has often been used in the literature of innovation, and has created the basis for many classical contingency studies. Similar concepts, however, did not become standard in the literature of projects, and it seems that theory development in project management is still in its early years. As a result, most project management literature still assumes that all projects are fundamentally similar and that “one size fits all.” The purpose of this exploratory research is to show how different types of projects are managed in different ways, and to explore the domain of traditional contingency theory in the more modern world of projects. This two-step research is using a combination of qualitative and quantitative methods and two data sets to suggest a conceptual, two-dimensional construct model for the classification of technical projects and for the investigation of project contingencies. Within this framework, projects are classified into four levels of technological uncertainty, and into three levels of system complexity, according to a hierarchy of systems and subsystems. The study provides two types of implications. For project leadership it shows why and how management should adapt a more project-specific style. For theory development, it offers a collection of insights that seem relevant to the world of projects as temporary organizations, but are, at times, different from classical structural contingency theory paradigms in enduring organizations. While still exploratory in nature, this study attempts to suggest new inroads to the future study of modern project domains.
Managing Inventory with Multiple Products, Lags in Delivery, Resource Constraints, and Lost Sales: A Mathematical Programming Approach
Authors: Downs Brian , Metters Richard , Semple John
Published: December 2003

This paper develops an order-up-to S inventory model that is designed to handle multiple items, resource constraints, lags in delivery, and lost sales without sacrificing computational simplicity. Mild conditions are shown to ensure that the expected average holding cost and the expected average shortage cost are separable convex functions of the order-up-to levels. We develop nonparametric estimates of these costs and use them in conjunction with linear programming to produce what is termed the “LP policy.” The LP policy has two major advantages over traditional methods: first, it can be computed in complex environments such as the one described above; and second, it does not require an explicit functional form of demand, something that is difficult to specify accurately in practice. In two numerical experiments designed so that optimal policies could be computed, the LP policy fared well, differing from the optimal profit by an average of 2.20% and 1.84%, respectively. These results compare quite favorably with the errors incurred in traditional methods when a correctly specified distribution uses estimated parameters. Our findings support the effectiveness of this mathematical programming technique for approximating complex, real-world inventory control problems.
Sequencing JIT Mixed-Model Assembly Lines Under Station-Load and Part-Usage Constraints
Authors: Drexl Andreas , Kimms Alf
Published: December 2003

This paper deals with two most important problems, from both practical and theoretical standpoints, arising in sequencing mixed-model assembly lines. Such lines have become core components of modern repetitive manufacturing, and just-in-time (JIT) manufacturing in particular. One problem is to keep the usage rate of all parts fed into the final assembly as constant as possible (the “level-scheduling problem”), while the other is to keep the line's workstation loads as constant as possible (the “car-sequencing problem”). In this paper the combined problem is formulated as a single-integer programming model. The LP-relaxation of this model is solved by column-generation techniques. The results of an experimental evaluation show that the lower bounds are tight.
Capacitated Multi-Item Inventory Systems with Random and Seasonally Fluctuating Demands: Implications for Postponement Strategies
Authors: Aviv Yossi , Federgruen Awi
Published: December 2003

We address multi-item inventory systems with random and seasonally fluctuating, and possibly correlated, demands. The items are produced in two stages, each with its own lead-time; in the first stage a common intermediate product is manufactured. The production volumes in the first stage are bounded by given capacity limits. We develop an accurate lower bound and close-to-optimal heuristic strategies of simple structure. The gap between them, evaluated in an extensive numerical study, is on average only 0.45%. We use the model to investigate the benefits of various delayed product differentiation (postponement) strategies, as well as other strategic questions, including (i) the benefits of flexible versus dedicated production facilities; (ii) the trade-off between capacity and inventory investments; and (iii) the trade-off between capacity investments and service levels.
Sharing and Lateral Transshipment of Inventory in a Supply Chain with Expensive Low-Demand Items
Authors: Grahovac Jovan , Chakravarty Amiya
Published: December 2003

The emergence of carriers that deliver items to geographically dispersed destinations quickly and at a reasonable cost, combined with the low cost of sharing information through networked databases, has opened up new opportunities to better manage inventory. We investigate these benefits in the context of a supply chain in which a manufacturer supplies expensive, low-demand items to vertically integrated or autonomous retailers via one central depot. The manufacturer's lead time is assumed to be due to the geographical distance from the market or a combination of low volumes, high variety, and inflexible production processes. We formulate and solve an appropriate mathematical model based on one-for-one inventory policies in which a replenishment order is placed as soon as the customer withdraws an item. We find that sharing and transshipment of items often, but not always, reduces the overall costs of holding, shipping, and waiting for inventory. Unexpectedly, these cost reductions are sometimes achieved through increasing overall inventory levels in the supply chain. Finally, while sharing of inventory typically benefits all the participants in decentralized supply chains, this is not necessarily the case—sharing can hurt the distributor or individual retailers, regardless of their relative power in the supply chain.
A Generalized Model of Operations Reversal for Fashion Goods
Authors: Jain Nikhil , Paul Anand
Published: December 2003

Operations reversal is a process design principle that involves switching two consecutive stages of the manufacturing process to improve process performance. In this paper we investigate conditions under which operations reversal can be used to reduce the variability—as measured by the variance and standard deviation—of production volumes at the intermediate stage of the manufacturing process. We generalize the operations reversal model of Lee and Tang (1998) to explicitly incorporate two important characteristics of fashion goods markets: heterogeneity among customers and unpredictability of customer preferences. We also present a new approach to modeling the operations reversal problem.
Information Sharing in a Supply Chain: A Note on its Value when Demand Is Nonstationary
Authors: Raghunathan Srinivasan
Published: December 2003

In a recent paper, Lee, So, and Tang (2000) showed that in a two-level supply chain with non-stationary AR(1) end demand, the manufacturer benefits significantly when the retailer shares point-of-sale (POS) demand data. We show in this paper, analytically and through simulation, that the manufacturer's benefit is insignificant when the parameters of the AR(1) process are known to both parties, as in Lee, So, and Tang (LST). The key reason for the difference between our results and those of LST is that LST assume that the manufacturer also uses an AR(1) process to forecast the retailer order quantity. However, the manufacturer can reduce the variance of its forecast further by using the entire order history to which it has access. Thus, when intelligent use of already available internal information (order history) suffices, there is no need to invest in interorganizational systems for information sharing.
Contracting to Assure Supply: How to Share Demand Forecasts in a Supply Chain
Authors: Cachon Gérard P. , Lariviere Martin A.
Published: December 2003

Forecast sharing is studied in a supply chain with a manufacturer that faces stochastic demand for a single product and a supplier that is the sole source for a critical component. The following sequence of events occurs: the manufacturer provides her initial forecast to the supplier along with a contract, the supplier constructs capacity (if he accepts the contract), the manufacturer receives an updated forecast and submits a final order. Two contract compliance regimes are considered. If the supplier accepts the contract under forced compliance then he has little flexibility with respect to his capacity choice; under voluntary compliance, however, he maintains substantial flexibility. Optimal supply chain performance requires the manufacturer to share her initial forecast truthfully, but she has an incentive to inflate her forecast to induce the supplier to build more capacity. The supplier is aware of this bias, and so may not trust the manufacturer's forecast, harming supply chain performance. We study contracts that allow the supply chain to share demand forecasts credibly under either compliance regime.
Managerial Allocation of Time and Effort: The Effects of Interruptions
Authors: Seshadri Sridhar , Shapira Zur
Published: December 2003

Time is one of the more salient constraints on managerial behavior. This constraint may be very taxing in high-velocity environments where managers have to attend to many tasks simultaneously. Earlier work by Radner (1976) proposed models based on notions of the thermostat or “putting out fires” to guide managerial time and effort allocation among tasks. We link these ideas to the issue of the level of complexity of the tasks to be attended to while alluding to the sequential versus parallel modes of processing. We develop a stochastic model to analyze the behavior of a manager who has to attend to a few short-term processes while attempting to devote as much time as possible to the pursuit of a long-term project. A major aspect of this problem is how the manager deals with interruptions. Different rules of attention allocation are proposed, and their implications to managerial behavior are discussed.
Coordination Mechanisms for a Distribution System with One Supplier and Multiple Retailers
Authors: Chen Fangruo , Federgruen Awi , Zheng Yu-Sheng
Published: December 2003

We address a fundamental two-echelon distribution system in which the sales volumes of the retailers are endogenously determined on the basis of known demand functions. Specifically, this paper studies a distribution channel where a supplier distributes a single product to retailers, who in turn sell the product to consumers. The demand in each retail market arrives continuously at a constant rate that is a general decreasing function of the retail price in the market. We have characterized an optimal strategy, maximizing total systemwide profits in a centralized system. We have also shown that the same optimum level of channelwide profits can be achieved in a decentralized system, but only if coordination is achieved via periodically charged, fixed fees, and a nontraditional discount pricing scheme under which the discount given to a retailer is the sum of three discount components based on the retailer's (i) annual sales volume, (ii) order quantity, and (iii) order frequency, respectively. Moreover, we show that no (traditional) discount scheme, based on order quantities only, suffices to optimize channelwide profits when there are multiple nonidentical retailers. The paper also considers a scenario where the channel members fail to coordinate their decisions and provides numerical examples that illustrate the value of coordination. We extend our results to settings in which the retailers' holding cost rates depend on the wholesale price.
Producer-Supplier Contracts with Incomplete Information
Authors: Lim Wei Shi
Published: December 2003

This paper investigates the contract design problem of a producer when he purchases parts from a supplier, and there is incomplete information regarding the quality of the parts. This is the first game-theoretic model of quality control that captures this informational asymmetry. We focus on two compensation schemes embedded in the contract, namely, price rebate (when inspection is done upon receipt of the parts) and warranty. We show that when a full-price rebate is not possible and the producer and the supplier have to share the damage costs, an optimal contract is such that the supplier compensates the producer by the same amount, regardless of his quality type. However, a supplier with low quality is more likely to be offered a contract with an inspection scheme, while a supplier with high quality is constrained with a warranty scheme. We also show that when the producer need not share the cost in exactly one of the compensation schemes, he may still offer the other compensation scheme to a supplier type depending on the relative costs involved, the maximum compensation cost acceptable by all supplier types, and his ex ante beliefs about the quality level of the supplier.
Outcomes-Adjusted Reimbursement in a Health-Care Delivery System
Authors: Fuloria Prashant C. , Zenios Stefanos A.
Published: December 2003

This paper considers a health-care delivery system with two noncooperative parties: a purchaser of medical services and a specialized provider. A dynamic principal-agent model that captures the interaction between the two parties is developed. In this model, patients arrive exogenously, receive periodic treatment from the provider, suffer costly complications that require hospital care, and eventually exit the system in death. The provider chooses the intensity of treatment in each period, incurs an associated cost, and is reimbursed by the purchaser according to observed patient outcomes. The purchaser's problem is to determine a payment system that will induce treatment choices maximizing total social welfare. The optimal payment system, referred to as the outcomes-adjusted payment system, is identified. It consists of a prospective payment per patient and a retrospective payment adjustment based on adverse short-term patient outcomes. This system induces the most efficient delivery of medical services by combining the immediate “threat” of a retrospective payment adjustment with the future reward of prospective payments generated by surviving patients. A numerical example is provided in the context of Medicare's End-Stage Renal Disease program. The example compares the optimal system to systems that are currently in place. The results suggest that the purchaser can achieve significant gains in patient life expectancy by switching to the outcomes-adjusted payment system, but this requires accurate information about treatment technology, patient characteristics, and provider preferences. The life-expectancy gains do not involve increased medical expenditures.
Procurement Planning to Maintain Both Short-Term Adaptiveness and Long-Term Perspective
Authors: Bonser Jewel S. , Wu S. David
Published: December 2003

We study the fuel procurement problem for electrical utilities under uncertain demand and market price. Long-term contractual supply commitments are made at a set price with fuel suppliers at the beginning of each year. Each month the procurement planner can use fuel from these contracts or purchase fuel at the current market price. Motivated by practical insights from this market, we propose a two-phase dynamic procedure to determine a procurement plan. In the first phase, the minimum contract purchases for each month are determined at the beginning of the year. In the second phase, given the minimum contract purchases, the more detailed procurement decisions are determined at the beginning of each month with the most up-to-date information. We perform intensive computational experiments that show that this procedure produces high-quality solutions comparable to a rolling-horizon stochastic-programming heuristic, is easier to maintain and generalize, is computationally faster, and is robust to random fluctuations in demand requirements, spot market prices, and other sources of uncertainty.
Implementable Mechanisms to Coordinate Horizontal Alliances
Authors: Nault Barrie R. , Tyagi Rajeev K.
Published: December 2003

Unprecedented changes in the economics of interaction, mainly as a result of advances in information and telecommunication technologies such as the Internet, are causing a shift toward more networked forms of organizations such as horizontal alliances—that is, alliances among firms in similar businesses that have positive externalities between them. Because the success of such horizontal alliances depends crucially on aligning individual alliance-member incentives with those of the alliance as a whole, it is important to find coordination mechanisms that achieve this alignment and are simple-to-implement. In this paper, we examine two simple coordination mechanisms for a horizontal alliance characterized by the following features: (i) firms in the alliance can exert effort only in their “local” markets to increase customer demand for the alliance; (ii) customers are mobile and a customer living in a given alliance member's local area may have a need to buy from some other alliance member; and (iii) the coordination rules followed by the alliance determine which firms from a large pool of potential member-firms join the alliance, and how much effort each firm joining the alliance exerts in its local market. In this horizontal alliance setup, we consider the use of two coordination mechanisms: (i) a linear transfer of fees between members if demand from one member's local customer is served by another member, and (ii) ownership of an equal share of the alliance profits generated from a royalty on each member's sales. We derive conditions on the distribution of demand externalities among alliance members to determine when each coordination mechanism should be used separately, and when the mechanisms should be used together.
A Multiple Attribute Utility Theory Approach to Ranking and Selection
Authors: Butler John , Morrice Douglas J. , Mullarkey Peter W.
Published: December 2003

Managers of large industrial projects often measure performance by multiple attributes. For example, our paper is motivated by the simulation of a large industrial project called a land seismic survey, in which project performance is based on duration, cost, and resource utilization. To address these types of problems, we develop a ranking and selection procedure for making comparisons of systems (e.g., project configurations) that have multiple performance measures. The procedure combines multiple attribute utility theory with statistical ranking and selection to select the best configuration from a set of possible configurations using the indifference-zone approach. We apply our procedure to results generated by the simulator for a land seismic survey that has six performance measures, and describe a particular type of sensitivity analysis that can be used as a robustness check.
A Nested Decomposition Approach to a Three-Stage, Two-Dimensional Cutting-Stock Problem
Authors: Vanderbeck François
Published: December 2003

We consider the cutting of rectangular order pieces into stock pieces of specified width and length. The cutting process involves three stages of orthogonal guillotine cutting: Stock pieces are cut into sections that are cut into slits that are cut into order pieces. Restrictions imposed on the cutting process make the combinatorial structure of the problem more complex, but limit the scope of solution space. The objective of the problem is mainly to minimize waste, but our model also accounts for other issues such as aging stock pieces, urgent or optional orders, and fixed setup costs. Our solution approach involves a nested decomposition of the problem and the recursive use of the column-generation technique: We use a column-generation formulation of the problem (Gilmore and Gomory 1965) and the cutting-pattern—generation subproblem is itself solved using a column-generation algorithm. LP-based lower bounds on the minimum cost are computed and, by rounding the LP solution, a feasible solution and associated upper bound is obtained. This approach could in principle be used in a branch-and-bound search to solve the problem to optimality. We report computational results for industrial instances. The algorithm is being used in industry as a production-planning tool.
Shared-Savings Contracts for Indirect Materials in Supply Chains: Channel Profits and Environmental Impacts
Authors: Corbett Charles J. , DeCroix Gregory A.
Published: December 2003

There are many materials for which the quantity needed by a firm is at best indirectly related to the quantity of final product produced by that firm, such as solvents in manufacturing processes or office supplies. For any such “indirect” materials, an inescapable incentive conflict exists: The buyer wishes to minimize consumption of these indirect materials, while the supplier's profits depend on increasing volume. Both buyer and supplier can exert effort to reduce consumption, hence making the overall supply chain more efficient. However, no supplier will voluntarily participate unless contract terms are fundamentally revised. This can be done through a variety of “shared-savings” contracts, where both parties profit from a consumption reduction. This paper analyzes several such contracts currently in use for chemicals purchasing. We show that such contracts can always increase supply-chain profits but need not lead to reduced consumption. We analyze equilibrium effort levels, consumption, and total profits, and show how these change with the contract parameters. We find that the goals of maximizing joint profits and minimizing consumption are generally not aligned. Also, surprisingly, a decrease in a cost parameter can lead to a decrease in profits; it may be necessary (but is always possible) to renegotiate the shared-savings contract to reap the benefits of a cost decrease.
Future Capacity Procurements Under Unknown Demand and Increasing Costs
Authors: Burnetas Apostolos , Gilbert Stephen
Published: December 2003

In this paper we study a situation in which a broker must manage the procurement of a short-life-cycle product. As the broker observes demand for the item, she learns about the demand process. However, as is often the case in practice, it becomes either more difficult or more expensive to procure the item as the selling season advances. Thus, the broker must trade off higher procurement costs against the benefit of making ordering decisions with better information about demand. Problems of this type arise, for example, in the travel industry, where a travel agent's cost of procuring airline and hotel reservations increases as the date of a vacation package approaches. We develop a newsvendor-like characterization of the optimal procurement policy. In a numerical analysis, we demonstrate how broker procurements tend to cluster just before price increases and how brokers can benefit from explicitly considering the effects of information about demand in their ordering policies.
Contingent Labor Contracting Under Demand and Supply Uncertainty
Authors: Milner Joseph M. , Pinker Edieal J.
Published: December 2003

Firms increasingly use contingent labor to flexibly respond to demand in many environments. Labor supply agencies are growing to fill this need. As a result, firms and agencies are engaging in long-term contracts for labor supply. We develop mathematical models of the interaction between firms and labor supply agencies when demand and supply are uncertain. We consider two models of labor supply uncertainty, termed productivity and availability uncertainty, and study how each affects the nature of the contracts formed. These models reflect two major roles played by the labor supply agency. In the case of productivity uncertainty we find that it is possible to construct a contract that coordinates the firm and agency hiring in an optimal way. In contrast, we show that in environments characterized by availability uncertainty, optimal contracts are not possible. However, there is a large range of contract parameters for which both parties would benefit from a contract. We analyze these and discuss the trade-offs that should be considered in contract negotiation.
Exchange Rates and the Choice of Ownership Structure of Production Facilities
Authors: Kouvelis Panos , Axarloglou Kostas , Sinha Vikas
Published: December 2003

The aim of this research is to study the effects of real exchange rates on the long-term ownership strategies of production facilities of firms entering foreign markets. Among the strategies considered are exporting (EXP), joint ventures with local partners (JV), and wholly owned production facilities (WOS) in the foreign country. Our research takes a first step in modeling the influence of exchange rates on the choice and dynamic adjustment of such strategies. The insights obtained from our modeling analysis are then translated into testable hypotheses and empirically verified with the use of firm level data from U.S. multinational corporations (both at the firm and a more aggregate level). An insightful result of our model is the identification of a hysteresis phenomenon that characterizes switching behavior between strategies in the presence of switchover cost. The magnitude of the hysteresis band, which is a measure of the inertia associated with keeping the current ownership structure, is affected by a multiplicity of factors such as exchange rate volatility and market power of the entering firm. Analytical and numerical results on the effects of such factors on the hysteresis band are provided. The four testable hypotheses generated from our modeling analysis are rigorously tested with the use of a multinomial logit model on data obtained from the Harvard Multinational Enterprise database, and a data set maintained by the Bureau of Economic Analysis, the U.S. Department of Commerce. The empirical results strongly support our insights that relatively depreciated real exchange rates (i.e., weak home currency) favor (a) the JV over the WOS and (b) EXP mode over the WOS or JV. Finally, we summarize our results into useful guidelines for global production managers.
On Maximizing the Net Present Value of a Project Under Renewable Resource Constraints
Authors: Vanhoucke Mario , Demeulemeester Erik , Herroelen Willy
Published: December 2003

In this paper we study the resource-constrained project-scheduling problem with discounted cash flows. Each activity of this resource-constrained project-scheduling problem has certain resource requirements and a known deterministic cash flow that can be either positive or negative. Deterministic cash flows are assumed to occur over the duration of the activities. Progress payments and cash outflows occur at the completion of activities. The objective is to schedule the activities subject to a fixed deadline to maximize the net present value subject to the precedence and resource constraints. With these features the financial aspects of project management are taken into account.We introduce a depth-first branch-and-bound algorithm that makes use of extra precedence relations to resolve a number of resource conflicts and a fast recursive search algorithm for the max-npv problem to compute upper bounds. The recursive search algorithm exploits the idea that positive cash flows should be scheduled as early as possible while negative cash flows should be scheduled as late as possible within the precedence constraints. The procedure has been coded in Visual C++, Version 4.0 under Windows NT, and has been validated on two problem sets.
Asymptotic Distribution of the EMS Option Price Estimator
Authors: Duan Jin-Chuan , Gauthier Geneviève , Simonato Jean-Guy
Published: December 2003

Monte Carlo simulation is commonly used for computing prices of derivative securities when an analytical solution does not exist. Recently, a new simulation technique known as empirical martingale simulation (EMS) has been proposed by Duan and Simonato (1998) as a way of improving simulation accuracy. EMS has one drawback however. Because of the dependency among sample paths created by the EMS adjustment, the standard error of the price estimate is not readily available from using one simulation sample. In this paper, we develop a scheme to estimate the EMS accuracy. The EMS price estimator is first shown to have an asymptotically normal distribution. Through a simulation study, we then find that the asymptotic normal distribution serves as a good approximation for samples consisting of as few as 500 simulation paths.
Technology Regimes and New Firm Formation
Authors: Shane Scott
Published: December 2003

At least since Schumpeter (1934 and 1942), researchers have been interested in identifying the dimensions of technology regimes that facilitate new firm formation as a mode of technology exploitation. Using data on 1,397 patents assigned to the Massachusetts Institute of Technology during the 1980-1996 period, I show that four hypothesized dimensions of the technology regime—the age of the technical field, the tendency of the market toward segmentation, the effectiveness of patents, and the importance of complementary assets in marketing and distribution—influence the likelihood that new technology will be exploited through firm formation.
Optimal Investment in Knowledge Within a Firm Using a Market Mechanism
Authors: Ba Sulin , Stallaert Jan , Whinston Andrew B.
Published: December 2003

There has been an extensive research literature on auctions, but recent developments in technology have resulted in new interest in auction mechanisms as a practical way of allocating resources. This paper presents a new double-auction mechanism to handle resource allocation for public goods when complementarity exists.

The mechanism is placed in the context of an organization's internal knowledge investment. Knowledge goods have two distinct characteristics. First, knowledge within an organization can be considered a public good, so it is subject to the free-rider problem. Second, knowledge is interrelated and interdependent; that is, there is complementarity among knowledge components. The value of knowledge often derives from a bundle of knowledge components, rather than from its individual pieces. These two characteristics present a serious challenge to allocating organizational resources for knowledge goods.

We introduce an internal market in which knowledge providers offer knowledge projects and knowledge consumers place bids to acquire them. The mechanism is a Groves-Clarke-type double auction that allows bundled knowledge goods to be traded so as to recognize complementarities between knowledge projects. The market mechanism we propose is incentive compatible; i.e., it induces people to reveal their true valuation. In addition, it allows trades of knowledge bundles to determine which knowledge components are most valuable from the organization's viewpoint. Under mild assumptions, the mechanism is a computationally tractable solution to operating a market of bundled public goods. We further show how “imputed prices” can be calculated for subsets of knowledge components and prove that a market mechanism that does not allow bundle orders or does not address the free-rider problem yields a systematic underinvestment in knowledge.
Gale-Shapley Stable Marriage Problem Revisited: Strategic Issues and Applications
Authors: Teo Chung-Piaw , Sethuraman Jay , Tan Wee-Peng
Published: December 2003

We study strategic issues in the Gale-Shapley stable marriage model. In the first part of the paper, we derive the optimal cheating strategy and show that it is not always possible for a woman to recover her women-optimal stable partner from the men-optimal stable matching mechanism when she can only cheat by permuting her preferences. In fact, we show, using simulation, that the chances that a woman can benefit from cheating are slim. In the second part of the paper, we consider a two-sided matching market found in Singapore. We study the matching mechanism used by the Ministry of Education (MOE) in the placement of primary six students in secondary schools, and discuss why the current method has limited success in accommodating the preferences of the students, and the specific needs of the schools (in terms of the “mix” of admitted students). Using insights from the first part of the paper, we show that stable matching mechanisms are more appropriate in this matching market and explain why the strategic behavior of the students need not be a major concern.
A Note on Stock Replenishment and Shipment Scheduling for Vendor-Managed Inventory Systems
Authors: Axsäter Sven
Published: December 2003

In a recent paper, Cetinkaya and Lee (2000) model integrated inventory control and shipment scheduling in connection with vendor-managed inventory (VMI). The model is optimized by an approximate technique. This note provides a simple procedure for exact optimization, and illustrates that the errors when using the suggested approximate technique may be very large for certain types of problems. We also suggest a new approximation and an adjustment that can be used to improve both the original and new heuristic.
Equity and the Technology Transfer Strategies of American Research Universities
Authors: Feldman Maryann , Feller Irwin , Bercovitz Janet , Burton Richard
Published: December 2003

American universities are experimenting with new mechanisms for promoting the commercialization of academic research and generating revenue from university intellectual property. This paper discusses mechanisms available to universities in managing the commercialization of intellectual property, considering equity as a technology transfer mechanism that offers advantages for both generating revenue and aligning the interests of universities, industry and faculty. Employing data from a national survey of Carnegie I and Carnegie II institutions, we document the recent rise in university equity holdings. We present and estimate a model that considers the university's use of equity to be a function of behavioral factors related to the university's prior experiences with licensing, success relative to other institutions, and the organization of the technology transfer office, as well as structural characteristics related to university type.
Selling University Technology: Patterns from MIT
Authors: Shane Scott
Published: December 2003

Many research universities engage in efforts to license inventions developed by university-affiliated inventors. However, no systematic explanation of the conditions under which university inventions will be licensed or commercialized has been provided. Drawing on transaction cost economics, I provide a conceptual framework to explain which university inventions are most likely to be licensed, commercialized, and generate royalties, and who will undertake that commercialization. I test this framework on data on the 1,397 patents assigned to the Massachusetts Institute of Technology during the 1980-1996 period. The results showthat (1) university inventions are more likely to be licensed when patents are effective; (2) when patents are effective, university technology is generally licensed to noninventors; (3) when patents are effective, licensing back to inventors increases the likelihood of license termination and reduces the likelihood of invention commercialization; and (4) the effectiveness of patents increases royalties earned for inventions licensed to noninventors. The implications of these findings for innovation management and strategy, entrepreneurship, and university technology commercialization are discussed.