THE CAPITAL MARKET VALUE OF A MULTIPERIOD INVESTMENT WITH THE OPTION OF PREMATURE ABANDONMENT

Conventional approaches to determining optimal abandonment of a project under uncertainty either assume risk-neutrality or impose a mean-variance criterion. Risk-neutrality is unrealistic while the mean-variance criterion precludes determination of the optimal strategy without consideration of covariances of returns among projects. Further, the use of variance of present value as a risk measure may result in the “optimality” of a time 0 strategy that involves maintaining a position at time t that will be “suboptimal” and would not be maintained. The use of the multiperiod capital asset pricing model (CAPM) as a decision criterion is consistent with contemporary theory of market behavior and remedies the deficiencies of the mean-variance approach noted above. Computationally, the optimal strategy for abandonment, when the commitment must be made at time 0 (a lease, say), can be determined with little difficulty beyond that of mean-variance models. When time of abandonment can remain unspecified, the value of the prospect that abandonment will occur at the optimal time can be determined, though the technique necessary is considerably more complicated. In both cases, the marginal costs of commitments that limit discretion over abandonment can be determined and attributed to those commitments.     

Illustration of a Method to Incorporate Preference Uncertainty in Benefit–Cost Analysis

Benefit–cost analysis is widely used to evaluate alternative courses of action that are designed to achieve policy objectives. Although many analyses take uncertainty into account, they typically only consider uncertainty about cost estimates and physical states of the world, whereas uncertainty about individual preferences, thus the benefit of policy intervention, is ignored. Here, we propose a strategy to integrate individual uncertainty about preferences into benefit–cost analysis using societal preference intervals, which are ranges of values over which it is unclear whether society as a whole should accept or reject an option. To illustrate the method, we use preferences for implementing a smart grid technology to sustain critical electricity demand during a 24‐hour regional power blackout on a hot summer weekend. Preferences were elicited from a convenience sample of residents in Allegheny County, Pennsylvania. This illustrative example shows that uncertainty in individual preferences, when aggregated to form societal preference intervals, can substantially change society's decision. We conclude with a discussion of where preference uncertainty comes from, how it might be reduced, and why incorporating unresolved preference uncertainty into benefit–cost analyses can be important.     

Fairness in Selling to the Newsvendor

This paper studies the impact of fairness concerns on supply chain performance (SCP) in the two‐party newsvendor setting. We extend prior fairness analysis to a wide range of demand distributions, and also allow the degree and definition of fairness to assume a broader range of preferences than those in prior literature. Contrary to prior literature, we find that if the retailer's ideal allocation to the supplier is not sufficiently large, regardless of demand variability, a fair‐minded retailer makes no difference to system efficiency when facing a traditional profit‐maximizing supplier. Only when the retailer's ideal allocation to the supplier is above a threshold can the retailer's fairness concern improve the system efficiency for sufficiently high demand uncertainty. In order for the retailer's fairness concern to improve expected profits of both parties compared to the traditional supply chain case (win–win), the demand uncertainty cannot be too low, the retailer is not very averse to disadvantageous inequity, and his ideal allocation to the supplier is within a specific range. If only the supplier is concerned for fairness, the results range from worsening to improving (but not coordinating) the system and a win–win situation is impossible. Finally, when both the supplier and retailer are fair‐minded, SCP is improved unless both parties prefer to allocate small portions of system profit to the other. Again, win–win will be achieved only when the demand uncertainty is sufficiently high, the retailer's ideal allocation is within a certain range, and he is not very averse to disadvantageous inequity.     

When Does a Retailer's Advance Selling Capability Benefit Manufacturer,Retailer, or Both?

Advance selling (AS) from a retailer to consumers is commonly observed in practice. With an AS capability, a retailer has the option to sell in advance or not. Having the AS option seems to increase flexibility and thus profit for a retailer. However, we show that the AS option can hurt the retailer's profit as well as supply chain performance. We identify two thresholds for a product's marginal production cost. A retailer's AS option benefits both the manufacturer and retailer when the marginal production cost is high, that is, above both thresholds. It benefits the manufacturer but hurts the retailer when the marginal production cost is moderate, that is, between the two thresholds. The result is ambiguous when the marginal production cost is low, that is, below both thresholds. We find that consumer valuation uncertainty under AS is the key driving force for the surprising result that having the retailer's AS option can hurt the retailer. When compared to the scenario where the retailer does not have the AS option, we find that the manufacturer's optimal wholesale price weakly decreases under the retailer's AS option if the marginal production cost is high. The statement is reversed if the marginal production cost is moderate or low.     

Nuclear Waste Management under Approaching Disaster: A Comparison of Decommissioning Strategies for the German Repository Asse II

This article compares different strategies for handling low‐ and medium‐level nuclear waste buried in a retired potassium mine in Germany (Asse II) that faces significant risk of uncontrollable brine intrusion and, hence, long‐term groundwater contamination. We survey the policy process that has resulted in the identification of three possible so‐called decommissioning options: complete backfilling, relocation of the waste to deeper levels in the mine, and retrieval. The selection of a decommissioning strategy must compare expected investment costs with expected social damage costs (economic, environmental, and health damage costs) caused by flooding and subsequent groundwater contamination. We apply a cost minimization approach that accounts for the uncertainty regarding the stability of the rock formation and the risk of an uncontrollable brine intrusion. Since economic and health impacts stretch out into the far future, we examine the impact of different discounting methods and rates. Due to parameter uncertainty, we conduct a sensitivity analysis concerning key assumptions. We find that retrieval, the currently preferred option by policymakers, has the lowest expected social damage costs for low discount rates. However, this advantage is overcompensated by higher expected investment costs. Considering all costs, backfilling is the best option for all discounting scenarios considered.     

具有技术许可联盟的R&D投资决策

本文开发了具有技术许可联盟的R&D投资决策模型。考虑了技术许可前后市场结构的变化,利用连续时间阈值自回归过程来模型这一非线性变化的特征,根据实物期权定价理论和博弈理论,给出了R&D投资项目的价值和最优投资规则。通过数值分析讨论了技术许可前后的收益期望增长率和不确定性以及许可合同中竞争者进入市场的时间参数对投资决策的影响。     

Review and Evaluation of the J100-10 Risk and Resilience Management Standard for Water and Wastewater Systems

Risk analysis standards are often employed to protect critical infrastructures, which are vital to a nation's security, economy, and safety of its citizens. We present an analysis framework for evaluating such standards and apply it to the J100-10 risk analysis standard for water and wastewater systems. In doing so, we identify gaps between practices recommended in the standard and the state of the art. While individual processes found within infrastructure risk analysis standards have been evaluated in the past, we present a foundational review and focus specifically on water systems. By highlighting both the conceptual shortcomings and practical limitations, we aim to prioritize the shortcomings needed to be addressed. Key findings from this study include (1) risk definitions fail to address notions of uncertainty, (2) the sole use of “worst reasonable case” assumptions can lead to mischaracterizations of risk, (3) analysis of risk and resilience at the threat-asset resolution ignores dependencies within the system, and (4) stakeholder values need to be assessed when balancing the tradeoffs between risk reduction and resilience enhancement.     

不确定环境下研发投资决策的期权博弈模型

假定产出价格(随机需求)服从带跳的几何布朗运动来模拟研发项目中突发事件和市场的不确定性特点,拓展了用几何布朗运动模拟市场不确定性的双寡头期权博弈模型,同时也是在带跳的几何布朗运动的实物期权方法中融入了竞争策略互动的影响.敏感性分析结果表明随着这两类不确定性的增大,参与双方进入门槛值都变大.突发事件带来的不确定提高会使得参与双方的期权价值降低,但是市场的不确定性变大对于追随者来说等待是有价值的,对领先者的期权价值的影响却是不定的.     

Economic Integration,International Capital Movements,and Labour Standards

Abstract. The paper develops a model where more integration initiates a movement towards the bottom of labour standards when increased integration enhances the flow of capital and so increases the marginal gain of a reduction in the strictness of standards. Moreover, a Pareto improving common international standard with higher strictness than in the Nash equilibrium can be negotiated among countries with the same preference for employed worker protection versus social efficiency. When preferences differ between countries, an agreed common or minimum strictness of labour standards will typically not be Pareto improving, but to the detriment of the country that gives less weight to the protection of employed workers. However, in this case there is also a Pareto improving solution, which raises the strictness of labour standards compared to the Nash equilibrium for both countries, but at the same time accepts different country standards reflecting their different preference.     

授权决策的期权特征与模型解析

本文利用实物期权方法对授权决策的核心问题——授权时机和授权对象的选择——进行了研究。首先分析了授权决策的期权特征,对授权决策中存在的实物期权进行了总结;然后构建了授权决策的实物期权模型,分别计算出了授权决策的期权价值和授权时员工对公司的人力资本价值,由此得出了一个可比性的授权决策标准,即临界业绩水平,从而简化了决策指标,提高了信息的利用率,使企业可以对特质各异的候选人进行准确比较,并分三种授权决策情形分别给出了决策方案,最后基于数值算例作出了进一步的解析。     

The Mirrlees Approach to Mechanism Design with Renegotiation (with Applications to Hold‐up and Risk Sharing)

The paper studies the implementation problem, first analyzed by Maskin and Moore (1999), in which two agents observe an unverifiable state of nature and may renegotiate inefficient outcomes following play of the mechanism. We develop a first‐order approach to characterizing the set of implementable utility mappings in this problem, paralleling Mirrlees's (1971) first‐order analysis of standard mechanism design problems. We use this characterization to study optimal contracting in hold‐up and risk‐sharing models. In particular, we examine when the contracting parties can optimally restrict attention to simple contracts, such as noncontingent contracts and option contracts (where only one agent sends a message).     

Seeking Closure: Competition in Complementary Markets*

When offering a product that has a complementary product in a different market, a firm must consider the interdependence between the complementary products as well as the competition within markets. If the firm participates in both markets, the balancing act becomes even more challenging. This article provides insights about strategies in this latter setting: when should the firm seek to keep its products closed to competing complementary products, and when would the firm be better off by accepting a common standard? To address these questions, we employ standard game theoretic analysis to a simple spatial model that captures aspects of both intermarket externalities and intramarket competition. We find that if a firm participates in both markets and chooses a closed standard, it achieves lower profits compared to an open standard, but gains greater market share. Surprisingly, we find that customers are better off when standards are kept closed.     

Contract Length as Risk Management When Labor is not Homogeneous

This paper examines the choice of contract length for workers who possess unique skills. Uncertainty, facing both the worker and the firm, creates an incentive to reallocate risk. The uncertainty arises from two sources: variation in the market value of the worker's human capital and fluctuation in the worker's physical production. Long‐term contracts are typically modeled as compensating wage differentials, or as a solution to the problem of asymmetric information. This paper develops a model proposing more complex behavior in the reallocation of risk between the contracting parties. The model shows that long‐term labor contracts are most likely to be observed when price uncertainty in the labor market exceeds the worker's productive uncertainty.     

The Effect of Neglecting Correlations When Propagating Uncertainty and Estimating the Population Distribution of Risk

Interest in examining both the uncertainty and variability in environmental health risk assessments has led to increased use of methods for propagating uncertainty. While a variety of approaches have been described, the advent of both powerful personal computers and commercially available simulation software have led to increased use of Monte Carlo simulation. Although most analysts and regulators are encouraged by these developments, some are concerned that Monte Carlo analysis is being applied uncritically. The validity of any analysis is contingent on the validity of the inputs to the analysis. In the propagation of uncertainty or variability, it is essential that the statistical distribution of input variables are properly specified. Furthermore, any dependencies among the input variables must be considered in the analysis. In light of the potential difficulty in specifying dependencies among input variables, it is useful to consider whether there exist rules of thumb as to when correlations can be safely ignored (i.e., when little overall precision is gained by an additional effort to improve upon an estimation of correlation). We make use of well-known error propagation formulas to develop expressions intended to aid the analyst in situations wherein normally and lognormally distributed variables are linearly correlated.     

Rush and Be Wrong or Wait and Be Late? A Model of Information in Collaborative Processes

Business processes have become more simultaneous and collaborative in the recent past. In simultaneous processes, multiple parties must adapt to one another in real time as decisions evolve. For example, New Product Development (NPD) requires collaboration in the context of Concurrent Engineering, and Supply Chain Management (SCM) in the context of collaborative planning. In both cases, parties must modify decisions based on preliminary information, information that is not fully precise or stable, about what the other parties are doing. This article develops a generalized model of real‐time decision making based on preliminary information, which applies both to NPD and SCM. The model offers insights into when to commit to a course of action, and we derive seven principles that help in dealing with preliminary information.     

A real options model of market entry: Endogenous uncertainty and exogenous uncertainty

We develop a real options model of market entry that focuses on the dueling growth and deferral options by differentiating between endogenous uncertainty and exogenous uncertainty. While exogenous uncertainty influences the growth option market value or price, it is endogenous uncertainty that influences the value of the growth option through the ability to create a competitive advantage from preemptive market entry. First, the firm can decrease the exercise price of the growth option (i.e., the cost of the follow-on investment) through experiential learning that reduces endogenous uncertainty. Second, the firm can increase the relative discounted cash flows of the follow-on investment due to its ability to influence market demand that reduces endogenous uncertainty. On the other hand, the value of the deferral option increases with exogenous uncertainty as firms cannot influence exogenous uncertainty, and therefore, should invest elsewhere while waiting for the exogenous uncertainty to subside. As such, we provide a solution to the conundrum that the value of both the growth option and the deferral option increase with uncertainty. Finally, we demonstrate how the model addresses sequential market entry; irreversibility and market entry mode; competition; scarce strategic resources; host country development level; and industry life cycle stage.     

THE BALANCED US PRESS

We measure the relative ideological positions of newspapers, voters, interest groups, and political parties, using data on ballot propositions. We exploit the fact that newspapers, parties, and interest groups take positions on these propositions, and the fact that citizens ultimately vote on them. We find that, on average, newspapers in the United States are located almost exactly at the median voter in their states—that is, they are balanced around the median voter. Still, there is a significant amount of ideological heterogeneity across newspapers, which is smaller than the one found for interest groups. However, when we group propositions by issue area, we find a sizable amount of ideological imbalance: broadly speaking, newspapers are to the left of the state‐level median voter on many social issues, and to the right on many economic issues. To complete the picture, we use two existing methods of measuring bias and show that the news and editorial sections of newspapers have almost identical partisan positions.     

Public Views on Drinking Water Standards as Risk Indicators

Government agencies often compare contaminant levels to standards and other regulatory benchmarks to convey relative risk to public audiences, as well as for enforcement. Yet we know little of how citizens interpret these risk indicators or factors influencing interpretations. Owners of private residential wells in New Jersey were surveyed by mail. A majority appreciated this comparison, trusted the standard, and could effectively compare the contaminant level to the standard. Most people who recalled that their own well water quality was unsatisfactory simply installed treatment systems. However, there was also a surprising amount of inability to tell whether pollution levels were better or worse than the standard, perhaps exacerbated by confusing institutional language to summarize the comparison (e.g., pollution “exceeds” or is “less than” the standard) and innumeracy. There was also substantial skepticism about the degree to which pollution levels below, or (to a lesser extent) above, the standard are harmless or harmful, respectively. Skepticism was variously due to distrust of standards, disbelief in thresholds for health effects, inability to accurately compare standards and contaminant levels, information processing, and demographics. Discontinuity in reactions below versus above the standard did not exist in the aggregate, and rarely among individuals, contrary to some previous findings. At identical standards and contaminant levels, familiar toxins (mercury, arsenic, lead) elicited higher risk ratings than less familiar ones. Given the wide institutional use of this risk indicator, further research on how to improve the design and use of this indicator, and consideration of alternatives, is warranted.     

A Stochastic Inventory Model With Fast‐Ship Commitments

We present a multiperiod model of a retail supply chain, consisting of a single supplier and a single retailer, in which regular replenishment occurs periodically but players have the option to support fast delivery when customers experience a stockout during a replenishment period. Because expedited shipments increase the supplier's transportation cost, and possibly production/inventory costs, the supplier typically charges a markup over and above the prevailing wholesale price for fast‐shipped items. When fast shipping is not supported, items are backordered if customers are willing to wait until the start of the next replenishment period. We characterize the retailers and the supplier's optimal stocking and production policies and then utilize our analytical framework to study how the two players respond to changes in supply chain parameters. We identify a sufficient condition such that the centralized supply chain is better off with the fast‐ship option. We find a range of markups for fast‐ship orders such that the fast‐ship option is preferred by both the supplier and the retailer in a decentralized chain. However, a markup that is a win–win for both players may not exist even when offering fast‐ship option is better for the centralized chain. Our analysis also shows that depending on how the markup is determined, greater customer participation in fast‐ship orders does not necessarily imply more profits for the two players. For some predetermined markups, the retailer's profit with the fast‐ship option is higher when more customers are willing to wait. However, the retailer may not be able to benefit from the fast‐ship option because the supplier may choose not to support the fast‐ship option when fast‐ship participation increases due to the fact that the fast‐ship participation rate adversely affects the initial order size.     

Estimates of the Health Risk Reductions Associated with Attainment of Alternative Particulate Matter Standards in Two U.S. Cities

As part of its periodic re-evaluation of particulate matter (PM) standards, the U.S. Environmental Protection Agency estimated the health risk reductions associated with attainment of alternative PM standards in two locations in the United States with relatively complete air quality data: Philadelphia and Los Angeles. PM standards at the time of the analysis were defined for particles of aerodynamic diameter less than or equal to 10 microm, denoted as PM-10. The risk analyses estimated the risk reductions that would be associated with changing from attainment of the PM-10 standards then in place to attainment of alternative standards using an indicator measuring fine particles, defined as those particles of aerodynamic diameter less than or equal to 2.5 microm and denoted as PM-2.5. Annual average PM-2.5 standards of 12.5, 15, and 20 microg/m3 were considered in various combinations with daily PM-2.5 standards of 50 and 65 microg/m3. Attainment of a standard or set of standards was simulated by a proportional rollback of "as is" daily PM concentrations to daily PM concentrations that would just meet the standard(s). The predicted reductions in the incidence of health effects varied from zero, for those alternative standards already being met, to substantial reductions of over 88% of all PM-associated incidence (e.g., in mortality associated with long-term exposures in Los Angeles, under attainment of an annual standard of 12.5 microg/m3). Sensitivity analyses and integrated uncertainty analyses assessed the multiple-source uncertainty surrounding estimates of risk reduction.