Do Shareholders Really Prefer Their Executives to Maximize the Equity Value? A Newsvendor Case*

In this article, we study how the operational decisions of a firm manager depend on her own incentives, the capital structure, and financial decisions in the context of the newsvendor framework. We establish a relationship between the firm’s cost of raising funds and the riskiness of the inventory decisions of the manager. We consider four types of managers, namely, profit, equity, firm value, and profit‐equity maximizers, and initially assume that they may raise funds to increase the inventory level only by issuing debt. We show that the shareholders are indifferent between the different types of managers when the coefficient of variation (CV) of demand is low. However, this is not the case when the CV of demand is high. Based on the demand and the firm’s specific characteristics such as profitability, leverage, and bankruptcy costs, the shareholders might be better off with the manager whose compensation package is tied to the firm value as opposed to the equity value. We, then, extend our model by allowing the manager to raise the required funds by issuing both debt and equity. For this case we focus on the equity and firm value maximizer managers and show that our earlier results (for the debt only case) still hold subject to the cost of issuing equity. However the benefit of the firm value maximizer manager over the equity maximizer manager for shareholders is considerably less in this case compared to the case where the manager can only issue debt. The Board of Directors can take these factors into consideration when establishing/modifying the right incentive package for the managers. We also incorporate the notion of the asymmetric information to capture its impact on the board of directors’ decision about the managers’ incentive package.     

Social signals as design interventions for enhancing citizen science contributions*

Despite the scientific potential and increasing popularity of web-based citizen science, low contribution from volunteers is often a major hurdle. Studies have shown that individual behavior could be altered through targeted design interventions, but little is known about the specific factors that modulate volunteers’ contributions. A particularly elusive question entails the role of social feedback, in the form of targeted notifications about the contribution of other volunteers. Based on social comparison theory, we hypothesized that (1) volunteers increase contribution when presented with information about a high-performing peer or group, and (2) volunteers conform more strongly to a group rather than to a single peer. To test whether volunteers’ contributions change due to the exposure to the contribution of a peer or group norm, we systematically varied the information presented to participants in an environmental monitoring citizen science project. Volunteers increased their contributions when they were presented with the contribution of a high-performing peer and norm, but they were not influenced by a low-performing peer or norm. Further, we found that volunteers were more likely to match the contributions of a group than that of a peer. However, when volunteers were simultaneously exposed to information about a peer and a group, the effect depended on the respective performance of the peer and group. A theoretical model was developed to explain volunteers’ response and dissect the specific role of social comparison. Our findings offer the possibility of increasing volunteers’ contributions through design interventions.     

A management consulting view on the statistical consulting process

In an earlier contribution to this journal, Kauermann and Weihs (Adv. Stat. Anal. 91(4):344 2007) addressed the lack of procedural understanding in statistical consulting: “Even though there seems to be a consensus that statistical consulting should be well structured and target-orientated, the range of activity and the process itself seem to be less well-understood.” While this issue appears to be rather new to statistical consultants, other consulting disciplines—in particular management consultants—have long come up with a viable approach that divides the typical consulting process into seven successive steps. Using this model as a frame allows for reflecting the approaches on statistical consulting suggested by authors published in AStA volume 91, number 4, and for adding value to statistical consulting in general.     

Experiments with cooperative 2 × 2 games

Nash's solution of a two-person cooperative game prescribes a coordinated mixed strategy solution involving Pareto-optimal outcomes of the game. Testing this normative solution experimentally presents problems in as much as rather detailed explanations must be given to the subjects of the meaning of threat strategy, strategy mixture, expected payoff, etc. To the extent that it is desired to test the solution using naive subjects, the problem arises of imparting to them a minimal level of understanding about the issue involved in the game without actually suggesting the solution.Experiments were performed to test the properties of the solution of a cooperative two-person game as these are embodied in three of Nash's four axioms: Symmetry, Pareto-optimality, and Invariance with respect to positive linear transformations. Of these, the last was definitely discorroborated, suggesting that interpersonal comparison of utilities plays an important part in the negotiations.Some evidence was also found for a conjecture generated by previous experiments, namely that an externally imposed threat (penalty for non-cooperation) tends to bring the players closer together than the threats generated by the subjects themselves in the process of negotiation.     

How Should a Firm Manage Deteriorating Inventory?

Firms selling goods whose quality level deteriorates over time often face difficult decisions when unsold inventory remains. Since the leftover product is often perceived to be of lower quality than the new product, carrying it over offers the firm a second selling opportunity, a product line extension to new and unsold units, and the ability to price discriminate. By doing so, however, the firm subjects sales of its new product to competition from the leftover product. We present a two period model that captures the effect of this competition on the firm's production and pricing decisions. We characterize the firm's optimal strategy and find conditions under which the firm is better off carrying all, some, or none of its leftover inventory. We also show that, compared to a firm that acts myopically in the first period, a firm that takes into account the effect of first period decisions on second period profits will price its new product higher and stock more of it in the first period. Thus, the benefit of having a second selling opportunity dominates the detrimental effect of cannibalizing sales of the second period new product.     

Relative deprivation and international migration oded stark

This article provides theoretical reasoning and empirical evidence that international migration decisions are influenced by relative as well as absolute income considerations. Potential gains in absolute income through migration are likely to play an important role in households' migration decisions, but international migration by household members who hold promise for success as labor migrants can also be an effective strategy to improve a household's income position relative to others in the household's reference group. The findings reported in this article provide empirical support for the hypothesis that relative deprivation plays a significant role in Mexico-to-U.S. migration decisions. The findings also suggest that this migration is an effective mechanism for achieving income gains in households that send migrants to the U.S. and that households wisely choose as migrants those of their members who are most likely to provide net income gains.     

A FACILITY LOCATION PROBLEM WITH DISTANCE-DEPENDENT DEMAND

This paper examines network systems where demand for the services of a facility originates at the nodes of the network and its magnitude depends on the shortest distance to a service-providing facility. Service systems with such features include bank branches, fastfood outlets, and grocery stores. With the assumption that demand is a Poisson-distributed random variable whose mean is an exponentially decreasing function of distance, possible locations based on two important performance measures are characterized: the expected value and the variance of the demand. Two procedures are proposed: one to find the locations with the minimum and maximum expected demand and the other to find the location(s) that provide a given level of expected demand. The procedures are illustrated by two examples.