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.     

Up Then Down: Bid‐Price Trends in Revenue Management

In the classic revenue management (RM) problem of selling a fixed quantity of perishable inventories to price‐sensitive non‐strategic consumers over a finite horizon, the optimal pricing decision at any time depends on two important factors: consumer valuation and bid price. The former is determined exogenously by the demand side, while the latter is determined jointly by the inventory level on the supply side and the consumer valuations in the time remaining within the selling horizon. Because of the importance of bid prices in theory and practice of RM, this study aims to enhance the understanding of the intertemporal behavior of bid prices in dynamic RM environments. We provide a probabilistic characterization of the optimal policies from the perspective of bid‐price processes. We show that an optimal bid‐price process has an upward trend over time before the inventory level falls to one and then has a downward trend. This intertemporal up‐then‐down pattern of bid‐price processes is related to two fundamental static properties of the optimal bid prices: (i) At any given time, a lower inventory level yields a higher optimal bid price, which is referred to as the resource scarcity effect; (ii) Given any inventory level, the optimal bid price decreases with time; that is referred to as the resource perishability effect. The demonstrated upward trend implies that the optimal bid‐price process is mainly driven by the resource scarcity effect, while the downward trend implies that the bid‐price process is mainly driven by the resource perishability effect. We also demonstrate how optimal bid price and consumer valuation, as two competing forces, interact over time to drive the optimal‐price process. The results are also extended to the network RM problems.     

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 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.     

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.     

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.     

Validity of the microsoft kinect system in assessment of compensatory stepping behavior during standing and treadmill walking

Background

Rapid compensatory stepping plays an important role in preventing falls when balance is lost; however, these responses cannot be accurately quantified in the clinic. The Microsoft Kinect? system provides real-time anatomical landmark position data in three dimensions (3D), which may bridge this gap.

Methods

Compensatory stepping reactions were evoked in 8 young adults by a sudden platform horizontal motion on which the subject stood or walked on a treadmill. The movements were recorded with both a 3D-APAS motion capture and Microsoft Kinect? systems. The outcome measures consisted of compensatory step times (milliseconds) and length (centimeters). The average values of two standing and walking trials for Microsoft Kinect? and the 3D-APAS systems were compared using t-test, Pearson’s correlation, Altman-bland plots, and the average difference of root mean square error (RMSE) of joint position.

Results

The Microsoft Kinect? had high correlations for the compensatory step times (r?=?0.75–0.78, p?=?0.04) during standing and moderate correlations for walking (r?=?0.53–0.63, p?=?0.05). The step length, however had a very high correlations for both standing and walking (r?>?0.97, p?=?0.01). The RMSE showed acceptable differences during the perturbation trials with smallest relative error in anterior-posterior direction (2-3%) and the highest in the vertical direction (11–13%). No systematic bias were evident in the Bland and Altman graphs.

Conclusions

The Microsoft Kinect? system provides comparable data to a video-based 3D motion analysis system when assessing step length and less accurate but still clinically acceptable for step times during balance recovery when balance is lost and fall is initiated.

     

Location and reliability problems on a line: Impact of objectives and correlated failures on optimal location patterns

In this paper we study a class of locations models where facilities are not perfectly reliable and failures may be correlated. We analyze problems with Median and Center objectives under complete and incomplete customer information regarding the state of facilities. The goal is to understand how failure probabilities, correlations, availability of information, and problem objective affect the optimal location patterns. In particular, we want to find analytical confirmations for location patterns observed in numerical experiments with network location models. To derive closed-form analytical results the analysis is restricted to a simple (yet classic) setting: a 2-facility problem on a unit segment, with customer demand distributed uniformly over the segment (results can be extended to other demand distributions as well). We derive explicit expressions for facility trajectories as functions of model parameters, obtaining a number of managerial insights. In addition we provide the decomposition of the optimal cost into the closed form components corresponding to the cost of travel, the cost of facility unreliability and the cost of incomplete information. Most of the theoretical insights are confirmed via numerical experiments for models with larger (3–5) number of facilities.