The firm under uncertainty: real and financial decisions

This paper examines the interplay between the real and financial decisions of the competitive firm under output price uncertainty. The firm faces additional sources of uncertainty that are aggregated into a background risk. We show that the firm always chooses its optimal debt–equity ratio to minimize the weighted average cost of capital, irrespective of the risk attitude of the firm and the incidence of the underlying uncertainty. We further show that the firm’s optimal input mix depends on its optimal debt–equity ratio, thereby rendering the interdependence of the real and financial decisions of the firm. When the background risk is either additive or multiplicative, we provide reasonable restrictions on the firm’s preferences so as to ensure that the firm’s optimal output is adversely affected upon the introduction of the background risk.     

When do stable roommate matchings exist? A review

We compare different preference restrictions that ensure the existence of a stable roommate matching. Some of these restrictions are generalized to allow for indifferences as well as incomplete preference lists, in the sense that an agent may prefer remaining single to matching with some agents. We also introduce a new type of cycles and in greater detail investigate the domain of preferences that have no such cycles. In particular, we show how the absence of these cycles relates to the “symmetric utilities hypothesis” by Rodrigues-Neto (J Econ Theory 135:545–550, 2007) when applied to roommate problems with weak preferences.     

Context dependent beliefs

This paper examines a model where the set of available outcomes from which a decision maker must choose alters his perception of uncertainty. Specifically, this paper proposes a set of axioms such that each menu induces a subjective belief over an objective state space. The decision maker’s preferences are dependent on the realization of the state. The resulting representation is analogous to state-dependent expected utility within each menu; the beliefs are menu dependent and the utility index is not. Under the interpretation that a menu acts as an informative signal regarding the true state, the paper examines the behavioral restrictions that coincide with different signal structures: elemental (where each element of a menu is a conditionally independent signal) and partitional (where the induced beliefs form a partition of the state space).     

The Borda class: An axiomatic study of the Borda rule on top-truncated preferences

The Borda rule, originally defined on profiles of individual preferences modelled as linear orders over the set of alternatives, is one of the most important voting rules. But voting rules often need to be used on preferences of a different format as well, such as top-truncated orders, where agents rank just their most preferred alternatives. What is the right generalisation of the Borda rule to such richer models of preference? Several suggestions have been made in the literature, typically considering specific contexts where the rule is to be applied. In this work, taking an axiomatic perspective, we conduct a principled analysis of the different options for defining the Borda rule on top-truncated preferences.     

A hybrid DEA-MOLP model for public school assessment and closure decision in the City of Philadelphia

Data envelopment analysis (DEA) is generally used to evaluate past performance and multi objective linear programming (MOLP) is often used to plan for future performance goals. In this study, we establish an equivalence relationship between MOLP problems and combined-oriented DEA models using a direction distance function designed to account for desirable and undesirable inputs and outputs together with uncontrollable variables. This equivalence model can be effectively used to support interactive processes and performance measures designed to establish future performance goals while taking into account the preferences of decision makers (DMs). In particular, it allows DMs to consider different efficiency improvement strategies when subject to budgetary restrictions. The applicability of the proposed method and the efficacy of the procedures and algorithms are demonstrated using a case study where the performance of high schools in the City of Philadelphia is evaluated.     

Hedging and the competitive firm under correlated price and background risk

This paper examines the behavior of the competitive firm under correlated price and background risk when a futures market exists for hedging purposes. We show that imposing the background risk, be it additive or multiplicative, on the firm has no effect on the separation theorem. The full-hedging theorem, however, holds if the background risk is independent of the price risk. In the general case of the correlated price and background risk, we adopt the concept of expectation dependence to describe the bivariate dependence structure. When the background risk is additive, the firm finds it optimal to opt for an over-hedge or an under-hedge, depending on whether the price risk is positively or negatively expectation dependent on the background risk, respectively. When the background risk is multiplicative, both the concept of expectation dependence and the Arrow–Pratt measure of relative risk aversion are called for to determine the firm’s optimal futures position.     

The investment decision of a Multinational Firm under uncertain quantity restrictions

In this paper we analyze the allocative investment decisions of a Multinational Firm (MNF) when it faces uncertain quantity restrictions such as a voluntary export restraint or a quota imposed by the host government. The model with uncertain quantity restrictions is analyzed further by introducing additional uncertainties such as a foreign tax rate, transfer prices, foreign exchange rates and foreign demand. The MNF invests more in the host country due to uncertain quantity restrictions. The risk averse MNF invests more in the host country despite its uncertain tax rate if the transfer price is less than the expected marginal revenue loss due to the uncertain quantity restriction. The uncertain transfer price leads the MNF to invest more in the foreign country if the tax rates are dissimilar between the two countries. Foreign demand uncertainty and foreign exchange rates uncertainty have the same effects on capital allocation between the host country and home country. In particular, we derive the condition under which the direction of investment is unambiguous.     

Investor protection,regulation and bank risk-taking behavior

This paper examines whether the influence of investor protection on banks’ risk is channeled through banking regulation, and vice-versa, using panel data from a sample of 567 European and US banks for the 2004–2015 period. As banking regulatory factors, we consider capital stringency, activity restrictions and private monitoring, whereas as investor protection factors, we consider the level of shareholder and creditor protection. We find that banking regulation moderates the positive direct influence of investor protection on banks’ risk, while investor protection reinforces the negative direct influence of banking regulation on risk. Moreover, we show that the negative effect of national regulations on banks’ risk is more pronounced during systemic crisis years. Finally, taking into account market competition, we argue that private monitoring only has a direct effect on banks’ risk, whereas the effects of capital stringency and activity restriction are channeled through market competition.     

Comparing preferences for employing males and nationals across countries: extending relational models and social dominance theory

We expand relational models theory by integrating it with social dominance theory to examine how national culture influences preferences for males and nationals in employment-related decisions. Data from the World Values Survey (N = 2331), culture scores from the GLOBE project (N = 62 countries), and Hofstede (N = 49 countries) indicate that collectivism is associated with an increased chance of preferences for males and nationals, gender egalitarianism is associated with a decreased chance of preferences for males, and masculinity is associated with more chances for preferences for nationals. Demographic variables (age, sex, and education) were also associated with our dependent variables after taking all the variance of the different cultural dimensions into account. Implications for theory and practice are discussed.     

Narrow‐Framing and Risk Preferences in Family and Non‐Family Firms

Building upon prospect theory’s concept of narrow‐framing, we explore family firms’ risk preferences across multiple decisions in corporate entrepreneurship. We argue that family firms’ decisions are less likely to be narrowly framed (more likely to be made as a group rather than in isolation) compared to non‐family firms. Examining the interaction between two risky decisions (internationalization and R&D investment) in two samples of publicly traded firms in the USA and China confirms our hypotheses. Family firms appear more likely than non‐family firms to diversify risk when making multiple decisions concerning corporate entrepreneurship. However, given inferior performance, risk taking across multiple decisions in family firms is positively related.     

Wealth effects of time variation in investor risk preferences

We investigate the source of risk premiums: individual risk preferences. By examining the wealth characteristics of agents of different risk preferences, we study the financial incentive of investors to demonstrate different risk preferences. To accomplish this, we model the stock market utilizing artificial adaptive agents. If investors have incentive to vary their risk preferences, or if investors of a constant risk preference vary the way they participate in the market under different market conditions, this could lead to time variation in market risk premiums. We find that agents have significant incentive to demonstrate different risk preferences under different market conditions.(JEl G12)     

Assessment of OECD Better Life Index by incorporating public opinion

Well-being has a multidimensional nature as it depends on multifaceted factors such as material conditions and quality of life. The Organization for Economic Co-operation and Development (OECD) has developed the Better Life Index (BLI) as part of the OECD Better Life initiative to facilitate the better understanding of what drives well-being of people. The BLI is a three-level hierarchical composite indicator that covers several socio-economic aspects. In this paper, considering the entire hierarchical structure of the index, we introduce a bottom-up procedure for the aggregation of the components at each level. We formulate the assessment of BLI as a multiple objective programming (MOP) problem that facilitates the implementation of different concepts to derive different aggregation schemes. We incorporate the data from previous years into the normalization process of the indicators, to take into account the discrepancy on their observed values and smooth their deviations across the years. Also, we consider the public opinion about well-being that is captured from the worldwide responses in the web platform of OECD BLI. We incorporate the public opinion into the assessment models in the form of weight restrictions. In this way, we reduce the effect of compensation that might be imposed by the adopted modelling approach. We apply our methodology to the data of 38 countries (35 OECD and 3 non-OECD economies) for the year 2017. Our findings illustrate that the public opinion in the form of weight restrictions can effectively drive the optimization process and depict the collective preferences to the BLI scores.     

Strategy-proofness on restricted separable domains

We study a problem in which a group of voters must decide which candidates are elected from a set of alternatives. The voters’ preferences on the combinations of elected candidates are represented by linear orderings. We propose a family of restrictions of the domain of separable preferences. These subdomains are generated from a partition that identifies the friends, enemies and unbiased candidates for each voter. We characterize the family of social choice functions that satisfy strategy-proofness and tops-onlyness properties on each of the subdomains. We find that these domain restrictions are not accompanied by an increase in the family of social choice functions satisfying the two properties.     

Nonparametric Methods for Evaluating Economic Efficiency and Imperfect Competition

This article unifies and extends ideas from nonparametric production analysis and DEA for testing organizational efficiency. We show how the admissible price set can be restricted to account for prior information on prices. These restrictions may relate prices to input and output quantities in order to test noncompetitive behavior of the evaluated decision making unit. While the resulting efficiency tests cannot always be cast into linear programming problems, we discuss various solution strategies for the tests. Thereby we consider the question when does local optimality of the result guarantee global optimality. We also show how the decision maker's preferences, for example ranking information, can be adopted into DEA models in a simple manner. Finally, the approach with price restrictions is illustrated with an application to test noncompetitive behavior of the pulp and paper industries in Finland.     

On the robustness of strategy proof mechanisms

Following the Gibbard-Satterthwaite impossibility theorem, the incentives literature has explored restrictions on the domains of unknown characteristics which enable the implementation of some social choice rules by dominant strategy incentive compatible mechanisms. This paper makes precise the intuitive idea that, even when restrictions on preferences take the extreme form of finite- dimensional parametrizations, implementable social choice rules display a lack of robustness and in a sense made explicit are rare.     

STRATEGIC DECISIONS MADE BY TOP EXECUTIVES AND MIDDLE MANAGERS WITH DATA AND PROCESS DOMINANT STYLES

The influence of a manager's decision style in strategic decision-making is explored using simulations. The Jungian style classification is extended to identify ‘data and process dominant’ styles of decision-making. Managers with process dominant styles can use several types of data and managers with data dominant styles can apply various modes of data processing. Both the expanded and the traditional definitions of style are used as factors to explain how 79 top executives and 89 middle managers rated project simulations. Decision style is found to be a key factor in explaining the likelihood of taking strategic action and the risk seen in this action. Decisions made by top executives are more style dependent than those of middle managers. The extended definition of style reveals more about the preferences of top executives than traditional style categories.     

Testing for intertemporal nonseparability

This paper presents a nonparametric analysis of a common class of intertemporal models of consumer choice that relax consumption independence. Within this class and in the absence of any functional form restrictions on instantaneous preferences, we compare the revealed preference conditions for rational habit formation and rational anticipation. We show that these models are observationally equivalent in the presence of finite data sets composed of prices, interest rates, and consumption choices.     

Cross-sectional tests of asset pricing models with full-rank mimicking portfolios

In the standard tests of asset pricing models, factor risk premia are estimated on a test asset span so that models are tested with degrees of freedom reduced by the number of factors. Risk premia of traded factors can be further restricted to be equal to their expected returns, but such restrictions cannot be imposed on models with nontraded factors, which may create a problem of testing without full restrictions or on unequal asset spans across models. We propose a full-rank mimicking portfolio approach by projecting nontraded factors onto a combined span of test assets and benchmark traded factors. Under the Hansen-Jagannathan distance framework, we demonstrate that full-rank mimicking portfolios can provide improved power and fair performance comparison against a benchmark model in both specification and model comparison tests.