Moral Hazard,Income Taxation and Prospect Theory*

The standard theory of optimal income taxation under uncertainty has been developed under the assumption that individuals maximise expected utility. However, prospect theory has now been established as an alternative model of individual behaviour, with empirical support. This paper explores the theory of optimal income taxation under uncertainty when individuals behave according to the tenets of prospect theory. It is seen that many of the standard results are modified in interesting ways. The first‐order approach for solving the optimisation problem is not valid over the domain of losses, and the marginal tax schedule offers full insurance around the reference consumption level. The implications of non‐welfarist objectives under income uncertainty are also examined.     

Consumer Choice Behavior and Electronic Shopping Systems – A Theoretical Note

The aim of this paper is to provide an overview of alternative approaches in modeling consumer choice behavior with respect to making purchases either in the traditional manner or using an electronic shopping system. We concentrate on the effects of two specific features: the amount of time spent on shopping and the shopping experience. We consider a simple two-good situation in which one good is a composite good that consists of all goods purchased electronically, and the other is the composite of all goods purchased in a traditional manner. The models suggest that both time saved and an increase in shopping experience related to Web-based shopping will lead to increased purchasing at a Web shop.     

The price of responsiveness: Cost analysis of change orders in make-to-order manufacturing

The ability to produce goods according to customers' specifications may be an important competitive advantage, but it exposes manufacturers to the risk of customers requesting changes in their specifications during the fulfillment of their orders. Manufacturers often accept these change orders in the name of customer service despite the fact that they incur additional costs. This study uses empirical data and activity-based costing to explore the real values and the accrual mechanisms of change orders' costs. The results show that the total costs are considerable, but the analyses also reveal opportunities for cost savings through the categorization of change orders, time fencing techniques, and improvements in information processing.     

Time delays,competitive interdependence,and firm performance

Research summary: Competitors' experiences of prior interactions shape patterns of rivalry over time. However, mechanisms that influence learning from competitive experience remain largely unexamined. We develop a computational model of dyadic rivalry to examine how time delays in competitors' feedback influence their learning. Time delays are inevitable because the process of executing competitive moves takes time, and the market's responses unfold gradually. We analyze how these lags impact learning and, subsequently, firms' competitive behavior, industry profits, and performance heterogeneity. In line with the extant learning literature, our findings reveal that time delays hinder learning from experience. However, this counterintuitively increases rivals' profits by reducing their investments in costly head‐to‐head competition. Time delays also engender performance heterogeneity by causing rivals' paths of competitive behavior to diverge. Managerial summary: While competitive actions such as new product launches, geographical expansion, and marketing campaigns require up‐front resource commitments, the potential lift in profits takes time to materialize. This time delay, combined with uncertainty surrounding the outcomes of competitive actions, makes it difficult for managers to learn reliably from previous investment decisions. This results in systematic underinvestment in competitive actions. The severity of the underinvestment grows as the time delay between an investment and its positive results increases. Counterintuitively, however, competitors' collective underinvestment increases profit‐making opportunities. In industries with large time delays, companies that do invest in competitive actions are likely to enjoy high returns on investment. It is also likely that rivals' paths of competitive behavior bifurcate. Together, these mechanisms generate large differences in competitors' profits. Copyright © 2016 John Wiley & Sons, Ltd.     

The role of supply management innovativeness and supplier orientation in firms’ sustainability performance

Questions about the influencing factors and measurement of firms' sustainability performance have attracted growing research interest, as the requirements for sustainability have steadily increased. This study examines whether supply management innovativeness and supplier orientation make positive impacts on firms' overall sustainability performance. An empirical study based on a survey targeting large- and medium-sized manufacturing companies in Finland shows that innovativeness in supply management considerably influences a firm's overall sustainability performance and that supplier orientation positively relates to sustainability performance. The benefits of innovativeness in supply management and strategic supplier orientation are directly realised in sustainability performance. Therefore, supply management is not only a gatekeeper against sustainability risks arising from the supply base but is also a function by which new ideas aiming to influence supply markets and firms' sustainability are presented.     

Pawns and queens revisited: public provision of private goods when individuals make mistakes

This paper analyses the optimal tax policy and public provision of private goods when the government is paternalistic and has a redistributive objective. When individuals only differ with respect to their income-earning abilities, the publicly-provided goods should be overprovided, relative to the decentralised optimum, if society’s marginal valuation of them exceeds the individual valuation and if these goods are complements to labour supply. However, when the individuals also differ in terms of their valuation of the publicly-provided good, this simple conclusion does not hold. Optimal marginal income tax rates are shown to differ from the standard rules if publicly-provided goods and labour supply are related.