Real Options Valuation: A Case Study of an E‐commerce Company

This paper presents a real options valuation model with original solutions to some issues that arise frequently when trying to apply these models to real‐life situations. The authors build on existing models by introducing an innovative and intuitive risk neutral adjustment that allows us to work with all the simulated paths. The problem of incorporating real options into each path is solved with a “nearest neighbors” technique, and uncertainty is simulated using a beta distribution that adapts better to company‐specific information. The model is then applied to a real life e‐commerce company to produce the following insights: the expanded present value is higher than the traditional present value; the presence of several real options make them interact so that their values are nonadditive; and part of the expanded present value is explained by the presence of “Jensen's inequality” that stems from the “convexity” between the value of each year's cash flow and the uncertain variables.     

Relational delegation

We analyze a cheap talk game with partial commitment by the principal. We first treat the principal's commitment power as exogenous and then endogenize it in an infinitely repeated game. We characterize optimal decision making for any commitment power and show when it takes the form of threshold delegation—in which case the agent can make any decision below a threshold—and centralization—in which case the agent has no discretion. For small biases, threshold delegation is optimal for any smooth distribution. Outsourcing can only be optimal if the principal's commitment power is sufficiently small.     

A nonparametric decomposition of the Mexican American average wage gap

This paper shows that average wage gap decompositions between any two groups of workers can be carried out using nonparametric wage structures. It also proposes an algorithm to correct for sample selection in nonparametric models known as tree structures. This paper studies the wage gap between third‐generation Mexican American and non‐Hispanic white workers in the southwest. It is shown that the decomposition heavily depends on functional assumptions, and that different aproaches to flexibility may render sufficiently good and similar results Copyright © 2008 John Wiley & Sons, Ltd.     

Academic scholarship,organization prestige,and the earnings of U.S. business school deans

This study models the market for business school deans as an outcome of a differential game between a university's central administration and the job candidates in the market for business school deans. In our model, the ability of a business school dean to advance the organization is enhanced by his or her own scholarly reputation, such that a job candidate chooses an optimal level of scholarship that relates to his or her marketability. In this way, the supply of scholarship (by job candidates) can be seen as the supply of job candidates in the market for business school deans, whereas the demand for scholarship can be seen as the demand for business school deans. The main features of our game‐theoretic model are tested using data from both national and regional business schools and colleges in the U.S. Econometric results indicate that each additional scholarly contribution by a business school dean generates a wage premium ranging from $1,000 to $1,200, whereas in the case of national institutions, each additional student enrolled at the doctoral (master's) level raises the wage by $671 ($56). Lastly, the production of between nine and 10 scholarly contributions is found to be necessary in order to face a 50% probability of holding a business school deanship at a national institution, whereas production of about 37 scholarly contributions leads to a 50% probability of holding a deanship with a named business school at a national institution.     

Top Incomes in Chile: A Historical Perspective on Income Inequality, 1964–2017

We present a novel series of Chilean top-income shares covering half a century, mainly based on income-tax declarations and the National Accounts. Such a time frame of analysis is still rare in the literature of developing countries. We distinguish between a fiscal-income series (1964–2017) and an adjusted series (1990–2017). The former covers individual income, while the latter also includes corporate undistributed profits, which affects both levels and trends. The fiscal-income estimates start with low levels and a decreasing trend over the 1960s. They then increase rapidly during the dictatorship years (1973–89). The series ends with a high, yet slowly decreasing, concentration for most of the recent democratic period (1990–2017). By contrast, the adjusted series has followed a U-shape since the return of democracy, contradicting the established consensus on falling inequality over the period. Furthermore, Chile ranks among the most unequal countries in both the OECD and Latin American countries over the period.     

Buying free rewards: the impact of a points-plus-cash promotion on purchase and reward redemption

While many studies have investigated consumer purchase behavior in reward programs, a better understanding of customer redemption behavior is lacking, particularly when promotions affect a core aspect of reward programs—free rewards. In this paper, we examine the impact of a promotion on purchase and reward redemption in a reward program in which consumers can partially cover the cost of a free reward with their money. The literature on reward programs suggests a positive reinforcement caused by reward redemption, whereas the literature on promotion provides different views regarding the existence of a postpromotion dip. Using data from a major retailer’s reward program, we verify that such a promotion attracted customers with less transaction activity and shorter tenure. Interestingly, consumers using the promotion increased their preference for hedonic rewards compared to their previously observed behavior. This change in preference persisted after the promotion ended. Overall, the promotion significantly increased the number of redemptions but generated a negative impact on subsequent consumer behavior by decreasing purchase incidence and quantity. Our findings point to a need to understand the trade-off between spending money on buying an otherwise free reward and future regular purchases.

     

Crises and liquidity in over-the-counter markets

We study the efficiency of liquidity provision by dealers and the desirability of policy intervention in over-the-counter (OTC) markets during crises. We emphasizes two OTC frictions: finding counterparties takes time, and trade is bilateral and involves bargaining. We model a crisis as a shock that reduces investors? asset demands, lasting until a random recovery time. In this context, dealers can provide liquidity to investors by accumulating asset inventories. When OTC frictions are severe, even well capitalized dealers may not find it privately optimal to accumulate inventories, and direct purchase by the government can improve welfare.     

An evolutionary game theory approach to the dynamics of the labour market: A formal and informal perspective

A stylized fact of the labour market in developing countries is that it is highly segmented in informality. One of the main factors that induce workers and firms into informality is an excessive regulatory system that makes formal economy little attractive. This study aims to analyze the dynamics of workers and firms’ entrance and withdrawal of the formal and informal economy, assessing the impact of taxes by using an evolutionary game theory approach in which economic agents decide for one these markets according to the expected pay-off. Moreover, the optimal relation between regulatory and enforcement action by the government is evaluated.     

Debts on debts

This paper studies the impact of mortgages on consumer debt and on debt on durable goods. Outstanding debt, representing mortgages, affects positively consumer debt, and the debt on durable goods. This hypothesis is empirically tested for the U.S. using PSID 2005 wave. Our results are striking. First, we find strong evidence supporting a positive association between mortgage loans and consumer debts, regardless of the measures used, the control variables used, and the methods used. The results remain unchanged when we address potential endogeneity and measurement error problems. Second, we find that the effects of mortgages on the debt on durable goods are in general smaller than the effects of mortgages on other types of debts. Third, our distributional analysis reveals an interesting pattern of the effects on consumer debt of mortgage over the distribution. Specifically, the effects monotonically decrease as the quantile increase, with the smallest effects being at the upper tail of the distribution. Finally, we also examine the short-run dynamics of the relation between mortgage and consumer debts. We find that there is no systematic relation between the growth rate of mortgage and the growth rates of consumer debts.