Fair welfare maximization

We consider the general problem of finding fair constrained resource allocations. As a criterion for fairness we propose an inequality index, termed “fairness ratio,” the maximization of which produces Lorenz-undominated, Pareto-optimal allocations. The fairness ratio does not depend on the choice of any particular social welfare function, and hence it can be used for an a priori evaluation of any given feasible resource allocation. The fairness ratio for an allocation provides a bound on the discrepancy between this allocation and any other feasible allocation with respect to a large class of social welfare functions. We provide a simple representation of the fairness ratio as well as a general method that can be used to directly determine optimal fair allocations. For general convex environments, we provide a fundamental lower bound for the optimal fairness ratio and show that as the population size increases, the optimal fairness ratio decreases at most logarithmically in what we call the “inhomogeneity” of the problem. Our method yields a unique and “balanced” fair optimum for an important class of problems with linear budget constraints.     

Ex Ante Stock Market Return Volatility Implied by the OEX Option Premium

Previous empirical evidence suggests that stock return volatility expectations change over time, but the existing models of time-varying variance lack a theoretical structure that is rigorously linked to the efficient markets dividend discount model. This paper develops and tests such a model. The conditional forecast variance of the return on the stock market portfolio is expressed as a linear combination of the adjusted conditional forecast variance of the interest rate and the dividend growth rate. An empirical test using the implied variance of the S&P 100 index option provides evidence that supports the model's predictions.     

Tariff protection and workforce gender: Evidence from U.S. manufacturing industries

A data set of 266 four-digit SIC U.S. manufacturing industries is used to examine the relationship between tariff protection and workforce gender. The paper shows that industries with a relatively large proportion of women are more likely to be protected by U.S. tariff policy, even when factors such as wages and human capital are controlled. Furthermore, this result is robust in that it is not driven by any particular industry or industries.     

The high cost of accurate knowledge

Many business thinkers believe it's the role of senior managers to scan the external environment to monitor contingencies and constraints, and to use that precise knowledge to modify the company's strategy and design. As these thinkers see it, managers need accurate and abundant information to carry out that role. According to that logic, it makes sense to invest heavily in systems for collecting and organizing competitive information. Another school of pundits contends that, since today's complex information often isn't precise anyway, it's not worth going overboard with such investments. In other words, it's not the accuracy and abundance of information that should matter most to top executives--rather, it's how that information is interpreted. After all, the role of senior managers isn't just to make decisions; it's to set direction and motivate others in the face of ambiguities and conflicting demands. Top executives must interpret information and communicate those interpretations--they must manage meaning more than they must manage information. So which of these competing views is the right one? Research conducted by academics Sutcliffe and Weber found that how accurate senior executives are about their competitive environments is indeed less important for strategy and corresponding organizational changes than the way in which they interpret information about their environments. Investments in shaping those interpretations, therefore, may create a more durable competitive advantage than investments in obtaining and organizing more information. And what kinds of interpretations are most closely linked with high performance? Their research suggests that high performers respond positively to opportunities, yet they aren't overconfident in their abilities to take advantage of those opportunities.     

Auditor Expertise and the Estimation of Dollar Error in Accounts

A major task that auditors undertake in formulating their audit opinion is to estimate the dollar error that might exist in accounts in light of their evaluation of internal control strengths and weaknesses. The research that has been undertaken to evaluate the quality of auditor performance on this task, however, has produced mixed results. The current study tries to overcome some theoretical limitations and measurement limitations that have undermined prior studies. Forty practising auditors rated their abilities on fourteen characteristics derived from a model of expertise. They then undertook an experiment where they judged the extent of dollar error that might exist in the inventories of a manufacturing company. They based their judgments on working papers provided to them that contained, among other information, an evaluation of the company's internal control system. An estimate of the 'true' dollar error in the inventories was calculated using a program that simulated the company's internal control and accounting system. This estimate was then used to calculate the accuracy of the auditors' judgments. Their ratings on the expertise characteristics were not related to their judgment accuracy. Their ratings were related, however, to their confidence in their judgment accuracy. Auditors who considered themselves more expert at the task were more confident in their judgment accuracy but they were, in fact, no more accurate than auditors who considered themselves to be less expert at the task.     

Incorporating sustainability criteria into credit risk management

Does a commercial debtor's economic, environmental and social performance in terms of sustainability affect its credit risk rating? Does adding criteria aimed at assessing a lender's environmental, social or sustainability practices provide added value to traditional financial rating criteria? Many analyses have reported that a correlation exists between companies' environmental and their financial performance. We checked out the assertion that it ‘pays to be sustainable’ by analyzing the role that criteria pertaining to sustainability and environmental orientation play in the commercial credit risk management process. Our results show that sustainability criteria can be used to predict the financial performance of a debtor and improve the predictive validity of the credit rating process. We conclude that the sustainability a firm demonstrates influences its creditworthiness as part of its financial performance. Copyright © 2008 John Wiley & Sons, Ltd and ERP Environment.