Strategic design under uncertain evaluations: structural analysis of design‐build auctions

I investigate firms' competition over price and product design under uncertain design evaluations in the context of Design‐Build (DB) auctions. Reviewers' design evaluations contain uncertainty from a bidder's perspective, leading luck to dampen differences in the firms' chances of winning. I model bidders' behavior and show semiparametric identification of the model primitives. Uncertain design evaluations increase the expected price of design quality and exacerbate an auctioneer's uncertainty in auction outcomes. These effects are mostly due to changes in bidding strategies. Bid ranking swaps due to uncertain evaluations account for a small share of these effects.     

The distributional effect of the rice policy in Japan, 1986–2010

This study aims to evaluate the distributional effect of the governmental rice policy in Japan on producers, consumers, and government expenditures from 1986 to 2010 using a partial equilibrium model. Policy measures include government purchase of rice, output payment, and acreage control. The simulation result shows that acreage control has been the principal policy measure for transferring income to producers, especially since the enforcement of the WTO Agreement on Agriculture. Acreage control is the policy measure with the lowest total efficiency and highest budgetary efficiency. This result implies that the government’s goal of transferring income to producers with minimum government cost has been achieved through a combination of policy measures.     

The Asymptotic Expansion Approach to the Valuation of Interest Rate Contingent Claims

We propose a new methodology for the valuation problem of financial contingent claims when the underlying asset prices follow a general class of continuous Itô processes. Our method can be applied to a wide range of valuation problems including complicated contingent claims associated with the term structure of interest rates. We illustrate our method by giving two examples: the valuation problems of swaptions and average (Asian) options for interest rates. Our method gives some explicit formulas for solutions, which are sufficiently numerically accurate for practical purposes in most cases. The continuous stochastic processes for spot interest rates and forward interest rates are not necessarily Markovian nor diffusion processes in the usual sense; nevertheless our approach can be rigorously justified by the Malliavin–Watanabe Calculus in stochastic analysis.     

Optimal tracking for asset allocation with fixed and proportional transaction costs

This paper studies the asset allocation problem of optimally tracking a target mix of asset categories when there are transaction costs. We consider the trading strategy for an investor who is trying to minimize both fixed and proportional transaction costs while simultaneously minimizing the tracking error with respect to a specified, target asset mix. We use imupulse control theory in a continuous-time, dynamic setting to deal with this problem in a general and analytical way, showing that the optimal trading strategy can be characterized in terms of a quasi-variational inequality. We derive an explicit solution for the two-asset case, and we use this to provide a sensitivity analysis, showing how the optimal strategy depends upon individual input parameters. We also use some theory for one-dimensional diffusion processes to derive analytical expressions for various measures of performance such as the average time between transactions.     

A Remark on a Singular Perturbation Method for Option Pricing Under a Stochastic Volatility Model

This paper studies the approximation accuracy of a singular perturbation method for option pricing up to the second order under a stochastic volatility model. First, numerical experiments confirm that the first order approximation provides sufficiently accurate option prices in a fast mean-reversion volatility case. On the other hand, it creates relatively large errors in a non-fast mean-reversion volatility environment. Then, the second order approximation formula is derived and the improvement of the approximation is investigated.     

RULE CHANGES AND UNCERTAINTY IN DISCRIMINATORY AND UNIFORM PRICE AUCTIONS

The auction literature indicates that uncertainty about the value of auctioned goods increases underpricing in discriminatory price auctions. Such uncertainty has a smaller effect on uniform price auctions because the pricing rule aggregates bidders' information. We find that uncertainty resulting from inexperience with an auction mechanism has similar effects. Using initial public offering (IPO) data from Japan and Israel, we find that average underpricing increases temporarily in Japan's discriminatory price auctions after changes in the auction rules, which suggests that bidders reduce their bids in response to uncertainty. Underpricing in Israel's uniform price auctions is not affected by rule changes.     

An Asymptotic Expansion Approach to Pricing Financial Contingent Claims

We propose a new methodology for the valuation problem of financial contingent claims when the underlying asset prices follow a general class of continuous Itô processes. Our method can be applicable to a wide range of valuation problems including contingent claims associated with stocks, foreign exchange rates, the term structure of interest rates, and even their combinations. We illustrate our method by discussing the Black-Scholes economy when the underlying asset prices follow the continuous diffusion processes, which are not necessarily time-homogeneous. The standard Black-Scholes model on stocks and the Cox-Ingersoll-Ross model on the spot interest rate are simple examples. Then we shall give a series of examples on the valuation formulae including plain vanilla options, average options, and other contingent claims. We shall also give some numerical evidence of the accuracy of the approximations we have obtained for practical purposes. Our approach can be rigorously justified by an infinite dimensional mathematics, the Malliavin-Watanabe-Yoshida theory recently developed in stochastic analysis.     

Determinants of Indonesian rural secondary school enrolment: gender,neighbourhood and school characteristics

In recent years the school enrolment rates of children aged 13–15 and 16–18 years have increased sharply in Indonesia, not only in urban but also in rural areas. Using various data sets spanning the years from 1993 to 2007, this paper investigates changes in factors associated with the enrolment of secondary school aged children in rural areas. It sheds light on the roles of gender and of neighbourhood and school characteristics, which have rarely been examined in the Indonesian context. The study finds that the disappearance of a gender gap in secondary enrolments between 1993 and 2007 contributed significantly to the rise in the overall enrolment rate. The findings also show that children living in wealthier communities and communities with a high proportion of enrolled children are more likely to attend school. Finally, various school characteristics are shown not to be strongly or consistently correlated with school enrolment.     

DOMESTIC COMPETITION POLICY AND TARIFF POLICY COMPARED*

M. Yano and F. Dei have demonstrated that, by controlling the degree of competition in a non‐tradables market (competition policy), a country can influence the terms of trade so as to increase its welfare, relative to free trade. Using their model, this study compares the extent of this effect with that of a tariff policy. It demonstrates that a competition policy can achieve a higher utility than a tariff policy if tariff rates are at levels currently tolerated in the real world. This demonstrates that domestic competition policy may play an important role as a substitute for tariff policy.     

Productivity Growth in the Chinese Economy by Industry and the Role of Foreign Capital

I. IntroductionIt is well known that China’s reform and open-up policy initiated in 1978 had an extremelylarge impact on the Chinese economy. This policy represented an about-face against thetraditional self-reconstruction strategy that China had maintained since the founding ofthe people’s Republic in 1949. Although China’s economy temporarily fell into confusionfor a few years after the Tian-an-men incident in 1989, China continued to record high GDPgrowth. Moreover, after Deng Xiao…