Co-development ventures: Optimal time of entry and profit-sharing

We find the optimal time for entering a joint venture by two firms, and the optimal linear contract for sharing the profits. We consider risk-sharing, timing-incentive and asymmetric decisions contract designs. If the firms are risk-neutral and the cash payments are allowed, all three designs are equivalent. With risk aversion, the optimal contract parameters may vary significantly across the three designs and across varying levels of risk aversion. We also analyze a dataset of joint biomedical ventures, in which, in agreement with our theoretical predictions, both royalty and cash payments are mostly increasing in the smaller firm's experience, and the time of entry happens sooner for more experienced small firms.     

Optimal pricing strategy for foreign market entry: a game theoretic approach

Given that pricing plays an important role in a company's international competitive strategy, researchers have long argued the need for theory building in the area of international pricing. This study develops an optimal pricing strategy for foreign market entry using a game theoretic framework. The proposed model assumes two firms, a local incumbent and a foreign entrant, competing in a market. Consumers know the quality of the incumbent's offering, but do not know how it compares to that of the foreign entrant's. Based on these assumptions, and using the theory of inference making, we propose an upward price distortion by the entrant firm as an optimal entry strategy under incomplete information. The paper presents a game theoretic derivation to establish that the game has a unique intuitive separating equilibrium where the entrant firm stands to gain by engaging in upward price distortion to signal high quality to consumers. Copyright © 2006 John Wiley & Sons, Ltd.     

Innovation contests with entry auction

We consider innovation contests for the procurement of an innovation under moral hazard and adverse selection. Innovators have private information about their abilities, and choose unobservable effort in order to produce innovations of random quality. Innovation quality is not contractible. We compare two procurement mechanisms—a fixed prize and a first-price auction. Before the contest, a fixed number of innovators is selected in an entry auction, in order to address the adverse selection problem. We find that–if effort and ability are perfect substitutes–both mechanisms implement the same innovations in symmetric pure-strategy equilibrium, regardless of whether the innovators’ private information is revealed or not. These equilibria are efficient if the procurer is a welfare-maximizer.     

Optimal two-object auctions with synergies

We design the revenue-maximizing auction for two objects when each buyer has bi-dimensional private information and a superadditive utility function (i.e., a synergy is generated if a buyer wins both goods). In this setting the seller is likely to allocate the objects inefficiently with respect to an environment with no synergies (see Armstrong, RES (2000)). In particular, the objects may be bundled too rarely or a buyer may win the bundle even though her valuations for the goods are weakly dominated by the values of another buyer.Received: 29 October 2001, Accepted: 29 October 2002, JEL Classification: D44, D82This paper has been written while the author was a member of the Dipartimento di Statistica e Matematica Applicata alle Scienze Umane "Diego De Castro", Universitá degli Studi di Torino, Italy. Valuable comments and suggestions were provided by Antonio Cabrales, Massimo Marinacci, three anonymous referees and, especially, by Mark Armstrong. The usual disclaimer applies.     

Optimal reinsurance with multiple tranches

Motivated by common practices in the reinsurance industry and in insurance markets such as Lloyd’s, we study the general problem of optimal insurance contracts design in the presence of multiple insurance providers. We show that the optimal risk allocation rule is characterized by a hierarchical structure of risk sharing where all agents take on risks only above the endogenously determined thresholds, or agent-specific deductibles. Linear risk sharing between two adjacent thresholds is shown to be optimal when all agents have CARA utilities. Furthermore, we show that the optimal thresholds can be efficiently calculated through the fixed point of a contraction mapping.     

Optimal mechanisms with simple menus

We consider revenue-optimal mechanism design for the case with one buyer and two items, when the buyer’s valuations are independent and additive. We obtain two sets of structural results of the optimal mechanisms, which can be summarized in one conclusion: under certain distributional conditions, the optimal mechanisms have simple menus.The first set of results states that, under a condition that requires that the types are concentrated on lower values, the optimal menu can be sorted in ascending order. Applying the theorem, we derive a revenue-monotonicity theorem which states that stochastically dominated distributions yield less revenue.The second set of results states that, under certain conditions which require that types are distributed more evenly or are concentrated on higher values, the optimal mechanisms have a few menu items. Our first result states that, for certain such distributions, the optimal menu contains at most 4 menu items. The condition admits power density functions. Our second result works for a weaker condition, under which the optimal menu contains at most 6 menu items. Our last result in this set works for the unit-demand setting, it states for uniform distributions, the optimal menu contains at most 5 items.     

Optimal Debt Contracts with Renegotiation

This paper sutudies the role of debt in committing a seller not to trade at a low price. We consider a discrete-time finite-horizon buyer–seller relationship. The seller makes an upfront relationship-specific investment, which is financed with debt. Debt then is repaid gradually to mitigate the hold-up risk. Even though debt is renegotiable, under the assumption that with a small probability renegotiation may fail and may lead to inefficient liquidation, debt still can be used as a commitment device. We solve for renegotiation proof dynamic debt contracts that are optimal for the seller and show that debt is repaid over the entire course of the relationship with declining repayments .     

Optimal capacity with stochastic demand

A model focusing on the choice of capacity in an environment with stochastic demand is presented. The paper establishes the conditions under which bias in traditional econometric measures of capacity utilization may occur. As illustration, the model is applied to the Norwegian vessel-building industry. The results from traditional econometric studies in this industry are adjusted using the results from the model presented. The analysis indicates an upward bias in the traditional capacity utilization index; the excess capacity in the analyzed industry, as determined by deviation from the optimal, stochastically-adjusted level of capacity, is higher than that determined by traditional econometric measures. However, the author is reluctant to draw definitive conclusions from the empirical part of the paper due to uncertainty regarding data and assumptions made. The empirical implementation is primarily illustrative and should be interpreted as such.     

Econometrics of first-price auctions with entry and binding reservation prices

This paper considers the structural analysis of first-price auctions with entry and binding reservation prices. The presence of entry decisions and binding reservation prices complicates the structural analysis. Building on the recent theoretical work on entry in auctions, this paper assumes that each potential bidder first decides whether or not to incur an entry cost and become an active bidder using a symmetric mixed strategy. Then each active bidder bids optimally following the increasing Nash–Bayesian equilibrium strategy. Using the observed bids and the number of actual bidders, we propose an MSM estimator to estimate the parameters in the distribution of private values and the distribution of the number of active bidders. Our approach can be used to validate the theoretical auction model, to test whether the reservation prices are binding, and to test the mixed-strategy of entry.     

Displacement and self-employment entry

Displacement is expected to decrease the reservation wage of self-employment by decreasing earnings in paid employment and increasing the probability of unemployment. This paper examines whether displacement increases the probability of self-employment using propensity score matching on Swedish register-based data. The data include all individuals displaced due to plant closures in 1987 and 1988, and a random sample of 200,000 employed individuals. The results suggest that displacement almost doubles the probability of entering self-employment the year after displacement. A sub-sample analysis indicates that individuals with a potentially worse position on the labor market react more strongly to displacement in terms of entering self-employment.     

Optimal pollution control with distributed delays

We present a model of optimal stock pollution control with general distributed delays in the stock accumulation dynamics. Using generic functional forms and a distribution structure covering a wide range of distributions, we solve analytically the complex dynamic system that arises from the introduction of these distributed delays. From a theoretical standpoint, our contribution extends the dynamic optimization literature that focused on single discrete delays and develops an original method to address control problems written as mixed type functional differential equations with general kernels. Our results show the qualitative impact of acknowledging these distributed delays on the optimal pollution paths dynamics. We study analytically the properties of the dynamics and we identify the conditions for the occurrence of limit cycles. This theoretical work contributes to the design of efficient environmental policies in the presence of complex delays.     

Optimal control with an unbounded horizon

This paper extends existence results for finite and infinite horizon control problems to ‘unbounded horizon’ problems where both finite and infinite terminal times are feasible and there are non-trivial payoff implications (in particular, because of a non-zero terminal valuation) in making this choice. The classical approach used in the paper leads to simple and fairly intuitive conditions for existence involving direct assumptions about the objective function, state dynamics, and control constraints which are accessible to applied users of control techniques. In addition, the results are proved under fairly weak concavity assumptions and thus have potential applicability to ‘increasing returns’ problems.     

Optimal fiscal policy with robust control

This paper analyzes how consumer uncertainty affects optimal fiscal policy in the Lucas and Stokey (1983) framework. The consumers, lacking confidence in their knowledge of the stochastic environment, endogenously tilt their subjective probability model away from an approximating probability model. The government, though, is confident that the approximating probability model characterizes the stochastic environment. This confidence dichotomy reveals a range of possible objective functions for an altruistic government. I assume that the government maximizes the consumers' expected utility under the consumers' own subjective probability model. It is found that this government relies less heavily on labor taxes to absorb the fiscal shock than would be optimal if consumers were fully confident in their probability model. This policy helps mitigate the direct welfare cost associated with consumer uncertainty. I compare this policy to the one implemented by a government that maximizes the consumers' expected utility under the approximating probability model.     

Optimal dividend strategies with time-inconsistent preferences

This paper studies the optimal dividend strategies of an insurance company when the manager has time-inconsistent preferences. We consider the problem for a naive manager and a sophisticated manager, and analytically derive the optimal dividend strategies when claim sizes follow an exponential distribution. Our results show that the manager with time-inconsistent preferences tends to pay out dividends earlier than her time-consistent counterpart and that the sophisticated manager is more inclined to pay out dividends than the naive manager. Furthermore, we extend these results to the case with claim sizes following a mixed exponential distribution, and provide a numerical analysis to reveal the sensitivity of the optimal dividend strategies to changes in the premium, claims and surplus volatility.     

面对入世,“人本”充满信心

人本集团有限公司是一家集生产轴承为主,集工、贸、商为一体的全国无区域集团企业,下辖40余家分公司,主要经营轴承、轴承配件、机电配件、汽车配件、化工、饮料食品生产与销售、商业服务、国际贸易、技术开发等.     

Joint ventures for entry deterrence

The literature of joint ventures has not discussed whether joint ventures may be used to deter entry. This paper then addresses how joint ventures may be used strategically for this purpose. Under the assumptions of linear demand and linear cost, as well as Stackelberg–Cournot interactions between incumbents and their joint venture firms, it is found that the incumbents can deter entry by creating independent joint ventures. Furthermore, it is shown that the optimal number of the joint ventures for the deterrence and the optimal deterrence strategies are functions of the number of potential entrants. Copyright © 1999 John Wiley & Sons, Ltd.     

Optimal allocation mechanisms with single-dimensional private information

We study revenue-maximizing allocation mechanisms for multiple heterogeneous objects when buyers care about the entire allocation, and not just about the ones they obtain. Buyers’ payoff depends on their cost parameter and, possibly, on their competitors’ costs. Costs are independently distributed across buyers, and both the buyers and the seller are risk-neutral. The formulation allows for complements, substitutes and externalities. We identify a number of novel characteristics of revenue-maximizing mechanisms: First, we find that revenue-maximizing reserve prices depend on the bids of other buyers. Second, we find that when non-participation payoffs are type-dependent, revenue-maximizing auctions may sell too often, or they may even be ex-post efficient.     

Mortgage Valuation with Optimal Intertemporal Refinancing Strategies

This article extends previous work on mortgage valuation in two ways. First, I identify the prepayment boundary by solving for the borrower's optimal prepayment strategy over the expected tenure in the house. Previous work has treated the prepayment decision as a one-time decision, not as an element of a multiperiod strategy. Second, the model incorporates borrower heterogeneity in terms of expected tenure in the house. The results show that the optimal refinancing strategy differs significantly from a sequence of one-time decisions. A borrower following the optimal strategy is less aggressive in refinancing and pays more interest and less transaction costs than does a borrower following a myopic strategy. Estimated mortgage values are higher and interest rate sensitivity is lower when compared to values calculated using the traditional approach.