Using Contingent Valuation to Measure User and Nonuser Benefits: An Application to Public Transit

The contingent valuation method (CVM) was used to measure the value of a community service, rural transit, that has both user and nonuser values. Traditional focus groups and a CVM questionnaire provide estimates of willingness to pay and willingness to accept. Tobit analysis was used to test relationships among the variables. Income was not related to the amount of perceived benefit, but the alternative desire to provide transit for others was statistically significant. Ranges for possible total benefits, user and nonuser, are provided for the test transit systems. Proper aggregation of benefits to the population was found to be critical.     

Surveying Farmers: A Case Study

A large percentage of farmers do not respond to mail surveys. To gain insight into why farmers do not respond and how to improve response rates, a three-step research design was developed. First, an initial survey, based on in-person interviews with 15 farmers, was sent to 100 farmers. Second, farmers who did not respond to this mail survey were contacted by phone to investigate the reasons for not responding. Third, based on the information from these nonrespondents, the survey instrument was revised and sent to 3,990 U.S. farmers. Our studies show that the period in which the survey is sent is a crucial factor in the willingness to participate, along with the form and amount of compensation, the sender of the questionnaire, and the perceived length of the questionnaire.     

United Grain Growers: Enterprise Risk Management and Weather Risk

In August of 1999, Mike McAndless, the risk manager of United Grain Growers (UGG), was preparing for a meeting with the firm's chief financial officer, Peter Cox. Mike and Peter had spent considerable time over the past three years with representatives of the Willis Group Ltd., a large international insurance broker, identifying and measuring UGG's major sources of risk. The risk assessment process indicated that, although UGG hedged most of its currency and commodity price risk and purchased insurance against property and liability losses, the firm's earnings still exhibited substantial volatility. This volatility was, in large part, due to the weather. Mike and Peter had to decide whether to retain the risk or shift it to another party using one of two innovative contractual arrangements: weather derivatives or a new type of insurance contract.     

Corporate Governance, Internal Decision Making, and the Invisible Hand

Proponents of the dominant contemporary model of corporate governance maintain that the shareholder is the primary constituent of the firm. The responsibility for managerial decision makers in this governance system is to maximize shareholder wealth. Neoclassical economists ethically justify this objective with their interpretation of Adam Smith's notion of the Invisible Hand. Using a famous quotation from The Wealth of Nations, they interpret the Invisible Hand as Smith's (An Inquiry into the Nature and Causes of the Wealth of Nations, Methuen &; Co., London) assertion that market participants, in pursuing their own self-interests without regard to the interests of others, will collectively provide the optimal economic benefit to society. We argue that the traditional interpretation of Smith is too narrow and potentially harmful to society. In order to fully understand Smith's notion of the influence of the Invisible Hand on human behavior, one must also consider The Theory of Moral Sentiments. In that work, Smith (The Theory of Moral Sentiments, A. Millar, London) portrays the pursuit of self-interest as only one of several potential motivations for human action. He also acknowledged the existence of a “sympathy principle,” which refers to the ability and propensity of human beings to consider the interests of others. Heilbroner (The Essential Adam Smith, W.W. Norton, New York, p. 59) suggests that Smith's sympathy principle allows one to “determine the appropriate degree of self-interest, the proper display of benevolence, the desirable strictness of justice.” In fact, Smith indicates that (1) a society whose members pursue self-interest without a sense of justice will eventually collapse; (2) a society whose members pursue self-interest checked by their sense of justice alone will survive; (3) a society whose members pursue self-interest, justice, and the interests of others will flourish. Since a more complete reading of Smith indicates that human beings, in considering their own interests, also reflexively consider the interests of others when making decisions, then the traditional corporate governance model appears to be lacking. A broader, multiple stakeholder approach to corporate governance that considers the interests of other constituencies may be more consistent with Smith's views. In particular, Smith's sympathy principle provides a theoretical foundation for a shift away from the narrow, yet dominant, shareholder-based corporate governance model and toward multiple stakeholder models of corporate governance [e.g., Business and Society: A Strategic Approach to Corporate Citizenship, Houghton Mifflin, Boston, MA] and internal decision-making [e.g., Sloan Management Review 38, (1997) 25–37].     

The Damoclean tax and innovation

The paper presents a novel tax that is designed to improve the performance of research and development (R&D) investments. Ideally, the tax allows the technical efficiencies of monopoly while bringing about the desirable effects of the competitive pressure of R&D rivalry. Thus, with the tax, the state can sanction a monopoly of R&D investment in order to attain technical efficiencies and yet avoid the underinvestment in R&D that would result without competitive pressures. A critique of the tax emphasizes the problems of implementing it and offers a more practical alternative that would achieve the same desirable effects.     

TESTS OF THE BLACK-SCHOLES AND CONSTANT ELASTICITY OF VARIANCE CURRENCY CALL OPTION VALUATION MODELS

An adaptation of the Cox-Ross/Emanuel-MacBeth call option valuation model for constant elasticity of variance diffusion processes is tested here against an adaptation of the Black-Scholes call option valuation model for the pricing of call currency options. Synchronized transactions data supplied by the Philadelphia Exchange are used. A maximum likelihood estimation procedure indicates a significant association between currency return variances and exchange rate levels. The constant elasticity of variance model exhibits significantly superior pricing accuracy for predictive intervals of three or fewer trading days.