Risk Aversion,Downside Risk Aversion and Paying for Stochastic Improvements

This paper considers the relationship between risk preferences and the willingness to pay for stochastic improvements. We show that if the stochastic improvement satisfies a double-crossing condition, then a decision maker with utility v is willing to pay more than a decision maker with utility u, if v is both more risk averse and less downside risk averse than u. As the condition always holds in the case of self-protection, the result implies novel characterizations of individuals’ willingness to pay to reduce the probability of loss. By establishing a general result on the correspondence between an individual's willingness to pay, and his optimal purchase of stochastic improvement when there is a given relationship between stochastic improvements and the amount paid for them, we further show that all results on the willingness to pay can be applied directly to characterize the conditions under which a more risk averse individual will optimally choose to buy more stochastic improvement. Generalizations of existing results on optimal choice of self-protection can be obtained as corollaries.     

Call for papers and participation

Call for papers and participation     

Signalling under intertemporal resolution of uncertainty: Distinguishing debt-with-warrants from similar offerings

This article extends existing static analyses of debt-with-warrants' ability to signal by considering the intertemporal resolution of uncertainty. Provided that managers seek to minimize residual risk while correctly signalling prospects, callable bonds-with-warrants can prove strictly superior to analogous offerings of pure debt or of debt-with-equity. Because our intertemporal structure allows bonds to be called while warrants remain outstanding, these complicated offerings can also be successfully discriminated from convertible bonds. Managers can further accentuate dissipation of residual risk by simultaneously issuing debt-with-warrants and buying down existing equity (through share repurchase or cash dividends).The authors express our appreciation to Charlie Jacklin for discussions concerning this material. Our thanks also go to an anonymous referee atRQFA who helped us to refine our final product.Much of the work for this paper was conducted while Professor Robbins was a Visiting Research Scholar at Stanford GSB.     

Bargaining Strength and Property Class in Office Markets

This paper examines the influence of bargaining power and property class on the prices of heterogeneous goods. Specifically, it explores the impact of buyer and seller characteristics on the transaction prices of office properties. The empirical model is based on the work of Harding, Rosenthal, and Sirmans (2003), which developed a method to distinguish between the impact of buyer and seller attributes on bargaining power and the choice of otherwise unidentified price effects (i.e., property class) in the context of hedonic price models. The data set contains information on transaction prices of office properties in Cook, DuPage, and Lake Counties, Illinois from 1995 to 1997. The results reveal systematic differences in bargaining power and property class for certain groups of buyers and sellers contained within the sample.     

The five minds of a manager

Managers are told: Be global and be local. Collaborate and compete. Change, perpetually, and maintain order. Make the numbers while nurturing your people. To be effective, managers need to consider the juxtapositions in order to arrive at a deep integration of these seemingly contradictory concerns. That means they must focus not only on what they have to accomplish but also on how they have to think. When the authors, respectively the director of the Centre for Leadership Studies at the University of Exeter in the U.K. and the Cleghorn Professor of Management Studies at McGill University in Montreal, set out to develop a masters program for practicing managers, they saw that they could not rely on the usual MBA educational structure, which divides the management world into discrete business functions such as marketing and accounting. They needed an educational structure that would encourage synthesis rather than separation. Managing, they determined, involves five tasks, each with its own mind-set: managing the self (the reflective mind-set); managing organizations (the analytic mind-set); managing context (the worldly mind-set); managing relationships (the collaborative mind-set); and managing change (the action mind-set). The program is built on the exploration and integration of those five aspects of the managerial mind. The authors say it has proved powerful in the classroom and insightful in practice. Imagine the mind-sets as threads and the manager as weaver. Effective performance means weaving each mind-set over and under the others to create a fine, sturdy cloth.     

Time consistent monetary policy with endogenous price rigidity

I characterize time consistent equilibrium in an economy with price rigidity and an optimizing monetary authority operating under discretion. Firms have the option to increase their frequency of price change, at a cost, in response to higher inflation. Previous studies, which assume a constant degree of price rigidity across inflation regimes, find two time consistent equilibria—one with low inflation, the other with high inflation. In contrast, when price rigidity is endogenous, the high inflation equilibrium ceases to exist. Hence, time consistent equilibrium is unique. This result depends on two features of the analysis: (1) a plausible quantitative specification of the fixed cost of price change, and (2) the presence of an arbitrarily small cost of inflation that is independent of price rigidity.     

The informational role of supermajorities

We study a collective decision making environment where an agenda setter makes strategic proposals to privately informed voters who vote strategically. We show that, consistent with empirical evidence, it can be optimal for the agenda setter to propose supermajorities. Due to an informational role that we unveil, optimal supermajorities can be less costly than minimum winning coalitions, even though more voters are awarded a positive share. We also examine consequences in terms of quality of decision making. We show that the introduction of a strategic agenda setter can lead to socially suboptimal decisions.