Employee stock options with performance conditions: do commonly used valuation heuristics work?

Valuation heuristics are widely used to value traditional time vesting option plans. This study analyses if these heuristics also qualify for valuing performance vesting plans. We examine performance conditions tied to the underlying stock, the stock's performance relative to a stock index, and an earnings measure. The differences between the approximated option values and the values assuming optimal exercise are overall smaller with the performance conditions than without them. In particular, this result holds when the heuristic exercise assumptions are based on the case without performance conditions, which is a considerable simplification in practice.     

Effiziente Risikosteuerung durch die Kfz-Versicherung – Eine verhaltensökonomische Untersuchung

From an economic perspective, the automobile insurance plays an important role in regulating the activity level of driving by closing a prevention gap of the strict liability for automobile accidents. The gap is caused by bounded rationality of car owners and drivers. Unrealistic optimism and self-serving bias lead to an underestimation of expected damages. As a result, the activity level of driving would rise above the optimum, social costs would exceed the utility from driving and too many accidents would occur. The article illustrates how the automobile insurance counteracts these inefficiencies and thereby leads to a more efficient activity level.     

Small firms in the SSBF

This paper uses Survey of Small Business Finance data to better understand how the owners of small firms use decisions about legal organization, firm size, capital structure, and owner investment in the firm to manage firm risk. The main findings are: Firms with unlimited liability are smaller, both when measured by assets and number of employees, and tend to be less leveraged than those whose owners limit personal exposure to firm liabilities. Entrepreneurs tend to hold largely undiversified positions by investing heavily in their firms, and this does not differ appreciably by legal organization. The percentage of firms with limited liability has remained virtually constant through time, although within this group there is a trend toward hybrid legal organizations with beneficial tax treatment. We estimate return on assets and find that entrepreneurship is a very risky undertaking, with high upside gain. The possibility of high future returns helps explain the coexistence of a large percentage of firms with negative equity and low default rates. The shape of the return distribution and limited liability interact; the option to declare bankruptcy shields owners from personal loss in the lower tail of the distribution while preserving the potential for significant firm returns in the upper tail.     

Output, prices, and the distribution of consumption in rural India

This article analyzes the relation among agricultural output, inflation, and the distribution of consumption in rural India, using both the Singh–Maddala and Dagum families to model the entire distribution parametrically. Employing a benchmark case in which growth is distributionally neutral and idiosyncratic shocks are completely smoothed, and using a GMM‐estimator to deal with potential simultaneity between output and consumption, we conclude that: (i) growth was not distributionally neutral; (ii) good harvests (relative to trend) yielded improvements according to first‐order stochastic dominance; (iii) slow growth before 1980 went with decreasing inequality; (iv) accelerated growth thereafter tended to increase inequality, though yielding improvements according to first‐order stochastic dominance; (v) consumption smoothing was incomplete.     

Optimisation and the selection of conservation contracts*

This paper explores alternative techniques for the selection of conservation contracts under competitive tendering programs. Under these programs, purchasing decisions are often based on the benefits score and cost for proposed projects. The optimisation problem is to maximise the aggregate benefits without exceeding the budget. Because the budget rarely permits all projects to be funded, there is a binary choice problem, known in the operations research published work as a knapsack problem. The decision‐maker must choose which projects are funded and which are not. Under some circumstances, the knapsack problem can be unsolvable because computational complexity increases exponentially with the number of projects. This paper explores the use of several decision rules for solving the optimisation problem including the use of advanced meta‐heuristics. It is shown that commonly applied techniques for project selection may not be providing the optimal solution. Improved algorithms can increase the environmental programs benefits and staying within budget. The comparison of algorithms is based on real data from the Western Australian Conservation Auction.     

Externalities in a life cycle model with endogenous survival

We study socially vs individually optimal life cycle allocations of consumption and health, when individual health care curbs own mortality but also has a spillover effect on other persons’ survival. Such spillovers arise, for instance, when health care activity at aggregate level triggers improvements in treatment through learning-by-doing (positive externality) or a deterioration in the quality of care through congestion (negative externality). We combine an age-structured optimal control model at population level with a conventional life cycle model to derive the social and private value of life. We then examine how individual incentives deviate from social incentives and how they can be aligned by way of a transfer scheme. The age-patterns of socially and individually optimal health expenditures and the transfer rate are derived. Numerical analysis illustrates the working of our model.     

The legacy of Max Weber and the early Austrians

The Review of Austrian Economics - This paper explores Max Weber’s intellectual relationship to the first generations of the Austrian School. Challenging his portrayal as a one-sided...     

A STATE-SPACE APPROACH TO ESTIMATE AND TEST MULTIFACTOR COX-INGERSOLL-ROSS MODELS OF THE TERM STRUCTURE

The objective of this paper is to estimate and test multifactor versions of the Cox-Ingersoll-Ross (CIR) model of the nominal term structure of interest rates. The proposed state-space approach integrates time series and cross-sectional aspects of the CIR model, is consistent with the underlying economic model, and can use information from all available points of the term structure. We recover estimates of the underlying factors that are consistent with the assumptions about the stochastic processes and compare them with factors obtained from standard factor analysis. We perform thorough diagnostic checking and thereby provide new evidence regarding conclusions about the adequacy of the CIR model. We present empirical results for U.S. Treasury market data. Although the specification of multifactor CIR models is sufficiently flexible for the shape of the term structure, we find strong evidence against the adequacy of the CIR model.