MISUSE AND OPTIMUM INSPECTING STRATEGY IN AGENCY PROBLEMS

Assets misuse by an agent and the optimal audit inspecting strategy are analyzed in this paper. The agent and the principal are acting to maximize their expected utility and both are characterized by risk aversion. The agent's decision about a theft takes into account the probability of benefiting from the stolen assets but also the probability of being penalized if caught. The principal's decision about the optimal number of audit teams, hence, the probability of uncovering the theft, takes into account the cost involved, the probability of one team of auditors uncovering the theft and the agent's decision about the theft. We get two response curves which describe the optimal behavior of both the agent and the principal and show that there may be a Nash solution to the problem. Since in real life there are often many principals (shareholders) with different utility functions, a set of efficient strategies is offered using the First and Second degree Stochastic Dominance rules. A numerical illustration which clarifies the methodology and displays the applicability of the model is also provided.     

The Association between Earnings' Yield and Market Returns: A Stochastic Dominance Analysis

This paper examines the contemporaneous association between earnings' yield and return on common stock, during the nineteen-year period commencing with 1959. The analysis includes 391 firms, which have been clustered in ten portfolios, by the magnitude and changes in their Total Debt to Total Assets ratios, over twenty years. Three Stochastic Dominance rules have been employed in a twofold examination: a market index and direct pairwise portfolio comparisons. The results suggest a positive association between earnings' yield and return on common stock and, therefore, support previously published findings. However, the association reported in this paper is limited to Third Degree Stochastic Dominance, which is tied to decreasing absolute risk aversion behaviour on the part of market participants. Since the analytical path followed in this study is free of some criticism voiced with respect to empirical applications of the capital asset pricing and market models, which have been utilized by previous writers, the results also lend further validity to the application of those models in similar studies. Résumé Cette étude examine l'association simultanée entre le rendement des bénéfices et le rendement d'actions ordinaires pendant une période de 19 ans commençant en 1959. L'analyse comprend 391 entreprises qui ont été regroupées en 10 portefeuilles selon l'ampleur et les changements du rapport de la dette totale et l'actif total sur une période de 20 ans. Trois règles de dominance stochastique ont ete employées dans un examen a deux volets portant sur l'indice boursier et les comparaisons de portefeuilles par paires. Les résultats indiquent une association positive entre les bénéfices et le rendement sur les actions ordinaires et corroborent donc les résultats d'études publiées précédemment. Cependant, l'association établie dans la présente etude est limitée à une dominance stochastique du troisième degré qui est reliée à une diminution du comportement d'aversion au risque absolu chez les participants sur le marché boursier. Comme le cheminement analytique de la présente étude ne comporte pas toutes les critiques concernant les applications empiriques des modèles de marché et de détermination de la valeur de l'actif qui ont été utilisés par d'autres auteurs, les résultats confèrent également une validité accrue à l'application de ces modèles dans des études semblables.     

The Effectiveness of Canadian Oil- and Gas-Pipeline Price Regulation 1976–82

This paper examines the effectiveness of the oil and gas-pipeline price-regulation system in Canada during the seven years beginning January 1976. Results for a threefold analysis are reported. When the seven-year period was considered as a whole, the regulatory system was not found to be ineffective in implementing the “comparable-earnings” and “capital-attraction” criteria. This finding also holds for the pre-October 1980 National Energy Plan-announcement period. The regulatory system was not effective, however, in achieving its proclaimed goals on a yearly basis. The “consumer-protection” hypothesis could not be rejected for the Canadian oil and gas-pipeline regulatory system. Résumé Ce mémoire examine l'efficacité de la réglementation relative aux prix d'utilisation des gazoducs et oléoducs au Canada sur une période de sept ans à partir de janvier 1976. Les résultats de cette analyse comportent trois volets. Si l'on tient compte globablement des sept années qui sont évaluées, la réglementation ne se montre pas inefficace du point de vue des profits comparatifs et de la facilité d'obtention de capitaux. Ces résultats s'appliquent à la période précédant la mise en vigueur de la Politique énergétique nationale en octobre 1980. Cependant, la réglementation n'atteint pas les objectifs fixés. L'hypothèse de protection du consommateur ne pouvait ětre rejetée dans le cas de la réglementation relative aux prix d'utilisation des gazoducs et oléoducs au Canada.     

The CAPM is Alive and Well: A Review and Synthesis

Mean-Variance (M-V) analysis and the CAPM are derived in the expected utility framework. Behavioural Economists and Psychologists (BE&P) advocate that expected utility is invalid, suggesting Prospect Theory as a substitute paradigm. Moreover, they show that the M-V rule, which is the foundation of the CAPM, is not always consistent with peoples' choices. Thus, BE&P cast doubt on the validity of expected utility paradigm and of the M-V rule, hence the CAPM is theoretically questionable. In addition, there is very little empirical support to the CAPM. We show in this study that the CAPM is theoretically valid even when one accepts the BE&P framework and even when expected utility is invalid. Moreover, within the BE&P framework there is a strong experimental support for the CAPM.     

The Geopolitics of Neighbourhood: Jerusalem’s Colonial Space Revisited

This article will focus on an ongoing process of Jerusalem’s contested urban space during the last decade namely the immigration of Palestinians, mostly Israeli citizens, to “satellite neighbourhoods”, i.e. Jerusalem’s colonial neighbourhoods that were constructed after 1967. Theoretically, this paper attempts to discuss neighbourhood planning in contested cities within the framework of geopolitics. In more details, we will focus on the relevance of geopolitics to the study of neighbourhood planning, by which we mean not merely a discussion of international relations and conflict or of the roles of military acts and wars in producing space. Rather, geopolitics refers to the emergence of discourses and forces connected with the technologies of control, patterns of internal migrations by individuals and communities, and the flow of cultures and capital.     

Envy and Altruism: Contrasting Bivariate and Univariate Prospect Preferences

We compare prospect ordering with and without envy and altruism. We find that envy can induce a violation of the univariate first‐degree stochastic dominance (FSD), and thus a violation of the classic expected utility monotonicity axiom. Surprisingly, altruism can also violate FSD preferences. The intuitive explanation of the result in the case of altruism hinges on the sign of the mixed derivative of the bivariate preference: the individual might prefer a certain correlation between her wealth and her peer group's wealth, and is therefore willing to violate FSD as long as the outcomes of the two parties are ordered according to her preferences. When investments are considered, envy and altruism can distort not only preferences but also actual choices.     

Strategic Trading, Liquidity, and Information Acquisition

We study endogenous liquidity trading in a market with long-livedasymmetric information. We distinguish between public information,tractable information that can be acquired, and intractableinformation that cannot be acquired. Besides information asymmetryand noise, the adverse-selection spread depends on the diffusionof intractable information and on the interest rate. With endogenousliquidity trading, efficiency is lower than that implied bynoise-trading models. Liquidity traders benefit from the informationreleased through the insider's trades in spite of their monetarylosses. We study factors that affect the insider's informationacquisition decision, including the amount of intractable information,observability, and information acquisition costs.     

Dealership market: Market-making with inventory

This study considers the problem of a price-setting monopolistic market-maker in a dealership market where the stochastic demand and supply are depicted by price-dependent Poisson processes [following Garman (1976)]. The crux of the analysis is the dependence of the bid-ask prices on the market-maker's stock inventory position. We derive the optimal policy and its characteristics and compare it to Garman's. The results are shown to be consistent with some conjectures and observed phenomena, like the existence of a ‘preferred’ inventory position and the downward monotonicity of the bid-ask prices. For linear demand and supply functions we derive the behavior of the bid-ask spread and show that the transaction-to-transaction price behavior is intertemporally dependent. However, we prove that it is impossible to make a profit on this price dependence by trading against the market-maker. Thus, in this situation, serially dependent price-changes are consistent with the market efficiency hypothesis.