Pricing executive stock options under employment shocks

We obtain explicit expressions for the subjective, objective and market value of perpetual executive stock options (ESOs) under exogenous employment shocks driven by an independent Poisson process. Previously, we obtain the executive's optimal exercise policy from the subjective valuation that is necessary for the objective one, or fair value. The perpetual ESO is compared with the true finite maturity ESO finding that the approximation is reasonably good. To illustrate the usefulness of the objective valuation for accounting purposes, we analyze the statistical distribution of the fair value when there is uncertainty about the employment shock intensity. Finally, the role of ESOs in the design of executives’ incentives is also discussed.     

The efficiency of equilibrium traffic flows

This paper studies the behavior of an optimizing driver on a freeway and the equilibrium speed at which specified flows of traffic move. It shows that both when passing is not allowed (the standard car-following framework of the engineering literature) and when it is permitted, the equilibria tend to exhibit speeds below the Pareto optimal speeds. The flat congestion toll proposed by Oron, Pines and Sheshinski (1973) does not, by itself, bring about Pareto optimality.     

Evaluating the economic impact of quality-reducing,seed-borne diseases: Lessons from Karnal bunt of wheat

Estimates of aggregate disease costs can be used for assigning research resources or to evaluate control measures. Most diseases cause production losses, but others affect quality and marketability. Seed-borne diseases also cause problems for the seed production and distribution industry. The aim in this paper is to examine issues relating to the economic impact of a quality-reducing, seed-borne disease, and to highlight differences compared to non-seed-borne diseases affecting yield only. Economic evaluation of quality-reducing, seed-borne diseases needs to incorporate impacts of trading restrictions such as quarantines or embargoes imposed by purchasers. The costs of measures taken to control diseases also represent part of the economic impact of the disease. Full economic costs of a disease include the direct (yield and quality) costs and costs of the control measures. The costs of Karnal bunt of wheat in Mexico were found to include many control costs that have often been overlooked. The optimal amount of resources to invest in controlling a disease depends on the likely annual costs of the disease and of control measures. Before implementing disease control policies, both the costs and the benefits of the policies need to be considered, taking the risks of each option into account, to ensure that the policy itself does not impose greater costs than the uncontrolled disease.     

Electricity Prices and Power Derivatives: Evidence from the Nordic Power Exchange

This paper examines the importance of the regular pattern in the behavior of electricity prices, and its implications for the purposes of derivative pricing. We analyze the Nordic Power Exchange's spot, futures, and forward prices. We conclude that the seasonal systematic pattern throughout the year, in particular, is of crucial importance in explaining the shape of the futures/forward curve. Moreover, in the context of the oneand two factor models analyzed in this paper, a simple sinusoidal functionis adequate in order capture the seasonal pattern of the features and forwardcurve directly implied by the seasonal behavior of spot electricity prices.     

A Non-cooperative Approach to Bankruptcy Problems

We propose an elementary game form that allows to obtain the allocations proposed by any acceptable bankruptcy rule as the unique payoff vector of the corresponding Nash equilibria.     

Income Shifting in the Spanish Dual Income Tax*

Based on a model of behavioural response to taxes, and using the Taxpayers Panel from the Instituto de Estudios Fiscales for the period 1999–2009, we analyse whether the dual nature of the Spanish personal income tax (PIT), reinforced by the 2007 reform, has influenced taxpayers’ behaviour, causing them to convert part of their ‘general income’ (from labour, real estate or economic activities) into ‘savings income’ (from movable capital or capital gains). We also extend the analysis of income shifting and study whether Spanish taxpayers also responded to the different tax treatments given to the two types of savings income (from movable capital and capital gains) until 2007, transforming savings income from one type to the other. The results of our study demonstrate three facts. First, Spanish taxpayers did respond to the different tax rates, shifting income from the general base to different forms of savings, especially capital gains. The highest‐income individuals and the self‐employed and business owners are the groups where this behaviour was most marked. Second, the self‐employed and business owners also turned income from movable assets into capital gains, guided by their different tax rates. And third, we find signs of ‘anticipation’ and ‘learning’ effects caused by the 2007 tax reform. We believe that the results obtained will enrich the growing literature on income shifting.     

Social protection during recessions: evidence from Chile

This article analyzes the main labor market risk management strategies adopted by the Chilean Government during the 1999 recession that was initially related to the Asian financial crisis. Their successes and failures can suggest innovative social protection solutions for other countries. It seems that the 1999–2001 labor reforms and a three-year plan to increase the minimum wage intensified the recession’s effects on unemployment. Probit models indicate that households coped with the recession’s effects by increasing wives’ labor supply but not by withdrawing children from schools. The expansion of employment programs probably helped households to adopt these coping strategies.     

Environmental impact of household activity in Spain

The objective of this paper is to analyse the environmental impacts of the Spanish economy by way of water and atmospheric pollution on the basis of a Spanish Accounting Matrix for 1999. Only households were taken as an exogenous account. The pollution measures are estimated for seven categories of pollution: three atmospheric pollutants (CO₂, NO_x and SO_x) and four indicators for water (waste water, nitrogen, metals and biological oxygen demand (BOD)). The environmental data base was obtained from the Spanish Statistical Institute.The analysis reveals that pollution in Spain is closely linked to food production, energy, extractive industries and paper manufacturing. We show that services, taken as a whole, are major polluters, though this is due to the volume of household expenditure they represent rather than their pollution potential as such. We also show that the Spanish economy avoids a great deal of pollution by importing inputs, which pollute where they are produced. Finally, the study also provides per capita pollution values for the aforementioned seven pollutants.     

Harvesting Preemption, Industrial Concentration and Enclosure of National Marine Fisheries

This paper explores how harvesting technology can affect firms' internalisation of common pool externalities and the incentives for expanding firm's size. Focusing on supply side non-pecuniary externalities, our closed-entry harvesting competition model suggests that when marginal harvesting costs are weakly sensitive to common pool externalities, atomistic competition is likely to remain, other things equal, as the predominant industrial structure in the fishery. The avenue for increasing industrial concentration is modelled via Stackelberg leadership which offers the option of preempting rivals' production. In our static modelling, a fishery subject to Stackelberg signalling results in higher overfishing versus the case of a highly decentralised harvesting sector (proxied by the use of Nash conjectures). Given that static optimising behaviour could be interpreted as a result of entry controls and other fishing regulations being widely perceived as ineffective controls, the obtained overfishing ranking suggests that in fisheries where strategic preemption in production is feasible, but where entry controls and other important regulations on fishing effort are considered to be ineffective, overfishing is likely to remain the predominant outcome, even if other incentives promote evolution towards a more concentrated industry structure. When the fishery is already overpopulated by numerous small firms, whatever advantages large firms may have in terms of profitability, numerous small-scale fishermen tend to make up for in the political arena. This imposes constraints on the politically feasible fishing regulations. We use a second best welfare benchmark to illustrate resulting policy trade-offs.