Participating Insurance Contracts and the Rothschild-Stiglitz Equilibrium Puzzle

We extend the Rothschild-Stiglitz (RS) insurance market model with adverse selection by allowing insurers to offer either non-participating or participating policies, that is, insurance contracts with policy dividends or supplementary calls for premium. It is shown that an equilibrium always exists in such a setting. Participating policies act as an implicit threat that dissuades deviant insurers who aim to attract low-risk individuals only. The model predicts that the mutual corporate form should be prevalent in insurance markets where second-best Pareto efficiency requires cross-subsidisation between risk types.     

Learning by fund-raising

From experience, fund-raisers become more efficient solicitors. This paper offers a full characterization of the optimal solicitation strategy when there are learning economies. The characterization is recursive, and does not require equilibrium computations. Our main results are that (1) the fund-raiser may now solicit a “ net free-rider”—a donor whose contribution falls below the marginal solicitation cost; (2) the number of solicitations is non-monotonic in the learning rate; and (3) a solicitation technology with high overhead but low marginal costs is likely to be optimal if income distribution in the population is relatively homogenous. The complementary case with a decreasing returns to scale technology is also considered.     

Ethical Reasoning in Action: Validity Evidence for the Ethical Reasoning Identification Test (ERIT)

In recent years, a growing number of small-to-medium-enterprises are embracing wind turbine projects not only as part of their cost reduction strategy but also to actively play their part in the global fight against climate change. However, it would appear there are currently limited empirical studies carried out in this emerging industry. This case study analyses the cost effectiveness of one such wind turbine initiative by a company in the Republic of Ireland, who invested in a 300 kW embedded wind turbine project at the end of 2013. The research methodology which is primarily a case study analysis included comparing historical electricity utility bills which allowed the 2013 quantity of electrical energy units imported, i.e. the year before the turbine was installed to be compared with the 2014 value, i.e. the year after the turbine was installed. Numerous site visits were undertaken over a four-year period, during which electric meter readings were recorded and stored. The findings of this piece of research indicate that the installation of the embedded wind turbine had minimal positive effect on the annual electricity costs for the company. Indeed the turbine appears to have significant negative effects such as a need for an increased maximum import capacity and also it appeared to contribute to a deteriorating utility power factor. While the aesthetic nature of the on-site turbine seemed to create a positive image of the company, it would appear that caution should be exercised when business owners select alternative energy providers who claim to be experts in the energy field but may have limited knowledge in this area of wind energy, which as of yet has minimal robust research into all aspects of its benefits/attributes.     

Multi-product capacitated facility location problem with general production and building costs

This research introduces the multi-product capacitated facility location problem with general production and building costs (MP-CFLPGC). The MP-CFLPGC extends previous problems found in the literature by including multiple products and general production and building cost functions that allow the modeling of different behaviors like economies of scale and congestion. The MP-CFLPGC is formulated as a mixed integer linear program (MILP). To evaluate the performance of the proposed formulation we analyze the results of a commercial optimizer on a set of 288 randomly generated test instances that resemble the Colombian cement industry supply chain. After one hour the optimizer achieved an optimality gap of 1.0 % or less in 55 % out of the 288 test instances. On average the optimality gap was 3.57 %. Additionally, we propose a randomized mathematical-programming-based heuristic for the test instances where the MILP formulation presents significantly high optimality gaps.     

Importers,Exporters and Multinationals: Exploring the Hierarchy of International Linkages

The purpose of this paper is to empirically explore two dimensions of the firm hierarchy of international market-specific linkages, using data on Swedish manufacturing firms from 1997 to 2007. First, we investigate the productivity ordering with respect to three international linkages; importing, exporting and investing abroad. Second, we explore whether differences in the productivity ordering across industries correlates with industry and country characteristics. Our findings support a general productivity hierarchy from importing to exporting and from exporting to investing abroad, as well as from a low to a high number of linkages (measuring the complexity of firms’ international linkages). However, an industry-by-industry examination shows that the hierarchical structure is only generally upheld when it comes to the number of international linkages, while the ordering of import, export and investment linkages does not exhibit the same regularity across industries. Extending the analysis, we find that the lack of a hierarchical structure is more likely in industries focusing on larger and less distant markets.     

The Coordinated Effect of a Merger with Balanced Sharing of Collusive Profits

It is hard to assess the coordinated effect of mergers in solid and convincing fashion, in part because economic theory deals mainly with the sustainability of tacit collusion and generally does not explore the conditions that foster collusion in the first place. Also the most popular schemes of collusion (Joint profit maximization and Nash Bargaining) proposed by the economic literature seem at odds with the evidence recorded on cartels and with the practical attitude of entrepreneurs. In this scenario the recent version of the Horizontal Merger Guidelines contained the interesting suggestion to pay attention to the process - parallel behaviour – which leads to collusive equilibria. Working on the same intuition we propose an approach based on the idea that firms can always find a feasible collusive agreement, for every possible value of the factor which discounts future profits. Assuming that in order to collude, firms demand the fair sharing of collusive gains, we exploit the egalitarian property of grim trigger strategies when all incentive compatibility constraints are binding. This approach suggests using three indicators to determine whether and how a merger affects the probability of collusion. An application of this approach to a real-world case (the AT&T/T-Mobile merger) is provided.     

It is not whom you know,it is how well you know them: Foreign entrepreneurs building close guanxi relationships

Within the growing body of Chinese entrepreneurship literature, guanxi is increasingly recognized as an important indigenous Chinese business practice with important implications for firm performance and success. Guanxi is defined as relationship or connection. China’s continued economic growth and forecasts of it becoming one of the world’s largest consumer markets present multinational corporations and foreign entrepreneurs alike with unprecedented economic opportunities. Thus, greater insight is required into how foreign entrepreneurs, as outsiders, establish and develop close guanxi relationships. Conceptualizing guanxi as a dynamic process, this paper explores the underlying interactions and processes foreign entrepreneurs engage in to establish and build a strong emotional connection and trust with their closest guanxi partner. Using an exploratory single case study approach, data from 15 foreign entrepreneurs operating legally registered small- and medium-size enterprises (SMEs) in Shanghai was collected and analyzed. In addition, self-administered structured questionnaires that utilize the McAllister trust scale were used to measure 20 foreign entrepreneurs’ levels of cognitive and affective trust toward their closest guanxi partner. Overall, the findings of the study provide an in-depth understanding of the complex interplay and functioning of third-party and anticipatory bases. In so doing, the study’s outsider perspective addresses a critical gap in the literature that yields initial yet important insights that contribute to a better understanding and appreciation of the inherent nuances and differences in relationship-building processes in cross-cultural settings. Furthermore, these findings bring to the fore the need to consider the ways in which this indigenous Chinese business practice may be evolving in the face of increasing internationalization.     

Econometrics and equilibrium models

In Rational Econometric Man, Edward Nell and Karim Errouaki present a welcome and timely case for the view that econometrics and econometric model-building may not be the magic tools to solve all empirical questions despite what many seem to have thought they were in the 1960s. Here I examine some possible problems with econometric models that have to do with their usually taking the form of equilibrium models. Some of these problems were recognized by Trygve Haavelmo decades ago. And as Aris Spanos has recently discussed, the problems are often the result of what we say in our textbooks. Some problems have to do with what we mean by econometric parameters and others with how we use probabilities.