A mutual insurance diffusion stochastic control problem

This paper determines the optimal loading factor policy of a mutual insurance firm. Insurance is viewed as a collective process of N persons paying fixed (or variable, contingent) premiums and seeking protection against claims. Risk reduction for each person is then exercised through a distribution of risk by aggregating individual risks and by accumulating cash (net of operating expenses) to meet possible contingent claims. By assuming an approximate claims diffusion process, stochastic control problems for selecting the optimum loading factor policies are stated and resolved analytically. In particular, the implicit cost of bankruptcy is computed and an optimum variable-feedback loading policy is established.     

Public Choice and Urban Water Quality*

Abstract . It is the purpose of this paper to examine critically the choice of “zero discharge” as me ultimate goal of our federal water pollution policy and to demonstrate that a goal of 90 percent removal of pollutants from effluents of urban areas will be more economically efficient. Our results indicate that in reaching “Zero discharge,” there is a minimal return in water quality for urban areas which are located on large bodies of water. The final conclusion is that the substantial resources, which would be required to surpass the level of 90 percent removal of pollutants, could be employed more effectively in other social programs.     

The accuracy of long-term earnings forecasts in the electric utility industry

This paper examines the accuracy of various methods of forecasting long-term earnings growth for firms in the electric utility industry. In addition to a number of extrapolative techniques, Value Line analyst forecasts are also evaluated. Value Line analyst forecasts for a five-year time horizon are found to be superior to many of the extrapolative models. Among the extrapolative models examined, implied growth and historical book value per share growth rate models performed best. These results provide strong support for using Value Line growth forecasts in cost of capital estimates for electric utilities in the context of utility rate cases. Value Line forecast errors could be explained by changes in dividend payout ratios, the firm's regulatory environment and bond rating changes.     

Maximum score estimation of the stochastic utility model of choice

This paper introduces a class of robust estimators of the parameters of a stochastic utility function. Existing maximum likelihood and regression estimation methods require the assumption of a particular distributional family for the random component of utility. In contrast, estimators of the ‘maximum score’ class require only weak distributional assumptions for consistency. Following presentation and proof of the basic consistency theorem, additional results are given. An algorithm for achieving maximum score estimates and some small sample Monte Carlo tests are also described.     

Modeling technical progress and total factor productivity: A plant level example

Shifts in the production frontier occur because of changes in technology. A model of how a firm learns to use the new technology, or how it adapts from the first production frontier to the second, is suggested. Two different adaptation paths are embodied in a translog cost function and its attendant cost share equations. The paths are the traditional linear time trend and a learning curve. The model is estimated using establishment level data from a non-regulated industry that underwent a technological shift in the time period covered by the data. The learning curve resulted in more plausible estimates of technical progress and total factor productivity growth patterns. A significant finding is that, at the establishment level, all inputs appear to be substitutes.This paper was processed by N.R. Adam.     

Measuring the dynamics of APEC output connectedness

We examine the dynamics of output connectedness of Asian Pacific Economic Cooperation (APEC) economies using time‐varying, region‐specific, generalised connectedness measures. We find that the connectedness of APEC economies with the rest of the world is quite substantial, with the 2008–09 Global Financial Crisis increasing the connectedness measures above their precrisis levels. The USA, China, and Korea are shown to be systemically important and to dominate APEC’s real activities, while outside the APEC region the roles of India and the UK are also non‐negligible. These results suggest that the majority of APEC economies are considerably open to output shocks from the dominant economies such that policymakers in APEC must be continuously conscious of headwinds originating from these sources.     

Heterogeneous country responses to the Great Recession: the role of supply chains

Review of World Economics - The one time shock of the Great Recession in 2008/9 opens up the opportunity to study the sensitivity of countries to global economic shocks. Some countries are more...     

Graduated Punishments in Public Good Games

I explain the ubiquitous use of graduated punishments by studying a repeated public good game in which a social planner imperfectly monitors agents to detect shirkers. Agents’ cost of contributing is private information and administering punishments is costly. Using graduated punishments can be optimal for two reasons. It increases the price of future wrongdoing (temporal spillover effect) and it can lead to bad types revealing themselves (screening effect). The temporal spillover effect is always present if graduated punishments prevail, but screening need not occur if agents face a finite horizon. Whether or not a screening effect is exploited has a substantial impact on both outcomes and actual punishments. If the temporal spillover effect is sufficiently strong, then first‐time shirkers are merely warned.