The complete incremental cost test for cross-subsidies with a sub-modular cost function

The complete Incremental Cost Test for cross-subsidies can be difficult to apply to a multi-product enterprise because every possible subset of products must be tested. However, this combinatorial problem can be avoided when the enterprise’s cost function is sub-modular by identifying the smallest subset of products causing the maximum cross-subsidy. This subset contains all of the products, and only those products, that are responsible for the cross-subsidies left by a stipulated set of prices. In addition, the subset can often be identified with a simple and efficient Myopic Algorithm. The algorithm should be particularly useful as a method for detecting cross-subsidies in regulated enterprises and networks because the cost functions for these industries are typically sub-modular.     

The politics of professional accounting research: some personal reflections

Professional research is generally undertaken by committees and is almost invariably commissioned and monitored by committees. This article deals with the politics of such research. It draws on the author's experiences with professional bodies and government organisations in several countries, with particular reference to the production of The Corporate Report in the United Kingdom and Corporate Reporting: its Future Evolution in Canada. Types of professionally sponsored research are analysed, and proposals for improvements in this type of research are presented, along with suggestions for further investigation of the issues dealt with.     

Capacity utilization and depreciation-in-use

In this paper, the effect capacity utilization has on the depreciation of capital goods is studied, starting from a quadratic approximation to a normalized short-run cost function. Expressions for the optimal rate of capacity utilization, the demands for labour and energy, and for investment are obtained. Investment is a function of past capital stock, expected future capital stock, expected future relative prices and expected future depreciation rates. Expectations are modelled via instruments. The model is tested using US total manufacturing quarterly data. Depreciation dependent upon usage is found to be both statistically and economically significant.     

Pricing Perpetual Options for Jump Processes

Abstract

We consider two models in which the logarithm of the price of an asset is a shifted compound Poisson process. Explicit results are obtained for prices and optimal exercise strategies of certain perpetual American options on the asset, in particular for the perpetual put option. In the first model in which the jumps of the asset price are upwards, the results are obtained by the martingale approach and the smooth junction condition. In the second model in which the jumps are downwards, we show that the value of the strategy corresponding to a constant option-exercise boundary satisfies a certain renewal equation. Then the optimal exercise strategy is obtained from the continuous junction condition. Furthermore, the same model can be used to price certain reset options. Finally, we show how the classical model of geometric Brownian motion can be obtained as a limit and also how it can be integrated in the two models.     

Using disaster planning to optimize expenditures on financial safety nets

Using a multiperiod model, this paper offers a benchmark standard for efficient safety net management. This standard embodies a market-mimicking strategy for identifying, preventing, and resolving bank insolvencies. Around the world, governmental reluctance to acknowledge weaknesses in their crisis prevention efforts supports an underinvestment in contingent plans for handling financial disaster. The model features the hypothesis that this underinvestment misserves taxpayers by increasing the ability of stakeholders in insolvent banks to extract implicit and explicit subsidies when and as the threat of an actual crisis intensifies.The William S. Vickrey Distinguished Address presented at the Fiftieth International Atlantic Economic Conference, October 15–18, 2000, Charleston, SC.     

Are computers driving real wages down?

The annual growth in mean employee compensation plummeted from 2.6% in 1947–73 to 0.4% in 1973–2003. Using both time-series regression and pooled, cross-section, time-series regression analysis for 44 industries over the period 1953–2000, we find that earnings growth is positively related to overall productivity growth, capital investment excluding computers, and the unionization rate. We find also that computerization has a significant negative effect on earnings growth, but no evidence that the growth of skills or educational attainment has any statistically significant effect on earnings growth. The dominant factors explaining the slowdown in wage growth are decline in the unionization rate, slowdown in both TFP growth and overall capital investment, and acceleration in computer investment.     

THE WEALTH EFFECTS OF INCOME INSURANCE

Precautionary savings models suggest that wealth should rise with income risk. Risk is reduced by means-tested transfers, however, which implies that transfer programs should discourage private wealth accumulation. We offer a comprehensive empirical assessment based on variation across states in the generosity of a number of programs, specifically unemployment insurance and means-tested transfers (Aid to Families with Dependent Children and Food Stamps). We use monthly data on married couples from the Survey of Income and Program Participation (SIPP) to regress wealth on income, income risk, and various measures of transfer generosity. The results support the precaution-ary savings model and reveal moderate negative wealth effects of both unemployment insurance and means-tested transfers, with an elasticity of about −0.18.