PRICING OF AMERICAN PATH-DEPENDENT CONTINGENT CLAIMS

We consider the problem of pricing path-dependent contingent claims. Classically, this problem can be cast into the Black-Scholes valuation framework through inclusion of the path-dependent variables into the state space. This leads to solving a degenerate advection-diffusion partial differential equation (PDE). We first estabilish necessary and sufficient conditions under which degenerate diffusions can be reduced to lower-dimensional nondegenerate diffusions. We apply these results to path-dependent options. Then, we describe a new numerical technique, called forward shooting grid (FSG) method, that efficiently copes with degenerate diffusion PDEs. Finally, we show that the FSG method is unconditionally stable and convergent. the FSG method is the first capable of dealing with the early exercise condition of American options. Several numerical examples are presented and discussed. ²     

Non-Europe: The magnitude and causes of market fragmentation in the EU

Non-Europe: The Magnitude and Causes of Market Fragmentation in the EU. — In 1985 the European Commission diagnosed its member states as suffering from excessive market fragmentation, later referred to as “Non-Europe.” The authors examine the empirical basis for the Commission’s diagnosis using a trade model derived from monopolistic competition. They then investigate the links between the initial size and subsequent evolution of border effects within the EU. The findings support the view that European consumers act as if imports from other members were subject to high nontariff barriers. However, there appears to be almost no relationship between market fragmentation and the barriers that were identified and removed by Europe’s Single Market Programme.     

Incentives for cost misrepresentation in supply chains

This paper investigates sequential manufacturer–retailer price determination and channel performance under possible misrepresentation by one member of its privately known cost. To the standard double marginalization game, we add a preliminary stage where the manufacturer (alternately the retailer) announces its privately known constant marginal cost. We prove that the manufacturer has no incentive to misrepresent its cost, and we give respective sufficient conditions on the demand function for the retailer to overreport and to underreport costs. Depending on the shape of the demand function, opportunistic behavior by the retailer may lower or raise the manufacturer’s profit and channel performance.     

What Is the Economic Meaning of FDH? A Reply to Thrall

Journal of Productivity Analysis -     

New patterns of consumer protection under warranty law: Lessons from the U.S. magnuson-moss warranty act

Warranty law appears to be a relevant instrument for granting protection to consumers against product disappointment. However, empirical studies concerning some warranty markets both in the United States and in West-European countries show that there continues to be no bargaining on warranties between sellers and buyers, that the most serious risks are all allocated to the user of the product, and that consumers are generally not granted an actual opportunity of challenging a breach of warranty and getting adequate compensation for losses sustained. The Magnuson-Moss Warranty-Federal Trade Commission Improvement Act which was enacted in the United States in 1975 constitutes a first comprehensive and consumer-oriented reform of traditional warranty law. It foresees new patterns of consumer protection under warranty statutes, combining warranty substance regulation with warranty information, administration, and litigation procedures. This paper first describes the Act's major provisions; it also points out some of its deficiencies. Although criticisms are formulated against the Act's ideology or basic assumptions, it is the author's opinion that it represents a decisive step towards legislative and administrative participation in the formulation of warranties. The Act undoubtedly suggests some, though not identical, avenues of reform that legislators and authorities of European countries and confederations should now propose in order to increase consumer protection against defective or unsatisfying products.     

Closing the development finance gap in post-conflict and fragile situations: What role for development finance institutions?

For many years, the main focus of international institutions and bilateral aid agencies has been on state building as the main action to support countries' recovery from conflicts or other fragile situations. The role of the private sector has been widely overlooked, despite being crucial in supporting economic growth and job creation. We argue that development finance institutions have a dedicated role to play in closing financial gaps, which are widening as fragility increases. They have the comparative advantages needed to make projects happen by supporting the private sector, hence significantly contributing to the recovery process.