Adjustment costs and theory of investment under uncertainty

It is shown that the stochastic investment rule for the price-setting monopolist facing random demand differs from the deterministic rule, due to the presence of the covariance of the marginal utility of profits and the MRTS between capital and labor. For the risk-neutral quantity-setting monopolist, the optimal current investment under random demand is shown to be greater than that under deterministic conditions, given that production technology is of the Cobb-Douglas type with constant returns to scale. When random wages and prices follow first-order autoregressive schemes, the risk-neutral competitive firm's current investment level is shown to be at least equal to that under certainty.     

The effectiveness of electric utility price regulation in the 1970s a stochastic dominance analysis

This paper examines whether electricity price regulation in the United States has been effective during the period January 1969 through December 1977. Because our analysis provides evidence suggesting that the price-setting system has been ineffective, we extended our study to examine the equability among regulated firms as well as the relationship between firms' asset size and return distributions. These latter examinations shed some light on the quality of the accounting information set, which serves as a major input to the price-setting process.     

Integrating strength-weakness analysis into strategic planning

Strength-weakness assessment, which must be performed as a part of any strategic planning process, is presented in terms of a process, termed SWA, that involves managers in making the critical informational choices that are implicit in strategic assessments of strengths and weaknesses. The process is illustrated in terms of its underlying premises, their implications, its benefits, and an illustrative substantive framework that can be used to guide the process.     

Optimal dynamic behavior of a market maker in choosing bid and asked prices

Dynamic programming is used to describe a specialist's choice of bid and asked prices given uncertainty about both limit and market orders. The role of limit orders is emphasized. Optimal quotes depend on the composition of limit orders, the size of the specialist's position, and the time of day. The optimal bid-ask spread, however, depends only on the composition of the book. The capitalized value of the specialist's franchise is studied. Long-run probability distributions for bid and ask prices are obtained, which show that the variances of these prices increase as the end of the day approaches.     

The economics of enforcement: The case of OSHA

A model of enforcement is developed that determines the impacts of OSHA actions on regulated parties. This model analyzes the effect of decision procedures developed by OSHA to enforce the law and their effect on resource allocation within the firm. It is concluded that the impacts from both the initial inspection and reinspection programs on the resource allocations of firms have likely been insignificantly different from zero. If OSHA is to increase the allocation of injury control resources of firms through its enforcement program, it must increase the costs of noncompliance that it imposes on firms.     

Long-run implications of industrial bond ratings as risk surrogates

The financial quality of industrial bonds is observed at two different times (1968 and 1976). Discriminant models, using pertinent financial ratios as input variables, are able to replicate approximately 70 percent of Moody's ratings for both years, thus indicating that ratings remain appropriate risk proxies for long periods, However, average levels of key ratios changed. Ratios measuring leverage, coverage, and profitability deterioriated over time, indicating increased absolute risk. But, since these deterioriations were fairly uniform across groups, there appears to be little change in the relative degree of riskiness across rating groups.     

Detecting financially troubled property-liability insurers

The financial failure of property-liability insurers results in unpaid claims amounting to approximately $25 millions annually. A more effective system must be developed to detect these troubled firms at an earlier date and reduce this cost to society. The current system employed by the National Association of Insurance Commissioners relies primarily on loss reserves and loss ratios. It appears that most failures result from dishonesty and the removal of assets from the company into the possession of management. This study presents a model which incorporates variables designed to detect this draining of assets and identify companies which show a high probability for failure. This model is tested on an independent sample and is successful in correctly classifying 88% of the firms three years prior to liquidation. This study differs from prior studies by using a new approach to selecting the variables for the model.     

Citizen participation through computer conferencing

As American society grows more diverse and the issues that must be decided grow more complex, the need for new forums and better forms for public debate increases. Is computer conferencing likely to meet this need because of its potential for facilitating public participation in government? To shed light on this question, we constructed, ran, and observed a computer conference on recombinant DNA among four participants with no previous experience in using computers and no scientific training. Results indicate that not only was this topic successfully discussed by lay people in this way, but that the conferencing mode of discussion was preferred by certain types of people. Our experience also gave us insights that may improve management of computer conferences for inexperienced users.     

Pricing strategies that adjust to inflation

Recently, the inflation rate has moved to significantly higher levels than most firms anticipated. The firms' errors in projecting the inflation rate proved costly to many—especially those with long-term contracts to deliver at a fixed price. This experience has led many firms to consider alternatives to fixed price contracts. This article addresses alternative contractural forms and develops the economic principle to be employed in designing the optimal contractual arrangement.