The Limits of Organizational Theory and Incentives (Or, Why Corporate Success Is Not Just About Money)

Most economists begin their study of organizational behavior by taking for granted that incentive compensation influences behavior. Managers and employees are assumed to have "utility functions" that reflect a very basic set of "preferences"—preferences for things like money and leisure and job security. And, as clearly simplistic as it is, this "model" of human behavior has been shown to have considerable predictive power.
But it is equally clear that financial incentives and rewards are not all that matters in motivating people within large organizations. What economists have failed to recognize is the important subjective consequences for employees of acting in accord with well-designed incentives that have been "internalized"—viewed not just as leading to financial rewards and corporate success, but as "the right thing to do." In the language of economists, a well-designed incentive program can end up influencing not only people's behavior, but their underlying "preferences," or what non-economists like to call "values." And it is these preferences and values that are at the core of an organization's "culture."     

Conditions for Myopic Valuation and Serial Independence of the Market Excess Return in Discrete Time Models

In a multiperiod pure exchange world with investors displaying HARA-preferences, conditions for period-by-period application of one-period asset pricing models are derived first. The future investment opportunity set may be uncertain, provided that in every period a specific market portfolio variable depending on preferences is known as of the preceding date. This variable need not be completely deterministic. Second, conditions for a serially independent market excess return are derived. These conditions render serial independence very unlikely. Hence estimation methods assuming serial independence are likely to yield biased results.     

Optimal consumption,portfolio and life insurance rules for an uncertain lived individual in a continuous time model

A continuous time model for optimal consumption, portfolio and life insurance rules, for an investor with an arbitrary but known distribution of lifetime, is derived as a generalization of the model by Merton (1971). The classic Tobin-Markowitz separation theorem obtains with the mutual funds being identical to those obtained under the assumption of certain lifetime. The investor is found to have a ‘human capital’ component of wealth, which is independent of his preferences and risky market opportunities and represents the certainty equivalent of his future net (wage) earnings. Explicit solutions, which are linear in wealth, are found for the investor with constant relative risk aversion.     

Consumption-portfolio optimization with recursive utility in incomplete markets

In an incomplete market, we study the optimal consumption-portfolio decision of an investor with recursive preferences of Epstein?CZin type. Applying a classical dynamic programming approach, we formulate the associated Hamilton?CJacobi?CBellman equation and provide a suitable verification theorem. The proof of this verification theorem is complicated by the fact that the Epstein?CZin aggregator is non-Lipschitz, so standard verification results (e.g. in Duffie and Epstein, Econometrica 60, 393?C394, 1992) are not applicable. We provide new explicit solutions to the Bellman equation with Epstein?CZin preferences in an incomplete market for non-unit elasticity of intertemporal substitution (EIS) and apply our verification result to prove that they solve the consumption-investment problem. We also compare our exact solutions to the Campbell?CShiller approximation and assess its accuracy.     

Institutional Markets,Financial Marketing,and Financial Innovation

Firms and institutions are monitored and controlled through a complex set of implicit and explicit contractual relations. Because of these agency theoretic relations, institutional behavior in financial markets is not a simple reflection of the preference structures of individuals. Institutional preferences give rise to a demand for new financial instruments and innovations, even when the returns on these instruments are “spanned” in the sense of complete pricing. The innovations can be thought of as solving moral hazard problems. An agency theoretic example serves to illustrate the demand, supply, and financial marketing of stripped securities. In short, institutions matter.     

我国区域税收优惠政策绩效的实证分析

区域税收优惠政策是我国税收优惠政策体系的一个重要组成部分。本文以西部大开发税收优惠政策为例,以实证分析的方法,详细阐述了税收优惠实施五年来的政策绩效,以及影响政策绩效的其他政策因素。分析结果表明:西部大开发税收优惠实施之后,西部地区的税收负担较过去确实相对下降了,这与理论上对政策效果的预期完全吻合,但东、西部的经济增长率仍然存在较明显的差距,同时东、西部经济发展水平的绝对差距和相对差距还在继续扩大。此外,出口退税与涉外税收优惠等其他一些税收优惠政策也在很大程度上抵消了我国区域税收优惠的政策绩效。     

Reference Variables,Factor Structure,and the Approximate Multibeta Representation

The Arbitrage Pricing Theory (APT) implies that if asset returns have a factor structure, then an approximate multibeta representation holds with respect to the factors as reference variables. This paper assumes that asset returns satisfy a factor structure and derives a condition under which the approximate multibeta representation holds with respect to a set of reference variables which may not be the factors. This condition is that the regression matrix of the reference variables on the factors is nonsingular. Implications for the testability of the APT are also discussed.     

Constrained listening,audience alignment,and expert communication

We consider a cheap-talk setting with two senders and a continuum of receivers with heterogenous preferences. Each receiver is constrained to listen to one of the senders but can choose which sender to listen to. The introduction of a second sender facilitates more informative communication and even enables full communication for a large set of sender preference pairs. We use the model to assess the size and characteristics of sender audiences, the amount of information communicated, and the impact of the senders' biases on the receivers' actions.     

Preferences representation in actuarial sciences

Abstract

The paper presents a generalization of Bernoulli's principle and of Von Neumann-Morgenstern's theorem with a view to lending more realism to the representation of preferences in actuarial sciences.     

Reward–risk portfolio selection and stochastic dominance

The portfolio selection problem is traditionally modelled by two different approaches. The first one is based on an axiomatic model of risk-averse preferences, where decision makers are assumed to possess a utility function and the portfolio choice consists in maximizing the expected utility over the set of feasible portfolios. The second approach, first proposed by Markowitz is very intuitive and reduces the portfolio choice to a set of two criteria, reward and risk, with possible tradeoff analysis. Usually the reward–risk model is not consistent with the first approach, even when the decision is independent from the specific form of the risk-averse expected utility function, i.e. when one investment dominates another one by second-order stochastic dominance. In this paper we generalize the reward–risk model for portfolio selection. We define reward measures and risk measures by giving a set of properties these measures should satisfy. One of these properties will be the consistency with second-order stochastic dominance, to obtain a link with the expected utility portfolio selection. We characterize reward and risk measures and we discuss the implication for portfolio selection.     

Directional Preferences, Information Processing, and Investors' Forecasts of Earnings

This paper investigates the effects of preferences on judgments in an investing context, where investors should be motivated to interpret information objectively, yet have clear preferences with respect to what the information they are evaluating conveys (i.e., a gain or a loss on their investment). The results of the experiment are consistent with theories of motivated reasoning that predict when and in what manner directional preferences affect how information is processed. Specifically, investors are motivated to agree unthinkingly with information that suggests they might make money on their investment, but disagree with information that suggests they might lose money. In disagreeing, long investors expect earnings to be relatively high and short investors expect earnings to be relatively low. These results have implications not only for understanding investor behavior, but also for understanding the biased behavior of market participants who face conflicts of interest, such as analysts, managers, and auditors, by providing direct evidence that such behavior can arise for purely psychological reasons.     

Commodity futures hedging,risk aversion and the hedging horizon

This paper examines the impact of management preferences on optimal futures hedging strategy and associated performance. Applying an expected utility hedging objective, the optimal futures hedge ratio is determined for a range of preferences on risk aversion, hedging horizon and expected returns. Empirical results reveal substantial hedge ratio variation across distinct management preferences and are supportive of the hedging policies of real firms. Hedging performance is further shown to be strongly dependent on underlying preferences. In particular, hedgers with high risk aversion and short horizon reduce hedge portfolio risk but achieve inferior utility in comparison to those with low aversion.     

Genetics,Homeownership, and Home Location Choice

We find that a significant proportion of the cross-sectional variation in the choice to own or rent is attributable to a genetic factor, while parental influence is not found to affect this choice. We also find evidence of gene-environment interactions: The environment moderates genetic effects on homeownership in that growing up in a wealthier family results in a stronger expression of genetic predispositions, while idiosyncratic life experiences appear to explain a larger portion of the variation in homeownership among those who grew up in a less wealthy family environment. Furthermore, we find that home location choices, for example, a familiar home location close to one’s birthplace and an urban versus a rural home location, are explained by both genetic factors and parental influence. Because we control for an extensive set of individual characteristics analyzed in existing research, an interpretation of our evidence is that an individual’s preferences with respect to homeownership and home location are partly genetic. The findings contribute to a deeper understanding of the factors that explain individual behavior with respect to the housing market, and add to an expanding literature on the biological and genetic factors that influence individuals’ economic and financial decisions.     

Centralisation versus Decentralisation of Public Policies: Does the Heterogeneity of Individual Preferences Matter?*

This paper explores the role of the heterogeneity of fiscal preferences in the assignment of policy tasks to different levels of government (decentralisation versus centralisation). With reference to a sample of European countries, a median‐voter mechanism of collective decision is assumed to work at both a national and a supranational level. Using data from a large international survey (the International Social Survey Programme, ISSP), a series of econometric models are estimated in order to make individual attitudes representative of different categories of public expenditure and of different countries. The dominance of decentralisation over centralisation or vice versa is determined on the basis of the utility loss that each individual suffers in connection with the distance between his or her own most preferred level of public expenditure and that chosen by the national/supranational median voter. The main finding is that, differently from the predictions of Oates's decentralisation theorem, the assignment of responsibilities at the supranational level (centralisation) for a number of public expenditure programmes (healthcare, education, unemployment benefits) dominates (or is close to dominating) decentralisation, even in the absence of economies of scale and interregional spillovers. However, when the possibility of interjurisdictional mobility is explicitly considered, in line with the predictions of Tiebout's model, decentralisation dominance becomes more and more substantial and also prevails in the sectors where, under the nonmobility assumption, the assignment of responsibilities at the supranational level is efficient.     

Heterogeneous preferences and equilibrium trading volume

The representative-agent Lucas model stresses aggregate risk and hence does not allow us to study the impact of agents’ heterogeneity on the dynamics of equilibrium trading volume. In this paper, we investigate under what conditions non-informational heterogeneity, i.e., differences in preferences and endowments, leads to nontrivial trading volume in equilibrium. We present a non-informational no-trade theorem that provides necessary and sufficient conditions for zero equilibrium trading volume in a continuous-time Lucas market model with heterogeneous agents, multiple goods, and multiple securities. We explain in detail how no-trade equilibria are related to autarky equilibria, portfolio autarky equilibria, and peculiar financial market equilibria, which play an important role in the literature on international risk sharing.     

Child Labor, School Attendance, and Intrahousehold Gender Bias in Brazil

An extensive survey data set of Brazilian households is usedto test whether intrahousehold gender bias affects the decisionsof mothers and fathers to send their sons and daughters to workand to school. An intrahousehold allocation model is examinedin which fathers and mothers may affect the education investmentand the child labor participation of their sons and daughtersdifferently because of differences in parental preferences ordifferences in how additional schooling affects sons' and daughters'acquisition of human capital. Brazilian household survey datafor 1998 are used to estimate the impact of each parent's educationon the labor market participation and school attendance of theirsons and daughters. For labor market participation, the father'seducation has a greater negative impact than the mother's educationon the labor status of sons. The father's education also hasa greater impact on sons' labor status than on daughters'. Forschooling decisions, the mother's education has a greater positiveimpact than the father's education on daughters' school attendance,but fathers have a greater positive impact on sons' school attendancethan on daughters'.     

Prospect theory,mitigation and adaptation to climate change

Prospect theory (PT) is a widely accepted theory for decisions under uncertainty. However, so far a systematic application to climate policy (CP) does not exist. One important postulation of PT is that outcomes are perceived as gains or losses, relative to the reference point. When it comes to CP, different decision-makers may have different reference points. For example, one decision-maker perceives the current climate as the reference point whereas another decision-maker may have another one, say climate in 100 years. For the former, climate damages are losses and the benefits of CP are reductions of losses. For the latter, benefits of CP are gains. PT suggests that the former places a higher value in CP than the latter. After a critical review whether and how PT may be applied to CP, the paper systematically presents this and other cases where PT offers new insights into climate-related analyses, notwithstanding the importance of well-known aspects such as discounting, altruism, political and economic costs. It is shown that accounting for PT may contribute to a better understanding of some well-known puzzles in the climate debate, including different preferences for CP amongst individuals and nations, the role of technical vs. financial adaptation, and the apparent preference for hard protection measures in coastal adaptation. Finally, concrete possibilities for empirical research on these effects are proposed.     

One monetary policy and 18 central bankers: The European monetary policy as a game of strategic delegation

This paper employs a multi-country delegation monetary policy model and argues that a decision-making mechanism based on the median voter theorem where intensity of preferences cannot play a role does not capture important aspects of policy setting in the European Monetary Union. Replacing the median voter mechanism with a less restrictive “weighted mean mechanism”, it is shown that strategic delegation can lead to a surprising degree of central bank inflation aversion. This finding supports the “The Twin Sister Hypothesis” and the perception of the European Central Bank implementing the policy of the Bundesbank rather than a more inflationary monetary policy.     

Multivariate utility maximization with proportional transaction costs

We present an optimal investment theorem for a currency exchange model with random and possibly discontinuous proportional transaction costs. The investor’s preferences are represented by a multivariate utility function, allowing for simultaneous consumption of any prescribed selection of the currencies at a given terminal date. We prove the existence of an optimal portfolio process under the assumption of asymptotic satiability of the value function. Sufficient conditions for this include reasonable asymptotic elasticity of the utility function, or a growth condition on its dual function. We show that the portfolio optimization problem can be reformulated in terms of maximization of a terminal liquidation utility function, and that both problems have a common optimizer.     

Preferences, continuity, and the arbitrage pricing theory

This article investigates the structure on preferences requiredto derive Ross's arbitrage pricing theory (APT). It is shownthat only ordinal preferences are required. In particular, theAPT does not require that agents possess preferences representableas risk-averse expected utility functions. This characteristicof the APT is not shared by the standard equilibrium-based capitalasset pricing models.