Stochastic Frontiers and Asymmetric Information Models

This article suggests that the global inefficiency which generally affects a production process is endogenous and depends on the incentives generated by the process environment. We propose to treat the usual correlation between the inefficiency and the regressors of the production frontier through the economic constraints that interfere on the activity of the producer

Choosing a transport contract over multiple periods

We offer a shipper and a carrier the choice among three contracts in which to frame their relationship. Both can also take recourse in the transport spot market. Demand and price on the spot market are dependent exogenous stochastic processes. We model the outcome of this endogenous choice of contract. The results, given in closed form, are different from those presented in the literature. Using numeric instances, we show how a choice is made and which contract would be preferred. Comparison on the variance of the economic returns are offered. The conclusions are applicable when the carrier is not capacity constrained.

Optimal Procurement Contracts with Pre–Project Planning

The paper studies procurement contracts with pre–project investigations in the presence of adverse selection and moral hazard. To model the procurer’s roblem, we extend a standard sequential screening model to endogenous information acquisition with moral hazard. The optimal contract displays systematic distortions in information acquisition. Due to a rent effect, adverse selection induces too much information acquisition to prevent cost overruns and too little information acquisition to prevent false project cancelations. Moral hazard mitigates the distortions related to cost overruns yet exacerbates those related to false negatives. The optimal mechanism is a menu of option contracts that achieves the dual goal of providing incentives for information acquisition and truthful information revelation

Time-varying spot and futures oil price dynamics

We investigate the role of crude oil spot and futures prices in the process of price discovery by using a cost-of-carry model with an endogenous convenience yield and daily data over the period from January 1990 to December 2008. We provide evidence that futures markets play a more important role than spot markets in the case of contracts with shorter maturities, but the relative contribution of the two types of market turns out to be highly unstable, especially for the most deferred contracts. The implications of these results for hedging and forecasting crude oil spot prices are also discussed

The new keynesian approach to dynamic general equilibrium modeling: models, methods, and macroeconomic policy evaluation

This chapter aims to provide a hands-on approach to New Keynesian models and their uses for macroeconomic policy analysis. It starts by reviewing the origins of the New Keynesian approach, the key model ingredients and representative models. Building blocks of current-generation dynamic stochastic general equilibrium (DSGE) models are discussed in detail. These models address the famous Lucas critique by deriving behavioral equations systematically from the optimizing and forward-looking decision-making of households and firms subject to well-defined constraints. State-of-the-art methods for solving and estimating such models are reviewed and presented in examples. The chapter goes beyond the mere presentation of the most popular benchmark model by providing a framework for model comparison along with a database that includes a wide variety of macroeconomic models. Thus, it offers a convenient approach for comparing new models to available benchmarks and for investigating whether particular policy recommendations are robust to model uncertainty. Such robustness analysis is illustrated by evaluating the performance of simple monetary policy rules across a range of recently-estimated models including some with financial market imperfections and by reviewing recent comparative findings regarding the magnitude of government spending multipliers. The chapter concludes with a discussion of important objectives for on-going and future research using the New Keynesian framework

Randomization in contracts with endogenous information

I consider a situation, where the agent can acquire payoff-relevant information either before or after the contract is signed. To raise efficiency, the principal might solicit information; to retain all surplus, however, she must prevent precontractual information gathering. The following class of stochastic contracts may solve this trade-off optimally: before signing, information acquisition is not solicited, and afterwards randomly. The key insight is that randomization makes precontractual information costlier for the agent.Information acquisition, Principal-agent, Mechanism design, Randomization

The value of the early unwind option in futures contracts with an endogenous basis

In this paper the implicit early unwind option of a risk neutral arbitrageur is valued. The problem is analyzed in a market microstructure framework where four different groups of market participants interact. Within this model the equilibrium price relationship between stock and futures markets is determined. Since the underlying of the option is influenced by arbitrage trading the underlying of the option depends contrary to standard option pricing theory on the unwind option itself. The non-Markovian stochastic process of the basis is characterized and the results of an extensive comparative static analysis of the option value are presented. --

The impact of forward trading on the spot power price volatility with Cournot competition

In this paper, we analyze the influence of forward trading on the volatility of spot power prices, in models where forward contracts are strategic tools used by energy producers to obtain profit security. We define volatility as the variance of the percentage change in spot power prices over a given time interval. As shown in Sapio (2008), volatility is related to stochastic fluctuations in preference and technology fundamentals, and is tuned by the price-elasticity of demand and supply, evaluated at equilibrium. We study two cases. First, we analyze the volatility implications of a model wherein the amount of forward trading is fixed, and producers compete a la Cournot. Fixed forward trading increases spot volatility, because forwards lower the spot price level, corresponding to a less elastic region of a linear demand function. However, if the amount of forward trading is endogenous, as in the two-stage model of Allaz (1992), producers can anticipate the spot market impact of stochastic shocks on fundamentals and 'sterilize' them. As a result, spot price volatility is closer to the value implied by an efficient market. Our theoretical results are illustrated by means of a simple simulation study.Electricity market; Cournot model; forward contract; volatility of spot price; elasticity;