Implementing Options Markets in California To Manage Water Supply Uncertainty

In California, the tremendous spatial and temporal variation in precipitation suggests that flexible contractual arrangements, such as option contracts, would increase allocative efficiency of water over time and space. Under such arrangements, a water agency pays an option premium for the right to purchase water at some point in the future, if water conditions turn out to be dry. The premium represents the value of the flexibility gained by the buyer from postponing its decision whether to purchase water. In California, the seller of existing option arrangements is often an agricultural producer who can fallow land, in the event that a water option is exercised. In this simulation-optimization approach, we seek to determine the value of transferring water uncertainty from one party to another at several locations in California, given current water prices and the spatial and temporal distribution of water year types in the state. (Preliminary analysis covers northern California; future analysis will incorporate southern California.) We analyze within a mathematical programming framework whether increased trading among water agencies across time as well as space would result in significant gains from trade. We use output from CALVIN, an economic-engineering optimization model of the California water system which runs the current configuration of the California water system over historical hydrological conditions, to generate water's imputed price at different locations during different seasons. We also explore reasons why previous theoretical calculations of option value in the western United States have far exceeded option premia on existing bilateral contracts.Risk and Uncertainty,

Bidding at Sequential First-Price Auctions with(out) Supply Uncertainty: A Laboratory Analysis

We report on a series of experiments that test the effects of an uncertain supply on the formation of bids and prices in sequential first-price auctions with private-independent values and unit-demands. Supply is assumed uncertain when buyers do not know the exact number of units to be sold (i.e., the length of the sequence). Although we observe a non-monotone behavior when supply is certain and an important overbidding, the data qualitatively support our price trend predictions and the risk neutral Nash equilibrium model of bidding for the last stage of a sequence, whether supply is certain or not. Our study shows that behavior in these markets changes significantly with the presence of an uncertain supply, and that it can be explained by assuming that bidders formulate pessimistic beliefs about the occurrence of another stage.sequential first-price auctions, independent private values, unit-demand, supply uncertainty, bidding behavior, price trends, experimental economics

Estimation and Comparison of Treasury Auction Formats when Bidders are Asymmetric.

The structural parameters of a share-auction model accounting for asymmetry across bidders, as well as supply uncertainty are estimated with a sample of French Treasury auctions. We find evidence of both informational and risk aversion asymmetries between bidders. A counter-factual analysis also suggests that, in the context of the French Treasury auctions, a shift from the discriminatory to the uniform-price format would simultaneously benefit the French Treasury and the auction's participants.

ESTIMATING THE BENEFITS OF GROUNDWATER CONTAMINATION CONTROL

In this paper, a conceptual model for estimating option price for groundwater quality protection is developed, and the effets of subjective demand and supply uncertainty and other variables on option price are estimated. A contingent valuation study to measure option price for groundwater quality protection was conducted in southwestern Georgia. Valuation results suggest that the monetary benefits to citizens of protecting groundwater supplies from agricultural chemical contamination are quite large.Environmental Economics and Policy,

Reliable network design under supply uncertainty with probabilistic guarantees

This paper proposes a bi-level risk-averse network design model for transportation networks with heterogeneous link travel time distributions. The objective of the network design is to minimise the total system travel time (TSTT) budget (TSTTB), which consists of the mean TSTT and a safety margin. The design is achieved by selecting optimal link capacity expansions subject to a fixed expansion budget. Users’ selfish behaviour and risk attitude are captured in the lower level traffic assignment constraints, in which travellers select routes to minimise their own path travel time budget. The properties of the design problem are analysed analytically and numerically. The analysis shows that despite the lack of knowledge of travel time distributions, the probabilities that the actual TSTT and the actual path travel time are, respectively, within the optimal TSTTB and the minimum path travel time budget under optimal design have lower bounds. The lower bounds are related to the system manager's and travellers’ risk aversion. The optimal TSTTB is proven to be bounded below even when the link expansion budget is unlimited.postprin

Integrated Workforce Capacity and Inventory Management Under Labour Supply Uncertainty

In a manufacturing environment with volatile demand, inventory management can be coupled with dynamic capacity adjustments for handling the fluctuations more effectively. In this study, we consider the problem of integrated capacity and inventory management under non-stationary stochastic demand and capacity uncertainty. The capacity planning problem is investigated from the workforce planning perspective where the capacity can be temporarily increased by utilising contingent workers from an external labour supply agency. The contingent capacity received from the agency is subject to an uncertainty, but the supply of a certain number of workers can be guaranteed through contracts. There may also be uncertainty in the availability of the permanent and contracted workers due to factors such as absenteeism and fatigue. We formulate a dynamic programming model to make the optimal capacity decisions at a tactical level (permanent workforce size and contracted number of workers) as well as the operational level (number of workers to be requested from the external labour supply agency in each period), integrated with the optimal operational decision of how much to produce in each period. We analyse the characteristics of the optimal policies and we conduct an extensive numerical analysis that helps us provide several managerial insights

When sustainability becomes an order winner: linking supply uncertainty and sustainable supply chain strategies

This study investigates how to implement a sustainable supply chain strategy by choosing a set of sustainable practices while considering the strategic priority assigned to sustainability within a company’s competitive strategy (i.e., an order winner (OW), market qualifier (MQ) or desirable attribute (DA)). Therefore, two research questions arise: RQ1. What are the sustainable supply chain management (SSCM) practices adopted by companies under the different levels of priority assigned to sustainability (i.e., OW, MQ and DA)? and RQ2. How does supply uncertainty influence the choices regarding the SSCM practices to adopt or vice versa? We addressed these questions through a two-step methodology that includes 10 exploratory case studies in different industries and four explanatory cases in the furniture industry. Six research propositions are developed, and we show how some sustainable practices are common to all companies in the sample, while others are only applicable when sustainability is an MQ or an OW. Moreover, in contrast to the suggestion in the literature, we observed that companies with sustainability as an OW implement sustainability practices despite increasing exposure to supply uncertainty. However, when sustainability is a DA or an MQ, companies might implement sustainable practices with the aim of reducing supply uncertainty rather than for sustainability goals. The cases show that investment in these practices can trigger a transition towards a situation in which sustainability is an OW

How does firm innovativeness enable supply chain resilience?:The moderating role of supply uncertainty and interdependence

Despite its potential benefits in a wide range of circumstances, firm innovativeness received scant attention in relation to managing the various risks and uncertainties in the global business environment. Likewise, there is still a limited understanding of firms’ supply chain resilience (SCR) and its related antecedents in the strategic management literature. This research focuses on exploring the relationship between firm innovativeness and SCR in an attempt to facilitate bridging the gap between two important research streams and shed some light on the contingent value of firm innovativeness against disruptions and adversities. The moderating role of supply uncertainty and interdependence in the focal relationship was also hypothesised and tested. Findings suggest that firm innovativeness is positively associated with firm SCR, and supply uncertainty negatively moderates this relationship but interdependence does not. We argue that this could be due to the dual nature of interdependence in supply networks