Optimization and heuristics : a comparative simulation study of management of a biological resource

Two approaches to the formulation of resource management policy sere considered, .The first was to construct a formal mathematical decision-making model of the system and to obtain optimal decisions analytically. The second was to use heuristics. The western tent caterpillar population system was chosen as the resource system on which to compare the approaches. various policies were tested on a computer simulation model of the system. It was found that a combination of the two approaches linear programming and heuristics) led to satisfactory harvesting policies. The results indicate that ignoring the basic biological attributes of the resource could lead to mismanagement, and possibly even destruction of the population.Science, Faculty ofMathematics, Department ofGraduat

Multifaceted aspects of agency relationships

Agency theory has been used to examine the problem of stewardship of an agent who makes decisions on behalf of a principal who cannot observe the agent's actual effort. Effort is assumed to be personally costly to expend. Therefore, if an agent acts in his or her own interests, there may be a "moral hazard" problem, in which the agent exerts less effort than agreed upon. This dissertation examines this agency problem when the agent's effort is multidimensional, such as when the agent controls several production processes or manages several divisions of a firm. The optimal compensation schemes derived suggest that the widely advocated salary-plus-commission scheme may not be optimal. Furthermore, the information from all tasks should generally be combined in a nonlinear fashion rather than used separately in compensating a manager of several divisions, even if the monetary outcomes are statistically independent. In situations where effort is best interpreted as time, effort can be viewed as being additive. The analysis in this special case shows that the nature of the outcome distribution, including the effect of effort on the mean of the distribution, is critical in determining whether it is optimal for the principal to induce the agent to diversify effort across tasks. These new results and the already existing agency theory results are applied to the sales force management problem, in which the firm wishes to motivate a salesperson to optimally allocate time spent selling the firm's various products. The agency model is also expanded to allow for the agent's observation of the first outcome (which is influenced by the agent's first effort) before choosing the second effort level. The optimal compensation schemes both in the absence of and the presence of a moral hazard problem are derived. The behavior of the second effort strategy is also examined. It is shown that the behavior of the agent's second effort strategy depends on the interaction between wealth and information effects of the first outcome. Results similar to those in the multidimensional effort case are obtained for the question of optimality of diversification of effort when effort is additive.Business, Sauder School ofGraduat

Comparison of the mean per unit and ratio estimators under a simple applications-motivated model

The mean per unit and the ratio estimators of the total score in a finite population are compared under a simple model motivated by insurance reimbursement in the pharmacy industry. Ranges of model parameters are given where one of the estimators is preferred, and when model parameters satisfy an equation, the ratio estimator is shown to be first order unbiased and never improved on by the mean per unit.Ratio estimator finite population total subdomains mean per unit estimator

Strategic Auditor Behavior and Going-Concern Decisions

This paper analyzes a game-theoretic model in which a client can potentially avoid a going-concern opinion and its self-fulfilling prophecy by switching auditors. Incumbent auditors are less willing to express a going-concern opinion the more credible the client's threat of dismissal and the stronger the self-fulfilling prophecy effect. Similarly, the client is more willing to switch auditors the more likely it is that auditors' reporting judgments will differ and the stronger the self-fulfilling prophecy effect. Further, with greater noise in the auditor's forecast of client viability, the auditor tends to express fewer going-concern opinions. Copyright Blackwell Publishers Ltd 1997.

Regulatory Implications of Bank Securitization and Executive Compensation

Asset securitization and executive compensation are frequently cited as leading causes of the 2008 financial crisis. Is there a connection between these two purported causes? The legal literature has failed to explore this question, but in recent research we have found a clear linkage between the two that we believe calls for better monitoring by bank regulators. In securitization, a firm, called an “originator,” sells financial assets, such as mortgages or accounts receivable, to a “special purpose entity.” This special purpose entity then directly or indirectly issues securities into the secondary market. Because the originator receives the cash from the sale of financial assets to the special purpose entity but is largely unconstrained contractually in how it uses it, there have long been concerns about agency costs of securitization. Agency costs can arise whenever a party (termed an agent) who is hired to act on behalf of another party (termed a principal) acts adversely to the interests of the principal. In securitization, observers have typically worried that originators would misspend the proceeds of the securitization on ill-conceived projects, leaving a judgment-proof corporate shell from which small and involuntary (e.g., tort) creditors could not collect. Yet, little attention was paid to the most obvious agency cost: excessive executive compensation. This is problematic because understanding the relationship between securitization and executive compensation sheds light on underlying incentives to securitize in the first place. If we want to understand why securitization exploded as it did in the run up to the 2008 financial crisis, we need to develop a better understanding of incentives to securitize. While there are many legitimate reasons to securitize, we find that securitization by banks bears a strong relationship to above-average compensation for bank CEOs. We created a unique dataset of over 20,000 firm-year observations from 1993 to 2009. Holding other things constant, if we take two commercial banks of roughly the same size, the one that securitizes pays its CEO over $400,000 more than the one that does not, about 20$400,000 is not enough to worry about. In a world of CEOs like Angelo Mozilo (former CEO of Countrywide Financial) and Lloyd Blankfein (CEO of The Goldman Sachs Group, Inc.), who earned hundreds of millions of dollars through securitization leading up to the crisis, this may seem like a rounding error. But we focus specifically on commercial banks—not non-bank financial firms, such as Countrywide and Goldman—because they invented securitization, were its predominant practitioners until the late 1990s, in theory were subject to special “safety and soundness regulation,” and have not been carefully studied in this regard. Our findings lead to several important questions: Why does this difference exist? Is this difference a problem? If it is, what should regulators do about it? We think the difference exists because securitization improves a bank’s return on assets, and banks were first-movers in securitization, developing early expertise in these complex transactions. Securitization began in the early 1970s in part as a response to regulators’ desire to see banks lend more without relaxing bank regulation. By securitizing home mortgages, banks were able to remove these mortgages from their balance sheets and stay within regulatory parameters, even as they were lending more to accommodate baby-boomers’ growing demand for housing. Because securitization increases the return on a bank’s assets, it created the appearance of value. But the complexity of the transactions, involving several steps and parties, produced barriers to entry for non-banks or industrial firms. The complexity and liquidity of securitizations—coupled with the absence of common lending covenants—may have made it more difficult for those who ordinarily monitor compensation (such as shareholders, directors, and regulators) to observe and act on the relationship between securitization and compensation. We think this relationship between bank securitization and CEO compensation is problematic for two reasons. First, we find that the shares of securitizing banks perform no better than the shares of non-securitizers. Thus, CEOs of securitizers may be paid better than non-securitizers, but the banks’ shareholders are not doing any better. Second, securitization created or contributed to significant social costs in the 2008 financial crisis, including distorted property values, needlessly complex foreclosure proceedings, and all the consequences of the federal bank bailout. Although we find the linkage between bank securitization and the compensation of bank executives to be problematic, we do not think our findings warrant significant restrictions on either securitization or compensation. Rather, we think that bank regulators should simply pay more careful attention to the relationship we have identified between securitization and compensation, giving heightened scrutiny to banks exhibiting this relationship. To date, the chief regulatory response to the financial crisis has been the 2010 Dodd-Frank Act, which adopts neither a straightforward nor intuitive strategy with respect to securitization and compensation. The Dodd-Frank Act requires originators of all sorts—banks and industrials—to retain a certain amount of risk associated with securitized assets and to “claw back”—that is, demand the return of—excessive compensation paid by failed banks or any firm that restates its earnings. While these might have been politically appealing tactics, neither is likely to deter excessive securitization and the destructive instability that it can create. Originators have long kept “skin in the game” contractually. Typically, they would do this by purchasing the riskiest tranche of securities issued in the securitization or by promising to repurchase securitized financial assets (e.g., mortgages) if the underlying obligor defaulted—or both. Our data show that it was not the originator’s skin in the game that mattered, but instead that of the bank originator’s CEO. Therefore, Dodd-Frank’s additional regulation requiring originators to retain some risk associated with securitized assets creates needless complexity. The threat of a clawback might deter some excessive compensation. However, we worry that if the policy goal is to reduce system-threatening transactions, a clawback is too late and too drastic to be effective. Further, under Dodd-Frank, a clawback is available only after a financial institution has failed or has restated earnings. Regulators will likely be reluctant to commence formal resolution proceedings against troubled banks, and the rules on earnings restatements are under-enforced and thus unlikely to have a deterrent effect. We think a better solution for regulators is a simpler one: monitor bank CEO compensation before a bank fails. Such monitoring should be sensitive to changes in compensation that associate with highly complex (and potentially risky) transactions. Given the structure of securitization, it is improbable that other bank stakeholders are in a position or have incentives to monitor this relationship as effectively as regulators. Thus, while monitoring by regulators is certainly not without its costs, it would appear to be a better alternative than other options currently in play

Management accounting

This is a special international edition of an established title widely used by colleges and universities throughout the world