Advance booking, cancellations, and partial refunds

We develop methods for calculating profit-maximizing and socially optimal rates of partial refunds on customers' no-shows and cancellations. We demonstrate how partial refunds can be used to screen consumers according to their different probabilities of cancellation and no-shows. Finally, we show that the socially-optimal rate of partial refund exceeds the equilibrium rate of partial refund.

The Value of NATO option for a New Member

The paper introduces a welfarist approach to the national safety of a nation with membership in a defense alliance as an option. The members are risk averse but heterogeneous in their safety classification. There are two public goods as insurance devices, the domestic military budget and the incremental safety provided by the membership in the alliance. The commitment of the alliance in the creation of safety is,however, imperfect. A sufficient condition is stated for the non-membership. Under a positive option value of the membership, several adverse incentive effects shaping the option value are identified, including the incentive to free ride in domestic defense investment and a moral hazard effect in terms of national commitment to the defense effort. The cost of participation is determined in the spirit of the median voter theorem. The alliance equilibrium is shown to be of two potential types, a stable alliance equilibrium with a positive mass and or a degenerate one with one member only. The driving force in the adjustment of the alliance is its size relative to the safety class of the median voter. Expectations of the decision making of the co-members concerning the commitment can result in multiple equilibria

Narrow Target Zones within Broad Zones: A Non-Speculative Exchange Rate Solution with Limited Resources

A smooth exchange rate target zone solution that internalizes the time inconsistency problem and is completely free from speculation incentives exists where the monetary resources available for an exchange rate defense are limited and the target zone collapses with probability one. In the unique closed form solution, a soft internal narrow target zone slides during a sterilized defense when the reserves change. For a smooth regime collapse the exchange rate is non-smoothpasted to the free-float. A target zone defended at its official borders is inherently speculative and results in a randomized regime collapse for the monetary intervention. Copyright Kluwer Academic Publishers 2003target zone, exchange rate, credibility, bounded reserves, regime switching,

Bank Run Risk and Optimal Reserves

We characterize the optimal reserves, and the generated probability of a bank run, as a function of the penalty imposed by the central bank, the probability of depositors’ liquidity needs, and the return on outside investment opportunities