Optimal shared-savings contracts in supply chains: Linear contracts and double moral hazard

In many supply chains consumption of indirect materials, sold by a supplier to a customer for use in her production process, can be reduced by efforts exerted by either party. Since traditional supply contracts provide no incentive for the supplier to exert such effort, shared-savings contracts have been proposed as a way to improve incentives in the channel, leading to more efficient effort choices by the two parties. Such shared-savings contracts typically combine a fixed service fee with a variable component based on consumption volume. We formalize this situation using the double moral hazard framework, in which both parties decide how much effort to exert by trading off the cost of their effort against the benefits that they will obtain from reduced consumption. We also extend the double moral hazard framework to analyze a broader class of cost-of-effort functions than considered so far, including the linear cost-of-effort functions commonly found in practice. We show that the supplier can still always induce the optimal second-best equilibrium with a linear shared-savings contract. Under this broader class of functions, however, the behavior of the optimal contract as a function of the problem parameters becomes more complex. We illustrate how small changes in the problem parameters can turn profits from being a well-behaved to a poorly-behaved function of the contract, and provide some theoretical characterization of this phenomenon. The practical significance of this is that simple (linear) contracts are sufficient in many double moral hazard contexts, even for the broader class of functions we consider, but care must be taken in selecting the optimal contract parameters.     

Dominant strategy mechanisms for contract auctions with risk aversion and moral hazard

Within the class dominant strategy incentive compatible mechanisms, we show that there exists an optimal contracting mechanism for the principal for a version of the incomplete information principal-agent problem in which several agents compete for a contract and the principal selects an agent via a contract auction. In our auction model, we assume that the principal and the agents are risk averse, and we allow for uncountably many agent types. We also assume that the principal's probability measure over type profiles in such that correlation between agent's types is possible. Thus, we do not require that agents' types be independently distributed. Finally, we impose limited liability constraints upon the set of contracts. Due to the nature of the individual rationality and incentive compatibility constraints, the existence problem is nonstandard and novel existence arguments are required. We prove existence using a measurable selection result and a new notion of compactness called K-compactness.     

Security design and firm dynamics under long‐term moral hazard

This paper addresses a moral hazard problem in which the agent's actions affect the future profits of the firm. The optimal contract can be implemented through the issuance of variable coupon debt and purchase of fixed‐coupon debt. Consequently, the resulting capital structure acts as a hedge for the firm, reducing underinvestment costs in bad states of nature and controlling overinvestment incentives in good ones. However, owing to asymmetric information between the firm's manager and investors, this hedge is only partial. The firm's investments vary with cash flows, disclosing the agent's asymmetric information to the principal. Copyright © 2016 John Wiley & Sons, Ltd.     

Innovation in long-term care insurance: Joint contracts for mitigating relational moral hazard

A recent innovation is joint long-term care (LTC) insurance policies covering two related individuals. This contribution purports to find out whether they have the potential of mitigating relational moral hazard (RMH) effects. Intra-family moral hazard has been suspected of being responsible for the sluggish development of private LTC insurance. The parent, anticipating the informal care provided by a family member LTC, is tempted to buy less LTC coverage. The family member (or more generally, the partner of a senior person), knowing that the bequest is protected by LTC insurance, has less incentive to provide informal care. Since a joint LTC policy makes senior and partner decide simultaneously rather than sequentially, it may lead to a partial internalization of RMH effects by turning coverage purchased by the senior and informal care provided by the partner from strategic substitutes into strategic complements under certain conditions.     

从双层规划的角度看道德风险理论的一阶条件方法

本文首先对双层规划的一个特殊例子即道德风险模型中使用的一阶条件方法（FOA）做简要的梳理,然后提出一种更为一般的使FOA有效的原则与方法。新方法主要依赖于代理人对委托人设置的目标的最优反应映射是否存在不动点,这个性质不要求原问题与用一阶条件放松以后的问题之间的约束集等价,从而也不要求代理人的期望效用对行动具有全局凹性。在新方法下,可以用较为简单的方法证明FOA在以下两种情形之一有效,即如果分布函数是概率分布的凸组合或者分布函数来自某些特殊的指数族分布。     

Moral coherence,moral worth and explanations of moral motivation

Moral internalism and moral externalism compete over the best explanation of the link between judgment and relevant motivation but, it is argued, they differ at best only verbally. The internalist rational-conceptual nature of the link’ as accounted by M. Smith in The Moral Problem is contrasted to the externalist, also rational, link that requires in addition support from the agent’s psychological-dispositional profile; the internalist link, however, is found to depend crucially on a, similarly to the externalist, psychologically ‘loaded’ profile. It is also argued that the differentiation of the two competing explanations is insufficient partly because they both fail to consider crucial quantitative parameters of the judgment-motivation link. Such parameters become very important particularly in the light of Smith’s claim that this link is grounded on the observable “striking fact” where changes in the set of one’s moral beliefs systematically bring about changes in one’s moral behavior. Examples of algorithms measuring moral coherence and moral worth are provided to serve as evidence for what it comes down to, vis-à-vis the alleged fact, only a verbal dispute between the two camps. Finally, the ‘misfiring’ of these explanations is understood in connection to the irreducibility of concepts such as ‘moral worth’, and/or, ‘moral sensitivity’.     

Investment and financing decisions in the presence of time-to-build

We study a firm’s optimal decisions on investment, default, and financing when the amount of time and the running costs for project completion are uncertain. In the presence of time-to-build, a firm makes conservative investment and financing decisions; investment is delayed, and the optimal leverage ratio is inverted U-shaped with respect to the size of the lag. Although equity holders can choose to default before the project has been completed, the default probability in the presence of time-to-build is lower than that in the absence of a lag in most cases because of the conservative investment and financing decisions. Given the lower default probability, equity holders may benefit more from debt financing in the presence of time-to-build than they would in the absence of a lag. When firms can shorten their expected time-to-build by bearing more costs, unlevered firms strive to reduce the lag more than optimally levered firms do. However, highly levered firms utilize more resources to reduce the lag than all-equity firms do because equity holders are more concerned about the possibility of default before the project’s completion.     

On the hazard rate and reversed hazard rate orderings in two-component series systems with active redundancies

The lifetimes of two-component series systems with two active redundancies are compared using the hazard rate and the reversed hazard rate orders. We study the problem of where to allocate the spares in a system to obtain the best configuration. We compare redundancy at component level vs. system level using the likelihood ratio order. For this problem we find conditions under which there is no hazard rate ordering between the lifetimes of the systems.     

Reducing incremental costs associated with the delegation of incentive contracting decisions: An analysis of planning and control decisions in a manufacturing setting in the presence of moral hazard

We compare and contrast two specific regimes involving the centralization and delegation of the incentive contracting decision in manufacturing organizations. In the centralization regime, a single individual simultaneously makes the allocation of demand to production facilities and determines the incentive compensation scheme for the managers at the facilities. Under the delegation regime, the demand allocation is decided upon initially by a superior and the incentive contracting decision is subsequently made by a subordinate, who is neither of the two managers in charge of the production facilities. Using the principal–agent paradigm, which assumes that the managerial efforts are unobservable, we demonstrate that the centralization regime performs no worse than the delegation regime. For situations where strategic or other requirements necessitate firms to opt for the delegation of the incentive contracting decision, we propose a heuristic that significantly increases the likelihood of mimicking the allocation and contracting decisions made under the centralized regime.     

Optimal financing and dividend control in the dual model

In this paper, we study the optimal financing and dividend control in the dual model. Under some constraints, we firstly construct two categories of suboptimal models and identify the value functions and the optimal policies corresponding to these two categories of suboptimal models. Finally we identify the value function and present an optimal policy corresponding to the general optimal model.     

Collaboration and sharing mechanisms in improving corporate social responsibility

This paper investigates the effects of the collaboration between an upstream and a downstream firm regarding their decisions of prices and levels of corporate social responsibility (CSR) efforts. The firms collaborate with each other by sharing their costs or benefits to improve their profitabilities and CSR performances. Three collaborative models are developed for considering that collaboration may be undertaken by either or both firms, and each model has both profit- and cost-sharing mechanisms. We derive and characterize the consumer valuation and the firms’ decisions at equilibrium with respect to the changes in the sharing scheme, and further identify the impacts of each sharing mechanism. Moreover, a Nash bargaining game is developed for examining the choices of sharing scheme under the negotiation between the firms. Finally, we provide economic and managerial insights for socially concerned companies.     

Manufacturer's optimal pricing and lot-sizing policies under trade-credit financing

In the year 2006, Teng et al considered an appropriate economic production quantity (EPQ) model in which the manufacturer receives the supplier's trade credit and provides trade credit to the customer simultaneously. The following two payment methods were discussed by Teng et al: The main purpose of this paper is summarized below: Finally, with a view to further motivating the interested researchers for using the methodology and mathematical analytic techniques in several other contexts in the field, we have chosen to include, in Section 12, a number of related recent works in the field.     

On local odds and hazard rate models in survival analysis

The present paper establishes an isometry between tangents and odds (hazard) ratio derivatives for randomly censored survival models. The procedure works for arbitrary distributions with discrete parts. As consequence common survival statistics are obtained via discrete empirical models. The isometry can also be used to specify semiparametric models given by odds (or hazard) derivatives.     

Optimal capital allocation in a hierarchical corporate structure

We consider capital allocation in a hierarchical corporate structure where stakeholders at two organizational levels (e.g., board members vs line managers) may have conflicting objectives, preferences, and beliefs about risk. Capital allocation is considered as the solution to an optimization problem whereby a quadratic deviation measure between individual losses (at both levels) and allocated capital amounts is minimized. Thus, this paper generalizes the framework of Dhaene et al. (2012), by allowing potentially diverging risk preferences in a hierarchical structure. An explicit unique solution to this optimization problem is given. In several examples, it is shown how the optimal capital allocation achieves a compromise between conflicting views of risk within the organization.     

Risk factor analysis and portfolio immunization in the corporate bond market

In this paper we develop a multi-factor model for the yields of corporate bonds. The model allows the analysis of factors which influence the changes in the term structure of corporate bonds. More than 98% of the variability in the corporate bond market is captured by the model, which is then used to develop credit risk immunization strategies for corporate bonds of multiple credit ratings. Empirical results are given for the US market using data for the period 1992–1999.     

Control and voting power in corporate networks: Concepts and computational aspects

This paper proposes to rely on power indices to measure the amount of control held by individual shareholders in corporate networks. The value of the indices is determined by a complex voting game viewed as the composition of interlocked weighted majority games; the compound game reflects the structure of shareholdings. The paper describes an integrated algorithmic approach which allows to deal efficiently with the complexity of computing power indices in shareholding networks, irrespective of their size or structure. In particular, the approach explicitly accounts for the presence of float and of cyclic shareholding relationships. It has been successfully applied to the analysis of real-world financial networks.     

On reversed hazard rate in general mixture models

This paper deals with the reversed hazard rate of general mixture models. Dependence and monotone properties of the reversed hazard rate are studied. Some lower bounds of the expected inactivity time of the overall population are presented with an application. Finally, preservation of DRHR under general mixture is discussed as well.