Simple models for multi-attribute choice with many alternatives: When it does and does not pay to face tradeoffs with binary attributes

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Portfolio delegation under short-selling constraints

In this paper we study delegated portfolio management when themanager's ability to short-sell is restricted. Contrary to previousresults, we show that under moral hazard, linear performance-adjustedcontracts do provide portfolio managers with incentives to gatherinformation. The risk-averse manager's optimal effort is an increasingfunction of her share in the portfolio's return. This result affectsthe risk-averse investor's optimal contract decision. The first best,purely risk-sharing contract is proved to be suboptimal. Usingnumerical methods we show that the manager's share in the portfolioreturn is higher than the rst best share. Additionally, this deviationis shown to be: (i) increasing in the manager's risk aversion and (ii)larger for tighter short-selling restrictions. When the constraint isrelaxed the optimal contract converges towards the first best risksharing contract.

Setting the rules of the game: The choice of electoral systems in advanced democracies

The origins of electoral systems have received scant attention in the literature. Looking at the history of electoral rules in the advanced world in the last century, this paper shows that the existing wide variation in electoral rules across nations can be traced to the strategic decisions that the current ruling parties, anticipating the coordinating consequences of different electoral regimes, make to maximize their representation according to the following conditions. On the one hand, as long as the electoral arena does not change substantially and the current electoral regime serves the ruling parties well, the latter have no incentives to modify the electoral regime. On the other hand, as soon as the electoral arena changes (due to the entry of new voters or a change in their preferences), the ruling parties will entertain changing the electoral system, depending on two main conditions: the emergence of new parties and the coordinating capacities of the old ruling parties. Accordingly, if the new parties are strong, the old parties shift from plurality/majority rules to proportional representation (PR) only if the latter are locked into a 'non-Duvergerian' equilibrium; i.e. if no old party enjoys a dominant position (the case of most small European states)--conversely, they do not if a Duvergerian equilibrium exists (the case of Great Britain). Similarly, whenever the new entrants are weak, a non-PR system is maintained, regardless of the structure of the old party system (the case of the USA). The paper discusses as well the role of trade and ethnic and religious heterogeneity in the adoption of PR rules.

Effect of Emotion and Personality on Deviation from Purely Rational Decision-Making

Human decision-making has consistently demonstrated deviation from "pure" rationality. Emotions are a primary driver of human actions and the current study investigates how perceived emotions and personality traits may affect decision-making during the Ultimatum Game (UG). We manipulated emotions by showing images with emotional connotation while participants decided how to split money with a second player. Event-related potentials (ERPs) from scalp electrodes were recorded during the whole decision-making process. We observed significant differences in the activity of central and frontal areas when participants offered money with respect to when they accepted or rejected an offer. We found that participants were more likely to offer a higher amount of money when making their decision in association with negative emotions. Furthermore, participants were more likely to accept offers when making their decision in association with positive emotions. Honest, conscientious, and introverted participants were more likely to accept offers. Our results suggest that factors others than a rational strategy may predict economic decision-making in the UG.

Otimização Não Linear de Mínimos Quadrados

O problema de otimização de mínimos quadrados e apresentado como uma classe importante de problemas de minimização sem restrições. A importância dessa classe de problemas deriva das bem conhecidas aplicações a estimação de parâmetros no contexto das analises de regressão e de resolução de sistemas de equações não lineares. Apresenta-se uma revisão dos métodos de otimização de mínimos quadrados lineares e de algumas técnicas conhecidas de linearização. Faz-se um estudo dos principais métodos de gradiente usados para problemas não lineares gerais: Métodos de Newton e suas modificações incluindo os métodos Quasi-Newton mais usados (DFP e BFGS). Introduzem-se depois métodos específicos de gradiente para problemas de mínimos quadrados: Gauss-Newton e Levenberg-Larquardt. Apresenta-se uma variedade de exemplos selecionados na literatura para testar os diferentes métodos usando rotinas MATLAB. Faz-se uma an alise comparativa dos algoritmos baseados nesses ensaios computacionais que exibem as vantagens e desvantagens dos diferentes métodos.

On certain greedoid polyhedra, partially indexable scheduling problems and extended restless bandit allocation indices

We present a polyhedral framework for establishing general structural properties on optimal solutions of stochastic scheduling problems, where multiple job classes vie for service resources: the existence of an optimal priority policy in a given family, characterized by a greedoid(whose feasible class subsets may receive higher priority), where optimal priorities are determined by class-ranking indices, under restricted linear performance objectives (partial indexability). This framework extends that of Bertsimas and Niño-Mora (1996), which explained the optimality of priority-index policies under all linear objectives (general indexability). We show that, if performance measures satisfy partial conservation laws (with respect to the greedoid), which extend previous generalized conservation laws, then theproblem admits a strong LP relaxation over a so-called extended greedoid polytope, which has strong structural and algorithmic properties. We present an adaptive-greedy algorithm (which extends Klimov's) taking as input the linear objective coefficients, which (1) determines whether the optimal LP solution is achievable by a policy in the given family; and (2) if so, computes a set of class-ranking indices that characterize optimal priority policies in the family. In the special case of project scheduling, we show that, under additional conditions, the optimal indices can be computed separately for each project (index decomposition). We further apply the framework to the important restless bandit model (two-action Markov decision chains), obtaining new index policies, that extend Whittle's (1988), and simple sufficient conditions for their validity. These results highlight the power of polyhedral methods (the so-called achievable region approach) in dynamic and stochastic optimization.

Econometrics and decision making: Effects of presentation mode

Much of empirical economics involves regression analysis. However, does thepresentation of results affect economists ability to make inferences for decision makingpurposes? In a survey, 257 academic economists were asked to make probabilisticinferences on the basis of the outputs of a regression analysis presented in a standardformat. Questions concerned the distribution of the dependent variable conditional onknown values of the independent variable. However, many respondents underestimateduncertainty by failing to take into account the standard deviation of the estimatedresiduals. The addition of graphs did not substantially improve inferences. On the otherhand, when only graphs were provided (i.e., with no statistics), respondents weresubstantially more accurate. We discuss implications for improving practice in reportingresults of regression analyses.

On the throughput-WIP trade-off in queueing systems, diminishing returns and the threshold property: A linear programming approach

We present a new unifying framework for investigating throughput-WIP(Work-in-Process) optimal control problems in queueing systems,based on reformulating them as linear programming (LP) problems withspecial structure: We show that if a throughput-WIP performance pairin a stochastic system satisfies the Threshold Property we introducein this paper, then we can reformulate the problem of optimizing alinear objective of throughput-WIP performance as a (semi-infinite)LP problem over a polygon with special structure (a thresholdpolygon). The strong structural properties of such polygones explainthe optimality of threshold policies for optimizing linearperformance objectives: their vertices correspond to the performancepairs of threshold policies. We analyze in this framework theversatile input-output queueing intensity control model introduced byChen and Yao (1990), obtaining a variety of new results, including (a)an exact reformulation of the control problem as an LP problem over athreshold polygon; (b) an analytical characterization of the Min WIPfunction (giving the minimum WIP level required to attain a targetthroughput level); (c) an LP Value Decomposition Theorem that relatesthe objective value under an arbitrary policy with that of a giventhreshold policy (thus revealing the LP interpretation of Chen andYao's optimality conditions); (d) diminishing returns and invarianceproperties of throughput-WIP performance, which underlie thresholdoptimality; (e) a unified treatment of the time-discounted andtime-average cases.

Restless bandits, partial conservation laws and indexability

We show that if performance measures in a stochastic scheduling problem satisfy a set of so-called partial conservation laws (PCL), which extend previously studied generalized conservation laws (GCL), then the problem is solved optimally by a priority-index policy for an appropriate range of linear performance objectives, where the optimal indices are computed by a one-pass adaptive-greedy algorithm, based on Klimov's. We further apply this framework to investigate the indexability property of restless bandits introduced by Whittle, obtaining the following results: (1) we identify a class of restless bandits (PCL-indexable) which are indexable; membership in this class is tested through a single run of the adaptive-greedy algorithm, which also computes the Whittle indices when the test is positive; this provides a tractable sufficient condition for indexability; (2) we further indentify the class of GCL-indexable bandits, which includes classical bandits, having the property that they are indexable under any linear reward objective. The analysis is based on the so-called achievable region method, as the results follow fromnew linear programming formulations for the problems investigated.

Contractual allocation of decision rights and incentives: The case of automobile distribution

We analyze empirically the allocation of rights and monetary incentives in automobile franchise contracts. These contracts substantially restrict the decision rights of dealers and grant manufacturers extensive contractual completion and enforcement powers, converting the manufacturers, de facto, in a sort of quasi-judiciary instance. Variation in the allocation of decision rights andincentive intensity is explained by the incidence of moral hazard in the relation. In particular, when the cost of dealer moral hazard is higher and the risk of manufactureropportunism is lower, manufacturers enjoy more discretion in determining the performance required from their dealers and in using mechanisms such as monitoring, termination and monetary incentives to ensure such performance is provided. We also explore the existence of interdependencies between the different elements of the system. and find some complementarities between completion and termination rights, and between monitoring rights and the intensity of incentives.

Exact tests for correlation and for the slope in simple linear regressions without making assumptions

We present an exact test for whether two random variables that have known bounds on their support are negatively correlated. The alternative hypothesis is that they are not negatively correlated. No assumptions are made on the underlying distributions. We show by example that the Spearman rank correlation test as the competing exact test of correlation in nonparametric settings rests on an additional assumption on the data generating process without which it is not valid as a test for correlation.We then show how to test for the significance of the slope in a linear regression analysis that invovles a single independent variable and where outcomes of the dependent variable belong to a known bounded set.

A test of the predictive validity of non-linear QALY models using time trade-off utilities

This paper presents a test of the predictive validity of various classes ofQALY models (i.e., linear, power and exponential models). We first estimatedTTO utilities for 43 EQ-5D chronic health states and next these states wereembedded in health profiles. The chronic TTO utilities were then used topredict the responses to TTO questions with health profiles. We find that thepower QALY model clearly outperforms linear and exponential QALY models.Optimal power coefficient is 0.65. Our results suggest that TTO-based QALYcalculations may be biased. This bias can be avoided using a power QALY model.

Price regulation of plastic money: A critical assessment of Spanish rules

Recent decisions by the Spanish national competition authority (TDC) mandate paymentsystems to include only two costs when setting their domestic multilateral interchange fees(MIF): a fixed processing cost and a variable cost for the risk of fraud. This artificiallowering of MIFs will not lower consumer prices, because of uncompetitive retailing; but itwill however lead to higher cardholders fees and, likely, new prices for point of saleterminals, delaying the development of the immature Spanish card market. Also, to the extent that increased cardholders fees do not offset the fall in MIFs revenue, the task of issuing new cards will be underpaid relatively to the task of acquiring new merchants, causing an imbalance between the two sides of the networks. Moreover, the pricing scheme arising from the decisions will cause unbundling and underprovision of those services whose costs are excluded. Indeed, the payment guarantee and the free funding period will tend to be removed from the package of services currently provided, to be either provided by third parties, by issuers for a separate fee, or not provided at all, especially to smaller and medium-sized merchants. Transaction services will also suffer the consequences that the TDC precludes pricing them in variable terms.

A simple access pricing rule to achieve the Ramsey outcome for interconnected networks

This paper considers a general and informationally efficient approach to determine the optimal access pricing rule for interconnected networks. It shows that there exists a simple rule that achieves the Ramsey outcome as the unique equilibrium when networks compete in linear prices without network-based price discrimination. The approach is informationally efficient in the sense that the regulator is required to know only the marginal cost structure, i.e. the marginal cost of making and terminating a call. The approach is general in that access prices can depend not only on the marginal costs but also on the retail prices, which can be observed by consumers and therefore by the regulator as well. In particular, I consider the set of linear access pricing rules which includes any fixed access price, the Efficient Component Pricing Rule (ECPR) and the Modified ECPR as special cases. I show that in this set, there is a unique rule that implements the Ramsey outcome as the unique equilibrium independently of the underlying demand conditions.