Decision Making & Negotiations

We propose a tractable, data-driven demand estimation procedure based on the use of maximum entropy (ME) distributions, and apply it to a stochastic capacity control problem motivated from airline revenue management. Specifically, we study the two fare-class "Littlewood" problem in a setting where the firm has access to only potentially censored sales observations. We propose a heuristic that iteratively fits an ME distribution to all observed sales data, and in each iteration selects a protection level based on the estimated distribution.

The seminal work by Grossmann and Hart (1986) made the study of firm boundaries susceptible to formal economic analysis, and illuminated an important role for markets in providing incentives. In this essay, I discuss some new directions that the literature has taken since. As a central challenge, I identify the need to provide a formal theory of the firm in which managerial direction and bureaucratic decision-making play a key role. Merging a number of existing incomplete contracting models, I propose two approaches with very different contracting assumptions.

We study the optimal composition of corporate boards. Directors can be either monitoring or advisory types. Monitoring constrains the empire-building tendency of chief executive officers (CEOs). If shareholders control the board nomination process, a non-monotonic relation ensues between agency problems and board composition. To preempt CEO entrenchment, shareholders may assemble an adviser-heavy board. If a powerful CEO influences the nomination process, this may result in a more monitor-heavy board.

Anthropologists who work in advertising and marketing research often make profound strategic contributions. However, many of them do not take an active part in strategy codification, specifically in the hands-on crafting of strategic documents, unless they are employed by advertising agencies as account planners or in strategy consulting firms that institutionalize the process. A concern throughout this chapter is that when anthropologists are absent throughout the process of strategy formulation, the power and influence of their contributions is curtailed.

We propose a simple approach to dynamic multi-period portfolio choice with quadratic transaction costs. The approach is tractable in settings with a large number of securities, realistic return dynamics with multiple risk factors, many predictor variables, and stochastic volatility. We obtain a closed-form solution for a trading rule that is optimal if the problem is restricted to a broad class of strategies we define as "linearity generating strategies" (LGS).

Many factors introduce the prospect of changes for the demand environment that a firm faces, with the specifics of such changes not necessarily known in advance. If and when realized, such changes affect the delicate balance between demand and supply and thus should be anticipated to the extent possible. We study the dynamic pricing problem of a retailer facing the prospect of a change in the demand function during a finite selling season with no inventory replenishment opportunity.

We use panel data to examine the prediction of Merton's intertemporal CAPM that time varying risk premiums arise from the conditional covariances of returns on assets with the return on the market. We find a positive and significant risk-return tradeoff that is driven by the time series variation in the conditional covariances, and the risk-premium on the market remains positive and significant after controlling for additional state-variables. Our estimation method allows us to estimate the risk-return tradeoff in the ICAPM using a large number of test assets.