Decision Making & Negotiations

Managing shipping vessel profitability is a central problem in marine transportation. We consider two commonly used types of vessels—liners (ships whose routes are fixed in advance) and trampers (ships for which future route components are selected based on available shipping jobs)—and formulate a vessel profit maximization problem as a stochastic dynamic program. For liner vessels, the profit maximization reduces to the problem of minimizing refueling costs over a given route subject to random fuel prices and limited vessel fuel capacity.

Entrepreneurs face significant nondiversifiable business risks. We build a dynamic incomplete markets model of entrepreneurial firms to demonstrate the important implications of nondiversifiable risks for entrepreneurs' interdependent consumption, portfolio allocation, financing, investment, and business exit (cash-out and default) decisions. The optimal capital structure is determined by a generalized tradeoff model where risky debt provides significant diversification benefits.

When it comes to the local economy, the local government wears more than one hat: it regulates land use and owns real property and has the authority to exercise the power of eminent domain. Each of these legal powers affects local real estate markets in ways that reach beyond local government's role as tax collector and provider of public goods and services. At different times and for different purposes, planners attempt to harness or to stimulate the forces of supply and demand in real estate markets.

Public-private partnerships (PPPs) are a favored strategy for implementing complex, large-scale projects. For more than thirty years, U.S. government officials have used PPPs to redevelop downtowns, revitalize neighborhoods, and foster economic development. Across the globe, policy makers see such arrangements as an innovative and resourceful means for dealing with the intensifying demands of urbanization. In particular, PPPs can play a central role in meeting the pressing demand for new, large-scale infrastructure investments and the equally urgent need to refurbish existing systems.

The relevance and importance of marketing in innovation management has been questioned in recent years. Marketing has been blamed directly or indirectly for poor returns on investment in innovation, and marketing models of the diffusion of innovations have not been widely adopted. In this monograph we argue that marketing is currently in a unique position to reaffirm its critical role in innovation management. We review some recent research that has already started this "reinstatement" process and propose some future directions that may help complete it.

This monograph focuses on the use of incomplete contracting models to study transfer pricing. Intrafirm pricing mechanisms affect division managers' incentives to trade intermediate products and to undertake relationship-specific investments so as to increase the gains from trade. Letting managers negotiate over the transaction is known to cause holdup (underinvestment) problems. Yet, in the absence of external markets, negotiations frequently outperform cost-based mechanisms, because negotiations aggregate cost and revenue information more efficiently into prices.

We investigate how nonfinancial performance measures (NPMs) can be used to encourage cooperation across divisions. The implementation of a project often requires joint efforts by multiple divisions. However, privately informed division managers sometimes find it in their self-interest to forgo profitable joint projects or to underinvest in relationship-specific assets.

Trevor Harris and his colleagues at Morgan Stanley have developed ModelWare, which attempts to assess the intrinsic value of enterprises. In this part, they begin with adjustments to reported accounting data, attempting to move accounting metrics closer to economic reality for each company. They then apply the basic concepts of the discounted cash flow approach described in Part I, such as the tradeoff between risk and reward, and consider the components of return on equity, including operating margins, asset turnover, and financial leverage.

We study the product design problem of a revenue-maximizing firm that serves a market where customers are heterogeneous with respect to their valuations and desire for a quality attribute and are characterized by a perhaps novel model of customer choice behavior. Specifically, instead of optimizing the net utility that results from an appropriate combination of prices and quality levels, customers are "satisficers" in that they seek to buy the cheapest product with quality above a certain customer-specific threshold.