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Robust Dual Dynamic Programming

Authors: Angelos Georghiou, Angelos Tsoukalas, Wolfram Wiesemann

Publication: Operations Research, Forthcoming

Abstract: 

Multi-stage robust optimization problems, where the decision maker can dynamically react to consecutively observed realizations of the uncertain problem parameters, pose formidable theoretical and computational challenges. As a result, the existing solution approaches for this problem class typically determine suboptimal solutions under restrictive assumptions. In this paper, we propose a robust dual dynamic programming (RDDP) scheme for multi-stage robust optimization problems. The RDDP scheme takes advantage of the decomposable nature of these problems by bounding the costs arising in the future stages through lower and upper cost to-go functions. For problems with uncertain technology matrices and/or constraint right-hand sides, our RDDP scheme determines an optimal solution in finite time. If also the objective function and/or the recourse matrices are uncertain, our method converges asymptotically (but deterministically) to an optimal solution. Our RDDP scheme does not require a relatively complete recourse, and it offers deterministic upper and lower bounds throughout the execution of the algorithm. We demonstrate the promising performance of our algorithm in a stylized inventory management problem.

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Published: 15 Nov 2018

The Effects of Analyst‐Country Institutions on Biased Research: Evidence from Target Prices

Authors: Mark T. Bradshaw, Alan G. Huang, Hongping Tan

Publication: Journal of Accounting Research, Forthcoming

Abstract: 

Prior research demonstrates that a strong institutional infrastructure in a country moderates self‐serving behavior of market participants. Cross‐country economic activities have increased significantly, presenting a research opportunity to examine the relative influence of local versus foreign institutional infrastructure on individual market participants. We utilize variation in analyst‐country location relative to covered firm location to examine institutional determinants of optimism in analyst research. Focusing on target prices, where persistent optimism is well documented, we find that analysts domiciled in countries with stronger institutional infrastructures exhibit significantly attenuated target price optimism and more value‐relevant target prices. Our results demonstrate the importance of domestic country‐level institutional factors in moderating self‐serving behavior of market participants engaged in cross‐country activities.

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Published: 15 Nov 2018

Optimizing Foreclosed Housing Acquisitions in Societal Response to Foreclosures

Authors: Senay Solak, Armagan Bayram, Mehmet Gumus, Yueran Zhuo

Publication: Operations Research, Forthcoming

Abstract:

A dramatic increase in U.S. mortgage foreclosures during and after the great economic recession of 2007-2009 had devastating impacts on the society and the economy. In response to such negative impacts, non-profit community development corporations (CDCs) throughout the U.S. utilize various resources, such as grants and lines of credit, in acquiring and redeveloping foreclosed housing units to support neighborhood stabilization and revitalization. Given that the cost of all such acquisitions far exceeds the resources accessible by these non-profit organizations, we identify socially optimal policies for CDCs in dynamically selecting foreclosed properties to target for potential acquisition as they become available over time. We evaluate our analytical results in a numerical study involving a CDC serving a major city in the U.S, and specify social return based thresholds defining selection decisions at different funding levels. We also find that for most foreclosed properties CDCs should not offer more than the asking price, and should typically consider overbidding only when the total available budget is low. Overall, comparisons of optimal policies with historical acquisition data suggest a potential improvement of around 20% in expected total impacts of the acquisitions on nearby property values. Considering a CDC with annual fund availability of $4 million for investment, this corresponds to an estimated additional value of around $280,000 for the society.

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Published: 15 Oct 2018

A Smart-City Scope of Operations Management

Authors: Wei Qi and Zuo-Jun Max Shen

Publication: Production and Operations Management, Forthcoming

Abstract:

We are entering an era of great expectations towards our cities. The vision of “smart city” has been pursued worldwide to transform urban habitats into superior efficiency, quality and sustainability. This phenomenon prompts us to ponder what role the scholars in operations management (OM) can assume. In this essay, we express our initial thoughts on expanding OM to the smart-city scope. We review smart-city initiatives of governments, industry, national laboratories and academia. We argue that the smart-city movement will transition from the tech-oriented stage to the decision-oriented stage. Hence, a smart city can be perceived as a system scope within which planning and operational decisions are orchestrated at the urban scale, reflective of multidimensional needs, and adaptive to massive data and innovation. The benefits of studying smart-city OM are manifold and significant: contributing to deeper understanding of smart cities by providing advanced analytical frameworks, pushing OM knowledge boundaries (such as data-driven decision making), and empowering the OM community to deliver much broader impacts than before. We discuss several research opportunities to embody these thoughts, in the interconnected contexts of smart buildings, smart grid, smart mobility and new retail. These opportunities arise from the increasing integration of systems and business models at the urban scale.

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Published: 10 Sep 2018

Designing Risk‐Adjusted Therapy for Patients with Hypertension

Authors: Manaf Zargoush, Mehmet Gumus, Vedat Verter, Stella S. Daskalopoulou

Publication: Production and Operations Management, Forthcoming

Abstract:

Limited guidance is available for providing patient‐specific care to hypertensive patients, although this chronic condition is the leading risk factor for cardiovascular diseases. To address this issue, we develop an analytical model that takes into account the most relevant risk factors including age, sex, blood pressure, diabetes status, smoking habits, and blood cholesterol. Using the Markov Decision Process framework, we develop a model to maximize expected quality‐adjusted life years, as well as characterize the optimal sequence and combination of antihypertensive medications. Assuming the physician uses the standard medication dose for each drug, and the patient fully adheres to the prescribed treatment regimen, we prove that optimal treatment policies exhibit a threshold structure. Our findings indicate that our recommended thresholds vary by age and other patient characteristics, for example (1) the optimal thresholds for all medication prescription are nonincreasing in age, and (2) the medications need to be prescribed at lower thresholds for males who smoke than for males who have diabetes. The improvements in quality‐adjusted life years associated with our model compare favorably with those obtained by following the British Hypertension Society's guideline, and the gains increase with the severity of risk factors. For instance, in both genders (although at different rates), diabetic patients gain more than non‐diabetic patients. Our sensitivity analysis results indicate that the optimal thresholds decrease if the medications have lower side‐effects and vice versa.

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Published: 8 Aug 2018

Supply Diagnostic Incentives under Endogenous Information Asymmetry

Authors: Mohammad E. Nikoofal, Mehmet Gumus

Publication: Production and Operations Management, Forthcoming

Abstract:

This paper develops a dyadic supply chain model with one buyer who contracts the manufacturing of a new product to a supplier. Due to the lack of experience in manufacturing, the extent of supply risk is unknown to both the buyer and supplier before the time of contract. However, after the contract is accepted, the supplier may invest in a diagnostic test to acquire information about his true reliability, and use this information when deciding on a process improvement effort. Using this setting, we identify both operational and strategic benefits and costs of diagnostic test. Operationally, it helps the supplier to take the first-best level of improvement effort, which would increase efficiency of the total supply chain. Strategically, it enables the buyer to reduce the agency costs associated with implementing process improvement on the supplier. Besides these benefits, diagnostic test increases the degree of information asymmetry along the supply chain. This in turn provides the supplier with proprietary information, whose rent would be demanded from the buyer in equilibrium. Benefit-cost analysis reveals two key factors in determining the value of diagnostic test: (i) degree of endogenous information asymmetry between supply chain firms, and (ii) the relative cost of diagnostic test with respect to process improvement cost. Our results indicate that when both are high, the mere presence of diagnostic test can result in less reliable supply chain. This implies that when incentives are not properly aligned, information asymmetry amplified due to diagnostic test neutralizes all its benefits.

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Published: 23 Jul 2018

A Model of Two-Sided Costly Communication for Building New Product Category Demand

Authors: Michelle Y. Lu , Jiwoong Shin

Publication: Marketing Science, Vol. 37, No. 3, May-June 2018

Abstract:

When a firm introduces a radical innovation, consumers are unaware of the product’s uses and benefits. Moreover, consumers are unsure of whether they even need the product. In this situation, we consider the role of marketing communication as generating consumers’ need recognition and thus market demand for a novel product. In particular, we model marketing communication as a two-sided process that involves both firms’ and consumers’ costly efforts to transmit and assimilate a novel product concept. When the marketing communication takes on a two-sided process, we study a firm’s different information disclosure strategies for its radical innovation. We find that sharing innovation, instead of extracting a higher rent by keeping the idea secret, can be optimal. A firm may benefit from the presence of a competitor and its communication effort. The innovator can share its innovation so that competitors can also benefit, which encourages rivals to enter the market. The presence of such competition guarantees a higher surplus for consumers, which can induce greater consumer effort in a two-sided communication process. Moreover, the increased consumer effort, in turn, prompts complementarity in the communication process and lessens the potential free-riding effect in communication between firms. Additionally, it encourages the rival firm to exert more effort, especially when the role of consumers becomes more important. Sharing innovation with a rival serves as a mechanism to induce more efforts in a two-sided communication process.

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Published: 23 Jul 2018

Oversight and Efficiency in Public Projects: A Regression Discontinuity Analysis

Authors: Eduard Calvo, Ruomeng Cui and Juan Camilo Serpa

Publication: Management Science, Forthcoming

Abstract:

In the U.S., four in ten public infrastructure projects report delays or cost overruns. To tackle this problem, regulators often scrutinize the project contractor’s operations. We investigate the causal effect of government oversight on project efficiency by gleaning 262,857 projects that span seventy-one U.S. federal agencies and 54,739 contractors. Our identification strategy exploits a regulatory bylaw: if a project’s anticipated budget exceeds a threshold value, the contractor’s operations are subject to surveillance from independent procurement officers; otherwise, these operational checks are waived. Using a regression discontinuity design, we find that oversight is obstructive to the project’s operations, especially when the contractor (i) has no prior experience in public projects, (ii) is paid with a fixed-price contract that includes performance-based incentives, and (iii) performs a labor-intensive task. In contrast, oversight is least obstructive — or beneficial — when the contractor (i) is experienced, (ii) is paid with a time-and-materials contract, and (iii) performs a machine-intensive task.

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Published: 10 Jul 2018

Supply Chain Proximity and Product Quality

Authors: Robert Bray, Juan Serpa and Ahmet Colak

Publication: Management Science, Forthcoming

Abstract:

We explore the effect of supply chain proximity on product quality by merging four independent data sources from the automotive industry, collecting: (i) auto component defect rates, (ii) upstream component factory locations, (iii) downstream assembly plant locations, and (iv) product-level links connecting the upstream and downstream factories. Combining these four datasets allows us to trace the flow of 27,807 products through 529 supplier factories and 275 assembly plants. We estimate that increasing the distance between an upstream component factory and a downstream plant by an order of magnitude increases the component’s expected defect rate by 3.9%. We also find that shorter inter-factory spans are associated with more rapid product quality improvements, and that supply chain distance is more detrimental to quality when automakers: (i) produce early generation models or (ii) high-end products, (iii) when they buy components with more complex configurations, or (iv) when they source from suppliers who invest relatively little in research and development

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Published: 11 Jun 2018

Cutting the Cord: Mutual Respect, Organizational Autonomy, and Independence in Organizational Separation Processes

Authors: Rene Wiedner and Saku Mantere

Publication: Administrative Science Quarterly, Forthcoming

Abstract:

Based on a longitudinal, qualitative analysis of developments in the English National Health Service, we develop a process model of how organizations divest or spin off units with the aim of establishing two or more autonomous organizational entities while simultaneously managing their continued interdependencies. We find that effective organizational separation depends on generating two types of respect—appraisal and recognition respect—between the divesting and divested units. Appraisal respect involves showing appreciation for competence or the effort to achieve it, while recognition respect requires considering what someone cares about—such as values or concerns—and acknowledging that they matter. The process model we develop shows that open communication is crucial to the development of both. We also find that certain attempts to gain organizational independence and respect may unintentionally undermine the development of autonomy. Counterintuitively, we find that increasing or maintaining interorganizational links via communication may facilitate organizational separation, while attempts by units to distance themselves from one another may unintentionally inhibit it. By linking organizational separation, autonomy, independence, and respect, this paper develops theory on organizational separation processes and more generally enhances our understanding of organizational autonomy and its relations with mutual respect.

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Published: 4 Jun 2018

Informed Options Trading Prior to Takeover Announcements: Insider Trading?

Authors: Patrick Augustin, Menachem Brenner, Marti G. Subrahmanyam

Publication: Management Science, Forthcoming

Abstract:

We quantify the pervasiveness of informed trading activity in target companies' equity options before the announcements of 1,859 U.S. takeovers between 1996 and 2012. About 25% of all takeovers have positive abnormal volumes, which are greater for short-dated out-of-the-money calls, consistent with bullish directional trading before the announcement. Over half of this abnormal activity is unlikely due to speculation, news and rumors, trading by corporate insiders, leakage in the stock market, deal predictability, or beneficial ownership filings by activist investors. We also examine the characteristics of option trades litigated by the SEC for alleged illegal insider trading. While the characteristics of such trades closely resemble the patterns of abnormal option volume in the U.S. takeover sample, we find that the SEC litigates only about 8% of all deals in it.

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Published: 24 May 2018

Inspiration from the 'Biggest Loser': Social Interactions in a Weight Loss Program

Authors: Kosuke Uetake, Nathan Yang 

Publication: Marketing Science, Forthcoming

Abstract: 

We investigate the role of heterogeneous peer effects in encouraging healthy lifestyles. Our analysis revolves around one of the largest and most extensive databases about weight loss that track individual participants' meeting attendance and progress in a large national weight loss program. The main finding is that while weight loss among average performing peers has a negative effect on an individual's weight loss, the corresponding effect for the top performer among peers is positive. Furthermore, we demonstrate that our results are robust to potential issues related to selection into meetings, endogenous peer outcomes, individual unobserved heterogeneity, lagged dependent variables, and contextual effects. Ultimately, these results provide guidance about how the weight loss program should identify role models.

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Published: 4 May 2018

A Large-Scale Approach for Evaluating Asset Pricing Models

Author: Laurent Barras

Publication: Journal of Financial Economics, Forthcoming

Abstract:

Recent studies show that the standard test portfolios do not contain sufficient information to discriminate between asset pricing models. To address this issue, we develop a large-scale approach that expands the cross-section to several thousand portfolios. Our novel approach is simple, widely applicable, and allows for formal evaluation/comparison tests. Its benefits are confirmed in empirical tests of CAPM- and characteristic-based models. While these models are all misspecified, we uncover striking performance differences between them. In particular, the human capital and conditional CAPMs largely outperform the CAPM which suggests that labor income and time-varying recession risks are primary concerns for investors.

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Published: 1 May 2018

Ruslan Goyenko paper "Illiquidity Premia in Equity Option Markets" selected Editor's Choice in Review of Financial Studies

Professor Ruslan Goyenko's paper "Illiquidity Premia in Equity Option Markets" with Peter Christoffersen, Kris Jacobs and Mehdi Karoui was selected as Editor's Choice article in the March 2018 issue of Review of Financial Studies.

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Published: 29 Mar 2018

Asset Pricing with Countercyclical Household Consumption Risk

Authors: George M. Constantinides and Anisha Ghosh

Publication: Journal of Finance, Vol. 72, No. 1, February 2017

Abstract:

We show that shocks to household consumption growth are negatively skewed, persistent, countercyclical, and drive asset prices. We construct a parsimonious model where heterogeneous households have recursive preferences. A single state variable drives the conditional cross-sectional moments of household consumption growth. The estimated model fits well the unconditional cross-sectional moments of household consumption growth and the moments of the risk-free rate, equity premium, price-dividend ratio, and aggregate dividend and consumption growth. The model-implied risk-free rate and price-dividend ratio are procyclical, while the market return has countercyclical mean and variance. Finally, household consumption risk explains the cross section of excess returns.

Read article: Journal of Finance

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Published: 29 Mar 2018

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