Peter Bardsley

The Collapse of the Australian Wool Reserve Price Scheme

This paper examines the background to the collapse of price stabilization under the Australian Wool Reserve Price Scheme in 1991-92 and draws out implications for the feasibility of goverment backed price stabilization schemes. Optimal control techniques are applied to the problem of valuing stabilization stockpiles. Option pricing techniques are used to elucidate the incentives facing the industry and to explain why the industry adopted policies that drove the scheme to its collapse. Copyright 1994 by Royal Economic Society.

The optimal management of research portfolios

Risky research projects are, other things being equal, intrinsically harder to monitor than projects that are less risky. It is shown using agency theory that a standard cost benefit analysis, which ignores the agency problem, will introduce a bias towards excessively risky projects, and it will under‐estimate the benefits from complementary investments in libraries, scientific equipment and other expenditures that increase the productivity of scientists. Research managers should be risk‐averse in their choice of projects, and they should aim to hold a balanced portfolio of projects. The nature of this portfolio problem is, however, quite different from the portfolio management problem in financial markets.

Local Utility Functions

In Machinas approach to generalised expected utility theory, decision makers maximise a choice functional which is smooth but not linear in the probabilities. When evaluating small changes, the choice functional can be approximated by the expectation of a local utility function. This local utility function is not however invariant under large changes in risk. This paper gives a simple explicit formula which can be used to write down the local utility functions of some common decision rules.

Global measures of risk aversion

Abstract Global risk aversion coefficients are defined in terms of the average curvature of utility functions. These coefficients can be related to the slope of indifference curves in a space of moments or cumulants, and they are used to characterise expected utility choice functionals in the class of all smooth choice functionals. The use of global risk aversion coefficients is illustrated with a simple portfolio problem.

Rat Races and Glass Ceilings

In an ongoing organization, such as a large law partnership firm, employees are motivated not only by current rewards but also by the prospect of promotion, and the opportunity to make the rules in the future. This leads to a recursive contract design problem in an overlapping generations environment, where current agents may become future principals. The principal offers, and promotion-motivated agents accept, harsh rat race contracts with low wages and high effort levels. Hiring and promotion probabilities emerge as the preferred instrument to screen high cost workers, who face employment barriers and a glass ceiling.

Multi-task agency: a combinatorial model

Abstract An agent allocates unobservable effort over a portfolio of projects; the principal observes only which projects succeed and which fail. An explicit solution to the multi-task agency problem is found using Mobius inversion in the lattice of project portfolios. An application is made to the structure and management of scientific research organisations. Optimal structures are compared with those derived by standard cost-benefit techniques. Systematic biases are identified in the selection of project type, in the level of investment in scientific infrastructure such as libraries, and in the diversification of tasks within the organisation.

A test of McClements' method for the estimation of equivalence scales

Abstract An attempt was made to determine equivalence scales for children by using the McClements technique to estimate the Prais-Houthakker expenditure model using Australian data. It was found that the method was used by McClements to identify the system introduced an unacceptable degree of subjective bias.

Auctioning contracts for environmental services

Policy-based markets for environmental services include government procurement, private procurement to satisfy regulatory requirements and private procurement through government offset markets. These markets are increasingly popular and raise questions about optimal procurement under different regulatory frameworks. The design of these schemes draws together issues in auction design and contract theory. Using a mixed adverse selection, moral hazard model, we show that optimal contract design may differ significantly between procurement and regulatory policy environments. We model risk averse landholders to preserve a key feature of the policy environment. These findings have implications for the design of pollution reduction schemes and the rehabilitation of environmental assets.

Duality in Contracting

In a linear contracting environment the Fenchel transform provides a complete duality between the contract and the information rent. Through an appropriate generalised convexity this can be extended to provide a complete duality in the supermodular quasilinear contracting environment that covers the majority of applications. Using this framework, we provide a complete characterization of the allocation correspondences that can be implemented by a principal in this environment. We also address the question of when an allocation can be implemented by a menu of simple contracts. Along the way, a supermodular envelope theorem is proved, somewhat different in nature to the Milgrom Segal result.

Cryptographic Commitment and Simultaneous Exchange

Simultaneous exchange of valuable secrets is problematic without use of a trusted intermediary. Examples include trade between strangers involving the transfer of property rights at a distance by exchange of emails, and simultaneous signing of contracts. There is a danger that the first person to commit to the transaction will lose everything if the other party does not reciprocate. We study information exchange mechanisms that establish credible simultaneous commitment and implement individually rational exchange without using an intermediary.