Management Science

Harpaz, Giora; Lee, Wayne Y.; Winkler, Robert L.

doi: 10.1287/mnsc.28.6.589pmid: N/A

This paper considers the effect of learning from experience on the output decisions of a perfectly competitive firm faced with the demand uncertainty. Specifically, a Bayesian framework for expectations formation and demand forecasting by a perfectly competitive firm is presented. Focusing the analysis on the determination of optimal sequential output decisions, it is shown that through output experimentation, the experimenting firm will select a non-myopic sequential policy and will tend to overproduce. The exact magnitude of the overproduction and the economic value of experimentation are contingent upon model parameters and the length of the planning horizon.

Harris, M.; Kriebel, C. H.; Raviv, A.

doi: 10.1287/mnsc.28.6.604pmid: N/A

This paper considers the question: How should a firm allocate a resource among divisions when the productivity of the resource in each division is known only to the division manager? Obviously if the divisions (as represented by their managers) are indifferent among various allocations of the resource, the headquarters can simply request the division managers to reveal their private information on productivity knowing that the managers have no incentive to lie. The resource allocation problem can then be solved under complete (or at least symmetric) information. This aspect is a flaw in much of the recent literature on this topic, i.e., there is nothing in the models considered which makes divisions prefer one allocation over another. Thus, although in some cases elaborate allocation schemes are proposed and analyzed, they are really unnecessary. In the model we develop, a division can produce the same output with less managerial effort if it is allocated more resources, and effort is costly to the manager. We further assume that this effort is unobservable by the headquarters, so that it cannot infer divisional productivity from data on divisional output and managerial effort. Given these assumptions, we seek an optimal resource allocation process. Our results show that certain types of transfer pricing schemes are optimal. In particular, if there are no potentially binding capacity constraints on production of the resource, then an optimal process is for each division to choose a transfer price from a schedule announced by the headquarters. Division managers receive a fixed compensation minus the cost of the resource allocated to them at the chosen transfer price. Resources are allocated on the basis of the chosen transfer prices. If there is a potentially binding constraint on resource production, a somewhat more complicated, but similar, scheme is required.

Cook, Wade D.; Seiford, Lawrence M.

doi: 10.1287/mnsc.28.6.621pmid: N/A

This paper investigates the Borda-Kendall method for the determination of a consensus ranking. It is shown that in the case of ties the method does not perform as claimed. A “minimum variance” method for determining the consensus ranking is proposed and its properties examined. It is shown to be equivalent to the Borda-Kendall method if ties are not allowed. An algorithm to determine the “minimum variance” consensus ranking in the case of ties is described. Results obtained from the solution of problems of various sizes are discussed.

Armstrong, Ronald D.; Cook, Wade D.; Seiford, Lawrence M.

doi: 10.1287/mnsc.28.6.638pmid: N/A

This paper investigates the problem of obtaining a compromise/consensus from a set of ordinal rankings of n objects supplied by m committee members. Earlier work by Cook and Seiford (Cook, Wade D., Lawrence M. Seiford. 1978. Priority ranking and consensus formation. Management Sci. 24 (16) 1721–1732.) dealt with the problem of consensus when attention was restricted to complete rankings only. That is, no ties were permitted. This paper examines the general problem which allows for tied preferences. A convex polyhedral representation is given of the feasible solution space, and a branch-and-bound procedure is developed for determining an optimal ranking. Computational results for various problem sizes are presented. Generalizations, and directions for further research are discussed.

Ben-Horim, Moshe; Levy, Haim

doi: 10.1287/mnsc.28.6.646pmid: N/A

Management of accounts receivable and trade credit policy should often be adjusted to reflect changing interest rates due to changing inflation. Firms can respond to inflation by either increasing the discount for cash payments or by shortening the credit period. This paper investigates the policy of shortening the credit period in response to changing inflation rates. We first assume that inflation is fully anticipated, and later we extend the analysis to incorporate inflation risk.

Chand, Suresh; Morton, Thomas E.

doi: 10.1287/mnsc.28.6.652pmid: N/A

This paper develops a “perfect planning horizon procedure” for the simple cash balance problem, where the objective of the firm is to schedule the selling and buying of its earning assets so that all the positive demands are met at minimum cost. Demand for cash can be both positive or negative; a positive demand means the cash outflow and a negative demand means the cash inflow. While the planning horizon procedure reported in Mensching, Garstka, and Morton (Mensching, J., S. Garstka, T. Morton. 1978. Protective planning-horizon procedures for a deterministic cash balance problem. Oper. Res. 26 637–652.) obtains optimal initial decisions for the infinite horizon cash balance problem by using forecasts for some finite horizon, the perfect procedure in this paper is guaranteed to obtain these decisions by using the minimum possible number of periods of forecast data. We also present a forward dynamic programming algorithm which is computationally more efficient than the forward algorithm of Blackburn and Eppen (Blackburn, J., G. Eppen. 1973. A two asset deterministic cash balance problem. Research Paper No. 133, Stanford University.). Our computational results show that the perfect procedure in this paper can lead to significant savings in the number of periods of forecast data required to obtain optimal initial decisions and the CPU time compared to the planning horizon procedure in Mensching, Garstka, and Morton (Mensching, J., S. Garstka, T. Morton. 1978. Protective planning-horizon procedures for a deterministic cash balance problem. Oper. Res. 26 637–652.).

Kallberg, J. G.; White, R. W.; Ziemba, W. T.

doi: 10.1287/mnsc.28.6.670pmid: N/A

This paper presents a stochastic linear programming formulation of a firm's short term financial planning problem. This framework allows a more realistic representation of the uncertainties fundamental to this problem than previous models. In addition, using Wets's algorithm for linear simple recourse problems, this formulation has approximately the same computational complexity as the mean approximation (i.e., the deterministic program obtained by replacing all random elements by their means). Using this formulation we empirically investigate the effects of differing distributions and penalty costs. We conclude that even with symmetric penalty costs and distributions the mean model is significantly inferior to the stochastic linear programming formulation. Thus we are able to demonstrate that ignoring the stochastic components in linear programming formulations can be very costly without having significant computational savings.

Mendelson, Haim; Amihud, Yakov

doi: 10.1287/mnsc.28.6.683pmid: N/A

This paper considers the consumption behavior of a risk-averse consumer with a preference for immediate consumption who faces an uncertain income stream and plans for a finite or infinite number of periods. The consumer may borrow up to a limit or save, where both saving and borrowing are subject to the same positive rate of interest. We derive the optimal consumption policies for both finite and infinite planning horizons, investigate their characteristics, and analyze their economic and behavioral implications.

Bawa, Vijay S.

doi: 10.1287/mnsc.28.6.698pmid: N/A

About 400 publications, working papers and books are included in this bibliography on Stochastic Dominance. It contains an exhaustive listing of papers that are either basic contributions to this subject or primarily concerned with applications of the Stochastic Dominance concepts. It also contains selective listing of papers from finance, economics, mathematics, mathematical physics, mathematical psychology, operations research and statistics literature to illustrate the wide applicability of Stochastic Dominance concepts.

doi: 10.1287/mnsc.28.6.713pmid: N/A