Exogenous Demand Research Articles

Local Labour Markets and Theft: New Evidence from Canada

AbstractThis paper provides causal evidence that labour market opportunities affect theft‐related crime rates in Canada. Synthetic panel data from 2007–2011 combine the Labour Force Survey and Uniform Crime Reports microdata. Low‐skill unemployment rates and corresponding crime rates are measured for age‐city‐specific groups of young males. IV estimates exploit the exposure of low‐skill employment to exogenous demand for exports to the US. Causal estimates of the elasticity of theft‐related crimes with respect to low‐skill unemployment range from 0.357 to 0.654. The use of aggregated unemployment rates appears to bias OLS estimates downward. IV estimates are found to mitigate this aggregation bias.

Synthesis and Generalization of Structural Results in Inventory Management: A Generalized Convexity Property

We address a general periodic review inventory control model with the simultaneous presence of the following complications: (a) bilateral inventory adjustment options, via procurement orders and salvage sales or returns to the supplier; (b) fixed costs associated with procurement orders and downward inventory adjustments (via salvage sales or returns); and (c) capacity limits associated with upward or downward inventory adjustments. We characterize the optimal adjustment strategy, both for finite and infinite horizon periodic review models, by showing that in each period the inventory position line is to be partitioned into (maximally) five regions. Our results are obtained by identifying a novel generalized convexity property for the value functions, which we refer to as (C1K1,C2K2)-convexity. To our knowledge, we recover most existing structural results for models with exogenous demands as special cases of a unified analysis.

Multi-business Firms, Resource Redeployment and Transaction Costs

This paper analyzes how changes in sales growth rates in a particular product niche imply corresponding changes with the opposite sign in other product niches of the same portfolio of a multi-business firm. When this correspondence happens, we argue that we are detecting a process of resource redeployment executed by diversifiers. We analyze the drink industry by exploiting tax changes in the alcoholic segments to create exogenous demand variation. We discover that the process of redeployment is particularly visible when the downstream buyer industry (supermarket) is concentrated and when specialized competition inside the focal product niche (i.e., beer) is fragmented. We argue that this evidence is consistent with a transaction costs view that assumes diversified companies more efficient in reallocating resources vis-à-vis the market.

The joy of flying: Efficient airport PPP contracts

We derive the optimal concession contract for an airport where the concessionaire’s effort impacts either non-aeronautical revenue (shops, restaurants, parking lots and hotels) or aeronautical revenues (passenger and airline fees). Our first model assumes that demand for the infrastructure is exogenous whereas demand for non-aeronautical services depends both on passenger flow and on the concessionaire’s effort and diligence. We show that the optimal principal-agent contract separates exogenous and endogenous risks. First, the term of the concession varies inversely with passenger flow, so that the concessionaire bears no exogenous demand risk. Second, the concessionaire bears part or all of non-aeronautical risk, which fosters effort. We also study a model where the concessionaire’s effort affects demand for aeronautical services and focus on the case where the contract includes a demand trigger for investment as an incentive. Both optimal contracts can be implemented with a Present-Value-of-Revenue (PVR) auction in which firms bid on the present value of aeronautical revenue and the concession ends when the bid is collected. PVR auctions have been used to auction airport PPP contracts in Chile, and demand triggers for investment have been used both in Brazil and Chile.

The Price of Fragmentation in Mobility-on-Demand Services

Mobility-on-Demand platforms are a fast growing component of the urban transit ecosystem. Though a growing literature addresses the question of how to make individual MoD platforms more efficient, much less is known about the cost of market fragmentation, i.e., the impact on overall welfare due to splitting demand between multiple independent platforms. Our work aims to quantify how much platform fragmentation degrades the efficiency of the system. In particular, we focus on a setting where demand is exogenously split between multiple platforms, and study the increase in supply rebalancing costs incurred by each platform to meet this demand, vis-à-vis the cost incurred by a centralized platform serving the aggregate demand. We show under a large-market scaling, this Price-of-Fragmentation undergoes a phase transition, wherein, depending on the nature of the exogenous demand, the additional cost due to fragmentation either vanishes or grows unbounded. We provide conditions that characterize which regime applies to any given system, and discuss implications of these findings on how such platforms should be regulated.

The Price of Fragmentation in Mobility-on-Demand Services

Mobility-on-Demand platforms are a fast growing component of the urban transit ecosystem. Though a growing literature addresses the question of how to make individual MoD platforms more efficient, less is known about the cost of market fragmentation, i.e., the impact on overall welfare due to splitting demand between multiple independent platforms. Our work aims to quantify how much platform fragmentation degrades the efficiency of the system. In particular, we focus on a setting where demand is exogenously split between multiple platforms, and study the increase in supply rebalancing costs incurred by each platform to meet this demand, vis-a-vis the cost incurred by a centralized platform serving the aggregate demand. We show under a large-market scaling, this Price-of-Fragmentation undergoes a phase transition, wherein, depending on the nature of the exogenous demand, the additional cost due to fragmentation either vanishes or grows unbounded. We provide conditions that characterize which regime applies to any given system, and discuss implications of these findings on how such platforms should be regulated.

Long-term modelling and assessment of the energy-economy decoupling in Spain

Over the past few years, a decoupling effect between economic growth and energy consumption has been detected in many countries. Albeit this fact may be understood as positive, it supposes a concern for energy systems modellers since assumption-making process, especially concerning the linkage of the socio-economic drivers with energy demand, cannot be founded on simplistic relationships any longer. Accordingly, this article develops a double assessment to solve that problem. It proposes the use of econometric models as suitable tools to project the electricity demand in Spain, and besides, it introduces those refined energy demand projections as input for the Spanish energy system model, created using the LEAP framework. The results show substantial deviations (up to 18% by 2050) in the electricity production required and, to some extent, such divergences involve changes in the electricity production technology mix. Besides, from the electricity demand side, the use of refined demand projections has a significant effect on the sectoral behaviour, proving that –with respect to a simplistic set of projections– industry demand is overestimated, whereas residential demand is undervalued. In summary, due to the existence of a decoupling effect, energy systems modellers should avoid making simplistic assumptions when taking exogenous demand projections.

Agricultural Frontiers as Controversial Place-making Territories

The intricacies of one of the most relevant agricultural frontiers in the world today – the State of Mato Grosso, in the Brazilian Amazon – are considered through an examination of place-making. Vast areas of rainforest and savannah were converted, since the 1970s, into places of intensive farming, to fulfil exogenous demands for land and agricultural production. Instead of merely studying the constellation of interconnected places, we examine the politicised genesis of the emerging places and their trajectory under socio-ecological disputes. Empirical results reveal three main moments of place-making characterised, respectively, by displacement, replacement and misplacement. In order to understand those intricate processes, it is necessary a qualitative intellectual jump: from place-making on the frontier to place-making as an ontological frontier in itself. Mato Grosso remains an unsettled frontier between a new socio-spatiality (shaped by fast economic growth) and the perpetuation of old practices (marked by exclusion and tensions).

Optimal capacity allocation in a production–inventory system with base stock

We address the optimal allocation of a given capacity in a multi-product inventory–production system with base stock. In the system, the base stock level is equal to the sum of the finished goods and work-in-process inventory. Each exogenous demand releases production of a new unit and increases the level of work-in-process. Unsatisfied demand is backordered. Using an open single-server queueing network, we model the behavior of the work-in-process in the manufacturing system in order to determine the cost-optimal base stock level. We focus on the utilizations in the network and compare balanced and unbalanced systems regarding their base stock level. In particular, we analyze the effect of capacity reallocation and show that a manufacturing system consisting of production stations with constant utilization rates, results in the lowest base stock level. With the combined application of queueing network theory and majorization theory, we are able to provide analytical explanations of the network’s behavior.

Endogenous Productivity of Demand-Induced R&D: Evidence from Pharmaceuticals

We examine trends in the productivity of the pharmaceutical sector over the past three decades. Motivated by Ricardo’s insight that productivity and rents are endogenous to demand when inputs are scarce, we examine the industry’s aggregate R&D production function. Using exogenous demand shocks to instrument investments, we find that demand growth can explain a large portion of R&D growth. Returns to scale have been stable whereas total factor productivity has declined significantly. Predicted rents based on our estimates and Ricardo’s theory closely match the trends we observe.

Wage Divergence, Business Cycle Co‐Movement and the Currency Union Effect

AbstractThis paper studies the impact of wage growth divergence on business cycle co‐movement in the context of currency unions. While the theoretical literature on optimum currency areas highlights the equilibrating effect of divergent wage growth after asymmetric exogenous demand shocks via the external demand channel, recent literature on euro area imbalances emphasizes its dis‐equilibrating effect as a source of asymmetric domestic demand shocks, and therefore suggests a negative link to business cycle co‐movement. Our empirical results reveal that the latter effect has been clearly dominating in the euro area: Wage growth differentials across countries – while of minor importance for non‐euro area EU countries with sovereign currencies – significantly reduce business cycle co‐movement within the monetary union and thus increase the cost of the common monetary policy. The large magnitude of the effect calls for enhanced co‐ordination efforts of wage policies in the euro area.

IFN-1 Bid crosstalk: foe or friend to stem cells

Under steady-state approximately 70% of the hematopoietic stem and progenitor cells (HSPC) in the bone marrow are quiescent, with low metabolic activity fueled by glycolytic metabolites (1). However, in response to exogenous demands such as cell loss or damage, or infection, they become highly proliferative and can efficiently and quickly expand or reconstitute the blood and immune systems (2,3).

Offset optimization in signalized traffic networks via semidefinite relaxation

We study the problem of selecting offsets of the traffic signals in a network of signalized intersections to reduce queues of vehicles at all intersections. The signals in the network have a common cycle time and a fixed timing plan. It is assumed that the exogenous demands are constant or periodic with the same period as the cycle time and the intersections are under-saturated. The resulting queuing processes are periodic. These periodic processes are approximated by sinusoids. The sinusoidal approximation leads to an analytical expression of the queue lengths at every intersection as a function of the demands and the vector of offsets. The optimum offset vector is the solution of a quadratically constrained quadratic program (QCQP), which is solved via its convex semidefinite relaxation. Unlike existing techniques, our approach accommodates networks with arbitrary topology and scales well with network size. We illustrate the result in two case studies. The first is an academic example previously proposed in the literature, and the second case study consists of an arterial corridor network in Arcadia, California.

Is Oprah Contagious? The Depth of Diffusion of Demand Shocks in a Product Network

Recent studies have documented that the contagion of information and behaviors in social networks is generally quite limited. We examine whether this pattern characterizes exogenous demand shocks d...

Remuneration models and revenue risk mitigation in road public–private partnership projects – a case study from Serbia

ABSTRACTAs a consequence of renewed interest in attracting private financing for infrastructure investments, public–private partnership (PPP) arrangements are mostly seen as a suitable mechanism for ensuring sound and quicker delivery of transport infrastructure projects. However, a general concern is that expectations of mobilizing private-sector funds have been overestimated in a number of cases. The purpose of this paper is to contribute to the risk analysis of transport PPP projects with substantial exogenous demand risk which could serve as a rationale for choosing the appropriate PPP model. The objective of this paper is to construct an analytical cash flow-based project model to facilitate the choice of the remuneration mechanism suitable for both private investors and public sector. The model provides an indication whether the project should be implemented as a ‘users pay’, a hybrid or an ‘annuity’ PPP model. The proposed methodology is illustrated using a case study from Serbia.

Place-making at the frontier of Brazilian agribusiness

The intricacies of one of the most relevant agribusiness frontiers in the world today—the north of the State of Mato Grosso, in the southern section of the Amazon, Brazil—are considered through a critical examination of place-making. Vast areas of Amazon rainforest and savannah vegetation were converted there, since the 1970s, into places of intensive soybean farming, basically to fulfil exogenous demands for land and agriculture production. The present assessment goes beyond the configuration of new places at the agricultural frontier, and starts with a qualitative intellectual jump: from place-making on the frontier to place-making as an ontological frontier in itself. It means that, instead of merely studying the frontier as a constellation of interconnected places, we examine the politicised genesis of the emerging places and their trajectory under fierce socio-ecological disputes. The consideration of almost five decades of intense historic-geographical change reveals an intriguing dialectics of displacement (of previous socio-ecological systems, particularly affecting squatters and indigenous groups, in order to create opportunities for migrants and companies), replacement (of the majority of disadvantaged farmers and poor migrants, leading to land concentration, widespread financialisation and the decisive influence of transnational corporations) and misplacement (which is the synthesis of displacement and replacement, demonstrated by mounting risks and a pervasive sentiment of maelstrom). Overall, there was nothing inevitable in the process of rural and regional development, but the problems, conflicts and injustices that characterise its turbulent geographical trajectory were all more or less visible from the outset.

Determination of socially equitable guarantees for public–private partnerships: a toll-road case from Turkey

ABSTRACTIn toll-road projects there is exogenous demand risk. Thus, the government may be required to provide a minimum-traffic guarantee to induce potential private partners to participate. The government must offer the most appropriate level of guarantee while also justifying this controversial fiscal policy tool to society. This study demonstrates the use of financial modeling, risk analysis, and economic evaluation in a toll-road project in Turkey, contributing to the narrowing of a capacity gap in the field. One criterion is proposed to produce a socially equitable guarantee level. This case study exemplifies the policy implications discussed in the conclusions, with a critical look at the public–private partnerships within the context of the neoliberal economic development theory.

One Size Might Not Fit All: Pandemics, Firm Heterogeneity, and Innovation in Indian Vaccine Markets

This paper examines the causal relationship between exogenous demand shocks and new product introductions in India’s vaccine markets. Using a novel dataset of detailed purchasing information forvaccines in the country and exploiting the occurrence of the 2009-10 global H1N1 pandemic as a causal demand shock, we provide evidence of heterogeneous responses to the shock by domestic and multinational vaccine manufacturers in the treated influenza vaccines market (used to remedy H1N1 influenza) relative to our control group of all other vaccine markets. Specifically, we find that such a shock results in reversal of market structure for influenza vaccines in India with a decline in sales of multinational vaccine manufacturers and significant gains in market share gains by domestic vaccine manufacturers. We further provide evidence that such a reversal of the market structure is driven by new product introductions by domestic vaccine manufacturers and their distinctive R&D strategies, whose effects persist even after the shock is over. Finally, we examine the efficacy of targeted policy instruments aimed at stimulating innovation in domestic manufacturers. Taken together, our results provide new evidence on how demand shocks create differential incentives for domestic and multinational manufacturers to innovate and contribute to the ongoing debate on the relationship between market size and innovation. In addition, our results offer useful insights into the role of policy on innovation and competition in the context of an emerging economy facing adverse welfare effects from pandemics.

Carbon footprint accounting of a typical wind farm in China

The reserves and exploitable capacity of the wind power resource in China are both ranked first in the world and could be developed to strengthen China’s energy security and mitigate global warming. Carbon footprint accounting of wind farms is vital for large-scale wind energy exploitation. This paper establishes a systematic accounting framework with life cycle assessment (LCA) and input–output analysis (IOA) for the overall carbon footprint of the life cycle of a typical wind farm. Carbon emissions from the construction, operation, and dismantling phases are considered in the LCA of the wind farm. Then, each expense of the wind farm is treated as a change in exogenous demand for the output of the corresponding economic sectors according to the IOA. In addition, the virtual carbon footprint from peak regulation triggered by the on-grid fluctuation of wind power is incorporated. The results show the total carbon footprint of the studied wind farm is 1.45×104tCO2 over the 21-year lifetime. The construction phase accounts for the largest fraction (76.74%), followed by the operation phase (15.32%) and dismantling phase (7.94%). According to the IOA, the indirect carbon footprint of the wind farm is greater than the direct footprint. The “Smelting and Pressing of Metals” sector that produces the steel and copper used to manufacture the wind turbines dominates the carbon footprint. The virtual carbon footprint of coal-fired power for wind power peak regulation is estimated to be 2.08×103tCO2, which is close to that of the operation phase.

On (Re-Scaled) Multi-Attempt Approximation of Customer Choice Model and its Application to Assortment Optimization

Motivated by the classic exogenous demand model and the recently developed Markov chain model, we propose a new approximation to the general customer choice model based on random utility called multi-attempt model, in which a customer may consider several substitutes before finally deciding to not purchase anything. We show that the approximation error of multi-attempt model decreases exponentially in the number of attempts. However, despite its strong theoretical performance, the empirical performance of multi-attempt model is not satisfactory. This motivates us to construct a modification of multi-attempt model called re-scaled multi-attempt model. We show that re-scaled 2-attempt model is exact when the underlying true choice model is Multinomial Logit (MNL); if, however, the underlying true choice model is not MNL, we show numerically that the approximation quality of re-scaled 2-attempt model is very close to that of Markov chain model. The key feature of our proposed approach is that the resulting approximate choice probability can be explicitly written. From a practical perspective, this allows the decision maker to use off-the-shelf solvers, or borrow existing algorithms from literature, to solve a general assortment optimization problem with a variety of real-world constraints.