Foregone Profits Research Articles

Estimating the cost of young stock mortality in livestock systems-An application to sheep farming in Ethiopia.

In sub-Saharan Africa, pre-weaning young stock mortality (YSM) is in the order of 20 to 30% across most livestock species and production systems. High YSM has significant economic implications for livestock keepers, but few studies provide estimates of the "cost of YSM." This study explores a bio-economic herd modeling approach to estimate the "cost of YSM" at farming/livestock system level. The static zero-growth version of DYNMOD was used to calculate the annual physical and monetary output of a sheep flock consisting of 100 breeding females at different levels of lamb mortality. Production parameter values and prices were taken from recently published research. Calculations were carried out for values of lamb mortality decreasing from 30% to 0% in 5% intervals, with 20% representing the "baseline" YSM. Calculations were repeated for a "high" fertility scenario (100% vs. 59% parturition rate) to gauge the sensitivity of the cost of YSM to another parameter determining flock productivity. The relation of revenue per head and YSM is close to linear over the range of analyzed YSM with 1% decrease in YSM resulting in an increase in revenue per animal of approximately 1%. At the higher fertility rate, the absolute cost of YSM to sheep farmers is higher while the relative increase in revenue per animal resulting from YSM reduction is lower. The estimated difference in revenue of the 100-ewe flock between the 20% and 0% lamb mortality scenarios (at baseline fertility) amounts to approximately USD 90 per additionally surviving lamb, which is far above its market value. Reduced lamb mortality ultimately impacts flock revenue through increased sales of "mature" animals, which embody the value of a lamb plus the revenue/profit from raising it to marketable age/weight. The modeling results suggest that foregone profit is an important component of the systemic "cost of YSM." Consequently, expected profit per animal, in addition to its current market value, is essential for estimating the absolute cost of YSM at farming system level.

Reward-dependent dynamics and changes in risk taking in the Balloon Analogue Risk Task

ABSTRACT The Balloon Analogue Risk Task (BART) assesses real-world decision-making processes in a laboratory setting and has been applied to both healthy and clinical populations. Whereas many previous studies established reliable links between behaviour in the BART and individual characteristics, such as gender, age, and educational level, little is known to date how dynamic, contextual features of the BART impact risk taking behaviour. The present paper fills this gap and reports the results of an online BART administered to a sample of 141 voluntary participants. Taking a novel, single-trial perspective, we document significant associations between experience and expectation related variables, in particular reward and punishment dynamics, and risk-taking behaviour in the BART. Having accrued more money increases risk-taking behaviour as does experiencing foregone profits through exploded balloons. Our findings are consistent with prominent theories of decision-making under risk which postulate intra-person changes in risk-appetite. Our results have important implications for future research as they stress that a more dynamic perspective on the BART can enrich our understanding of the factors that shape risk-taking behaviour.

The Split-Screen Approach for Project Appraisal (Part I: The Theory)

This paper illustrates an innovative approach to financial modeling of engineering decision-making and industrial projects. The approach is a minimal one, grounded as it is on three notions, two laws, and one matrix that combines them, called Split-Screen Matrix (SSM). This split-screen approach consists in linking the accounting and financial input data and systematizes them into the SSM, whose columns report the pro forma book values of capital (balance sheets), the corresponding income components (income statements), and the associated cash flows (cash-flow statements) while the rows show the project’s dynamical evolution. The SSMs are then linked via a continuous split-screen strip. To appraise the project, we use a pair of SSMs, namely, the project matrix and the benchmark Matrix (with the related strips), the latter containing the alternative amount invested and the associated foregone profit of a financial portfolio replicating the project’s cash flows. Using differences between the corresponding elements of the two strips, the economic profitability of the project can be easily measured, in both absolute terms (e.g., net present value, market value added, residual income) and relative terms (e.g., average return on assets, cash-flow return on capital). The accounting-and-finance engineering system (AFES) obtained with the split-screen approach is particularly helpful when using spreadsheet modeling because it does not require (knowledge and) use of financial spreadsheet functions. The application of this approach on spreadsheet modeling is essentially based on the continuous split-screen strip, here described, and is illustrated in a following paper (Baschieri and Magni 2023, “The Split-Screen Approach for Project Apraisal (Part II: Spreadsheet Modeling)”).

Hospital Expenditures Under Global Budgeting and Single-Payer Financing: An Economic Analysis, 2021-2030.

U.S. hospitals provide large amounts of low-value care and devote inordinate resources to administration, while some hospitals leverage market power to realize large profits. Meanwhile, many rural and safety net hospitals are financially distressed. The coexistence of waste and want suggests that U.S. hospital financing is neither efficient nor equitable. We model the economic consequences of adopting the mode of hospital payment used in Canada and the U.S. Veterans Health Administration and proposed in the leading congressional single-payer Medicare-for-All bill: global budgeting. Our models assume increased utilization due to expanded and upgraded coverage; gradual reductions in administrative costs from simplified payment; and the elimination of hospital profits, with hospital capital expenditures funded by explicit grants rather than from profits or borrowing. We estimate that non-federal hospital operating budgets will total $17.2 trillion between 2021 and 2030 under current law versus $14.7 trillion under single-payer with global budgeting. This difference reflects $520 billion in foregone profits and $1,984 billion in reduced expenditures on hospital administration; expenditures on clinical operating budgets, however, would be higher than under current law, funded out of profits.

Impact of Xylella fastidiosa subspecies pauca in European olives

Xylella fastidiosa is the causal agent of plant diseases that cause massive economic damage. In 2013, a strain of the bacterium was, for the first time, detected in the European territory (Italy), causing the Olive Quick Decline Syndrome. We simulate future spread of the disease based on climatic-suitability modeling and radial expansion of the invaded territory. An economic model is developed to compute impact based on discounted foregone profits and losses in investment. The model projects impact for Italy, Greece, and Spain, as these countries account for around 95% of the European olive oil production. Climatic suitability modeling indicates that, depending on the suitability threshold, 95.5 to 98.9%, 99.2 to 99.8%, and 84.6 to 99.1% of the national areas of production fall into suitable territory in Italy, Greece, and Spain, respectively. For Italy, across the considered rates of radial range expansion the potential economic impact over 50 y ranges from 1.9 billion to 5.2 billion Euros for the economic worst-case scenario, in which production ceases after orchards die off. If replanting with resistant varieties is feasible, the impact ranges from 0.6 billion to 1.6 billion Euros. Depending on whether replanting is feasible, between 0.5 billion and 1.3 billion Euros can be saved over the course of 50 y if disease spread is reduced from 5.18 to 1.1 km per year. The analysis stresses the necessity to strengthen the ongoing research on cultivar resistance traits and application of phytosanitary measures, including vector control and inoculum suppression, by removing host plants.

Key Assembling Issues Relating to Mechanical Vibration of Fabricated Rotor of Large Induction Machines

In many applications, where rotating machines of high power are used, high demands on reliability and safety are laid. Precise manufacturing procedures has to be kept even in case of machines retrofits when e.g. rotors are newly assembled. Even small inaccuracies or misguiding the precise technological procedure can lead to improper running of the machine and it can result in shut-down of complete drive. In case of primary circuits of nuclear power plants, it further means the shut-down of the whole power plant. Consequently, it results in significant financial losses (foregone profit and cost given by problem fixing). The paper presents a methodology of vibration origin investigation in case of large rotating machines which are part of drives like pump, compressors etc. The methodology is based on the detection of undesirable vibration using a diagnostic system on-site and further it uses mathematical modelling of corresponding mechanical parts to reveal the vibration origin. The modelling along with the measurement showed that the detected dangerous vibration is caused by misguided assembling of the rotor of the machine.

Cash versus opportunity costs and revenues in bilateral bargaining

We extend previous experimental research on the relevance of cash versus opportunity costs for decision making to a bilateral bargaining setting in which we consider not only cash and opportunity costs, but also cash and opportunity revenues. In the negotiation between a seller and a buyer, a seller’s additional cash cost (cash revenue) reduces (increases) the welfare from trade, i.e., the sum of the partners’ payoffs in case they agree to cooperate, whereas an opportunity cost (revenue) represents a foregone profit (loss) outside the cooperation which does not affect the welfare from trade, but only the gain from trade, i.e., the increase in total payoffs of the two bargaining partners relative to the payoffs they can realize without cooperation. We employ theories of mental accounting and loss aversion to derive hypotheses that contrast bargaining outcomes with a standard-theoretic benchmark prediction implying that the bargaining partners will equally split the gain from trade irrespective of whether the additional item is a cash or opportunity cost or revenue. We hypothesize that prices are less sensitive to the additional item and thus deviate more strongly from the benchmark prediction when the item is an opportunity instead of a cash cost or revenue, because an opportunity cost or revenue is outside, whereas a cash cost or revenue is inside the relationship. We further hypothesize that prices are less sensitive to the item and thus deviate more strongly from the benchmark prediction when the item is an opportunity cost instead of an opportunity revenue, because the opportunity cost is in the gain domain, whereas the opportunity revenue is in the loss domain. Our experimental results support the former, but not the latter prediction. We conclude that the effect of cash versus opportunity costs or revenues on decision making critically depends on the strategic context in which they occur.

SAVING LIVES OR SAVING MONEY? UNDERSTANDING THE DUAL NATURE OF PHYSICIAN PREFERENCES

A longstanding literature has highlighted the tension between the altruism of physicians and their desire for profit. This paper develops new implications for how these competing forces drive pricing and utilization in healthcare markets. Altruism dictates that providers reduce utilization in response to higher prices, but profit-maximization does the opposite. Rational physicians will behave more altruistically when treating poorer patients or those that face higher medical cost burdens, and when foregone profits are lower. These insights help explain the observed heterogeneity in pricing dynamics across different healthcare markets. We empirically test the implications of our model by utilizing two exogenous shocks in Medicare price setting policies. Our results indicate that patient income, out-of-pocket costs, and profitability alone explain up to one-quarter of the variation in price elasticities. Finally, we demonstrate that uniform policy changes in reimbursement or patient cost-sharing may lead to unintended consequences.

Harvest Reporting, Timely Information, and Incentives for Technology Adoption

Natural resource managers typically adopt precautionary quota buffers to account for scientific and management uncertainty. Such buffers ensure compliance with harvest targets up to a confidence level set by the manager, but represent foregone profits and create incentives for firms’ voluntary investment in the provision of information that lessens the regulator's uncertainty. This paper characterizes conditions under which the fishing industry would willingly upgrade its reporting technology to provide accurate and timely catch data. Wireless technologies currently available to harvesters make the provision of real‐time information feasible and affordable. Industry's incentives critically depend on the manager's expected choice of effort restrictions under the alternative technologies. Upgrading is attractive if the new distribution of reporting error shifts probability mass away from large errors so that the quantile at the confidence level is reduced. First‐order stochastic dominance by the distribution under the baseline technology is a sufficient condition. Evidence from the Maryland Blue Crab Accountability Pilot Program, an industry‐led initiative that tested the feasibility of adopting e‐logbooks, illustrates the results. Real‐time availability of accurate catch information under electronic reporting would translate into in‐season adjustments of the manager's controls that could increase the industry's total harvest.

Optimizing time-limited price promotions

Prior research involving promotional response models has largely overlooked the impact of time limits on customer response. We address this issue by developing a price-promotion model in which time limits are conceptualized not only in terms of their effects on customer awareness but also customer urgency. Further, the proposed model incorporates recent insights from behavioral research which indicates that time limits can either enhance or diminish the effects of discount incentives. A key advantage of our approach is that it places minimal demands on managers’ resources, while also leveraging their unique knowledge of the market. In collaboration with an online retailer who frequently uses price promotions, we examine a real-world promotion and illustrate the insights facilitated by the model. In this empirical context, urgency declines with longer time limits but it does so less steeply when accompanied by larger discounts. Additionally, the managers learned that they tend to use time limits that are too long and discounts that are too small, resulting in foregone profits. We conclude by demonstrating the value of sensitivity analyses for understanding how profits can vary with changes in the environment and with differences in the accuracy of managers’ knowledge about customer responsiveness.

Hidden costs of supply management in a small market

AbstractCanada regulates its dairy and poultry industries through supply management. The supply‐management programs use target prices, production quotas and import tariff‐rate quotas to raise domestic prices. Canadian supply‐managed producers cannot export their output to world markets as exports would be considered subsidized under World Trade Organization rules. In this paper, we show that once foregone export opportunities are accounted for, supply management may no longer be beneficial to domestic producers of the supply‐managed commodities. The extent to which foregone profits from exports dominate domestic rents depends on Canada's comparative advantage, domestic market elasticities and the extent of supply management distortion in the domestic market.

Green auctions and reduction of information rents in payments for environmental services: an experimental investigation in Sunan County, northwestern China.

Reducing information rents is an important task for government agencies wishing to purchase maximal environmental services with limited budgets. This paper reports on several green auction options for reducing information rents and improving the performance of the “Grain for Green” Payments for environmental services (PES) program implemented in northwestern China. In r experimental auctions and investigations, door-to-door interviews were conducted and bidding envelopes and survey questionnaires were used to determine the offers and the foregone profits of the participants. Three scenarios are analyzed in this paper: a uniform price auction, a discriminatory price auction, and an opportunity-cost system. The results show that compared to the uniform price auction system, the other auction systems can increase the cost-effectiveness of conservation contracting. Competitive bidding can reveal true opportunity costs and can reduce information rents extracted from the government by farmers using private information. The demographics and average bids of these auction types were also analyzed. “Perfect information” in the opportunity-cost offer system has the best performance but is very hard to implement in reality. The results of this research show that the auction is a valuable tool for purchasing conservation contracts in northwestern China, but that in the future, the performance of these auctions should be studied with relaxed model assumptions.

Optimal management of a multispecies shorebird flyway under sea-level rise.

Every year, millions of migratory shorebirds fly through the East Asian-Australasian Flyway between their arctic breeding grounds and Australasia. This flyway includes numerous coastal wetlands in Asia and the Pacific that are used as stopover sites where birds rest and feed. Loss of a few important stopover sites through sea-level rise (SLR) could cause sudden population declines. We formulated and solved mathematically the problem of how to identify the most important stopover sites to minimize losses of bird populations across flyways by conserving land that facilitates upshore shifts of tidal flats in response to SLR. To guide conservation investment that minimizes losses of migratory bird populations during migration, we developed a spatially explicit flyway model coupled with a maximum flow algorithm. Migratory routes of 10 shorebird taxa were modeled in a graph theoretic framework by representing clusters of important wetlands as nodes and the number of birds flying between 2 nodes as edges. We also evaluated several resource allocation algorithms that required only partial information on flyway connectivity (node strategy, based on the impacts of SLR at nodes; habitat strategy, based on habitat change at sites; population strategy, based on population change at sites; and random investment). The resource allocation algorithms based on flyway information performed on average 15% better than simpler allocations based on patterns of habitat loss or local bird counts. The Yellow Sea region stood out as the most important priority for effective conservation of migratory shorebirds, but investment in this area alone will not ensure the persistence of species across the flyway. The spatial distribution of conservation investments differed enormously according to the severity of SLR and whether information about flyway connectivity was used to guide the prioritizations. With the rapid ongoing loss of coastal wetlands globally, our method provides insight into efficient conservation planning for migratory species.

THE POTENTIAL FOR SHORT-RUN SHIFTING OF A CORPORATE PROFITS TAX

Can the owners of a firm shift a corporate profits tax to consumers? Not in the short run if the tax is stated as a proportion of profits and the firm is a profit maximizer. But what if the firm wishes to pursue a strategy other than profit maximization, say revenue maximization subject to a profit constraint? Under such a condition the firm's reaction to a tax or tax increase might be a price rise that captures part of the foregone profits. We show that firms which operate at a point on their demand curve that differs from profit maximization have an incentive to raise price in response to the tax – and that high cost firms have a greater incentive to raise price than do low cost firms. Our empirical analysis of the US beer industry confirms this finding, and sheds light on the Krzyzaniak–Musgrave analysis of the 1960s which suggested that the corporation income tax produced significant short-run shifting.

Business Restructuring Transactions: Key Aspects, Valuation and the Indian Perspective

This article addresses some of the more important aspects of restructuring transactions from a transfer pricing perspective. The valuation approaches used for computing exit charges will also be considered, namely the foregone profits approach and the bargaining theory.

Fallpauschalenentwicklung in der rekonstruktiven Mammachirurgie

Diagnosis-Related Groups (DRG) were introduced in Germany in 2004 as a medico-economic classification system. In this analysis, we looked at reconstructive surgery after breast cancer, focusing on changes of the fee-per-case system in the last 6 years. Immediate, delayed, pedicle and free flaps as well as alloplastic reconstructive methods were analysed using data from German reference hospitals. We analysed the length of stay, reimbursements, costs and profits. The biggest profit margin was found in free perforator flaps. These were up to 3 times higher than in alloplastic reconstruction and pedicle flaps. Due to the fact that the underlying costs for the calculation of reimbursement are always retrospective, we accounted for the rate of price increase. In spite of increasing mean profits, foregone profits of up to €574 per case due to inflation were not taken into consideration. Contrary to actual guidelines, neither the immediate reconstruction of the breast by autologous tissue, nor the bilateral reconstruction is taken into account economically. Although a more differentiated reimbursement of breast reconstruction by DRG has taken place in the last years, the subject still remains a classical example for insufficient mapping of new medical standards in our DRG system. As the choice of surgical therapy is increasingly influenced by free market mechanisms, the risk for economic selection in contradiction to clinical recommendations becomes a real problem. Even 9 years after its introduction, the German DRG system is far from being a learning or quick adapting system.

The many factors that affect the success of regulatory mechanisms designed to foster investments in energy efficiency

A utility’s profit-maximizing level of investment in energy efficiency or demand-side management (DSM) programs and mix of programs is affected by natural load growth, the frequency of rate cases, program costs, and the structure of any mechanism designed to either compensate the utility for foregone profits or sever the link between sales and profits. Under a range of reasonable assumptions, decoupling can incent a utility to invest in DSM. However, a utility experiencing high natural load growth and little inflation is likely to resist the imposition of a decoupling mechanism, as it would tend to lower profits. A utility with low growth in per-customer sales will tend to favor decoupling, as it will tend to lead to higher profits than under traditional regulation. The results presented here are quite sensitive to the assumptions made regarding natural load growth, regulatory lag, the frequency of price changes, price elasticity of demand, and other factors. This suggests that there is not a single approach to promoting energy efficiency without penalizing utility profits that will work in all situations for all utilities.

Costs and Benefits of Learning through Alliances for Entrepreneurial Firms

A firm that lacks the specialized complementary assets necessary to commercialize an innovation faces a trade-off between contracting with an incumbent to access those assets and integrating downstream into commercialization. According to the framework developed in the prior literature, under a strong appropriability regime the innovator is likely to be better off contracting with an incumbent (as long as it can negotiate reasonable terms). However, we argue that if the innovator can learn from its experience in product commercialization, and thereby build its own commercialization capabilities, then the benefits of integrating downstream may outweigh the opportunity costs of learning and foregone profits. Alternatively, by engaging in joint commercialization, the innovator may be able to avoid these opportunity costs, albeit at the expense of higher inter-organizational governance costs. We illustrate the relationship between the choice of commercialization mode, commercialization experience, and performance in the context of the pharmaceutical industry. Specifically, we study how commercialization mode and experience affects the likelihood of drug approval. We find that when innovators lacking commercialization experience participate in the commercialization process though either joint commercialization or by commercializing alone, the product is less likely to be approved. However, innovators that have participated in the commercialization process in the past are more likely to successfully commercialize subsequent innovations under joint commercialization than those which have only contracted the commercialization to an incumbent. The results suggest that in some circumstances participating in the commercialization process, either through self-commercialization or by engaging in joint commercialization, may be the optimal strategy even for firms without the requisite complementary assets.

'Zombie' Banks Make 'Zombie' Firms

This paper finds evidence that regulatory forbearance toward weakly capitalized banks, which creates “zombie” banks, leads to the creation of “zombie” firms in the Japanese banking crisis of 1997-2003. Capital weak banks bankrupt large borrowers at higher levels of indebtedness than similar firms with better capitalized banks. The average “zombie” entering bankruptcy has an extra 4.7 years of unlife and is 20.8% more indebted than bankrupt firms with better capitalized banks. This is the first direct evidence of bank capitalization being the driving force behind “zombie” firms. I quantify the direct costs of increased bad debts due to forbearance at 4.2% of nominal Japanese GDP in 1997 or US$181 billion. This does not include the indirect costs such as the loss to competitors through lower profitability and employment, nor the foregone profits for banks of not making loans to profitable firms. The results are robust to several alternative measures of indebtedness and are confirmed by robustness checks showing that weakly capitalized banks increase the rate of bad loan disposal and bankruptcies of listed firms after receiving government capital injections. These results are particularly relevant in the aftermath of the global financial crisis of 2008. Regulatory forbearance towards banks remains a politically more palatable option than extensive capital injection in many countries; this study suggests that forbearance may prove to be very costly.

Confronting the costs and conflicts associated with biodiversity

1 Norwegian Institute for Nature Research, Trondheim, Norway 2 Department of Economics, University of Victoria, Victoria, BC, Canada 3 Department of Biology, The University of Mississippi University, MS, USA 4 Marine Mammal Research Unit, The University of British Columbia, Vancouver, BC, Canada 5 South African National Biodiversity Institute, Claremont, South Africa 6 Animal Demography, Department of Zoology, University of Cape Town, Rondebosch, Cape Town, South Africa 7 American Museum of Natural History, Central Park West at 79th Street, New York, NY, USA 8 Wildlife Ecology and Conservation, University of Florida, Gainesville, FL, USA 9 Division of Economics, University of Stirling, Stirling, UK 10 University of Lyon I, Villeurbanne, France 11 Department of Biological Sciences, The University of Hull, Hull, UK 12 CSIRO Davies Laboratory, Aitkenvale, Qld, Australia 13 University of Stellenbosch, Bellville, South Africa 14 Aberdeen Centre for Environmental Sustainability (ACES), University of Aberdeen & Macaulay Institute, Aberdeen, UK 15 Institute of Zoology, Zoological Society of London, London, UK