Implicit Costs Research Articles

Gulf Cooperation Council (GCC)—Energy Price Reforms in the GCC—What Can Be Learned From International Experiences?

Energy prices in the GCC countries are low by international standards. These low prices have co-existed with rapid economic development in the region over the past 50 years, but the costs of this policy have also risen in terms of very high energy usage per capita. Providing energy at low prices has also effectively absorbed resources that could otherwise have been invested in human and physical capital or saved for future generations. The implicit cost of low energy prices in the GCC, in terms of foregone revenue, is estimated to be around 5 percent of GDP (about 8 percent of non-oil GDP) this year. GCC countries have been embarking on energy price reform in recent years. The recent decision of the UAE to remove fuel subsidies is an important initiative. Nevertheless, energy prices are generally still below international levels and differ substantially across the GCC countries. In most countries, further steps are needed to raise energy prices to reduce the growth in energy consumption and to support the fiscal adjustment that is necessary in the current lower oil price environment. Evidence in this paper suggests the inflationary impact of higher energy prices in the GCC is likely to be small, and while there may be some adverse effect on growth in the near-term, over the longer-term the growth benefits should be positive. Given the low weight of energy products in the CPI, first round effects of higher energy prices should be limited, while well anchored inflation expectations should help prevent second-round effects. On growth, a gradual increase in energy prices should have a manageable impact on industrial activity, although energy intensive industries will be adversely affected and will need to adjust. In the longer-term energy price reforms could generate significant permanent real income gains for the economy as a whole. More broadly, international experiences suggest that the likelihood of success with energy price reforms increases if the reforms are:

A new tool to connect blood vessels in fundus retinal images.

This paper presents a novel tool that allows a user to reconstruct the retinal vascular network from fundus images. The retinal vasculature consists of trees of arteries and veins. Common segmentation algorithms are not able to completely segment out the blood vessels in fundus images. This failure results in a set of disconnected or broken up vascular segments. Reconstructing the whole network has crucial importance because it can offer insight into global features not considered so far, including retinal fluid dynamics. This tool uses implicit neural cost functions to join vessel segments. Results have shown that the quality of the segmentation affects the outcome of connectivity algorithms and by enhancing the segmentation the connectivity can be improved.

The Market Impact of Passive Trading

Implementing a passive strategy with significant assets under management affects market values and thus gives rise to implicit costs in addition to the explicit costs, such as commissions and transaction-related fees. This article presents a conceptual framework and mathematical model for decomposing implicit trading costs and comparing them across active, passive, and smart beta strategies that do not involve frequent trading. The proposed framework, which improves on the weighted-average market capitalization/turnover approach, is intended to help providers and investors evaluate the investability or capacity of index-based strategies.

When will wind energy achieve grid parity in China? – Connecting technological learning and climate finance

China has adopted an ambitious plan for wind energy deployment. This paper uses the theory of the learning curve to investigate financing options to support grid parity for wind electricity. First, relying on a panel dataset consisting of information from 1207 wind projects in China’s thirty provinces over the period of 2004–2011, this study empirically estimates the learning rate of onshore wind technology to be around 4.4%. Given this low learning rate, achieving grid parity requires a policy of pricing carbon at 13€/ton CO2e in order to increase the cost of coal-generated electricity. Alternatively, a learning rate of 8.9% would be necessary in the absence of a carbon price. Second, this study assesses the evolution of additional capital subsidies in a dynamic framework of technological learning. The implicit average CO2 abatement cost derived from this learning investment is estimated to be around 16€/ton CO2e over the breakeven time period. The findings suggest that climate finance could be structured in a way to provide up-front financing to support this paradigm shift in energy transition.

Does stock market liquidity explain real economic activity? New evidence from two large European stock markets

This paper examines the relationship between stock market liquidity, which proxies for the implicit cost of trading shares, with macroeconomic conditions. We provide evidence that stock market liquidity contains strong and robust information about the condition of the economy for both the UK and Germany in the presence of well-established leading indicators. Our findings exemplify the importance of small cap firms’ liquidity in explaining the state of the economy and support the “flight-to-quality argument”. Finally, the empirical findings show that there is not any differential role of liquidity in explaining the course of macroeconomic variables between a capital market and a bank-oriented economy.

Teaming Up for Sustained Performance: A Repeated-Game Model of Voluntary Horizontal Collaboration

This paper presents a model to characterize the dynamics of and rationale for voluntary horizontal collaborations commonly seen in global supply chains and organizations. Examples of such collaborations include supply clusters, supplier alliances, and teams of peers within organizations. The model consists of two key elements. One is a repeated game framework that captures the dynamics of the underlying environment, such as the long-term interactions between individual players who have limited capabilities and face uncertain demand. The second element is a peer help mechanism, which articulates the implicit short-term cost and long-term benefit of team production and generate synergies among the players. Our analysis shows that the emergence of horizontal collaborations depends on the difference between the individual players’ productivity levels, players’ patience, and the prevalence of high performers on the team. We also show that equilibrium team size is determined by the cost/technology structure of the collaboration, which varies depending on what kind of asset (e.g., inventory or capacity) is shared. We further extend the model to a principal-agent framework, in which the principal can benefit from forming teams of agents but cannot enforce or monitor whether peer help occurs. Finally, we characterize the optimal compensation and team structure for the principal to assign agents to teams.

Efficiency or Competition? A Structural Econometric Analysis of Canada's AWS Auction and the Set‐Aside Provision

In 2008, Industry Canada auctioned 105 MHz of spectrum to a group of bidders that included incumbents and potential new entrants into the Canadian mobile phone market, raising $4.25 billion. In an effort to promote new entry, 40 MHz of spectrum was set‐aside for new entrants. In order to estimate the implicit cost of the set‐aside provision, we estimate the parameters of the bidders' profit function via a maximum match estimator based on the notion of pairwise stability in matches. We find that all telecommunications firms valued both geographic complementarities across auction licenses as well as absolute spectrum. Under a reasonable alternative scenario, our results indicate that the set‐aside led to a total profit loss of approximately 10%.

Cost‐Effective Placement of Best Management Practices in a Watershed: Lessons Learned from Conservation Effects Assessment Project

AbstractThis article reviews the key, cross‐cutting findings concerning watershed‐scale cost‐effective placement of best management practices (BMPs) emerging from the National Institute of Food and Agriculture Conservation Effects Assessment Project (CEAP) competitive grants watershed studies. The synthesis focuses on two fundamental aspects of the cost‐effectiveness problem: (1) how to assess the location‐ and farmer‐specific costs of BMP implementation, and (2) how to decide on which BMPs need to be implemented and where within a given watershed. Major lessons learned are that (1) data availability remains a significant limiting factor in capturing within‐watershed BMP cost variability; (2) strong watershed community connections help overcome the cost estimation challenges; (3) detailing cost components facilitates the transferability of estimates to alternative locations and/or economic conditions; and (4) implicit costs vary significantly across space and farmers. Furthermore, CEAP studies showed that (5) evolutionary algorithms provide workable ways to identify cost‐effective BMP placements; (6) tradeoffs between total conservation costs and watershed‐scale cost‐effective water quality improvements are commonly large; (7) quality baseline information is essential to solving cost‐effectiveness problem; and (8) systemic and modeling uncertainties alter cost‐effective BMP placements considerably.

Developing multi-dimensional green value

Purpose– The purpose of this study is to elucidate how green value influences potential green hotel customers’ propensity to choose green. Studies on green hotels emphasized environmental and financial benefits that conventional hotels do not provide to society or the companies. However, these benefits may not be the ones that resonate best with its potential customers. Besides, given the characteristics of green products, it is also important to point out how customers perceive green-related costs.Design/methodology/approach– A pilot test was conducted in three universities and then an anonymous questionnaire was randomly administered to Korean passengers at the Incheon International Airport. Exploratory factor analysis and structural equation modeling were the primary methods of data analysis.Findings– Four dimensions for perceived green benefits and three dimensions for perceived green costs emerged: functional, emotional, social and epistemic benefits; and monetary, explicit and implicit costs. Environmental concern influenced perceived green benefits positively and perceived green costs negatively, while its relationship with purchase intention was insignificant. Perceived green benefits was not a significant predictor of purchase intention, but perceived green costs was, and it partially mediated the effect of environmental concern on purchase intention. Functional and emotional benefits as well as monetary and explicit costs were significantly associated with purchase intention.Research limitations/implications– This study has only investigated customer perceived value of a green hotel stay in the pre-purchase stage, and hotel brand level was not taken into consideration. Besides, convenience sampling of Korean respondents only may limit the generalizability of the research findings.Practical implications– Research findings help to explain the inconsistency between eco-friendly attitude and green purchase intentions. Managers may understand the importance of developing customers’ green awareness and how to market the green value to them.Originality/value– Few researches have focused on the role of customer perceived value in explaining true behavioral change of green hotel guests. The current study may be the first attempt to incorporate the social exchange theory into the conceptual model, and extend the knowledge of perceived value in this specific green context by not only emphasizing multi-dimensional perceived green benefits and perceived green costs but also incorporating a situational factor of environmental concern.

Determining Lack of Marketability Discounts: Employing an Equity Collar

A discount for the lack of marketability is the implicit cost of quickly monetizing a non-marketable asset at its current value. These discounts are used in many venues to determine the fair market value of a non-marketable asset such as a privately-held business. There has been much written on the quantification of the discount for the lack of the marketability which is briefly summarized in this article. Marketability refers to monetizing the non-marketable asset at its cash equivalent current value. Current practice often uses the cost of a put option as a proxy for the discount. A put option insures that the investor will receive no less than the current value of the underlying asset. However, the use of a put also allows the investor to maintain the asset’s upside potential. Therefore, the cost of a put overstates the discount for the lack of marketability. We show that the cost of monetizing a non-marketable asset at its current value through a loan, secured by an at-the-money equity collar, more effectively captures the true cost of marketability. When puts and calls cannot be employed to secure the current value on the underlying asset, a portfolio consisting of the non-marketable asset and a stock index, where puts and calls can be written on the index can be constructed. The effectiveness of the portfolio in creating a risk free outcome depends upon the correlation and volatility of the stock index and the non-marketable asset. We demonstrate that, relative to current practice, the use of an equity collar with a loan greatly reduces the implied discount for the lack of marketability.

The Effect of Social Interaction on Economic Transactions: Evidence from Changes in Two Retail Formats

Examining changes in two different retail formats, we show that consumers alter their purchases depending on the retail environment. In both settings, the change in behavior coincides with a reduction in the interpersonal interaction required to complete a transaction. As such, we contend that the format changes reduced a “social friction” that would otherwise inhibit consumers due to an implicit cost associated with ordering certain items in social settings. This paper was accepted by Pradeep Chintagunta, marketing.

Time is money: An empirical examination of the effects of regulatory delay on residential subdivision development

Variation in regulatory costs over time and across different types of investment projects creates risk for developers who hold land. These so-called implicit costs, which arise as a result of regulatory delay in the land development process, are hypothesized to be potentially large, but empirical evidence of their influence on development outcomes is limited. Using a unique micro-level data set on parcel-level subdivision development that includes data on the timing of subdivision approvals, we test the effects of implicit costs that arise as a result of increased subdivision approval times on the timing and pattern of residential subdivision development. Consistent with theory, we find that these regulation-induced implicit costs reduce the probability of subdivision development on any given parcel. In addition, we find that systematic variation in regulation-induced implicit costs across space has reduced development in more heavily regulated urbanized areas intended for development and intensified development in less regulated exurban areas located farther away. The results provide a new explanation of scattered, low-density urban development as the result of optimal land development with multiple development options and heterogeneous regulatory costs.

Valuing Regulations Affecting Addictive or Habitual Goods

The analysis of regulations affecting addictive or habitual goods has drawn considerable controversy. Some studies have suggested that such regulations have only small welfare benefits, as consumers value these goods despite health benefits from quitting, while other studies suggest that information or behavioral problems make existing consumption decisions a poor guide to welfare evaluation. We examine potential utility offsets to health benefits of regulations affecting addictive or habitual goods theoretically and empirically. Our analysis focuses on individuals who consume these goods only, ignoring other social costs and benefits. Theoretically, we show the importance of several factors including: money saved in addition to health improvements; differentiating steady-state utility losses from short-term withdrawal costs; lack of utility loss for people dissuaded from starting to consume the good; and accounting for utility consequences of explicit or implicit cost increases. Our empirical analysis considers regulations that affect smoking. To measure the welfare cost of smoking cessation, we divide the population into those with more and less rational smoking behavior and use the valuation of smoking from more rational smokers to impute values of losses for less rational smokers. Our results show that the utility cost of smoking cessation is small relative to the health gains in people for whom withdrawal costs are the main utility loss of quitting, and even among people who have some ongoing loss, the utility offsets represent 20%–25% of the health gains. While marginal smokers induced to quit by regulations can be expected to have low or no steady-state loss, even this higher estimate is far below prevailing estimates of the utility cost of smoking used by the Food and Drug Administration and other analysts.

The Implicit Costs of Government Deposit Insurance

The Diamond-Dybvig (DD) model is often cited as a theoretical justification for government deposit insurance. In the model, rational agents find it in their interest to withdraw their bank deposits if they suspect other depositors plan to do likewise. When a sufficient number of agents are expected to liquidate their accounts, a bank run ensues. Guaranteeing deposits through a system of government-administered deposit insurance removes the temptation to run on the bank and thereby precludes the need to ever use the deposit insurance. As Thomas Sargent makes clear, deposit insurance enters the model as a costless solution: The good news in the Diamond-Dybvig model ... is that if you put in government-supplied deposit insurance, that knocks out the bad equilibrium. People don't initiate bank runs because they trust that their deposits are safely insured. And a great thing is that it ends up not costing the government anything to offer the deposit insurance! It's just good all the way around [Rolnick 2010: 31]. Diamond and Dybvig (1983: 44) conclude, Government deposit insurance can improve on the best allocations that private markets provide. In practice, however, government-provided deposit insurance is not a costless solution. It is frequently invoked to cover the losses of failed banks. In the United States, deposit insurance provided by the Federal Deposit Insurance Corporation (FDIC) is administered as a rainy-day fund. Each member bank pays a premium based on its risk rating and on the amount of insurable deposits held by the bank. Premiums are held in a deposit insurance fund (DIF) administered by the FDIC. When a member bank becomes insolvent, debts to its depositors are paid out of the DIF and premiums for all banks increase until the fund is restored. Annual premiums reflect the cost of operating and administering the system and recent losses due to bank failures. The cost of guaranteeing deposits through such a system is decidedly nonzero. The costs of providing insurance are sufficiently high as to warrant their inclusion in any reasonable model of deposit insurance. If the corresponding benefits of deposit insurance were sufficiently large and the alternative means of acquiring these benefits were either nonexistent or sufficiently costly, then ignoring the real-world costs of government-provided deposit insurance is perhaps appropriate. However, we do not believe this is the case. The benefits are not so large that one need not be concerned with costs, and there are potentially superior alternatives to government-provided deposit insurance. If one is to consider alternatives by engaging in comparative institutional analysis, a better understanding of the costs of government deposit insurance is required. In what follows, we explore the explicit costs of government-provided deposit insurance. We focus on the FDIC as a specific example. First, we review the DD model and show how FDIC deposit insurance differs from the model in several key respects. Second, we discuss the history of the FDIC, paying particular attention to how the maximum amount covered, number of bank failures, and cost of managing the deposit insurance fund have changed over time. Third, we briefly discuss private deposit insurance and other risk-constraining mechanisms as alternatives to government-provided insurance. Finally, we offer some concluding remarks. Theory of Deposit Insurance The DD model demonstrates that although banks can reduce individual risk by acting as financial intermediaries, they create systemic risk in the potential for bank runs. Under certain conditions, financial contagion can cause all banks, even solvent ones, to be run upon simultaneously. Diamond and Dybvig (1983) propose that government insurance can costlessly limit the risk of bank runs by guaranteeing the values of customer deposits. Here we review the DD model to demonstrate how deposit insurance under FDIC differs from that posited by Diamond and Dybvig. …

Fast incremental LDA feature extraction

Linear discriminant analysis (LDA) is a traditional statistical technique that reduces dimensionality while preserving as much of the class discriminatory information as possible. The conventional form of the LDA assumes that all the data are available in advance and the LDA feature space is computed by finding the eigendecomposition of an appropriate matrix. However, there are situations where the data are presented in a sequence and the LDA features are required to be updated incrementally by observing the new incoming samples. Chatterjee and Roychowdhury proposed an algorithm for incrementally computing the LDA features followed by Moghaddam et al. who accelerated the convergence rate of these algorithms. The proposed algorithms by Moghaddam et al. are derived by applying the chain rule on an implicit cost function. Since the authors have not had access to the cost function they could not analyze the convergence of the proposed algorithms and the convergence of the proposed accelerated techniques were not guaranteed. In this paper, we briefly review the previously proposed algorithms, then we derive new algorithms to accelerate the convergence rate of the incremental LDA algorithm given by Chatterjee and Roychowdhury. The proposed algorithms are derived by optimizing the step size in each iteration using steepest descent and conjugate direction methods. We test the performance of the proposed algorithms for incremental LDA on synthetic and real data sets. The simulation results confirm that the proposed algorithms estimate the LDA features faster than the gradient descent based algorithm presented by Moghaddam et al., and the algorithm proposed by Chatterjee and Roychowdhury.

Time is Money: An Empirical Examination of the Effects of Regulatory Delay on Residential Subdivision Development

Variation in regulatory costs over time and across different types of investment projects creates risk for developers who hold land. These so-called implicit costs, which arise as a result of regulatory delay in the land development process, are hypothesized to be potentially large, but empirical evidence of their influence on development outcomes is limited. Using a unique micro-level data set on parcel-level subdivision development that includes data on the timing of subdivision approvals, we test the effects of implicit costs that arise as a result of increased subdivision approval times on the timing and pattern of residential subdivision development. Consistent with theory, we find that these regulation-induced implicit costs reduce the probability of subdivision development on any given parcel. In addition, we find that systematic variation in regulation-induced implicit costs across space has reduced development in more heavily regulated urbanized areas intended for development and intensified development in less regulated exurban areas located farther away. The results provide a new explanation of scattered, low-density urban development as the result of optimal land development with multiple development options and heterogeneous regulatory costs.

Conflict acts as an implicit cost in reinforcement learning.

Conflict has been proposed to act as a cost in action selection, implying a general function of medio-frontal cortex in the adaptation to aversive events. Here we investigate if response conflict acts as a cost during reinforcement learning by modulating experienced reward values in cortical and striatal systems. Electroencephalography recordings show that conflict diminishes the relationship between reward-related frontal theta power and cue preference yet it enhances the relationship between punishment and cue avoidance. Individual differences in the cost of conflict on reward versus punishment sensitivity are also related to a genetic polymorphism associated with striatal D1 versus D2 pathway balance (DARPP-32). We manipulate these patterns with the D2 agent cabergoline, which induces a strong bias to amplify the aversive value of punishment outcomes following conflict. Collectively, these findings demonstrate that interactive cortico-striatal systems implicitly modulate experienced reward and punishment values as a function of conflict.

Practical Applications of Are Flows Costly to ETF Investors?

As ETFs evolve to include more exotic products, cash creation and redemption is becoming a more common strategy for investors to gain exposure to less-liquid, difficult-to-trade assets, particularly in emerging markets. In <b><i>Are Flows Costly to ETF Investors?</i></b>, <b>Gerald Buetow</b> and <b>Brian J. Henderson</b> examine whether or not cash creations and redemptions are costly to investors. Buetow is Chief Investment Officer at <b>Innealta Capital</b>, in Charlottesville, Virginia, and Henderson is an Assistant Professor of finance at the <b>George Washington University</b>, in Washington, DC. “The idea was that, if we are going to incorporate these exposures into our various strategies, then we should be able to understand the implicit cost of the exposures, ” <b>Buetow</b> explains. “This research attempts to better quantify those costs. ” <b>TOPICS:</b>Exchange-traded funds and applications, exchanges/markets/clearinghouses, in markets

On Linearity of Transaction Costs in Order Driven Market

We research the properties of implicit transaction costs function for general-shaped limit order book. Equivalent conditions for linearity of the function are presented in terms of market liquidity. We also present a suitable functional form of implicit costs for order-driven market on the Moscow Interbank Currency Exchange (MICEX), based on high-frequency trading data. The proposed form meets the definition of costs and implied properties while corresponding to the real form of order distribution.

The impact of AACSB accreditation on the autonomy and costs of limited resource institutions whose missions are primarily teaching

Purpose – The purpose of this paper is to evaluate the impact of AACSB accreditation on the autonomy and costs of limited resource institutions whose missions are primarily teaching. Design/methodology/approach – To evaluate the research questions, a content analysis of all publications in the EBSCO Business Source Premier Database for the period January 1, 1990 through December 15, 2012 was conducted. Findings – The findings indicate that in the process of becoming AACSB accredited, faculty members of the subject institutions shift their focus more toward research and less toward teaching activities, and that the institutions become less autonomous and more like their benchmark AACSB institutions. In addition, the costs of AACSB accreditation are likely to be significant for the subject institutions. Research limitations/implications – The findings of the study point to the need for additional theoretical and empirical research related to the research questions. First, there is a need to formulate a conceptual framework for clearly identifying and measuring the implicit and explicit costs, including all of the opportunity costs, associated with accreditation. In addition, there is a compelling need to develop a conceptual framework and measurement system that will allow business schools to better assess their quality and productivity. For limited resource institutions whose missions are primarily teaching this system should comport with the schools’ teaching missions. Practical implications – The findings suggest that the subject institutions seeking AACSB accreditation should carefully consider a number of questions before pursing accreditation. First, is the institution's mission congruent with AACSB standards or will its mission have to be changed? If AACSB accreditation is deemed to be appropriate, how will the associated changes in resource needs and resource allocation serve to further the institution's mission? And, what are the incremental costs of accreditation, and does the institution have the resource base to sustain accreditation? Originality/value – The study is the first to conduct a detailed content analysis to evaluate some of the costs and benefits of AACSB accreditation for limited resource institutions whose missions are primarily teaching.