Implicit Penalty Research Articles

The implicit penalty effect: implicit cue validity regulates performance in an exogenous cueing paradigm.

The implicit penalty effect: implicit cue validity regulates performance in an exogenous cueing paradigm.

Penalized estimation of hierarchical Archimedean copula

This manuscript discusses a novel estimation approach for parametric hierarchical Archimedean copula. The parameters and structure of this copula are simultaneously estimated while imposing a non-concave penalty on differences between parameters which coincides with an implicit penalty on the copula’s structure. The asymptotic properties of the resulting penalized estimator are studied and small sample properties are illustrated using simulations.

Direct versus indirect penalties for supply contracts in high-tech industry

Unlike consumer goods industry, a high-tech manufacturer (OEM) often amortizes new product development costs over multiple generations, where demand for each generation is based on advance orders (i.e., known demand) and additional uncertain demand. Also, due to economic regulatory reasons, high-tech OEMs usually source from a single supplier. Relative to the high retail price, the costs for a supplier of producing high-tech components are low. Consequently, incentives are misaligned: the OEM faces relatively high under-stock costs and the supplier faces high over-stock costs.In this paper, we examine supply contracts that are intended to align the incentives between a high-tech OEM and a supplier so that the supplier will invest adequate and yet non-verifiable capacity to meet the OEM’s demand. When focusing on a single generation, the manufacturer can coordinate a decentralized supply chain and extract all surplus by augmenting a traditional wholesale price contract with a “contingent penalty” should the supplier fail to fulfill the OEM’s demand. When the resulting penalty is too high to be enforceable, we consider a new class of “contingent renewal” wholesale price contracts with a stipulation: the OEM will renew the contract with the incumbent supplier for the next generation only when the supplier can fulfill the demand for the current generation. By using non-renewal as an implicit penalty, we show that the contingent renewal contract can coordinate the supply chain. While the OEM can capture the bulk of the supply chain profit, this innovative contract cannot enable the OEM to extract the entire surplus.

Fast Corotated Elastic SPH Solids with Implicit Zero-Energy Mode Control

We develop a new operator splitting formulation for the simulation of corotated linearly elastic solids with Smoothed Particle Hydrodynamics (SPH). Based on the technique of Kugelstadt et al. [2018] originally developed for the Finite Element Method (FEM), we split the elastic energy into two separate terms corresponding to stretching and volume conservation, and based on this principle, we design a splitting scheme compatible with SPH. The operator splitting scheme enables us to treat the two terms separately, and because the stretching forces lead to a stiffness matrix that is constant in time, we are able to prefactor the system matrix for the implicit integration step. Solid-solid contact and fluid-solid interaction is achieved through a unified pressure solve. We demonstrate more than an order of magnitude improvement in computation time compared to a state-of-the-art SPH simulator for elastic solids. We further improve the stability and reliability of the simulation through several additional contributions. We introduce a new implicit penalty mechanism that suppresses zero-energy modes inherent in the SPH formulation for elastic solids, and present a new, physics-inspired sampling algorithm for generating high-quality particle distributions for the rest shape of an elastic solid. We finally also devise an efficient method for interpolating vertex positions of a high-resolution surface mesh based on the SPH particle positions for use in high-fidelity visualization.

Loan Officers Impede Graduation from Microfinance: Strategic Disclosure in a Large Microfinance Institution

One of the most important puzzles in microfinance is the low rate of borrower graduation to larger, more flexible loans. Utilizing observational and experimental data from a large Chilean microfinance institution, we demonstrate that loan officers impede borrower graduation due to common features of their compensation contracts. Our partner lender offers both microloans and larger, more flexible graduation loans, and relies on loan officer endorsements to determine borrower graduation. Loan officers are rewarded for the size of their portfolio and repayment, and so are implicitly penalized when good borrowers graduate. In an experiment designed to isolate strategic disclosure, we modify compensation to reduce this implicit penalty and document that loan officers withheld endorsements of their most qualified borrowers prior to the shift. Graduated borrowers endorsed after the shift are 34% more profitable for our partner lender than those endorsed beforehand. A back-of-the- envelope calculation suggests that strategic behavior of loan officers accounts for $4.8-29.2 billion in lost social value from forgone borrower graduations in microfinance worldwide. Our experimental design may prove useful for other experiments within firms.

Waves at a fluid-solid interface: Explicit versus implicit formulation of boundary conditions using a discontinuous Galerkin method.

An accurate solution of the wave equation at a fluid-solid interface requires a correct implementation of the boundary condition. Boundary conditions at fluid-solid interface require continuity of the normal component of particle velocity and traction, whereas the tangential components vanish. A main challenge is to model interface waves, namely, the Scholte and leaky Rayleigh waves. This study uses a nodal discontinuous Galerkin (dG) finite-element method with the medium discretized using an unstructured uniform triangular meshes. The natural boundary conditions in the dG method are implemented by (1) using an explicit upwind numerical flux and (2) by using an implicit penalty flux and setting the modulus of rigidity of the acoustic medium to zero. The accuracy of these methods is evaluated by comparing the numerical solutions with analytical ones, with source and receiver at and away from the interface. The study shows that the solutions obtained from the explicit and implicit boundary conditions provide the correct results. The stability of the dG scheme is determined by the numerical flux, which also implements the boundary conditions by unifying the numerical solution at shared edges of the elements in an energy stable manner.

Subjectivity in Tournaments: Implicit Rewards and Penalties and Subsequent Performance

This study extends the literature on the tradeoffs associated with subjectivity in tournament incentive systems by describing the effects of implicit penalties (rewards), whereby workers ranked at the top (bottom) of objective performance rankings fail to receive the reward (penalty) due to management's subjective performance evaluations. Using data from a field setting where incentive contracts are structured as repeated tournaments, we find that workers respond differently to subjective versus objective awards of rewards and penalties. Additionally, workers subject to implicit rewards (penalties) exhibit performance reactions that counterbalance those of workers receiving subjective penalties (rewards), with net effects indistinguishable from zero. However, while the effects of subjective rewards and penalties reverse in the subsequent period, the performance effects of implicit rewards and penalties persist. Our study documents consequences of subjectivity that might alter the effectiveness of tournament incentives, and is relevant for the practice of incentive design.

Does Mercy Bear Richer Fruits than Strict Justice? Implicit Effects of Subjective Rewards and Penalties in Tournaments

This study explores the effects of subjective ex-post adjustments of objective performance in a tournament incentive contract including both rewards and penalties. We extend prior literature on the tradeoffs associated with subjectivity in performance evaluations by considering the effects of subjective rewards (penalties) not only on the members of the organization that explicitly receive them, but also on those that, as a mechanical consequence of the tournament structure, face implicit penalties (rewards). We predict and find that, in presence of subjective evaluations, performance effects related to implicit rewards (penalties) counterbalance those associated with explicit penalties (rewards). While the net effect between subjective rewards and implicit penalties is not significantly different than zero, we find that the balance between subjective penalties and implicit rewards is significantly positive. Our study documents effects of subjective evaluations that might alter the effectiveness of incentive systems, and are relevant for the practice of management accounting.

Health insurance subsidies and the expansion of an implicit marriage penalty: a regional comparison of various means-tested programmes

ABSTRACTAny subsidy provision for healthcare premiums, including those embedded in Affordable Care Act (ACA), has the potential to result in some couples facing an implicit penalty when married relative to unmarried. To illustrate such consequences of means-tested subsidies of health insurance premiums, we construct hypothetical households earning different levels of income who are eligible for current subsidies in the USA. and compare the estimated implicit marriage penalty faced by these households to the one faced by low-income households who are eligible for various means-tested programmes (e.g. TANF, WIC, SNAP) for each of the 48 contiguous states. We find that, like very low-income households, marriage can potentially penalize couples who receive health insurance premium subsidies by decreasing their overall disposable income by as much as 14%. We find that the ACA increases the number of households subject to marriage penalties embedded in means-tested programmes for low-income couples. This distortion will exist for any future health insurance premium subsidies that are means tested at the household income level.

The suspension of borrowing: an implicit penalty for loan default under imperfect information

ABSTRACTA credit seeker may be suspended from borrowing for a period of time due to a previous default. Such suspension is widely used in bank lending through credit check. Our work analyses the effects of suspension on the investment choice of borrowers under uncertainty and on the lending policy of banks facing asymmetric information. We show that suspension should be tightened at low loan rates, but loosened otherwise, to improve the repayment performance of borrowers. We also show that although credit rationing may not be completely removed due to imperfect information, the excess demand for credit or transitive waiting in the market can actually be attenuated by such efficient use of suspension. Our theoretical predictions are consistent with observed cyclical patterns of changes in lendingrates and suspension severity.

Operational Strategies for a Portfolio of Wind Farms and CHP Plants in a Two-Price Balancing Market

In this paper, we explore the portfolio effect of a system consisting of a combined heat and power (CHP) plant and a wind farm. The goal is to increase the overall profit of the portfolio by reducing imbalances and, consequently, their implicit penalty in a two-price balancing market for electricity. We investigate two different operational strategies, which differ in whether the CHP plant and the wind farm are operated jointly or independently, and we evaluate their economic performance on a real case study based on a CHP-wind system located in the western part of Denmark. We present a comprehensive mathematical model for describing the different heat and power production units of the CHP plant and suggest different ways of determining its operation in a setup with two trading floors: a day-ahead market and a balancing market. We build a simulation framework that runs in a rolling-horizon fashion, so that forecasts for heat demand, wind power production, and market prices are updated at each iteration. We conclude that the portfolio strategy is the most profitable due to the two-price structure of the balancing market. This encourages producers to handle their imbalances outside the market.

Solving complex PDE systems for pricing American options with regime‐switching by efficient exponential time differencing schemes

AbstractIn this article, we study the numerical solutions of a class of complex partial differential equation (PDE) systems with free boundary conditions. This problem arises naturally in pricing American options with regime‐switching, which adds significant complexity in the PDE systems due to regime coupling. Developing efficient numerical schemes will have important applications in computational finance. We propose a new method to solve the PDE systems by using a penalty method approach and an exponential time differencing scheme. First, the penalty method approach is applied to convert the free boundary value PDE system to a system of PDEs over a fixed rectangular region for the time and spatial variables. Then, a new exponential time differncing Crank–Nicolson (ETD‐CN) method is used to solve the resulting PDE system. This ETD‐CN scheme is shown to be second order convergent. We establish an upper bound condition for the time step size and prove that this ETD‐CN scheme satisfies a discrete version of the positivity constraint for American option values. The ETD‐CN scheme is compared numerically with a linearly implicit penalty method scheme and with a tree method. Numerical results are reported to illustrate the convergence of the new scheme. © 2012 Wiley Periodicals, Inc. Numer Methods Partial Differential Eq 2013

Securities regulation and implicit penalties

The extant literature offers extensive support for the significant role played by institutions in financial markets, but implicit regulation and monitoring have yet to be examined. This study fills this void in the literature by employing unique Chinese datasets to explore the implicit regulation and penalties imposed by the Chinese government in regulating the initial public offering (IPO) market. Of particular interest are the economic consequences of underwriting IPO deals for client firms that violate regulatory rules in China’s capital market. We provide evidence to show that the associated underwriters’ reputations are impaired and their market share declines. We further explore whether such negative consequences result from a market disciplinary mechanism or a penalty imposed by the government. To analyze the possibility of a market disciplinary mechanism at work, we investigate (1) the market reaction to other client firms whose IPO deals were underwritten by underwriters associated with a violation at the time the violation was publicly disclosed and (2) the under-pricing of IPO deals undertaken by these underwriters after such disclosure. To analyze whether the government imposes an implicit penalty, we examine the application processing time for future IPO deals underwritten by the associated underwriters and find it to be significantly longer than for IPO deals underwritten by other underwriters. Overall, there is little evidence to suggest that the market penalizes underwriters for the rule-violating behavior of their client firms in China. Instead, the Chinese government implicitly penalizes them by imposing more stringent criteria on and lengthening the processing time of the IPO deals they subsequently underwrite.

Valuing the Guaranteed Minimum Death Benefit Clause with Partial Withdrawals

In this paper, we give a method for computing the fair insurance fee associated with the guaranteed minimum death benefit (GMDB) clause included in many variable annuity contracts. We allow for partial withdrawals, a common feature in most GMDB contracts, and determine how this affects the GMDB fair insurance charge. Our method models the GMDB pricing problem as an impulse control problem. The resulting quasi-variational inequality is solved numerically using a fully implicit penalty method. The numerical results are obtained under both constant volatility and regime-switching models. A complete analysis of the numerical procedure is included. We show that the discrete equations are stable, monotone and consistent and hence obtain convergence to the unique, continuous viscosity solution, assuming this exists. Our results show that the addition of the partial withdrawal feature significantly increases the fair insurance charge for GMDB contracts.

Organizational Enablers for NPD Portfolio Selection

Despite substantial research that advocates the 'right' portfolio of NPD initiatives for the firm, one important aspect has been overlooked: creating a portfolio of NPD initiatives is not equivalent to ‘choosing from a menu' of initiatives. NPD initiatives are defined by and within the organization. Thus, portfolio selection rests upon two challenges: the cross-functional nature of tasks, which require collaboration; and the subtle dependence of innovative outcomes on explicit and implicit incentives. In this paper, we explore how the interplay between these challenges determines the initiatives that are ultimately supported by the NPD organization. We abstract the NPD organization as two functional managers, who report to a common vice president (VP), and analyze the strategic interactions of all three stakeholders. The VP decides whether to empower the managers to define the initiative and how to reward them contingent on the outcome. We evaluate how: (i) asymmetry of information regarding each function's capability, and (ii) the explicit rewards and implicit penalties managers receive based on the outcomes, affect their upfront resource commitments. We find a profound effect of the information asymmetry: the set of initiatives the organization deems profitable is reduced, thus impeding its potential to innovate. To counter such a shortcoming, the VP may optimally misalign the payoffs of the stakeholders, either by changing the incentive plans or by empowering the organization.

Quadratic Convergence for Valuing American Options Using a Penalty Method

The convergence of a penalty method for solving the discrete regularized American option valuation problem is studied. Sufficient conditions are derived which both guarantee convergence of the nonlinear penalty iteration and ensure that the iterates converge monotonically to the solution. These conditions also ensure that the solution of the penalty problem is an approximate solution to the discrete linear complementarity problem. The efficiency and quality of solutions obtained using the implicit penalty method are compared with those produced with the commonly used technique of handling the American constraint explicitly. Convergence rates are studied as the timestep and mesh size tend to zero. It is observed that an implicit treatment of the American constraint does not converge quadratically (as the timestep is reduced) if constant timesteps are used. A timestep selector is suggested which restores quadratic convergence.

Optimal material properties for transient problems

The aim of this article is to analyze the problem of optimizing material properties within the context of a time-dependent problem. The objective is to minimize the difference between the actual values of a field variable and a desired "target" distribution after a prescribed time T. The field variable is related to a transient physical phenomenon with given initial and boundary conditions. The time-independent material properties are taken as the design variables. For simplicity, only the case of transient heat conduction is analyzed, though the method can be naturally extended to elastodynamics. Examples and test cases are solved numerically for different types of boundary conditions and target functions using a scaled-gradient method. The scaling function serves the purpose of satisfying constraints, but can also be used as an implicit penalty formulation to obtain optimal topologies by introducing an additional bias in the scaling. Its performance is compared to the unbiased method.

Techniques to suppress intermediate density in topology optimization of compliant mechanisms

Discrete topological problems are often relaxed with continuous design variables so that they can be solved using continuous mathematical programming. Such practice prevails because large-scale discrete 0–1 mathematical programming is not generally available. Although the relaxed problems become tractable, they may cause the appearance of intermediate density in the optimum topologies, especially those of structures and compliant mechanisms. Various penalty schemes have been proposed to suppress the intermediate density. Most of the past works assumed that the same penalty schemes could be effectively applied to both problems of stiffest structure design and compliant mechanism design. Differences in nature between the problems are generally neglected. This work distinguished the two problems, and observed that complaint mechanism (CM) problem does not suffer intermediate density as seriously as minimum compliance (MC) problem does. Besides allocating more material, explicit and implicit penalties were pursued to suppress intermediate density. To ensure mesh-independence and not to complicate the nonconvex objective function in CM problem, a new technique using a constraint of explicit penalty with variable bound is proposed to suppress intermediate density in topology optimization of compliant mechanisms. Together with a perimeter constraint, the new technique is also applied to MC problem.

The Dynamic Effects of Tax Law Asymmetries

Under the laws of most countries, a distinction is made between gains and losses by businesses. Losses that must be carried are subjept to two penalties: a of interest, and expiration. Previous examinations have focused on the higher expected tax payments such a tax system without offset imposes on risky projects. This paper presents a dynamic analysis of the impact of taxation on investment when gains and losses are treated asymmetrically. The results demonstrate how firm characteristics and the timing of taxes can influence behaviour. Under current U.S. tax law, a distinction is made between gains and losses by businesses. For corporations, gains are taxed at what is essentially a flat rate of 46%, while losses do not necessarily qualify for a refund at the same rate. To obtain an immediate refund, the taxpayer must have had taxable income during the three previous years in excess of the current loss. Any losses that cannot be carried back in this fashion must be carried forward, subject to two implicit penalties: such carryforwards earn no interest, and they expire after fifteen years. Similar provisions apply in other countries. Hence, businesses investing in risky projects for which the probability of having to carry losses forward is positive can expect to pay higher taxes than they would under a system with full loss offset, i.e. the immediate refund of taxes for losses incurred. Many corporations

The effect of discretionary price control decisions on equity values

Abstract The macro literature presents conflicting evidence on the effects of price controls. In this study, the fact that the macro-economic effect of wage and price controls is the aggregation of the micro-economic effects is used to implement a different approach to measure the effects of price controls. The effect of price controls is inferred from examining the impact of discretionary regulatory decisions on the equity values of individual firms during Phase II of Nixon's Economic Stabilization Program. The empirical results indicate that violators of the regulations incurred significant abnormal losses that were unrelated to the explicit penalties. This suggests that implicit penalties were imposed on offending firms. The analysis of price increase decisions provides weak evidence that these Price Commission decisions had an impact on equity values.