Limited Time Horizon Research Articles

VC Funds: Aging Brings Myopia

We study the conflict of interests between the limited partners (LPs) and the general partner (GP) in a VC fund with a limited life span. LPs commit money to investments in risky projects, while the GP selects projects and provides unobservable monitoring effort. We assume that midway into the project, the GP privately observes its quality and the estimated time to exit and decides whether to continue investing and monitoring. The limited time horizon of the fund forces the GP to dispose of any unfinished projects when the fund is dissolved. This, combined with the informational advantage of the GP, leads to inefficient decisions during the intermediate investment stages. This paper presents a simple model that identifies two types of such inefficiency. We show that when unfinished projects are fairly priced in the market, bad projects are always continued. At the same time, under a wide range of parameter values good projects with a somewhat longer expected completion time may be effectively discontinued, when the GP opportunistically decides not to invest monitoring effort in them. We discuss several contractual amendments to alleviate the problem. First, we show that reduction of the GP's stake in all the unfinished projects can significantly weaken his incentives to prolong bad projects. This in turn may induce the GP to put effort into the delay-prone good projects, since their price increases. An outright termination of all unfinished projects, as practiced by some VC funds, is similar in nature, but leads to suboptimal early write-offs of some good projects. We also show that allocating non-vested cash (but not decision) rights in the unfinished projects to the GP has similar beneficial effects. Finally, we provide some evidence that is suggestive of the significant extent of the problem in the post-2000 period.

Balance Sheet Tests or Solvency Tests — or Both?

One of the standard requirements of company law is the restriction of distributions to shareholders in order to protect the legitimate interests of the company’s creditors. As lawful dividends do not have to be paid back when the company runs into losses at a later stage, we need a yardstick in order to decide on the availability of funds for distribution. The traditional balance sheet test is running into criticism due to the rigidity of the old rules and the conflicts between the philosophy of IAS/IFRS and the concept of creditor protection. Newly offered devices like the solvency test aim at giving a better view of the business prospects of the company, but they suffer from a limited time horizon and a wide range of discretion for directors. This makes them particularly problematic when longterm obligations have to be addressed. In the end, a combination of the balance sheet test and the solvency test seems to be a reasonable solution.

Transport and the environment: the need for policy for long-term radical change

Although transport is an activity fundamental to society, it is also accepted that it has negative impacts. The problem for policy is how to promote economic growth while reducing environmental impacts. The response of society, so far, is inadequate to solve these problems. Dramatic reduction in emissions, are necessary. Most policy analysis does not consider dramatic changes. An important aspect of the limited time horizon of analysis and policy is that there are few plausible and specific visions of very-low-emission transport systems. Directed processes of change—transitions—to new forms of transport are required, in terms of transport systems, the structure of the built environment and lifestyles, and culture. It requires the consideration of how to initiate social and economic processes that will transform transportation. Policy must provide the direction and processes while realising that the ability to control outcomes in detail is limited. The literature on technology transitions is helpful here. The transportation-demand-management (TDM) literature shows how to change behaviour, in particular the need for packages of mutually supporting actions and policies. The literature on sustainable consumption also has useful ideas for strategies to effect behavioural change, similar in some respects to the technological-transitions literature.(A)

Age‐Related Differences in Responses to Emotional Advertisements

This research investigated motivational influences associated with age on responses to emotional advertisements. Experiment 1 showed increased liking and recall of emotional ads among older consumers and that time horizon perspective moderates these age-related differences. Experiment 2 revealed influences of age and time horizon perspective on responses to different types of emotional ads. Ads focusing on avoiding negative emotions were liked and recalled more among older consumers and among young consumers made to have a limited time horizon perspective. This research illustrates the importance of considering age-related differences in information processing due to motivational as well as to cognitive changes.

Directional leakage and parameter drift

AbstractA new method for eliminating parameter drift in parameter estimation problems is proposed. Existing methods for eliminating parameter drift work either on a limited time horizon, restricts the parameter estimates to a range that has to be determined a priori, or introduces bias in the parameter estimates which will degrade steady state performance. The idea of the new method is to apply leakage only in the directions in parameter space in which the exciting signal is not informative. This avoids the problem of parameter bias associated with conventional leakage. Copyright © 2005 John Wiley & Sons, Ltd.

A comparative analysis of macro stress-testing methodologies with application to Finland

This paper reviews the state-of-the-art of macro stress-testing methodologies. We assess the progress made both in the econometric analysis of balance sheet indicators and in the simulation of value-at-risk measures to assess system-wide vulnerabilities. To illustrate the main analytical approaches in the literature, we estimate two different models for stress-testing purposes using data for Finland over the time period from 1986 to 2003. The Finnish experience in the early 1990s appears particularly suited for macro stress-testing as it includes a severe recession with significantly higher-than-average default rates and banks’ loan losses. We highlight a number of methodological challenges that still remain concerning in particular the correlation of market and credit risks over time and across institutions, the limited time horizon generally used for macro stress-testing and the potential instability of reduced-form parameter estimates because of feedback effects.

Optimal seismic design for limited planning time horizon with detailed seismic hazard information

This study focuses on the optimal seismic design of buildings for the limited planning time horizon considering earthquakes generated from Poisson and non-Poisson processes. The analyses of the optimal design incorporate possible effects of the time elapsed since the last major earthquake, extended service period above the planning period and costs due to partial damage and collapse. An analysis algorithm is developed based on simulation technique, considering detailed seismic information; the evaluation of the linear/non-linear responses and different structural damage levels; and the assessment of the statistics of the damage cost. The algorithm is implemented and applied to simplified steel frame structures located in western Canada. Analysis results suggest that the optimal seismic design level is sensitive to the assumption of the cost of non-structural components. The analysis results also indicate that if the seismic hazard is dominated by earthquakes generated from a Poisson process, the impact of the extended service period after the planning period on the optimal design is not very significant. The impact of the elapsed time since the last major earthquake can be significant resulting in time-dependent optimal seismic design coefficients, if the seismic hazard is dominated by earthquakes generated from a non-Poisson process.

Reflections on international political party assistance

For the past two decades, the international community has been providing assistance to political parties as part of its efforts to promote multi-party democracy in developing and transition societies. Its assistance programmes are designed to help political parties improve their organizational capacities, promote internal democracy, recruit women and minorities, and effectively participate in legislative processes. The programmes also support legal and regulatory reforms for effective functioning of parties. This article examines the nature and form of political party assistance given by the international community. It also raises a number of questions and issues concerning party assistance programmes. These are a lack of local ownership of assistance programmes; the possible negative impacts of financial and commodity assistance; limited technical expertise of donor and intermediary organizations; limited time horizon of assistance projects; partisanship nature of assistance; balancing political party and civil society assistance; and finally the relevance of the assistance models.

Comparing energy use and environmental performance of land transport modes

Environmental impacts related to policy measures such as transport investments are relevant for ex ante evaluations like cost–benefit analyses (CBAs), environmental impact assessments (EIAs) and strategic environmental assessments (SEAs). However, the methodologies used in determining impacts are much less developed than those employed in estimating transport and economic impacts. The aim of the present paper is to show how rough methodologies used in current practice might lead to serious faults in estimating environmental impacts. This is followed by suggestions for improvements to these methodologies. The first suggestion is related to indicators. Since only a limited number of these are used presently, such as emissions of carbon dioxide and nitrous oxide, including more indicators might prove to be helpful. Second, changes in emissions (e.g. due to regulations) are often considered for only a limited time horizon, so extending the time horizon for emission factors is therefore an important improvement. Third, sometimes emission factors from the literature or from another country/area are used, while the circumstances are not comparable; this might lead to serious faults. Using country‐ or region‐specific data, however, will improve the quality of assessments. Fourth, one often ignores that the effects of a given emission volume depend on the distance between source and receptor. The effects due to traffic, such as particulate matter or nitrous dioxide emissions, might then have more health impacts than emissions from industrial or power plants, and be reason enough to include these aspects as well. Fifth, it is suggested that categories of goods are broken down to determine freight modes, since lorries currently transport goods with a lower specific gravity (kilograms/volume unit) than those transported by rail and barge. The sixth suggestion calls for inclusion of indirect energy use and emissions resulting from the construction of vehicle and infrastructure. While some recommendations can be implemented relatively easily in ex ante evaluations, others will need further research.

Directional Leakage and Parameter Drift

A new method for eliminating parameter drift in parameter estimation problems is proposed. Existing methods for eliminating parameter drift work either on a limited time horizon, restrict the parameter estimates to a range that has to be determined à priori, or introduce bias in the parameter estimates which will degrade steady state performance. The idea of the new method is to apply leakage only in the directions in parameter space in which the exciting signal is not informative. This avoids the problem of parameter bias associated with conventional leakage.

Configuration and reconfiguration - planning for uncertainty?

This paper addresses the issue of planning in new small firms. The literature indicates that planning is problematic. First, in spite of an assumption that planning is a "good thing", the extent of planning activity in small firms appears limited. Secondly, the benefits accruing to those who plan are equivocal, even ambiguous. Whilst planning may be associated with improved performance the direction of causality is unclear. Finally, other reasons cited as planning benefits for large established firms may even work to disadvantage the small firm by imposing a strategic rigidity. Analysis of the literature suggests that models of planning and strategy for larger firms may be unsuited to small firms, especially new small firms. This is because planning is intended to be the precursor to strategic actions and strategy is about managing the interface of the internal resources of the firm and the external environment. The business environment in which new small firms, in particular, operate is likely to be uncertain. This presents the research questions for this study: Do new small firms operate in an uncertain environment? If so what are the implications for small firm planning? A case study is presented and analysed to address these questions. It is clear that this firm operates in conditions of uncertainty which is increased by the internal changes created by the development of the firm as it strives to fit into its environment. As new threats or opportunities emerged a planning approach with a very limited time horizon was adopted. This process was premised upon knowledge of and attitude towards, existing resources and aspirations. It was highly iterative as the firm first configured to fit the expected environment, then reconfigured to adapt to the experiences of the uncertainty. This configuration and reconfiguration means that formalised, prescriptive, long term planning of objectives, strategy and implementation is unrealistic for new small firms.

Negotiation Models and Production Planning for Virtual Enterprises

A temporary networked enterprise (also denoted “virtual enterprise”) is an emerging organization based upon relationships among firms, which decide to cooperate together in a given value chain for a limited time horizon. The crucial point in the development of said network is “to search for partners” and organize interactions among firms. The paper aims to define some criteria for supporting the design of a virtual enterprise. The scope is to have simple conditions able to evaluate if cooperation among potential partner firms could be successfully stipulated, based on the likeness of their goals and the wideness of the connecting information pattern.

The US stock market and the global economic crisis

The question whether the US equity market is overvalued is important from a policy perspective because a significant derating could interact adversely with the realisation of risks of recession. A simple dividend based model suggests that the market is two or three times overvalued. Allowing for stock buybacks, takeovers for cash and temporary unsustainable earnings growth leave the market overvalued by 20–30 per cent. The ‘New Economy’ view that recessions are things of the past and that technical change justifies permanently higher earnings growth is implausible. An influential argument that the traditional premium earned by equities over bonds is too high is itself theoretically special. Similarly the recent relationship between US inflation and the risk premium has not held at other times and places, while the fact that most wealth is held by middle-aged people with limited time horizons supports a larger premium. Our best guess is that the current premium is 1.7 per cent p.a. which is near the lower end of the historical range although equity investors do not appear to be prepared for lower returns in the face of the possibility of global recession in the next 12–18 months. The risk that a US market adjustment might aggravate such a recession in the US itself is a basis for reconsidering central banks' disregard of asset prices in setting monetary policy.

A note on block and bad‐as‐old renewal of components with limited system time horizon

As the time to dispose of a system approaches, renewal of wearing components becomes progressively less attractive. The traditional optimization method for this situation is through net present value and dynamic programming. Presents a much simpler solution for rapidly‐wearing components founded on finding the optimum number of equal renewal intervals. Unequal intervals increase expected failures for any fixed number of intervals, and it is argued that it is unnecessary to discount costs. The model can be used with either the Cox renewal function or the cumulative hazard function representing the expected number of failures between scheduled renewals of the component, the choice depending on whether the component is minimally repaired or renewed at these failures.

Dose-related decrease of serum coenzyme Q 10 during treatment with HMG-CoA reductase inhibitors

Coenzyme Q 10 (ubiquinone) the essential mitochondrial redox-component and endogenous antioxidant, packaged into the LDL+VLDL fractions of cholesterol, has been suggested as an important anti-risk factor for the development of atherosclerosis as explained by the oxidative theory. Forty-five hypercholesterolemic patients were randomized in a double-blind trial in order to be treated with increasing dosages of either lovastatin (20–80 mg/day) or pravastatin (10–40 mg/day) over a period of 18 weeks. Serum levels of coenzyme Q 10 were measured parallel to the levels of cholesterol at baseline on placebo and diet and during active treatment. A dose-related significant decline of the total serum level of coenzyme Q 10 was found in the pravastatin group from 1.27±0.34 at baseline to 1.02±0.31 mmol/l at the end of the study period (mean±S.D.), P<0.01. After lovastatin therapy the decrease was significant as well and more pronounced, from 1.18±0.36 to 0.84±0.17 mmol/l, P<0.001. Although HMG-CoA reductase inhibitors are safe and effective within a limited time horizon, continued vigilance of a possible adverse consequence from coenzyme Q 10 lowering seems important during long-term therapy.

Fast Solution and Detection of Minimal Forecast Horizons in Dynamic Programs with a Single Indicator of the Future: Applications to Dynamic Lot-Sizing Models

In most dynamic planning problems, one observes that an optimal decision at any given stage depends on limited information, i.e., information pertaining to a limited set of adjacent or nearby stages. This holds in particular for planning problems over time, where an optimal decision in a given period depends on information related to a limited future time horizon, a so-called forecast horizon, only. In this paper we identify a general class of dynamic programs in which an efficient forward algorithm can be designed to solve the problem and to identify minimal forecast horizons. Such a procedure specifies necessary and sufficient conditions for a stage to arise as a forecast horizon. This class of dynamic programs includes the single-item dynamic lot-sizing model with general concave costs, both with and without backlogging, to which special attention is given.

On discount, temporal justice, sustainability and limited foresight

Intertemporal resource allocation with zero rate of time preference is discussed. With time translation invariance, the Hamiltonian, i.e. the total welfare flow, is conserved. This conservation law, the counterpart of the energy principle in analytical mechanics, thus expresses intertemporal justice. The effect of a limited foresight is taken into account. Planning is done within a limited but diffuse time horizon, and planning beyond the horizon is left to future generations. The heritage handed over to future generations is valued in terms of the welfare flow that it makes possible. The result is a goal function with a non-zero discount rate but also with a complement to the utility term, describing the buildup of long-term productive stocks. This extra term thus counteracts the discount of the future. The resulting goal function is shown to be an estimate of the present value of a total welfare .

An intercomparison of hydrological network-design technologies

Abstract Two network-design technologies are compared by random sub-sampling of actual streamflow data. The technologies, Network Analysis for Regional Information (NARI) and Network Analysis Using Generalized Least Squares (NAUGLS), have a common objective, viz. to maximize regional information within a limited budget and time horizon. The data used for intercomparison are from a network of 146 streamgauges in the central part of the United States. In general, the results for the illustrative example indicate that the NAUGLS method conveys more information than the NARI method to the network designer interested in maximizing regional information about mean annual flows with a limited budget.

Property-Liability Insurance Pricing Models: An Empirical Evaluation

Over the past two decades, several pricing models that integrate underwriting and investment performance have been proposed or used to determine property4ability insurance rates. In general, these models have been tested separately and only over a relatively limited time horizon. In this article, the major property-liability insurance pricing models are evaluated over the 60-year period from 1926 through 1985 and the results of the various models are compared in terms of the ability to predict actual underwriting profit margins. Differences between model predictions and realized underwriting profit margin series are examined over the entire period as well as various subperiods in order to demonstrate how individual models perform under different conditions. The goal of this research is to assist actuaries and researchers in the application of pricing models and interpretation of results.

Growth, Employment and Education: An Application of Multicriteria Analysis to Pakistan

Development planning is a multicriteria problem. Apart from economic goals (like economic growth, income distribution, employment, price stability, balance of payments, etc.) a set of basic human needs (like food, health , housing, clothing, education, etc.) has to be fulfilled within a limited time horizon. Of course, not all targets of economic policy can reach desirable levels within a plan period given scarce resources and trade-offs between goals and basic needs. Priorities have to be formulated and goals and needs have to be weighted against another. Multicriteria analysis can contribute to this weighing process by circumscribing feasible areas and by quantifying above mentioned trade-offs. The purpose of this paper is to present an illustration of multicriteria analysis in which at least two goals of economic policy (growth and employment) and one basic human need (education) are incorporated. The model is applied to Pakistan due to data access.