Long-run Decisions Research Articles

Ideology, organisation, and path dependency: The use of violence among Egyptian Islamist movements

Does ideology prevent social movements from resorting to violence? Structuralist, organisational, or political economy theories are widely agnostic on the relationship between ideology and the use of violence. In contrast, this article argues that founding ideologies indirectly shape social movements’ long-run decisions regarding the use violence, primarily by influencing the kind of individuals who join the movement to begin with. A path dependency develops as new members reinforce the initial ideology, as individuals who might tip the ideological-organisational equilibrium towards utilising new tactics join other organisations instead. Over time, ideology morphes from being initially an endogenous factor into an exogenous constraint how the group can behave. The article compares the mainstream Egyptian Muslim Brotherhood (MB), al-Jama‘a al-Islamiyya (IG) and the Jihad Organisation (JO), studying individual biographies, the groups’ recruitment patterns and their corresponding ideologies. The article thereby explains why the MB, with some minor exceptions, remained committed to non-violent activism, in contrast with the JO that resorted to violent means only and the IG that applied both violent and non-violent means. In the conclusion, the article addresses cases in Algeria and Madagascar to indicate the relevance of this argument beyond Egyptian Islamist movements to future comparative work.

The impact of neighboring markets on renewable locations, transmission expansion, and generation investment

Many long-term investment planning models for liberalized electricity markets either optimize for the entire electricity system or focus on confined jurisdictions, abstracting from adjacent markets. In this paper, we provide models for analyzing the impact of the interdependencies between a core electricity market and its neighboring markets on key long-run decisions. This we do both for zonal and nodal pricing schemes. The identification of welfare optimal investments in transmission lines and renewable capacity within a core electricity market requires a spatially restricted objective function, which also accounts for benefits from cross-border electricity trading. This leads to mixed-integer nonlinear multilevel optimization problems with bilinear nonconvexities for which we adapt a Benders-like decomposition approach from the literature. In a case study, we use a stylized six-node network to disentangle different effects of optimal regional (as compared to supra-regional) investment planning. Regional planning alters investment in transmission and renewable capacity in the core region, which affects private investment in generation capacity also in adjacent regions and increases welfare in the core region at the cost of system welfare. Depending on the congestion-pricing scheme, the regulator of the core region follows different strategies to increase welfare causing distributional effects among stakeholders.

Battery investment by a strategic wind producer: A scenario-based decomposition approach

This paper develops an investment decision-making tool for a strategic wind producer, who desires to expand its portfolio by investing in battery systems. This enables the wind producer to better manage its production profile, which eventually yields an increased profit. The long-run decisions are strategic siting, sizing, and depth of discharge tuning of the battery system, and the short-run decisions are strategic offers to the market in terms of price and quantity. In this setup, we linearly model the technical characteristics of battery systems, e.g., depth of discharge, and then evaluate its impacts on the battery systems’ number of cycles. The wind power uncertainty is modeled by a set of scenarios. The resulting model is a stochastic bi-level problem, which can be recast as a stochastic mixed-integer and linear model. However, this problem is generally hard-to-solve or even computationally intractable if many scenarios are considered. Hence, we use a scenario-based decomposition technique via progressive hedging algorithm to make the model scalable. An upper bound is then derived as a benchmark to assess the quality of results. Two case studies based on a six-bus and the IEEE 24-bus reliability test systems are used to evaluate the performance of the proposed approach.

Queueing analysis for operations modeling in port logistics

Purpose The use of queueing network models was stimulated by the appearance (1975) of the exact product form solution of a class of open, closed and mixed queueing networks obeying the local balance principle and solved, a few years later, by the popular mean value analysis algorithm (1980). Since then, research efforts have been produced to approximate solutions for non-exponential services and non-pure random mechanisms in customer processing and routing. The purpose of this paper is to examine the suitability of modeling choices and solution approaches consolidated in other domains with respect to two key logistic processes in container terminals. Design/methodology/approach In particular, the analytical solution of queueing networks is assessed for the vessel arrival-departure process and the container internal transfer process with respect to a real terminal of pure transshipment. Findings Numerical experiments show the extent to which a decomposition-based approximation, under fixed or state-dependent arrival rates, may be suitable for the approximate analysis of the queueing network models. Research limitations/implications The limitation of adopting exponential service time distributions and Poisson flows is highlighted. Practical implications Comparisons with a simulation-based solution deliver numerical evidence on the companion use of simulation in the daily practice of managing operations in a finite-time horizon under complex policies. Originality/value Discussion of some open modeling issues and encouraging results provide some guidelines on future research efforts and/or suitable adaption to container terminal logistics of the large body of techniques and algorithms available nowadays for supporting long-run decisions.

The Impact of Neighboring Markets on Renewable Locations, Transmission Expansion, and Generation Investment

Many long-term investment planning models for liberalized electricity markets either optimize for the entire electricity system or focus on confined jurisdictions, abstracting from adjacent markets. In this paper, we provide models for analyzing the impact of the interdependencies between a core electricity market and its neighboring markets on key long-run decisions. This we do both for zonal and nodal pricing schemes. The identification of welfare optimal investments in transmission lines and renewable capacity within a core electricity market requires a spatially restricted objective function, which also accounts for benefits from cross-border electricity trading. This leads to mixed-integer nonlinear multilevel optimization problems with bilinear nonconvexities for which we adapt a Benders-like decomposition approach from the literature. In a case study, we use a stylized six-node network to disentangle different effects of optimal regional (as compared to supra-regional) investment planning. Regional planning alters investment in transmission and renewable capacity in the core region, which affects private investment in generation capacity also in adjacent regions and increases welfare in the core region at the cost of system welfare. Depending on the congestion-pricing scheme, the regulator of the core region follows different strategies to increase welfare causing distributional effects among stakeholders.

Exploration Activity, Long-run Decisions, and the Risk Premium in Energy Futures

Investment by oil firms positively affects the futures basis and negatively predicts excess returns on crude oil futures. I build an equilibrium model of drilling, exploration, and storage to understand these facts. Firms’ capital stock lowers extraction costs as firms drill in increasingly expensive fields. Drilled wells produce the resource at a geometrically declining rate; however, by specifying consumers’ habit level equaling production from old wells, the futures basis and risk premium are only related to drilling, investment, and inventory. Investment leads to a more elastic drilling response by firms and dampens oil price increases from demand shocks, thus lowering the risk premium.Received October 10, 2015; editorial decision March 30, 2018 by Editor Philip Strahan. Author has furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online

An exploratory analysis of earnings management practices in Australia and New Zealand

PurposeThis study aims to explore corporate earnings management practices in Australia and New Zealand before and after the regulatory changes and corporate governance reforms. The study argues that the effectiveness of regulatory reforms has to be reflected in constraining earnings management in post-reform period as compared to pre-reform period.Design/methodology/approachUsing a sample of 3,966 firm-year observations, including all ASX and NZX listed firms for the period 2001-2006, the study examines earnings management practices in both countries in pre- and post-reform periods with appropriate statistical methods.FindingsThe results indicate some interesting phenomenon: the magnitude of earnings management did not decline after the governance reform as a positive time trend is observed in the entire sample as well as in Australian and New Zealand sub-samples, suggesting that earnings management has been growing over time. Additional test indicates no structural change has occurred before and after the new regulations. The shifting from decreasing earnings management to increasing earnings management can be interpreted as an evidence that earnings become more ‘informative’ in a more transparent disclosure regime to capture short-run benefits from regulator reforms.Research limitations/implicationsThe shifting of earnings management behaviour from decreasing to increasing income can be interpreted as the outcome of more “informative”, rather than “deliberate”, earnings management in a more transparent disclosure regime to capture short-run benefits of regulatory reforms, which is worth further investigation. The findings of the study can lead regulatory authorities taking appropriate measures to promote earnings quality in corporate financial reporting from a long-run decision usefulness context. Any future reforms should be directed to protecting the interest of stakeholders as well as ensuring benefits outweighing costs for them.Practical implicationsThe findings of the study can lead regulatory authorities in taking appropriate measures to promote earnings quality in corporate financial reporting from a long-run decision usefulness context.Originality/valueThe study adds value to the existing earnings management literature as well as effectiveness of regulations for the benefit of wider stakeholder groups.

Characteristics of Long-run Return and Risk: A Unified Performance Metric

It is well documented in the literature that long-run asset prices do not follow a random walk, thus their returns are not independent and identically distributed (i.i.d.) over time. But how can this notion—long-run returns and volatilities being horizon dependent—be incorporated into formal pricing models? In this paper, we develop a unified risk-adjusted return metric that is applicable to both private assets and public securities. Since such metric is based on a pair of empirically determined return and risk characteristic lines that depict the horizon impact on return and volatility, our performance metric is rooted in empirical evidence rather than assumptions. The results suggest that long-run asset performance cannot be adequately measured by single-period return and volatility. Rather, prudent long-run investment decisions must include careful consideration of the anticipated holding period and a proper understanding of the long-run return and risk characteristics.

An Exploratory Analysis of Earnings Management Before and after the Governance and Disclosure Regulatory Changes in Australia and New Zealand

This study examines the effect of regulatory changes and corporate governance reforms on firms’ earnings management practices in Australia and New Zealand. Using a sample of 3,966 firm-year observations including all ASX and NZX listed firms from the period 2001 to 2006, we find that the magnitude of earnings management did not decline after the introduction of new regulations to reform corporate governance. In fact, we observe a positive time trend suggesting that earnings management has been growing over time. We also perform Chow test and the results indicate a structural change has occurred in earnings management practice before and after the new regulation was introduced in Australia. The results reveal that managers tend to reduce earnings before the introduction of corporate law and economic reform program, companies with high reported earnings may be targeted by the regulators and attracted more public inquiry during the reform movement and therefore managers would have incentive to engage in downward earnings management to reduce such political exposure. We also find that subsequently following the reform action, managers are more likely to show a smooth and growing earnings string to prove that firm performance has benefited from the reform. As such, upward earning management severs a role of information signalling in the period after the introduction of corporate law and economic reform program to convince investors the better shaped and improved financial performance after the regulatory change. These findings taken together can lead regulatory authorities considering appropriate measures to promote earnings quality in corporate financial reporting from a long-run decision usefulness context.

The Institutional Power Shortage in China: Capacity Shortage or Capacity Under-utilisation?

China has experienced off-seasonal power shortages in recent years, where the growth in capacity supply exceeds the power demand. This paper investigates the mechanism of power shortages in China by estimating the capacity expansion and capacity utilisation models with the annual data of 30 provinces from 2006 to 2011. With the theoretical and empirical evidence, we find that: 1) the mechanism of the power shortages in China could be twofold: the capacity shortage and the capacity under-utilisation, where the two can have a combined effect on shaping the power supply pattern in China; 2) the 'coal-price-inflation-internalising' policy employed by the state to solve the 'coal-electricity' conflict leads to the short-run power shortage and also distorts the market demand signal of the capacity utilisation for the power firms to make long-run investment decisions.

Integrating a Land Use Transport Model with a Serious Game for Supporting Planning Decisions under Rising Energy Prices

This article presents and evaluates the integration of a land-use and transport model with a political serious game. This methodological design was tested within a research project, which intended to assess the impacts of energy price increases in the metropolitan region of Hamburg. Models are tools commonly employed by planners to describe, explain and forecast land-use and transportation-related processes. However, the sole use of models has some major limitations. Models are not able to simulate the political decision-making process that can radically change outcomes and scenarios used for model forecasts. Particularly, models designed for facilitate long-run decisions at the strategic level can produce distorted outputs and scenarios if policies in response to major structural changes are not (well) assessed. Connecting a modeling framework to a qualitative experiment in an interactive way could enhance quality of supporting tools for planners and stakeholders dealing with complex issues. A serious game can contribute to enhance the quality of model input-data and, hence, to enhance the reliability of model outputs. By reporting the experience of the project “€LAN – Energy prices and land use” this paper contributes to expand the empirical knowledge on the potentials of employing serious games in the planning field. Within the research project, it could be observed that the use of the framework has helped decision-makers to gain a better understanding of complex problems, to deepen spatial policy integration, and to design innovative strategies coping with increasing energy prices.

The evolution of hyperbolic discounting: Implications for truly social valuation of the future

We explore the standard expected utility model and alternatives to it. We then examine the behavioral and neurological evidence for hyperbolic discounting. We discuss evidence related to the neurological and behavioral evolution of discounting in non-human animals and in humans. We explore new findings about the importance of sociality in human behavior and the implications for truly social time preference. Finally, we discuss the implications of the neurological evidence on discounting for social environmental valuation, in particular the implications for very long-run decisions such as those involved in climate change mitigation and biodiversity preservation.

Towards a practical understanding of interest rate determination and the investment decision

Investment risk is highly correlated with variations in market interest rates. This paper examines a fundamental determinant of interest rates, and therefore investment risk. Monetary policy directly impacts market interest rates. As such, it is important for risk managers and investment managers to understand the mechanics of this key macroeconomic policy. This is especially true of managers of firms that are highly capital intensive. Capital intensive firms have a relatively long planning horizon – it is thus essential for investment and risk managers to comprehend those factors that influence the cost of capital, including macroeconomic policy that affects market interest rates. The purpose of this paper is to explain the potential impact that monetary policy has on the long-run investment decision.

Should shareholders delegate location decisions?

This paper analyzes whether owners of firms have incentives to delegate firms' location decisions to managers or not. Our analysis shows that owners do have incentives to keep their long-run decisions (the location of the firms) for themselves. In this context we show that the delegation of short-run decisions (prices) to managers leads to an increase in the degree of product differentiation with regard to the case in which firms do not hire managers.

Does ‘better’ discounting lead to ‘worse’ outcomes in long-run decisions? The dilemma of hyperbolic discounting

The shortcomings of conventional discounting, especially in the context of long-run environmental problems, have been extensively discussed in the literature. Recently, hyperbolic discounting, i. e. discounting at declining instead of constant discount rates, has attracted a lot of interest among both scientists and politicians. Although there are compelling arguments for employing hyperbolic discounting, there are also pitfalls, which have to be pointed out. In this paper I show that the problem of time-inconsistency, an inherent characteristics of hyperbolic discounting, leads to a potential clash between economic efficiency and intergenerational equity. As an example, I refer to the weak progress in the controlling of greenhouse gas emissions under the Kyoto protocol. As the problem of time-inconsistency cannot be solved on economic grounds alone, there is a need for an intergenerational moral commitment.

How environmental concern influences the investment decision: an application of capital theory

We develop a conceptual analysis of long-run decisions about the economy and the environment. In particular, we focus on the innovation of a new technique of production. We base our study on three components. First, capital theory as means of describing production. Second, joint production as implied by the laws of thermodynamics. Third, the time structure of the produced waste by-product, characterised by the magnitude of its degradation rate. The crucial variable in our analysis is the decision maker's time horizon. We show that, unlike in the no pollution case or in the flow pollution case, extending the time horizon when there is a polluting capital bad may make it less likely that a new technique of production is introduced. We conclude that fully taking into account dynamic aspects of environmental pollution considerably increases the complexity of economic valuation and the need for environmental precaution when making an investment decision.

International Duopoly, Tariff Policy and the Superiority of Free Trade

This paper addresses the effectiveness of tariff policy in the long-run production framework in which decisions must be made about plant size and the level of output to be produced by foreign duopolists competing with each other in the importing country's market. We consider two types of tariff regime, discriminatory and uniform, and show that the importing country's welfare is unambiguously higher in the uniform tariff case. We consider free trade in the same production framework and show that, as the long-run capacity decision becomes increasingly relevant relative to the short-run quantity decision, free trade dominates tariffs in welfare rankings. JEL Classification Number: F1.

The Meaning of Size: Output? Scope? Capacity? The Case of Airline Hubs

The "size" of a production facility has different specific meanings depending on the nature of the business decision at issue. We present a general theoretical model illustrating the profit-maximizing firm's interrelated choice of plant size in long-run, medium-run and short-run contexts. The model is then estimated for U.S. airline hubs. The results suggest that competition operates primarily via the capacity (long-run) size decision. A game-theoretic simulation based upon the results is consistent with the argument that the smaller of two hubs sharing an airport is at a significant competitive disadvantage. The "size" of a plant seems a simple concept. Yet, depending on the reason for ask- ing "how big" the plant is, several different definitions are evoked by economists to answer that question. Examples include the current volume of output, the short-run capacity of the plant, and minimum efficient scale. Looking in another dimension, a measure of scope ("How many distinct products does the firm produce at this plant?") is sometimes needed. And, finally, for some purposes it is relative size (measured, e.g., by market share) that is most relevant. The standard textbook discussion of size speaks of these matters at a high level of abstraction. Typically the choice of plant size is portrayed as a long-run decision; it is the combination of fixed inputs that minimizes the cost of producing the desired long-run output. In the short run, firms are said to choose the mix of variable inputs that maximizes profits given the set of fixed inputs already in place. Within that plant, firms may vary output and capacity utilization (within limits). The mission of this paper is twofold. First, we aim to provide a deeper under- standing of the hierarchical relationship which underlies the output, scope and capacity choices of a firm. We do this by modeling explicitly the profit-maximizing calculus of the firm as it makes long-run and short-run decisions affecting its size. Though the model arises from the specific context of the airline industry, in which a hub serves the function of the plant in the generic textbook discussion, it is in fact a quite general discussion of these interrelated choices. Second, we use this model to illuminate some significant aspects of airline competition.

Product and Process Flexibility in an Innovative Environment

This article studies several attributes of a firm's long-run decisions about organizational structure, attributes that affect the firm's short-run innovative activity. We focus on flexibility, which lowers the future costs of implementing innovations, and research capabilities, which improve the future opportunities for innovation. We consider two dimentsions of innovation: demand-enhancing (product) and cost-reducing (process). These two types of innovation are complementary in terms of increasing the firm's net revenue in the short run. The complementarities between the firm's short-run decision variables then lead to complementarities between its long-run decisions about product and process flexibility and research capabilities.

Allocations and Common Costs in Long-Run Investing and Pricing Decisions: An Historical Analysis

The extent to which allocated common costs should influence business decisions remains controversial in management accounting. In the finance and investment literature this issue is generally ignored or dismissed by appeals to the‘incremental’ principle. This article presents an historical analysis of allocations in long-run investing and pricing decisions. It is demonstrated that seminal figures in the development of both investment and price theory were conscious of the need for firms to cover common costs and generally favoured some form of allocation. The anti-allocationist position is shown to be of relatively recent origin and to have caused an inconsistency in the management accounting literature in the treatment of common costs. European costing theory is shown to have been consistently allocationist. Evidence of a return in the recent U.S. literature to the older Anglo-American, and continuing European, allocations tradition is presented.