Mark-up Rate Research Articles

Probabilistic Approach to Determining Overhead-cum-markup Rate in Bid Price

The bid price for a construction project comprises the contractor's estimated direct cost and overhead cost plus its applied markup. Contractors often use an all-in rate to lump overhead and markup together on top of direct cost for arriving at a bid price. Such a method is naturally prone to inaccuracy and involves a greater risk in competitive bidding, if the applied rate is selected subjectively. The present research aims to develop an improved approach to determining the combined rate of overhead and markup in the bid price for a project. Four factors, i.e., direct cost, duration, type of work, and location, were used as inputs to build a regression model from cost and bid data of collected projects for predicting the overhead and markup rate in the winning bid for a project, which, together with the model error, is used to estimate the probability of winning for a bid level. Then, based on minimization of overall loss risk proposed by a previous research, the bid preventing over-cuts in price competition is determined by using the model, the probabilistic estimates of project cost, and the probability of recovering costs if losing the bid. The approach is illustrated using two cases and the suggested bids for the cases are compared with those from other models.

A multi-sectoral version of the Post-Keynesian growth model

Abstract With this inquiry, we seek to develop a disaggregated version of the post-Keynesian approach to economic growth, by showing that indeed it can be treated as a particular case of the Pasinettian model of structural change and economic expansion. By relying upon vertical integration it becomes possible to carry out the analysis initiated by Kaldor (1956) and Robinson (1956, 1962), and followed by Dutt (1984), Rowthorn (1982) and later Bhaduri and Marglin (1990) in a multi-sectoral model in which demand and productivity increase at different paces in each sector. By adopting this approach it is possible to show that the structural economic dynamics is conditioned not only to patterns of evolving demand and diffusion of technological progress but also to the distributive features of the economy, which can give rise to different regimes of economic growth. Besides, we find it possible to determine the natural rate of profit that makes the mark-up rate to be constant over time.

Large Banks, Loan Rate Markup and Monetary Policy

This paper studies the implications of introducing large monopolistic banks, which can affect macroeconomic outcomes and thus the response of monetary policy to inflation, in a model with a collateral constraint linking the borrowers’ credit capacity to the value of their durable assets. First, we find that strategic interaction generates a countercyclical loan spread, which amplifies the impact of monetary and technology shocks on the real economy. This type of financial accelerator adds up to the one due to financial frictions and is crucially related to the existence of non-atomistic banks. Second, the level of the spread and the degree of amplification are positively related to the level of entrepreneurs’ leverage, reflecting the fact that higher leverage implies greater elasticity of the policy rate to changes in loan rates, which in turn increases banks’ market power. Third, we find that amplification is stronger the more aggressive the central bank’s response to inflation, as measured by the inflation coefficient in the Taylor rule.

Debt Restructuring Costs and Firm Bankruptcy: Evidence from CDS Spreads

A recent change to the U.S. tax code (IRS Regulation TD9599) lowered the costs certain creditors incur when restructuring debt out of court. We show how CDS spreads gauge the cost wedge between inversus out-of-court restructurings. Empirically, we find that CDS spreads declined by record figures on the regulation’s announcement, with declines concentrated among distressed firms with higher ratios of syndicated loans — the credit category treated by TD9599. Distressed firms’ access to syndicated loans increased and interest rate markups declined. The analysis shows how changes to the tax code may improve welfare in financial distress.

Competition in a New Industrial Economy: Toward an Agent-Based Economic Model of Modularity

When firms (conglomerates) are competing, not only for the present, with a given population of customers and a fixed set of commodities or service, but also for the future, in which products are constantly evolving, what will be their competitive strategies and what will be the emerging ecology of the market? In this paper, we use the agent-based modeling of a modular economy to study the markup rate dynamics in a duopolistic setting. We find that there are multiple equilibria in the market, characterized by either a fixed point or a limit cycle. In the former case, both firms compete with the same markup rate, which is a situation similar to the familiar classic Bertrand model, except that the rate is not necessarily zero. In the latter case, both firms survive by maintaining different markup rates and different market shares.

Analysing interest rate mark-ups in the Australian mortgage market

The aim of this paper is to enhance transparency and competition in Australia's mortgage market by examining the behaviour of the mortgage interest rate spread of 39 individual lenders. Using a time-varying probability regime-switching model and monthly data (2000M9–2012M3), we identify two very distinctive regimes: a low mark-up regime (R1) and a high mark-up regime (R2). Without setting any given date a priori, the results from both the regime-switching approach and a sequential search method indicate that the spread exhibits a significant upward shift around early 2008 for all lenders. The estimated switching model controls for the rising wholesale funding costs and changes in global consumer confidence over the sample period. The results show that building societies are generally less inclined to remain in R2 than most banks (particularly foreign subsidiary banks) and some credit unions, and are consequently more likely to offer competitive mortgages to borrowers.

Supply chain coordination with defective items and quantity discount

This study develops an integrated inventory system involving defective items and quantity discount for optimal pricing and ordering strategies. The model analysed in this study is one in which the buyer orders a quantity, the vendor produces more than buyer's order quantity in order to reduce set-up cost, and then he/she offers an all-units quantity discount to the buyer. Our objective is to determine the optimal order quantity, retail price, mark-up rate, and the number of shipments per production run from the vendor to the buyer, so that the entire supply chain joint total profit incurred has a maximum value. Furthermore, an algorithm of finding the optimal solution is developed. Numerical examples are provided to illustrate the theoretical results.

Asset Quality Misrepresentation by Financial Intermediaries: Evidence from RMBS Market

We contend that buyers received false information about the true quality of assets in contractual disclosures by intermediaries during the sale of mortgages in the $2 trillion non-agency market. We construct two measures of misrepresentation of asset quality -- misreported occupancy status of borrower and misreported second liens -- by comparing the characteristics of mortgages disclosed to the investors at the time of sale with actual characteristics of these loans at that time that are available in a dataset matched by a credit bureau. About one out of every ten loans has one of these misrepresentations. These misrepresentations are not likely to be an artifact of matching error between datasets that contain actual characteristics and those that are reported to investors. At least part of this misrepresentation likely occurs within the boundaries of the financial industry (i.e., not by borrowers). The propensity of intermediaries to sell misrepresented loans increased as the housing market boomed, peaking in 2006. These misrepresentations are costly for investors, as ex post delinquencies of such loans are more than 60% higher when compared with otherwise similar loans. Lenders seem to be partly aware of this risk, charging a higher interest rate on misrepresented loans relative to otherwise similar loans, but the interest rate markup on misrepresented loans does not fully reflect their higher default risk. Using measures of pricing used in the literature, we find no evidence that these misrepresentations were priced in the securities at their issuance. A significant degree of misrepresentation exists across all reputable intermediaries involved in sale of mortgages. The propensity to misrepresent seems to be largely unrelated to measures of incentives for top management, to quality of risk management inside these firms or to regulatory environment in a region. Misrepresentations on just two relatively easy-to-quantify dimensions of asset quality could result in forced repurchases of mortgages by intermediaries up to $160 billion.

Inflation targeting in an import dependent indebted economy

This paper develops a one-sector Kaleckian model of an import dependent indebted small open economy; where the mark-up rate is sensitive to both changes in the interest rate and the exchange rate and foreigners provide part of the long-term finance. The short-run consequences of an inflation targeting policy in the form of high interest rates and strong domestic currency are explored. Among the possible short-run scenarios, the one most relevant for developing countries involves a decline in the profit rate, the capacity utilization rate and the rate of accumulation as well as the employment rate and the real wage. Leverage ratio of the firms and the extent of external indebtedness play an important role in bringing about this result. Long-run analysis reveals that this scenario is associated with instability in the long run and that, also in the long run, the extent of foreign indebtedness and the responsiveness of capital inflows to the return on existing portfolios are important in determining the direction of the effects of inflation targeting on the equilibrium debt–capital ratio.

Neutralizing tendency of wages to grow below productivity rate

The apparent stability on relative shares in revenue during the 2000s, or even the increase increase in wages share in Latin American countries, seems to be surprise in Kaldor’s opinion, or even mystery for Schumpeter, or well finally a to economic theory according to Robinson. Various theories trying to explain sharing of value added insist on investment relative size, saving importance, different types of technical progress (biased or not), amount of idle capacity, cost structure, intermediate products importance, higher markup rates searching by entrepreneurs and, consecutively, on distributive conflict. We will analyze main macroeconomic models - those of Kaldor, Robinson and Kalecki – in order to overtake that reproach to economic theory. JEL Classification: E12; D33; O1; O15; O54.

Under the Hood: Auto Loan Interest Rate Hikes Inflate Consumer Costs and Loan Losses

Markups on auto loan interest rates are routinely used to compensate a dealership for the service of securing financing with a third party lender. However, rate markups add percentage points to the rate a consumer would legitimately qualify for, and are added without the adequate disclosure to the consumer. Such a dynamic creates a reverse competition environment where the dealer's service only increases the cost to consumers, never decreasing it. Our research analyzes automobile asset backed securities and data from multiple auto industry sources to examine the scope of auto rate markups and their impact on loan performance. We conclude that rate markups on auto loans lead to more expensive loans and higher odds for default and repossession for subprime consumers. As a result, the report recommends divorcing all dealer compensation from the manipulation of the interest rate.

A computational approach to pricing a bank credit line

Using trended Brownian motion to characterize borrower cash needs over time, we are able to derive a probability density function for the time to depletion of a bank credit line as well as the likelihoods for the time to exhausting the sources of liquidity that fund the loan. Armed with these analytic results, we solve for the credit line mark-up rate and the configuration of stored liquidity that maximizes the bank’s intertemporal expected profits from the loan. The optimality conditions produce a system of integral differential equations whose solutions we then simulate over a host of scenarios.

A Note: Debt Selling and Their Impact on Islamic Bank Value

This paper shows how a risk management mechanism through selling debt can affect the value of Islamic banks. Islamic banks are able to maximize their value from the sale of murabahah on housing debt in order to manage their risk arising from fluctuations in interest rates. A tractable theoretical model is developed to maximize the Islamic banks’ values from the sale of housing debt financing in order to hedge against fluctuations in interest rates. Our findings showed that Islamic banks could improve their earnings and rectify the problem in aligning their assets and liabilities through the benefits of debt selling. A rise in the market interest rates leads to an increase in the base financing rate and the mark-up rate in Islamic banks, since market interest rates serve as benchmarks in determining profits or mark-ups. If the Islamic banks engage in debt selling to decrease their risk exposure, their earnings or value may be amplified since they have the opportunity to undertake other positive NPV projects from the payoffs on the murabahah debt selling.

An Asymmetric Oligopolist can Improve Welfare by Raising Price

We demonstrate that, in Bertrand/Cournot equilibrium, a firm with a relatively small market share may improve social welfare by raising its price. This could be because the price increase can mitigate an output-structure distortion: if there are two goods which have the same marginal cost, then, under some conditions, the good in higher demand (the efficient good) will have a higher markup rate than the other good (the inefficient good). This suggests that the output structure is distorted in favor of the inefficient good, since the higher markup rate of the efficient good should lead to a considerable increase in demand for the inefficient good.

Does entry improve welfare? A general equilibrium approach to competition policy

We consider a simple general equilibrium model with imperfect competition. Firms are price takers in the input market and compete a la Cournot in some or all of the product markets and their technologies display constant returns to scale. We show that an increase in the number of firms in a given sector does not always improve welfare. We also provide a characterization in terms of mark-up rates of the sectors for which entry is welfare enhancing. Our results challenge the common idea that mergers with no cost synergy are not desirable for consumers.

What does excess bank liquidity say about the loan market in Less Developed Countries?

Evidence about commercial banks’ liquidity preference says the following about the loan market in less developed countries (LDCs): (i) the loan interest rate is a minimum markup rate; (ii) the loan market is characterized by oligopoly power; and (iii) indirect monetary policy, a cornerstone of financial liberalization, can only be effective at very high interest rates that are likely to be deflationary. The minimum rate is a mark-up over an exogenous foreign interest rate, marginal transaction costs and a risk premium. In order to present its case, the paper utilizes and extends the oligopoly model of the banking firm. A calibration exercise demonstrates that the hypothesis of a minimum mark-up loan rate is largely consistent with the observed stylized facts of flat liquidity preferences.

International Competition, Debt, and Uneven Development in a North-South Macroeconomic Model

This paper examines whether the intensification of international competition widens the gap between developing and developed economies. The intensification of international competition with an influential trade union in the North is known to lower the North’s markup rate. This paper is unique because it points out that the intensification of international competition can widen the North-South gap when the Southern debt is taken into consideration. It also shows that the egalitarian policy in the North as influenced by trade unions is compatible with its international policy: relief of interest payments. JEL classification: F19, O19 Keywords: North-South, Uneven Development, Debt

Optimal Guaranteed Profit Margins for Both Vendors and Retailers in the Fashion Apparel Industry

Guaranteed profit margin (GPM) is one of the chargebacks that retailers frequently employ in the fashion industry. With this stipulation, the store demands a vendor's guarantee of its target mark-up rate, even in a markdown operation. This makes the retailer order too much and later liquidate a greater amount of leftovers. We propose a new GPM scheme for supply chain coordination. Specifically, if the retailer compensates the vendor for the same fraction of the joint costs as the guaranteed mark-up rate, the retailer's quantity choice results in profit maximization for the entire supply chain. Thus, the supply chain becomes fully coordinated and provides win–win outcomes for both retailer and vendor.

Optimal lot size model for deteriorating items with demand rate dependent on displayed stock level (DSL) and partial backordering

In this paper, we consider the problem of determining the lot size of a single deteriorating item with the demand rate dependent on displayed stock level, selling price of an item and frequency of advertisement in the popular electronic and print media, also through the sales representatives. Shortages, if any, are allowed and partially backlogged with a variable rate which depends on the duration of waiting time upto the arrival of next lot. Here, the transportation cost for replenishing the goods is considered explicitly and the storage capacity of the showroom/shop is assumed to be limited (finite). According to the relative size of the stock level dependency demand parameters and the storage capacity of the showroom/shop, different scenarios with sub scenarios have been mentioned and solved with the help of GRG (generalised reduced gradient) method and the computational procedure. The convexity analysis is done by showing the average profit function in each case as pseudo concave. To illustrate the results and its significant features, a numerical example is given. Finally, to study the effect of changes of demand parameters, deterioration, backlogging parameters and mark-up rate on the maximum initial stock level, shortage level, frequency of advertisement per cycle along with the maximum average profit are presented numerically.

What Determines Banks' Market Power? Akerlof or Herfindahl

We introduce a theoretical model predicting that banks' interest rate markups follow a lifecycle pattern. Due to endogenous bank monitoring by competing banks, borrowing firms initially face a low markup, thereafter an increasing markup until it falls for old firms. By applying a large sample of small firms and a new measure of asymmetric information, we find that firms with significant asymmetric information problems have a more pronounced life-cycle pattern of interest rate markups. We also examine effects of concentrated banking markets on interest markups. Results indicate that markups are mainly driven by asymmetric information problems (Akerlof). However,we find weak evidence that bank market concentration is important for old firms (Herfindahl).