Misallocation Of Risk Research Articles

Dispute root causes and prevention in Iranian public-private partnership projects: a causal-predictive model

PurposePublic–private partnerships (PPPs) are notoriously prone to disputes among stakeholders, some of which may unduly jeopardize contract performance. Contract disputes arising in Iran are often due to inefficiency of PPP concession agreements and practice. This study presents a causal-predictive model of the root causes and preventive measures for inter-organization disputes to enhance the likelihood of achieving desirable performance in PPP projects.Design/methodology/approachA theoretical “causal-predictive” model was developed with fourteen hypotheses based on extant literature and contractual agency theory, which resulted in the creation of a pool of 110 published items. Data were obtained from a questionnaire survey with 75 valid responses, completed by 4 stratified groups of Iranian PPP experts. Partial least square structural equation modeling (PLS-SEM) was used for validating the proposed model via a case study.FindingsResults reveal that the main three factors of PPP desirable performance are as follows: on-time project completion, high quality of activities/products and services for public satisfaction. Further, the most influential factors of the lifecycle problems, construction stage, and preferred risk allocation included risk misallocation, improper payment mechanism and failure to facilitate a timely approval process.Originality/valueFor researchers, the findings contribute to the theory of contractual agency; specifically, how different influences among the model's elements lead to better PPP performance. In practical terms, proposed outcome-based strategies will inform PPP stakeholders to avoid dispute occurrence and thus improve the time, quality and services of projects.

How Did Balance Loss Occur? A Cross-stakeholder Analysis of Risk Misallocation in a Sponge City PPP Project

How Did Balance Loss Occur? A Cross-stakeholder Analysis of Risk Misallocation in a Sponge City PPP Project

The Criminalization of Immigration and Intellectual Disability in the United States

Public attitudes, negative stereotypes, and stigma are essential to cultural narratives about the membership status of people with intellectual disability and people who have immigrated to the United States. With a concern for the exclusion of people from participation in democratic societies, this mixed methods study explores conceptual links between the criminalization of intellectual disability and immigration. The overlay of criminal justice norms and practices onto civil law without parallel adoption of safeguards results in the misallocation of risk to individuals with out-group membership status. This study offers conceptual analysis by applying to the policy issue, standard of proof of intellectual disability in death penalty cases, the framework of membership theory and related constructs present in the scholarly literature on immigration policy. Exact measures logistic regression is used to predictively link states’ standards of proof of intellectual disability with immigration status. It was found that the best model predicting the probability of a Higher than Preponderance standard of proof of intellectual disability in death penalty cases was a two-variable model consisting of Prior Ban and Unauthorized Immigration. This study presents recommendations for research and policy practice.

Development of risk misallocation causal networks using interpretive judgement in the construction industry

The allocation of risk in the construction industry determines to some extent the success of the project as inappropriate allocation has the resultant effects of claims, disputes, tensions, cost overruns, schedule overruns and quality shortfalls. The existent literature has predominantly focused on risk misallocation as the allocation of risk to the inappropriate party. Notwithstanding, risk misallocation includes use of inappropriate mechanisms, incomprehensive allocation and use of inappropriate resources. This paper developed causal networks resulting in risk misallocation. The causal networks are developed from 15 purposive semi-structured interviews from a heterogeneous sample and supplemented sequentially by 198 questionnaire survey responses in the building sector selected randomly from construction clients, contractors and consultants. The causal networks depict how the processes of risk identification, risk analysis, risk control measures and risk allocation could lead to risk misallocations. The findings suggest that the risk control/response stage has potential for various forms of risk misallocation in comparison to any other stage. Networks presented are a basis for improvement in professional practice for construction professionals as they manage risk on various projects.

Risk Management Failures

Abstract We model risk management as information acquisition that delays trading decisions. In markets with preemptive competition, this can lead to a race to the bottom, where prioritizing trade execution over risk management is optimal for each firm, but collectively inefficient. As time competition intensifies, mean trading profit supplants risk concerns as the main driver of risk management quality, causing risk misallocation to rise with trading speed and volume. This pathology of risk management failure—the trio of time-consuming risk assessment, preemptive competition, and boom markets—has distinctive regulatory implications. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

DNPV: a valuation methodology for infrastructure and Capital investments consistent with prospect theory

Traditional valuation methods such as net present value (NPV) utilize increased discount rates to account for risk, in the process introducing a time bias effect that promotes short-termism. Application of NPV often discourages much needed infrastructure projects that require large capital investments yet are slow to generate positive cashflows. NPV also downplays the significance of future liabilities and can lead to risk misallocation amongst investment partners and stakeholders. The decoupled net present value (DNPV) method introduces the risk-as-a-cost concept that prices the risk of obtaining lower-than-expected cashflows and thus represents investors’ compensation for bearing such risks. Capturing the loss-aversion attitudes described by prospect theory, DNPV provides a transparent and consistent valuation framework for long-term investments by: (i) calculating expected values of cashflow components using their probability characterizations, (ii) defining the cost of risk (market and non-market) as the expected downside value, (iii) subtracting/adding the cost of risk from/to expected revenues/expenditures, and (iv) discounting the results using risk-free rates. DNPV’s power is illustrated by re-analyzing a 42-year toll-road concession initially evaluated using NPV and real options. The case study shows how explicit risk quantifications could be used to better structure the concession and reallocate risks among stakeholders.

MODELING CONTRACT PRACTICES RESULTING IN RISK MISALLOCATION

Risk misallocation has been a topic of discussion in the extent literature for some time now. The literature points out that risk management is the key to ensuring that optimal risk allocation is achieved. While the focus on risk allocation has been about the party best suited to carry a given risk, the issue of how misallocation occurs is rarely dealt with. This paper modeled how risk misallocation can result from contract practice. This was done through a literature review and 15 purposive heterogeneous semi-structured interviews conducted with clients, project managers, architects, engineers and quantity surveyors in the Zambian building sector. The derived model suggests that misallocation could result from inappropriate selection of risk mitigation mechanisms provided for in the contract, poor selection of contracts and use of inappropriate procurement routes. These findings advance knowledge that necessitates the allocation of risk appropriately as the areas of contract practice and risk management are rarely researched with regards to risk misallocation.

RISK ALLOCATION MECHANISM FOR BUILDING PROJECTS BASED ON THE RIBA PLAN OF WORK

The Zambian construction industry, like many other construction industries in developing countries, is characterized with frequent project failure evidenced by quality shortfalls, cost overruns, time overruns and, on occasion, abandonment of projects. Various construction industries, particularly developed ones, have mechanisms in place to alleviate the aforementioned risks. Moreover, it has been reported that construction organizations in developing countries, approach risk management implied risk allocation in construction projects by using a set of practices that are normally insufficient, often produce poor results, and limit the success of project outcome. It is from this background that a risk allocation mechanism tailored to the Zambian building sector is proposed, based on the RIBA plan of work for new large to medium sized projects. Various mechanisms and processes are documented in the existing literature, all developed for particular jurisdictions, project types and modes of procurement. Though beneficial, the crafting of most of these mechanisms does not focus on curtailing sources of inappropriate risk allocation, but rather focuses on who, between the client and contractor, should be allocated a particular risk. This paper documents a mechanism for risk allocation after establishing the causes of risk misallocation through a questionnaire survey, interviews, and document analysis. The mechanism integrates contract practice and risk management to make it robust for alleviating both contractual and non-contractual risks. However, its utility, to an extent, is dependent on the risk perceptions of the user as it is driven by decision-making.

The (Next) Big Short: Prediction, Narrative, and Law in the Climate Crisis

The Subprime Mortgage Crisis was a predictive failure that involved the misallocation of risk and blindness to uncertainty. Climate change, and the coming Climate Crisis, parallels the Subprime Mortgage Crisis in important ways that render our current approaches irrational and irresponsible. I examine the predictive failures of the Subprime Mortgage Crisis by focusing on what makes probabilities more likely to be accurate, and the circumstances in which predictions blind us to the uncertainty of large scale negative consequences. Using the theory of the Black Swan and other critiques from Nassim Nicolas Taleb, I explore the application of probability theory in the context of the Climate Crisis. At the same time, data and statistics are insufficient to motivate both individual actors and political entities to act proactively. Therefore, I posit that beyond the probabilistic conception of uncertainty and risk associated with global climate change, the Climate Crisis demands a narrative that resonates with individuals at a local, personal, and emotional level. I use narrative theory and the doctrine of legal storytelling to explain the difficulty experienced in implementing legal mitigation solutions for the Climate Crisis at the current time. The variety of legal solutions offered, all of which may accomplish the goal of reducing carbon emissions via a carbon tax or otherwise, are irrelevant if none of them are deployed. The difficulty in enacting legislative and regulatory reforms is best viewed as a failure of narrative rather than statistics, facts, or science.

Perceptions of risk allocation methods and equitable risk distribution: a study of medium to large Southeast Queensland commercial construction projects

Economic upheaval and project complexity often lead to unequal risk allocation between contractual parties. A review of the literature identifies major problems in relation to the fairness and equality of the risk allocation process. However, most existing studies have been conducted from the client's perspective rather than that of contractors or consultants and do not focus specifically on risk misallocation. This paper aims at determining the factors involved by a questionnaire survey of the perceptions of contractors and consultants of the main issues in relation to medium to large commercial construction projects in South East Queensland, Australia. The findings are generally consistent with existing research results in that approximately half the respondents feel that their contractual risk allocation is unfair. In addition, there is a lack of use of formal risk management methods, and the arbitrary passing down of risks from the client has increased in recent years. A better understanding is provided of the issues contributing to unequal risk allocation, decision-making and management that will help promote fairness and equality between the contractual parties in the current process of risk management.

Risk Misallocation on Highway Construction Projects

AbstractHighway construction projects are the most time-bound to a design-bid-build contract structure aiming at passing the large amounts risk instead of promoting a state of shared risk among all project participants. When issues such as changed conditions, third-party delay, or questions regarding design adequacy arise, the effects of risk misallocation are magnified, resulting in projects that suffer with regards to cost and schedule. The research presented in this article discusses strategies and guidelines to help project participants improve the state of risk allocation on highway projects. After conducting a literature review, a survey performed identified the top 5 most commonly misallocated risks in the highway construction industry to be (1) design adequacy, (2) specification interpretation, (3) third-party delay, (4) changed conditions, and (5) claims process. In-depth legal research on these risks was done in order to develop flow charts, which are the primary contribution of this study to th...

First, do no harm Capital Failure: Rebuilding Trust in Financial Services Nicholas Morris and David Vines, Eds. Oxford University Press, 2014. 422 pp.

First, do no harm <b>Capital Failure: Rebuilding Trust in Financial Services</b> <i>Nicholas Morris and David Vines, Eds.</i> Oxford University Press, 2014. 422 pp.

Making Peter, Tom, Dick and Harry Pay for Paul's Follies: Regulatory Exceptionalism to Pacta Sunt Servanda During Performance of Public Contracts in India

The doctrine of "Pacta Sunt Servanda" revolves around the necessity of ensuring that reliable promises are made; and that any defaults by either party are properly evaluated and addressed during adjudication of contractual disputes. As an international best practice, this doctrine is always applied strictly with very few permissible exceptions; and in certain cases of public contracts, additional theories of "exceptionalism" operate so as to protect public interest even in case of omissions by public officials vis-a-vis important requirements of public procurement policy. India, on the other hand, recently witnessed certain orders by its premier regulator in the electricity sector, where the Pacta Sunt Servanda doctrine was substantially derogated from, potentially resulting in misallocation of risk and liability. This short academic paper examines in detail certain procedural and substantive deviations by the Indian regulator, either expressly or impliedly, and concludes with suggestions for restoring the balance in public contracts, with a view to ensuring reliability of contractual promises made in public domains.

Risk Misallocation in Public–Private Partnership Projects in China

ABSTRACT This article attempts to compare the preferred and actual risk allocation and then to evaluate the impact of risk misallocation (if any) on project performance. The results show a significantly negative relationship between project performance and risk misallocation. The smaller the degree of risk misallocation was, the more successful the project would be. One group of three risks (including “Corruption,” “Government's intervention,” and “Government's reliability”) and the other group of three risks (including “Approval and permit,” “Immature juristic system,” and “Land acquisition”) were found to contribute considerably to the prediction of project performance. This article provides information on the impact of risk misallocation on project performance in China's public–private partnership (PPP) projects. To enter and perform well in China's PPP market, private firms should pay particular attention to the identified risks.

Stronger than Kryptonite? Inalienable Profit Sharing Schemes in Copyright Law

Starting in 2013, authors of copyrighted work and their successors will be able to terminate every assignment and license 35 years after execution. These termination rights are inalienable and are expected to have a substantial impact on some industries, and in particular, the music industry. This Article provides an in-depth economic analysis of these inalienable rights. It explores the traditional justifications for the inalienability of termination rights and finds them unconvincing and lacking. Indeed, termination rights seem to be rooted in a romantic perception of a starving, unsophisticated artist, a description that is neither accurate nor justifies inalienability. The effects of termination rights on the incentives to create are analyzed in-depth. It is shown that when competition among buyers of copyrighted work is limited, inalienable termination rights might promote economic efficiency. Those rights allow the creator to sell her work in two steps. Initially, the pre-termination rights are sold when the seller lacks market power, but later, when the value of the work is known, the author can sell her post-termination rights as a monopolist. This can increase the incentives to create. The main costs of this system include the misallocation of risk among the author and her buyers, an end-game problem — the need to control the externalities between the parties as termination approaches, and the problem in reassembling the various rights after termination. The Article makes several suggestions for improving this system including allowing the parties to contract around the rules of termination when it approaches, and forcing the author to grant the transferees compulsory licenses. The analysis suggests that while termination rights might have been economically desirable in the past, nowadays their costs probably outweigh their benefits in major copyright industries. The Article further shows that adopting a similar mandatory resale royalties system in the fine art industry, which is common in foreign jurisdictions and is currently being considered by the U.S. Copyright Office, is undesirable.

Construction Risk Identification and Allocation: Cooperative Approach

Over the past decades, numerous research efforts have been undertaken concerning the allocation of construction risks. Although the research currently available provides many valuable insights into the issue, industry participants remain concerned over risk associated with construction contracting. Based on this problem, a research product was developed to aid contracting parties in identifying, assessing, and allocating each construction risk. After a three-phase survey methodology for data collection, three worksheets were developed to identify construction risks with high potential for conflict and to aid in assessing and allocating these risks to the appropriate parties. To complement the model worksheets, three tools were developed: flowcharts, to help determine which party should carry each particular risk; legal research; and risk allocation principles, to help select appropriate contract language to address the identified risks. This paper discusses (1) the risk assessment and allocation model, including its accompanying tools, followed by a legal research discussion that will help parties to better understand construction contracts; and (2) the legal terms that often cause misallocation of risk with severe consequences.

Is Arbitrage Socially Beneficial?

Economists often associate information efficiency of prices with allocative (Pareto) efficiency. When arbitrageurs connect segmented markets to correct a misallocation of risk, this assumption is sound. However, when opportunities for arbitrage or financial innovation arise from mispricings caused by the presence of confused investors or other distortions, such market-making is harmful. Rather than arbitrage facilitating the flow of risk to those who can most efficiently bear it, this harmful arbitrage allocates risk to those who least understand it. The beneficial effects of efficient pricing on real investment decision mitigate the harms caused by arbitrage, but also limits its benefits by providing substitute insurance. Even when arbitrage is not strictly harmful, it may be oversupplied, especially given that it typically employ some of the most talented workers.

A normative analysis of capital income taxes in the presence of aggregate risk.

A simple portfolio model is used to examine the efficiency effects of capital income taxes when the economy faces aggregate risk. To achieve a first best optimum the use of state contingent lump-sum taxes is required. Through the tax policy the riskiness of total consumption is partly assigned to the private consumption and partly to the public consumption. State independent income taxes may generate a misallocation of risk and distort the allocation of resources between assets. The second best optimum, representing a trade-off between these inefficiencies, is characterized. Uniform taxation is shown to be optimal only in very special cases. Finally, the second best optimality rule for public consumption is extended to the case of uncertainty.

A Normative Analysis of Capital Income Taxes in the Presence of Aggregate Risk

A simple portfolio model is used to examine the efficiency effects of capital income taxes when the economy faces aggregate risk. To achieve a first best optimum the use of state contingent lump sum taxes is required. Through the tax policy the riskiness of total consumption is partly assigned to the private consumption and partly to the public consumption. State independent income taxes may generate a misallocation of risk and distort the allocation of resources between assets. The second best optimum, representing a trade-off between these inefficiencies, is characterized. Uniform taxation is shown to be optimal only in very special cases. Finally, the second best optimality rule for public consumption is extended to the case of uncertainty.

Agency costs and innovation

Stylized facts indicate that small firms are responsible for a disproportionate share of innovative research. There are many possible explanations for this fact. The paper seeks to understand this phenomenon as the outcome of an optimal assignment of tasks across individuals and organizations. It is shown that incentive costs associated with a given task depend on the total portfolio of tasks that an individual or an organization undertakes. Mixing hard to measure activities (innovation) with easy to measure activities (routine) is particularly costly, since it will either lead to misallocation of attention across tasks or to misallocation of risk. Larger firms are at a comparative disadvantage in conducting highly innovative research, because of the costs associated with managing a heterogeneous set of tasks. It is further argued that optimal organizational responses to coordination and control of routine tasks will lead to bureaucratization within the firm and to financial constraints imposed by capital markets, both of which are hostile to innovation.