This study reviews one of the unresolved research puzzles in corporate finance; why do companies ... more This study reviews one of the unresolved research puzzles in corporate finance; why do companies pay dividends? In this context, a qualitative study dealing with content analysis is carried out based on theoretical and empirical researches. After critically reviewing 407 research articles in dividend policy, 50 empirical studies were taken as the sample based on relevance to the research puzzle. The content analysis provides some significant insights and stylized facts with regard to the corporate dividend policy. However, the research conducted is fundamentally flawed in its design which is based on quantitative approaches in order to elucidate a behavioural explanation. As a result, most of the study findings cannot be relied upon to see consistency with the theories in question.Despite years of theoretical and empirical evidences, the findings show that the dividend puzzle still remains as an unresolved research phenomenon in corporate finance due to lack of unanimity among the researchers over the explanations. This study provides the reader with an all-embracing understanding of the theories and empirical explanations of the dividend puzzle. It is imperative for the researchers to focus on all empirical and theoretical explanations in a single study and test them simultaneously using a triangular approach in order to have a single consensus over this puzzle. Thus, developing a new paradigm or models to deal with the dividend puzzle is suggested and until then, the deduction of various theories in different studies is inconclusive and inconsistent.
This paper presents an empirical analysis of job search behavior among older Americans using the ... more This paper presents an empirical analysis of job search behavior among older Americans using the Health and Retirement Study. Increasing longevity, improving health conditional on age, increasing labor supply flexibility stemming from an increase in part-time work, self-employment and the use of technological advances to promote second careers, and increasing labor force participation, make the study of search behavior at the end of the life cycle an important research topic. The analysis shows that older Americans actively search for new jobs, both on-the-job and when out of work, and that previous work attachment and health limitations are key to understanding the different job search behavior of employed and nonemployed individuals, as well as males and females.
This paper presents an "audit" of the multistage application and appeal process that the U.S. Soc... more This paper presents an "audit" of the multistage application and appeal process that the U.S. Social Security Administration (SSA) uses to determine eligibility for disability benefits from the Disability Insurance (DI) and Supplemental Security Income (SSI) programs. We study a subset of individuals from the Health and Retirement Study (HRS) who applied for DI or SSI benefits between 1992 and 1996. We compare the SSA's ultimate award decision (i.e. after allowing for appeals) to the applicant's self-reported disability status. We use these data to estimate classification error rates under the hypothesis that applicants' self-reported disability status and the SSA's ultimate award decision are noisy but unbiased indicators of, a latent "true disability status" indicator. We find that approximately 20\% of SSI/DI applicants who are ultimately awarded benefits are not disabled, and that 60\% of applicants who were denied benefits are disabled. Our analysis also yields insights into the patterns of self-selection induced by varying delays and award probabilities at various levels of the application and appeal process. We construct an optimal statistical screening rule using a subset of objective health indicators that the SSA uses in making award decisions that results in significantly lower classification error rates than does SSA's current award process.
We provide an empirical analysis of the Social Security disability application, award, Ž. and app... more We provide an empirical analysis of the Social Security disability application, award, Ž. and appeal process using the Health and Retirement Survey HRS. We show that the appeal option increases the award probability from 46% to 73%. However, this comes at the cost of significant delays: the duration between application and award is over three times longer for those who are awarded benefits after one or more stages of appeal. Our results reveal the importance of self-selection in application and appeal decisions. In particular, an individual's self-assessed disability status emerges as one of the most powerful predictors of application, appeal, and award decisions.
are especially grateful to an anonymous contact at a U.S. steel service center (i.e., a steel "mi... more are especially grateful to an anonymous contact at a U.S. steel service center (i.e., a steel "middleman") who gave us access to confidential data on steel prices and inventories that initiated our inquiry into this topic. We are grateful for financial support from National Science Foundation grant 9905145. Any opinions, findings, and conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of the National Science Foundation. The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research.
work was made possible by the financial support of the Economic Research Initiative on the Uninsu... more work was made possible by the financial support of the Economic Research Initiative on the Uninsured at the University of Michigan. The authors also gratefully acknowledge additional financial support from the National Institute on Aging under grant 1 P01 AG022481-01A1. Ben´ıtez-Silva is grateful for the hospitality of the Departments of Economics of the University of Maryland and Universitat Pompeu Fabra during the completion of this paper, and to the Fundaci´on BBVA for financial support. We thank the staff of the University of Michigan Survey Research Center and the Health and Retirement Study for answering numerous questions. The opinions expressed in this paper are ours alone and do not represent the opinions of ERIU, or the Board of Governors of the Federal Reserve System or its staff. This paper analyzes the dynamics of health insurance coverage, health expenditures, and health status in the decade expanding from 1992 to 2002, for a cohort of older Americans. We follow 13,594...
We present a dynamic extension of the classic static model of Bertrand price competition that all... more We present a dynamic extension of the classic static model of Bertrand price competition that allows competing duopolists to undertake cost-reducing investments in an attempt to "leapfrog" their rival and attain, at least temporarily, low-cost leadership. The model resolves a paradox about investing in the presence of Bertrand price competition: if both firms simultaneously invest in the current state-of-the-art production technology and thereby attain the same marginal cost of production, the resulting price competition drives the price down to marginal cost and profits to zero. Thus, it would seem that neither firm can profit from undertaking the cost-reducing investment, so the firms should not have any incentive to undertake cost-reducing investments if they are Bertrand price competitors. We show this simple intuition is incorrect. We formulate a dynamic model of price and investment competition as a Markov-perfect equilibrium to a dynamic game. We show that even when...
This paper analyzes the dynamics of health insurance coverage, health expenditures, and health st... more This paper analyzes the dynamics of health insurance coverage, health expenditures, and health status in the decade expanding from 1992 to 2002, for a cohort of older Americans. We follow 13,594 individuals interviewed in Waves 1 to 6 of the Health and Retirement Study, most of whom were born between 1930 and 1940, as they transition from work into retirement. Although this i?½depression cohorti?½ is by and large fairly well prepared for retirement in terms of pension coverage and savings, we identify significant gaps in their health insurance coverage, especially among the most disadvantaged members of this cohort. We find that government health insurance programsi?½particularly Medicare and Medicaidi?½significantly reduce the number of individuals who are uninsured and the risks of large out of pocket health care costs. However, prior to retirement large numbers of these respondents were uninsured, nearly 18% at the first survey in 1992. Moreover, a much larger share, about 55% of...
We consider the problem of estimating stochastic processes that are endogenously sampled. We obse... more We consider the problem of estimating stochastic processes that are endogenously sampled. We observe a discrete-time stochastic process {p t } at a subset of times {t 1 ,. .. ,t n } that depend on the outcome of a probabilistic sampling rule that depends on the history of the process as well as other observed covariates x t. We focus on a particular example where p t is the daily wholesale price of a standardized steel product. The endogenous sampling problem arises from the fact that the firm only records p t on the days that it purchases steel. We present a parametric analysis of this problem under the assumption that the timing of steel purchases is part of an optimal trading strategy that maximizes expected discounted profits. We show that estimation of this model is both tractable and simple using the method of simulated moments (MSM) where censored simulations of the price process are used instead of high dimensional numerical integration of a likelihood function. We use the MSM estimator to estimate a truncated lognormal AR(1) model of the wholesale price processes for particular types of steel plate but find the model is rejected by specification tests. We provide evidence that suggests that one reason for this rejection may be that one of the key assumptions underlying our model is invalid, namely that the firm we study maximizes expected discounted profits.
We present a fast and accurate computational method for solving and estimating a class of dynamic... more We present a fast and accurate computational method for solving and estimating a class of dynamic programming models with discrete and continuous choice variables. The solution method we develop for structural estimation extends the endogenous grid-point method (EGM) to discrete-continuous (DC) problems. Discrete choices can lead to kinks in the value functions and discontinuities in the optimal policy rules, greatly complicating the solution of the model. We show how these problems are ameliorated in the presence of additive choice-specific independent and identically distributed extreme value taste shocks that are typically interpreted as "unobserved state variables" in structural econometric applications, or serve as "random noise" to smooth out kinks in the value functions in numerical applications. We present Monte Carlo experiments that demonstrate the reliability and efficiency of the DC-EGM algorithm and the associated maximum likelihood estimator for structural estimation of a life-cycle model of consumption with discrete retirement decisions.
† Benítez-Silva and Hitsch are grateful for the financial support of the Cowles Foundation for Re... more † Benítez-Silva and Hitsch are grateful for the financial support of the Cowles Foundation for Research in Economics through a Carl Arvid Anderson Dissertation Fellowship. Benítez-Silva is also grateful to the John Perry Miller Fund for additional financial support. Hall and Rust gratefully acknowledge financial support from a National Science Foundation grant, SES-9905145. Pauletto gratefully acknowledges financial support from the Swiss National Science Foundation grant 8210-50418.
We revisit the comparison of mathematical programming with equilibrium constraints (MPEC) and nes... more We revisit the comparison of mathematical programming with equilibrium constraints (MPEC) and nested fixed point (NFXP) algorithms for estimating structural dynamic models by Su and Judd (SJ, 2012). Their implementation of the nested fixed point algorithm used successive approximations to solve the inner fixed point problem (NFXP-SA). We redo their comparison using the more efficient version of NFXP proposed by Rust (1987), which combines successive approximations and Newton-Kantorovich iterations to solve the fixed point problem (NFXP-NK). We show that MPEC and NFXP are similar in speed and numerical performance when the more efficient NFXP-NK variant is used.
Recruitment, Retention and Retirement in Higher Education, 2005
This paper considers the effect of retiree health insurance coverage on retirement decisions of a... more This paper considers the effect of retiree health insurance coverage on retirement decisions of academics, and attempts to answer two key questions of interest in this conference volume: 1) how do retiree health insurance plans affect retirement decisions? and 2) if retiree health plans are cut back or eliminated, by how much will faculty delay their retirements? I argue that the risk of uninsured health care costs is a major consideration affecting faculty retirement decisions, and via computer simulations, I show that naive attempts to cut costs by eliminating retiree health insurance can end up increasing rather than saving total costs of compensation, since it induces faculty to delay retirement and thus increases the cost of wages, health insurance and other fringe benefits over longer employment durations. These issues are of increasing relevance, since the rapid rise health care costs and health insurance premiums is putting increasing pressure on employers to limit health insurance coverage, or in some cases to eliminate retiree health plans altogether. Thus, colleges and universities face a difficult cost/benefit tradeoff in designing retirement and compensation packages. This paper develops a prototype "life cycle model" of a faculty member's retirement decision that accounts for the incentives created by their pension plan provisions (including defined benefit and defined contribution plans), the effect of private and public disability insurance plans, and the provisions of their health insurance coverage-both while employed as well as their retiree health insurance coverage, if any, during retirement. I use this model to illustrate the important impact of changes in retiree health insurance coverage on retirement decisions, in experiments that predict by how much academics will delay retirement if retiree health insurance is eliminated, or the level of coverage is reduced. I use the model to perform cost/benefit calculations from the standpoint of an academic institution as to whether it is more cost effective to provide more generous retiree health insurance coverage or limit these benefits in various ways. I show that there are "compromise packages" such as continuing retiree health insurance until Medicare eligiblity age (currently age 65), that are significantly less costly than the policy of providing retiree health insurance regardless of age, or eliminating retiree health insurance benefits altogether.
This essay reviews Kenneth I. Wolpin's (2013) monograph The Limits of Inference without Theor... more This essay reviews Kenneth I. Wolpin's (2013) monograph The Limits of Inference without Theory, which arose from lectures he presented at the Cowles Foundation in 2010 in honor of Tjalling Koopmans. While I readily agree with Wolpin's basic premise that empirical work that eschews the role of economic theory faces unnecessary self-imposed limits relative to empirical work that embraces and tries to test and improve economic theory, it is important to be aware that the use of economic theory is not a panacea. I point out that there are also serious limits to inference with theory: 1) there may be no truly “structural” (policy invariant) parameters, a key assumption underpinning the structural econometric approach that Wolpin and the Cowles Foundation have championed; 2) there is a curse of dimensionality that makes it very difficult for us to elucidate the detailed implications of economic theo- ries, which is necessary to empirically implement and test these theories; 3) the...
We construct an intertemporal model of rent-maximizing behaviour on the part of a timber harveste... more We construct an intertemporal model of rent-maximizing behaviour on the part of a timber harvester under potentially multi-dimensional risk as well as geographical het- erogeneity. Subsequently, we use recursive methods (in particular, the method of dy- namic programming) to characterize the optimal policy function, the rent-maximizing timber-harvesting profile. One noteworthy feature of our application is the unique and detailed information we have organized in the form of a dynamic geographical information system to account for site-specific cost heterogeneity in harvesting and transportation as well as uneven-aged stand dynamics in timber growth and yield across space and time in the presence of stochastic lumber prices. Our model is a powerful tool with which to investigate issues of aggregation and to understand the evident cycles that are predicted in harvesting under our assumptions.
This study reviews one of the unresolved research puzzles in corporate finance; why do companies ... more This study reviews one of the unresolved research puzzles in corporate finance; why do companies pay dividends? In this context, a qualitative study dealing with content analysis is carried out based on theoretical and empirical researches. After critically reviewing 407 research articles in dividend policy, 50 empirical studies were taken as the sample based on relevance to the research puzzle. The content analysis provides some significant insights and stylized facts with regard to the corporate dividend policy. However, the research conducted is fundamentally flawed in its design which is based on quantitative approaches in order to elucidate a behavioural explanation. As a result, most of the study findings cannot be relied upon to see consistency with the theories in question.Despite years of theoretical and empirical evidences, the findings show that the dividend puzzle still remains as an unresolved research phenomenon in corporate finance due to lack of unanimity among the researchers over the explanations. This study provides the reader with an all-embracing understanding of the theories and empirical explanations of the dividend puzzle. It is imperative for the researchers to focus on all empirical and theoretical explanations in a single study and test them simultaneously using a triangular approach in order to have a single consensus over this puzzle. Thus, developing a new paradigm or models to deal with the dividend puzzle is suggested and until then, the deduction of various theories in different studies is inconclusive and inconsistent.
This paper presents an empirical analysis of job search behavior among older Americans using the ... more This paper presents an empirical analysis of job search behavior among older Americans using the Health and Retirement Study. Increasing longevity, improving health conditional on age, increasing labor supply flexibility stemming from an increase in part-time work, self-employment and the use of technological advances to promote second careers, and increasing labor force participation, make the study of search behavior at the end of the life cycle an important research topic. The analysis shows that older Americans actively search for new jobs, both on-the-job and when out of work, and that previous work attachment and health limitations are key to understanding the different job search behavior of employed and nonemployed individuals, as well as males and females.
This paper presents an "audit" of the multistage application and appeal process that the U.S. Soc... more This paper presents an "audit" of the multistage application and appeal process that the U.S. Social Security Administration (SSA) uses to determine eligibility for disability benefits from the Disability Insurance (DI) and Supplemental Security Income (SSI) programs. We study a subset of individuals from the Health and Retirement Study (HRS) who applied for DI or SSI benefits between 1992 and 1996. We compare the SSA's ultimate award decision (i.e. after allowing for appeals) to the applicant's self-reported disability status. We use these data to estimate classification error rates under the hypothesis that applicants' self-reported disability status and the SSA's ultimate award decision are noisy but unbiased indicators of, a latent "true disability status" indicator. We find that approximately 20\% of SSI/DI applicants who are ultimately awarded benefits are not disabled, and that 60\% of applicants who were denied benefits are disabled. Our analysis also yields insights into the patterns of self-selection induced by varying delays and award probabilities at various levels of the application and appeal process. We construct an optimal statistical screening rule using a subset of objective health indicators that the SSA uses in making award decisions that results in significantly lower classification error rates than does SSA's current award process.
We provide an empirical analysis of the Social Security disability application, award, Ž. and app... more We provide an empirical analysis of the Social Security disability application, award, Ž. and appeal process using the Health and Retirement Survey HRS. We show that the appeal option increases the award probability from 46% to 73%. However, this comes at the cost of significant delays: the duration between application and award is over three times longer for those who are awarded benefits after one or more stages of appeal. Our results reveal the importance of self-selection in application and appeal decisions. In particular, an individual's self-assessed disability status emerges as one of the most powerful predictors of application, appeal, and award decisions.
are especially grateful to an anonymous contact at a U.S. steel service center (i.e., a steel "mi... more are especially grateful to an anonymous contact at a U.S. steel service center (i.e., a steel "middleman") who gave us access to confidential data on steel prices and inventories that initiated our inquiry into this topic. We are grateful for financial support from National Science Foundation grant 9905145. Any opinions, findings, and conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of the National Science Foundation. The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research.
work was made possible by the financial support of the Economic Research Initiative on the Uninsu... more work was made possible by the financial support of the Economic Research Initiative on the Uninsured at the University of Michigan. The authors also gratefully acknowledge additional financial support from the National Institute on Aging under grant 1 P01 AG022481-01A1. Ben´ıtez-Silva is grateful for the hospitality of the Departments of Economics of the University of Maryland and Universitat Pompeu Fabra during the completion of this paper, and to the Fundaci´on BBVA for financial support. We thank the staff of the University of Michigan Survey Research Center and the Health and Retirement Study for answering numerous questions. The opinions expressed in this paper are ours alone and do not represent the opinions of ERIU, or the Board of Governors of the Federal Reserve System or its staff. This paper analyzes the dynamics of health insurance coverage, health expenditures, and health status in the decade expanding from 1992 to 2002, for a cohort of older Americans. We follow 13,594...
We present a dynamic extension of the classic static model of Bertrand price competition that all... more We present a dynamic extension of the classic static model of Bertrand price competition that allows competing duopolists to undertake cost-reducing investments in an attempt to "leapfrog" their rival and attain, at least temporarily, low-cost leadership. The model resolves a paradox about investing in the presence of Bertrand price competition: if both firms simultaneously invest in the current state-of-the-art production technology and thereby attain the same marginal cost of production, the resulting price competition drives the price down to marginal cost and profits to zero. Thus, it would seem that neither firm can profit from undertaking the cost-reducing investment, so the firms should not have any incentive to undertake cost-reducing investments if they are Bertrand price competitors. We show this simple intuition is incorrect. We formulate a dynamic model of price and investment competition as a Markov-perfect equilibrium to a dynamic game. We show that even when...
This paper analyzes the dynamics of health insurance coverage, health expenditures, and health st... more This paper analyzes the dynamics of health insurance coverage, health expenditures, and health status in the decade expanding from 1992 to 2002, for a cohort of older Americans. We follow 13,594 individuals interviewed in Waves 1 to 6 of the Health and Retirement Study, most of whom were born between 1930 and 1940, as they transition from work into retirement. Although this i?½depression cohorti?½ is by and large fairly well prepared for retirement in terms of pension coverage and savings, we identify significant gaps in their health insurance coverage, especially among the most disadvantaged members of this cohort. We find that government health insurance programsi?½particularly Medicare and Medicaidi?½significantly reduce the number of individuals who are uninsured and the risks of large out of pocket health care costs. However, prior to retirement large numbers of these respondents were uninsured, nearly 18% at the first survey in 1992. Moreover, a much larger share, about 55% of...
We consider the problem of estimating stochastic processes that are endogenously sampled. We obse... more We consider the problem of estimating stochastic processes that are endogenously sampled. We observe a discrete-time stochastic process {p t } at a subset of times {t 1 ,. .. ,t n } that depend on the outcome of a probabilistic sampling rule that depends on the history of the process as well as other observed covariates x t. We focus on a particular example where p t is the daily wholesale price of a standardized steel product. The endogenous sampling problem arises from the fact that the firm only records p t on the days that it purchases steel. We present a parametric analysis of this problem under the assumption that the timing of steel purchases is part of an optimal trading strategy that maximizes expected discounted profits. We show that estimation of this model is both tractable and simple using the method of simulated moments (MSM) where censored simulations of the price process are used instead of high dimensional numerical integration of a likelihood function. We use the MSM estimator to estimate a truncated lognormal AR(1) model of the wholesale price processes for particular types of steel plate but find the model is rejected by specification tests. We provide evidence that suggests that one reason for this rejection may be that one of the key assumptions underlying our model is invalid, namely that the firm we study maximizes expected discounted profits.
We present a fast and accurate computational method for solving and estimating a class of dynamic... more We present a fast and accurate computational method for solving and estimating a class of dynamic programming models with discrete and continuous choice variables. The solution method we develop for structural estimation extends the endogenous grid-point method (EGM) to discrete-continuous (DC) problems. Discrete choices can lead to kinks in the value functions and discontinuities in the optimal policy rules, greatly complicating the solution of the model. We show how these problems are ameliorated in the presence of additive choice-specific independent and identically distributed extreme value taste shocks that are typically interpreted as "unobserved state variables" in structural econometric applications, or serve as "random noise" to smooth out kinks in the value functions in numerical applications. We present Monte Carlo experiments that demonstrate the reliability and efficiency of the DC-EGM algorithm and the associated maximum likelihood estimator for structural estimation of a life-cycle model of consumption with discrete retirement decisions.
† Benítez-Silva and Hitsch are grateful for the financial support of the Cowles Foundation for Re... more † Benítez-Silva and Hitsch are grateful for the financial support of the Cowles Foundation for Research in Economics through a Carl Arvid Anderson Dissertation Fellowship. Benítez-Silva is also grateful to the John Perry Miller Fund for additional financial support. Hall and Rust gratefully acknowledge financial support from a National Science Foundation grant, SES-9905145. Pauletto gratefully acknowledges financial support from the Swiss National Science Foundation grant 8210-50418.
We revisit the comparison of mathematical programming with equilibrium constraints (MPEC) and nes... more We revisit the comparison of mathematical programming with equilibrium constraints (MPEC) and nested fixed point (NFXP) algorithms for estimating structural dynamic models by Su and Judd (SJ, 2012). Their implementation of the nested fixed point algorithm used successive approximations to solve the inner fixed point problem (NFXP-SA). We redo their comparison using the more efficient version of NFXP proposed by Rust (1987), which combines successive approximations and Newton-Kantorovich iterations to solve the fixed point problem (NFXP-NK). We show that MPEC and NFXP are similar in speed and numerical performance when the more efficient NFXP-NK variant is used.
Recruitment, Retention and Retirement in Higher Education, 2005
This paper considers the effect of retiree health insurance coverage on retirement decisions of a... more This paper considers the effect of retiree health insurance coverage on retirement decisions of academics, and attempts to answer two key questions of interest in this conference volume: 1) how do retiree health insurance plans affect retirement decisions? and 2) if retiree health plans are cut back or eliminated, by how much will faculty delay their retirements? I argue that the risk of uninsured health care costs is a major consideration affecting faculty retirement decisions, and via computer simulations, I show that naive attempts to cut costs by eliminating retiree health insurance can end up increasing rather than saving total costs of compensation, since it induces faculty to delay retirement and thus increases the cost of wages, health insurance and other fringe benefits over longer employment durations. These issues are of increasing relevance, since the rapid rise health care costs and health insurance premiums is putting increasing pressure on employers to limit health insurance coverage, or in some cases to eliminate retiree health plans altogether. Thus, colleges and universities face a difficult cost/benefit tradeoff in designing retirement and compensation packages. This paper develops a prototype "life cycle model" of a faculty member's retirement decision that accounts for the incentives created by their pension plan provisions (including defined benefit and defined contribution plans), the effect of private and public disability insurance plans, and the provisions of their health insurance coverage-both while employed as well as their retiree health insurance coverage, if any, during retirement. I use this model to illustrate the important impact of changes in retiree health insurance coverage on retirement decisions, in experiments that predict by how much academics will delay retirement if retiree health insurance is eliminated, or the level of coverage is reduced. I use the model to perform cost/benefit calculations from the standpoint of an academic institution as to whether it is more cost effective to provide more generous retiree health insurance coverage or limit these benefits in various ways. I show that there are "compromise packages" such as continuing retiree health insurance until Medicare eligiblity age (currently age 65), that are significantly less costly than the policy of providing retiree health insurance regardless of age, or eliminating retiree health insurance benefits altogether.
This essay reviews Kenneth I. Wolpin's (2013) monograph The Limits of Inference without Theor... more This essay reviews Kenneth I. Wolpin's (2013) monograph The Limits of Inference without Theory, which arose from lectures he presented at the Cowles Foundation in 2010 in honor of Tjalling Koopmans. While I readily agree with Wolpin's basic premise that empirical work that eschews the role of economic theory faces unnecessary self-imposed limits relative to empirical work that embraces and tries to test and improve economic theory, it is important to be aware that the use of economic theory is not a panacea. I point out that there are also serious limits to inference with theory: 1) there may be no truly “structural” (policy invariant) parameters, a key assumption underpinning the structural econometric approach that Wolpin and the Cowles Foundation have championed; 2) there is a curse of dimensionality that makes it very difficult for us to elucidate the detailed implications of economic theo- ries, which is necessary to empirically implement and test these theories; 3) the...
We construct an intertemporal model of rent-maximizing behaviour on the part of a timber harveste... more We construct an intertemporal model of rent-maximizing behaviour on the part of a timber harvester under potentially multi-dimensional risk as well as geographical het- erogeneity. Subsequently, we use recursive methods (in particular, the method of dy- namic programming) to characterize the optimal policy function, the rent-maximizing timber-harvesting profile. One noteworthy feature of our application is the unique and detailed information we have organized in the form of a dynamic geographical information system to account for site-specific cost heterogeneity in harvesting and transportation as well as uneven-aged stand dynamics in timber growth and yield across space and time in the presence of stochastic lumber prices. Our model is a powerful tool with which to investigate issues of aggregation and to understand the evident cycles that are predicted in harvesting under our assumptions.
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