This paper documents that the earnings yield and book-to-price combine to predict equity returns in a way that is consistent with the rational pricing of risk. It is well known that earnings yields predict returns in the cross-section, consistent with standard formulas that show that the earnings yield equals the required return when there is no expected earnings growth beyond that from retenti...

In this paper we study the endogenous determination of monopoly price. Our proposed game of endogenous monopoly-price setting extends the literature on monopoly-price, monopoly rent-seeking contests and monopoly rentseeking rent-avoidance contests by (i) determining the monopoly price such that it maximizes a composite utility function that depends on two components: expected social welfare and...

Risk classification involves concepts similar to those in ratemaking (Chapter 3) and individual risk rating (Chapter 4). Actuaries use risk classification primarily in ratemaking when there is not sufficient information to estimate a price for a given individual. In order to derive a price, individuals who are expected to have the same costs are grouped together. The actuary then calculates a p...

We consider how to jointly set the price and capacity in order to maximize the steady-state expected profit in a GI/GI/1 queue with a high rate of prospective customer arrivals. We show that the optimal price and service rate for the GI/GI/1 queue are such that the system operates in heavy traffic. Then, since it is not possible to provide analytic expressions for the exact optimal price and se...

In many markets, consumers obtain price quotes before making purchases. This paper considers a fixed-sample size model of consumer search for price quotes when sellers must spend resources to learn the true cost of providing goods/services. It is found that (1) even with ex ante identical consumers and sellers, there is price dispersion in the equilibrium; (2) the expected equilibrium price can...

Using data from employer-provided health insurance and Medicare Part D, we investigate whether healthcare utilization responds to the dynamic incentives created by the nonlinear nature of health insurance contracts. We exploit the fact that, because annual coverage usually resets every January, individuals who join a plan later in the year face the same initial ("spot") price of healthcare but ...

A recent strategy carried out by the aircraft industry to reduce the total cost of the new generation fighters has consisted in the development of a single airframe with different technical and operational specifications. This strategy has been designed to reduce costs in the Research, Design and Development phase with the ultimate objective of reducing the final unit price per aircraft. This i...

In estimating the cost-effectiveness of diagnostic procedures, it is helpful to treat diagnostic information as a commodity with a unit price. The amount of useful information provided by a test result can be measured in binary units (bits), and the unit price of the information produced by the test result can be expressed in dollars per bit in much the same way that the price of gold is given ...

This paper estimates optimal hedging ratios for a Finnish spring wheat producer under price and yield uncertainty. The contract available for hedging fixes the price and quantity at the time of sowing for a delivery at harvest. Autoregressive models are used to obtain point forecasts for the conditional mean price and price volatility at harvest. Expected yield and yield volatility are estimate...