nep-ppm New Economics Papers
on Project, Program and Portfolio Management
Issue of 2012‒03‒28
eight papers chosen by
Arvi Kuura
Parnu College - Tartu University

  1. Reaching an Optimal Mark-Up Bid through the Valuation of the Option to Sign the Contract by the Successful Bidder By João Adelino Ribeiro; Paulo Jorge Pereira; Elísio Brandão
  2. Global Co-Evolution of Firm Boundaries: Process Commoditization, Capabilities Development, and Path Dependencies By Stephan Manning; Silvia Massini; Carine Peeters; Arie Lewin
  3. Seeking Alpha: Excess Risk Taking and Competition for Managerial Talent By Acharya, Viral V; Pagano, Marco; Volpin, Paolo
  4. Do Public Work Schemes Deter or Encourage Outmigration? Empirical Evidence from China By Chau, Nancy H; Kanbur, Ravi; Qin, Yu
  5. Grant financing of metropolitan areas : a review of principles and worldwide practices By Shah, Anwar
  6. Why uncertainty matters - discounting under intertemporal risk aversion and ambiguity By Traeger, Christian P.
  7. Team Incentives: Evidence from a Firm Level Experiment By Bandiera, Oriana; Barankay, Iwan; Rasul, Imran
  8. Balanced skills among nascent entrepreneurs By Stuetzer, Michael; Obschonka, Martin; Schmitt-Rodermund, Eva

  1. By: João Adelino Ribeiro (Faculdade de Economia, Universidade do Porto, Portugal); Paulo Jorge Pereira (CEF.UP, Faculdade de Economia, Universidade do Porto, Portugal); Elísio Brandão (Faculdade de Economia, Universidade do Porto, Portugal)
    Abstract: This paper aims to establish a support decision model by which an optimal mark-up (profit margin) in the context of a bidding process is reached through the valuation of the option to sign the contract assuming the contractor is chosen to perform the project. The price included in the bid proposal remains unchanged from the moment the offer is sealed until the contractor has the right - but not the obligation - to sign the contract, whereas construction costs vary stochastically throughout the period. Contractors should only sign the contract if the construction costs, at that moment, are lower than the price previously defined. We evaluate the option using an adapted version of the Margrabe (1978) exchange option formula and we also assign a probability of winning the bid for each profit margin using a function that respects the inverse relationship between these two variables. We conclude that to the higher value of the option - weighted by the probability of winning the contract - corresponds the optimal mark-up bid. Finally, we consider the existence of penalty costs which makes the model more efficient in explaining what actually takes place in some legal environments; we then conclude that the option to sign the contract and, therefore, the optimal mark-up bid are affected by their existence.
    Keywords: Optimal bidding; real options; construction projects; price determination
    JEL: G31 D81
    Date: 2012–03
  2. By: Stephan Manning; Silvia Massini; Carine Peeters; Arie Lewin
    Abstract: This paper studies the co-evolution of firm boundaries and capabilities by examining the influence and interplay of process commoditization, changing external availability of capabilities and firm specific paths of governance decisions, along with strategic drivers guiding these decisions. We test hypotheses on a unique and comprehensive panel of global services sourcing projects from early experiments in 1980s through 2011. Our findings suggest that initial firm governance decisions are strongly influenced by process commoditization, external availability of services, and firm strategic objectives. With experience, governance decisions are primarily affected by past decisions and emerging – internal and/or external – sourcing capabilities. The results indicate persistent heterogeneity of boundary configurations as firm and supplier capabilities develop and differentiate over time.
    Keywords: Disintegration; task commoditization; global service providers; capabilities; path dependence; global sourcing
    Date: 2012–03
  3. By: Acharya, Viral V; Pagano, Marco; Volpin, Paolo
    Abstract: We present a model of labor market equilibrium in which managers are risk-averse, managerial talent (‘alpha’) is scarce, and firms seek alpha, that is, compete for this talent. When managers are not mobile across firms, firms provide efficient long-term compensation, which allows for learning about managerial talent and insures low-quality managers. In contrast, when managers can move across firms, high-quality managers can fully extract the rents arising from their skill, which prevents firms from providing co-insurance among their employees. In anticipation, risk-averse managers may churn across firms before their performance is fully learnt and thereby prevent their efficient choice of projects. The result is excessive risk-taking with pay for short-term performance and build up of long-term risks. We conclude with analysis of policies to address the resulting inefficiency in firms' compensation.
    Keywords: executive compensation; managerial talent; managerial turnover; short-termism
    JEL: D62 G32 G38 J33
    Date: 2012–03
  4. By: Chau, Nancy H; Kanbur, Ravi; Qin, Yu
    Abstract: How does the introduction of rural public work schemes impact individual incentives to migrate? This paper examines this question in the context of rural public work program (Yigong-daizhen) in China, and unveils empirical evidence that suggest that the introduction of Yigong-daizhen projects in fact stimulates outmigration at the village level, after controlling for village characteristics and project types. By furthermore accounting for the endogeneity of Yigong-daizhen placement, the impact of such projects is found to be even larger. These results are consistent with household migration behavior in the presence of significant cost of migration, and credit market imperfection.
    Keywords: Outmigration; Public Works Schemes; Rural China
    JEL: H53 J43 O15
    Date: 2012–01
  5. By: Shah, Anwar
    Abstract: In the new information age in the globalized and interconnected world, metropolitan areas hold the key to the future prosperity and growth of nations. This paper takes a closer look at grant-financing regimes faced by metropolitan areas and their role in facilitating or hindering improvements in economic and social outcomes of residents of metropolitan areas. A review of 42 large metropolitan areas worldwide shows that, with a few notable exceptions, metropolitan areas in general are hamstrung from playing their potential role in economic advancement. Metro areas have large economic bases and therefore little a priori needs for grant financing, yet they have strong dependence on central transfers. This is because of the highly constrained fiscal autonomy given to these areas, especially in developing countries, with the singular exception of metro areas in China. Such a strong reliance on transfers undermines local autonomy and local accountability. General purpose transfers are formula based , transparent and predictable yet they discriminate against metropolitan areas as they utilize a one size fit all (common formula) for all local governments -- large or small. Such formula typically incorporate equal per jurisdiction component that discriminates against large metropolitan areas. Compactness is rarely rewarded and the greater needs of metro areas for transportation, education, health, culture and welfare go unrecognized. Overall the emphasis in grant financing of metro areas deals with vertical fiscal gaps or project based specific purpose grants. To ensure that metropolitan areas can play their dual roles in improving economic and social outcomes for residents, it is important to strengthen their fiscal autonomy while at the same time enhancing their accountability to local residents. The paper argues that results based grant financing of social and transportation services and tournament based approaches to encourage inter-jurisdictional competition need to be given serious consideration to ensure metropolitan autonomy while strengthening citizen based accountability.
    Keywords: Municipal Financial Management,Subnational Economic Development,Public Sector Economics,Access to Finance,Public Sector Management and Reform
    Date: 2012–03–01
  6. By: Traeger, Christian P.
    Abstract: Uncertainty has an almost negligible impact on project value in the economicstandard model. I show that a comprehensive evaluation of uncertainty and uncertainty attitude changes this picture fundamentally. The analysis relies on the discount rate, which is the crucial determinant in balancing immediate costs against future benefits and the single most important determinant of optimal mitigation  policies in the integrated assessment of climate change. The paper examines two shortcomings in the recent debate and the current models addressing climate change assessment. First, removing an implicit assumption of (intertemporal) risk neutrality reduces the growth effect in social discounting and significantly amplifies the importance of risk and correlation. Second, debate and models largely overlook the difference in attitude with respect to risk and with respect to non-risk uncertainty. The paper derives the resulting changes of the risk-free and the stochastic social discount rate and points out the importance of even thin tailed uncertainty for climate change evaluation. It discusses combinations ofuncertainty and correlation that reduce the social discount rate to pure preference. In a theoretical contribution, the paper extends the smooth ambiguity model by providing a threefold disentanglement between, risk aversion, ambiguity aversion, and the propensityto smooth consumption over time.
    Keywords: ambiguity, climate change, cost benefit analysis, discounting, intertemporal substitutability, risk aversion, uncertainty, Agricultural and Resource Economics, Natural Resources and Conservation
    Date: 2012–01–26
  7. By: Bandiera, Oriana; Barankay, Iwan; Rasul, Imran
    Abstract: Many organizations rely on teamwork, and yet field evidence on the impacts of team-based incentives remains scarce. Compared to individual incentives, team incentives can affect productivity by changing both workers’ effort and team composition. We present evidence from a field experiment designed to evaluate the impact of rank incentives and tournaments on the productivity and composition of teams. Strengthening incentives, either through rankings or tournaments, makes workers more likely to form teams with others of similar ability instead of with their friends. Introducing rank incentives however reduces average productivity by 14%, whereas introducing a tournament increases it by 24%. Both effects are heterogeneous: rank incentives only reduce the productivity of teams at the bottom of the productivity distribution, and monetary prize tournaments only increase the productivity of teams at the top. We interpret these results through a theoretical framework that makes precise when the provision of team-based incentives crowds out the productivity enhancing effect of social connections under team production.
    Keywords: rank incentives; team-based incentives; teams; tournaments
    JEL: D23 J33 M52
    Date: 2012–01
  8. By: Stuetzer, Michael; Obschonka, Martin; Schmitt-Rodermund, Eva
    Abstract: This paper examines the effects and origins of balanced skills among nascent entrepreneurs. In a first step we apply Lazear’s jack-of-all-trades theory to investigate performance effects of a balanced skill set. Second, we investigate potential sources of balanced skills, thereby testing the investment hypothesis against the endowment hypothesis. Analyzing data on high-potential nascent projects, we find support for the notion that balanced skills are important for making progress in the venture creation process. Regarding the origins of balanced skills, the data support both hypotheses. In line with the investment hypothesis an early interest in an entrepreneurial career, prior managerial and entrepreneurial experience are significantly related with a more balanced skill set. Supporting the endowment hypothesis, an entrepreneurial personality profile indicating entrepreneurial talent is correlated with a balanced skill set. Our results thus hint at the need for theories on the origins of a balanced skill set that integrate both views.
    Keywords: Nascent entrepreneurship; balanced skills; human capital; new venture creation; entrepreneurship
    JEL: L26 J24 M13
    Date: 2012–02–01

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