Karl Schmedders

Kubler, Felix and Karl Schmedders. 2010. Non-Parametric Counterfactual Analysis in Dynamic General Equilibrium. Economic Theory. 45

In this paper we examine non-parametric restrictions on counterfactual analysis in a simple dynamic stochastic general equilibrium model. Under the assumption of time-separable expected utility and complete markets all equilibria in this model are stationary, the Arrow-Debreu prices uniquely reveal the probabilities and discount factor and the equilibrium correspondence defined as the map from endowments to stationary (probability-free) state prices, is identical to the equilibrium correspondence in a standard Arrow-Debreu exchange economy with additively separable utility. We examine observable restriction on this correspondence and give necessary as well as sufficient conditions on profiles of individual endowments that ensure that associated equilibrium prices cannot be arbitrary. While often there are restrictions on possible price changes we also show that in most cases results from a single agent economy do not carry over to a setting with heterogeneous agents.

Earle, Robert L., Karl Schmedders and Tymon Tatur. 2007. On Price Caps under Uncertainty. Review of Economic Studies. 74(1): 93-111.

This paper shows how standard arguments supporting the imposition of price caps break down in the presence of demand uncertainty. In particular, though in the deterministic case the introduction or lowering of a price cap (above marginal cost) results in increased production, increased total welfare, decreased prices, and increased consumer welfare, we show that all of the above comparative statics predictions fail for generic uncertain demand functions. For example, for price caps sufficiently close to marginal cost, a decrease in the price cap always leads to a decrease in production and total welfare under certain mild conditions. Under stronger regularity assumptions, all of the monotone comparative statics predictions from the deterministic case also do not hold for a generic uncertain demand if we restrict attention to price caps in an arbitrary fixed interval (as long as the price caps are binding for some values in that interval).

Kubler, Felix and Karl Schmedders. 2001. Incomplete Markets, Transitory Shocks, and Welfare. Review of Economic Dynamics. 4(4): 747-766.

Although equilibrium allocations in models with incomplete markets are generally not Pareto-efficient, it is often argued that quantitative welfare losses from missing assets are small when time horizons are long and shocks are transitory. In this paper we use a computational analysis to show that even in the simplest infinite horizon model without aggregate uncertainty welfare losses can be substantial. Furthermore we show that in this model welfare losses from incomplete markets do not necessarily disappear when one considers calibrations of the model in which agents become very patient. We argue that when the economic model is calibrated to higher frequency data, the period persistence of negative income shocks must increase as well. In this case the welfare loss of incomplete markets remains constant even as agents' rate of time preference tends to one.

Earle, Robert L. and Karl Schmedders. 2001. Demand Uncertainty and Risk-Aversion: Why Price Caps May Lead to Higher Prices.

Standard oligopoly theory suggests that price caps will tend to constrain the price of a good over the short-term and increase production. Firms become price-takers when the amount produced is less than where the price cap intersects the demand function. Recently imposed price caps in California, however, have resulted in anecdotal evidence that suggests that this might not always be the case. Typical explanations for increases in price and decreases in production are sociological and psychological in nature. While these lines of reasoning may go a long way in explaining the observed fact, the absence of an economic explanation is rather unsatisfying. In this note we give such an economic explanation by examining a simple economic model. We enhance a standard Cournot model through the introduction of demand uncertainty and agents' risk aversion. Multiple examples show that the introduction of a price cap in this model may indeed lead to higher prices and lower production quantities. Very interestingly, even a price cap set above the equilibrium prices obtained with no price cap, can result in lower output and higher prices.

Schmedders, Karl, Charlotte Snyder and Ute Schaedel. 2012. Hollywood Rules. Case 5-111-012 (KEL700).

Wall Street hedge fund manager Kim Meyer is considering investing in an SFA (slate financing arrangement) in Hollywood. Dave Griffith, a Hollywood producer, is pitching for the investment and has conducted a broad analysis of recent movie data to determine the important drivers of a movie’s success. In order to convince Meyer to invest in an SFA, Griffith must anticipate possible questions to maximize his persuasiveness.

Schmedders, Karl, Russell Walker and Michael Stritch. 2010. Arbor City Community Foundation (B): Managing Good Fortune. Case 5-310-502(B) (KEL586).

The Arbor City Community Foundation (ACCF) was a medium-sized endowment established in the late 1970s through the hard work of several local families. The vision of the ACCF was to be a comprehensive center for philanthropy in the greater Arbor City region. ACCF had a fund balance (known collectively as “the Fund”) of just under $240 million. The ACCF board of trustees had appointed a committee to oversee investment decisions relating to the foundation assets. The investment committee, under the guidance of the board, pursued an active risk-management policy for the Fund. The committee members were primarily concerned with the volatility and distribution of portfolio returns. They relied on the Value-at-Risk (VaR) methodology as a measurement of the risk of both short- and mid-term investment losses.

The questions in part (A) of the case direct the students to analyze the risk inherent in both one particular asset and the entire ACCF portfolio. For this analysis the students need to calculate daily VaR and monthly VaR values and interpret these figures in the context of ACCF’s risk management.

In part (B) the foundation receives a major donation. As a result the risk inherent in its portfolio changes considerably. The students are asked to evaluate the risk of the fund’s new portfolio and to perform a portfolio rebalancing analysis.

Schmedders, Karl and I. Campbell Lyle. 2007. Fueling Sales at EuroPet. Case 5-307-505 (KEL368).

EuroPet S.A. was a multinational company operating gas stations in many European countries. There was a growing propensity for supermarkets to attach gas stations to their retail operations, which was developing into a major threat to EuroPet. As a result, in the mid-1990s, the company began to develop and brand its own convenience stores co-located with its gas stations. However, the company was spending much more on advertising the convenience stores than its competitors did. Management now had to decide if the increase in sales attributed to advertising efforts justified the advertising spend by analyzing the market data from one large metropolitan area: Marseille, France.

Schmedders, Karl, Charlotte Snyder and Sophie Tinz. 2013. Germany’s Bundesliga: Does Money Score Goals?. Case 5-113-002 (KEL754).

During one of the most nerve-wracking football matches of the 2012–2013 Bundesliga season, life-long friends Franz Dully and Max Vogel begin arguing about whether the wealth of a football club determines its success during the season. In order to disprove Vogel's claim that "money scores goals," Dully must analyze the Bundesliga's current market values, points earned, and mid-season leader data.

Rott, Armin and Karl Schmedders. 2008. Spiegel Online. Case 5-108-007 (KEL330).

Spiegel Online (www.spiegel.de) is the leading news Web site in Germany. The site was first designed to accompany Der Spiegel, one of Europe’s largest and Germany’s most influential weekly magazine, which has a weekly circulation of around one million. The site’s content is produced by a team of more than fifty journalists writing in several categories: politics, business, networld, panorama, arts and entertainment, science, university, school, sports, travel, weather, and automobiles. The original content is complemented by articles purchased from news agencies and selected articles from the print edition. Spiegel-Verlag is a major contributor to the Hamburg Media School, which offers professional master’s degree programs in Media Management (MBA), film, and journalism. In their second year, MBA students typically engage in consulting projects with major media companies. In a recent assignment, Spiegel Online posed two questions to the MBA team: are there any chances for an economically successful entry into the market for interactive classifieds? And if so, what should the business model look like in detail? A student team analyzed markets for classified ads and found one market segment that appeared to be particularly promising: the market for art objects. During the development of a business plan for a new venture in this market it became apparent that there is much uncertainty about the key input parameters to the business plan. As a result, it is very difficult to assess the viability of the business idea. How can the team properly account for the uncertain input parameters? What is the impact if this uncertainty on the bottom line? Will a Web site for art objects earn or lose money? How can the team communicate this uncertainty to a group of high-level decision makers who want a simple “go or no-go” recommendation?

Schmedders, Karl and Markus Schulze. 2016. Solid as Steel: Production Planning at thyssenkrupp. Case 5-215-250 (KEL942).

thyssenkrupp Steel Europe, a major European steel company, operates a so-called push-pickling line (PPL) in Bochum, Germany. The PPL produces a particular type of steel strips that are sold to B2B customers, mainly in the automotive industry. In spring 2014, a senior vice president of thyssenkrupp Steel's production operations and one of his production managers notice that over the span of ten years the production facility regularly did not meet its planned production volumes. They set out to determine the drivers for the deviations from planned production figures with the ultimate goal to improve the production planning process at the Bochum PPL. Students will step into the shoes of Markus Schulze—a production manager at thyssenkrupp Steel—as he searches for performance drivers at the Bochum PPL and analyzes recent production data to build a forecasting model for production planning.

Schmedders, Karl, Patrick Johnston and Charlotte Snyder. 2008. Milk and Money. Case 5-407-754 (KEL343).

The financial success of dairy farms depends critically on the price of their main output, milk. Large volatility in the price of milk poses a considerable business risk to dairy farms. This is particularly true for family-run dairy farms. The question then arises: how can a farm owner hedge the milk price risk? The standard approach to establish a price floor for a commodity such as milk is to purchase put options on commodity futures. At the Chicago Mercantile Exchange, farmers can buy put options on the price of a variety of milk products. However, the price a farm receives for its milk depends on many factors and is unique to the farm. Thus, a farmer cannot directly buy put options on the price he receives for the milk his farm produces. Instead the farmer needs to determine which of the options available for trade at the Chicago Mercantile Exchange offer the best hedge for his own milk price. The assignment in this case is to examine historical data on several prices of milk products and the milk price received by a family-run dairy farm in California. Students need to find the price that is most closely correlated to the farm's milk price and to then choose options with the appropriate strike price that serve as the best hedge for the farm's price risk.

Schmedders, Karl, Peter Eso, Peter Klibanoff and Graeme Hunter. 2006. Orangia Highways (A). Case 5-106-007(A) (KEL185).

The decision maker is in charge of procurement auctions at the department of transportation of Orangia (a fictitious U.S. state). Students are asked to assist him in estimating the winning bids in various auctions concerning highway repair jobs using data on past auctions. The decision maker is faced with various professional, statistical, and ethical dilemmas.

Schmedders, Karl, Russell Walker and Michael Stritch. 2010. Arbor City Community Foundation (A): The Foundation. Case 5-310-502(A) (KEL585).

The Arbor City Community Foundation (ACCF) was a medium-sized endowment established in the late 1970s through the hard work of several local families. The vision of the ACCF was to be a comprehensive center for philanthropy in the greater Arbor City region. ACCF had a fund balance (known collectively as “the Fund”) of just under $240 million. The ACCF board of trustees had appointed a committee to oversee investment decisions relating to the foundation assets. The investment committee, under the guidance of the board, pursued an active risk-management policy for the Fund. The committee members were primarily concerned with the volatility and distribution of portfolio returns. They relied on the Value-at-Risk (VaR) methodology as a measurement of the risk of both short- and mid-term investment losses.

The questions in part (A) of the case direct the students to analyze the risk inherent in both one particular asset and the entire ACCF portfolio. For this analysis the students need to calculate daily VaR and monthly VaR values and interpret these figures in the context of ACCF’s risk management.

In part (B) the foundation receives a major donation. As a result the risk inherent in its portfolio changes considerably. The students are asked to evaluate the risk of the fund’s new portfolio and to perform a portfolio rebalancing analysis.

Schmedders, Karl, Peter Eso, Peter Klibanoff and Graeme Hunter. 2006. Orangia Highways (B). Case 5-106-007(B) (KEL186).

In Case (B) models for computing optimal bids in highway procurement auctions are developed from the perspective of the bidders.

Schmedders, Karl, Peter Eso, Peter Klibanoff and Graeme Hunter. 2007. Pedigree vs. Grit: Predicting Mutual Fund Manager Performance. Case 5-407-755 (KEL396).

An asset management company must replace the manager of its two signature mutual funds, who is about to retire. Two candidates have been short-listed. The management team is divided and cannot decide which of the two candidates would make the better mutual fund manager. The retiring manager presents a linear regression model to examine success factors of mutual fund managers. This linear regression is the starting point for the subsequent analysis.