Executive options with inflated equity prices

Purpose – The purpose of this paper is to solve the optimal managerial compensation problem when shareholders are either naïvely optimistic or rational. Design/methodology/approach – The paper uses applied game theory to derive the optimal CEO compensation package with over optimistic shareholders. Findings – The results suggest that boards of directors should decrease option grants to CEOs when equity is likely to be irrationally overvalued at the date when the CEO's options vest. Research limitations/implications – The implications of the model are consistent with the available empirical evidence. In addition, the model generates new testable predictions about managerial stock price manipulation, the number of options granted, and the magnitude of the options’ strike prices that have not yet been formally tested. Originality/value – This is the only paper to derive closed-form solutions to optimal CEO compensation when shareholders are naïvely optimistic.

Applied Game Theory in Business Analytics

In this chapter we introduce the concept of game theory and its use as a decision making tool in a competitive situation among players. We define and describe some different types of games and solution methodologies. We present the assumptions regarding these different types of game. We define and represent the different types of games between two players as either total conflict or partial conflict. We present solution techniques to both total conflict and partial conflict games. We present both pure strategy and mixed strategy solutions. We discuss the Nash equilibrium.

Research on Strategies of Pricing and Coordinating in Reverse Supply Chain for Remanufacturing

Based on the remanufacturing reverse supply chain consisted of single retailer and single manufacturer, this paper applied game theory to establish a non-cooperative game and cooperative game model and got optimal pricing strategy by solving this two kinds of game model. By comparing the total profits of reverse supply chain in every game model, a conclusion was draw that non-cooperative game model led to profit loss and double marginal effect. In order to solve the problems, revenue sharing contract was used to coordinate the reverse supply chain and coordinating strategy was got. The results show that revenue sharing contract can increase the total profits of the reverse supply chain, while at the same time meet the respective interests of retailer and manufacturer and coordinate the reverse supply chain.