Stéphane Villeneuve was working in mathematical finance when he met Jean-Paul Décamps, Thomas Mariotti and Jean-Charles Rochet, who convinced him to join TSE: “they showed me that there were great mathematical pro- blems in industrial economics”, he explains. “Industrial economics syste- matically considers the friction inherent in the real world, whilst mathematical finance is based on a theoretical per- fect market.”
The Toulouse economists notably study friction due to information asymmetry and moral hazards, or moral risks, for example when an insurer cannot verify prevention put in place by the insured party. “I study principal-agent type dyna- mic problems in a quantitative manner.
This quantitative approach links proba- bility, control theory and optimisation and looks to describe contracts explicitly or in a digital manner.” These questions cover various fields: insurance, portfolio management and investment decisions.
Bonus-malus system for managers
The researcher has worked with quan- titative tools on issues including paying managers and refinancing companies: “with regards to manager payment, our results confirm that a bonus-ma- lus approach is best. The idea is to block manager payment in an escrow account which develops in line with performance. The manager receives payment only after a long period of success has been ob- served. Inversely, their area of action is reduced after poor results to limit losses linked to the manager’s decisions.” For company refinancing, Stéphane and his co-authors demonstrate that they each have a cash reserve threshold when it is in their interest to pay dividends to shareholders. This cash reserve buffer level helps avoid the use of the costly re- financing market when new investment opportunities arise. Stéphane has wor- ked with EDF R&D to build investment policy management tools “EDF wanted to understand how improved manage- ment of their liquid asset reserve could help them to finance their huge nuclear investments.”
Obscure algorithms
The dynamic and quantitative approach to industrial economics by Stéphane has a major advantage: it allows the analytical characterisation of optimal contracts through partial differential equations which require digital ap- proaches when the model becomes complex. Stéphane wants digital me- thods used in economics and finance to become more transparent: “many au- thors do not provide the code or even a description of the algorithm which al- lows them to obtain their digital results, therefore making their work unclear.” The researcher would like a greater number of reviews to verify digital methods used to prevent approximation or simulation errors. He notes progress, however, “some reviews have started to require an accurate description of digital me- thods and the provision of calculation codes before publishing research ar- ticles; it’s a good start.”
Extract of TSE Mag#17 Summer 2018
