Information Technology Reference
In-Depth Information
The scenario subjects have to interact with is described as follows. Subjects are
asked to manage a virtual operating firm. Accounting for some preliminary infor-
mation (a forecast on the future level of demand and past realization of the same
variable which are continuously updated), subjects are asked to set the level of their
physical capital which in turn determines the optimal scale of production, i.e. the
level of production which minimizes production costs. Once this choice has been
made the software reveals the level of demand. The maximum profit is realized if
the optimal production scale is equal to the received demand. The difference be-
tween production revenues and costs decreases as long as the gap between the opti-
mal production scale and the level of demand increases. For high levels of the gap,
productions costs become progressively higher than revenues and the firm suffers
an increasing loss.
Beyond this production revenue/cost structure, financial burdens (interest and
dividends) have to be accounted for. The economic result of the firm activity is
indeed obtained by subtracting production and financial costs from the sales influx
and it can be either positive or negative. Concerning financial costs, we set the cost
of the equity base higher than the interest on debt following Myers and Majluf [10].
In this way subjects have to take a basic
speculative decision
: a high level of the
equity base ensures entrepreneurs against prospective losses but at the same time
it reduces the rate of return of the entrepreneurial activity. In our settings, a firm
can have serious consequences after a number of consecutive negative economic
results: the equity base may reach low values so that a further loss could lead the
equity base to negative levels. In this case the software requires subjects to activate
a bailout procedure which has a cost (i.e. it implies a penalty).
The experimental subjects' performance is evaluated according to a score
computed by the software as the average return on investment minus the bailouts
penalties.
2.2
The Web-Based Software Model
In this subsection we describe the functioning of our web-based software model.
Figure 1 shows the Graphical User Interface (GUI) related to the decision process
described above
1
.
The GUI is composed of a control panel and three charts.
The control panel is divided into three specific sections. The top one displays in-
formation on the figures supplied by the forecasting service, the production choices,
the market demand realizations and the errors made in guessing such levels con-
cerning the time of the choice and three past periods. In the second section labeled
as the “patrimonial and economic accounting” the user monitors the balance sheet
items and the debt ration looking at the stock line. The economic result is showed
under the label “profit” together with its maximum achievable value, the Return on
1
For those interested in experiencing a trial of the software, point the browser to
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