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As part of new ESCoE funded research on shadow prices, Julia Wdowin discusses why it's important to estimate the value of missing capital assets.
The post Measuring and estimating shadow prices appeared first on Bennett Institute for Public Policy.

The effect of migration and home remittances on the shadow
prices of labour and foreign exchange is analysed here , taking into
consideration changes in their social marginal productivities. It is
argued that appreciation of currency, due to large capital inflows and
not to increased productivity, results in a misallocation of resources,
and, therefore, there is an urgent need for a proper analysis to
determine the optimal level of emigrants.

PurposeFocusing on managerial problems related to the measurement of intangibles, this paper develops and validates a hedonic-pricing methodology for the evaluation of the intangible resources of companies obtaining their shadow prices.Design/methodology/approachThe paper adapts a hedonic-pricing methodology developed primarily for markets in real estate and secondhand cars to define how much intangibles may contribute to companies' market value. A certain calibration of the original tool has been developed to make this methodology appropriate for interpretation and practical use. The main advantage of this approach is that it allows for an evaluation of the shadow prices of intangible resources. These prices can be interpreted as the market value of the intangible resources which are not reflected on the balance sheet.FindingsThe results of this study demonstrate that hedonic pricing with a self-selection correction generates robust estimates. As one can see, the positive contribution of a high endowment of intangibles for all shadow prices is confirmed through estimations using two different techniques. Meanwhile, the negative effect of a low endowment is even more evident for the baseline model. This model shows consistent negative shadow prices for the majority of underinvested intangibles. Brands have the highest shadow prices in the introduced models; human capital, as measured by the qualification of top management and investments in employees, has likewise demonstrated high prices. However, most structural resources seem to be not reflected to a large degree in companies' market value.Practical implicationsThis paper brings new opportunities to obtain the monetary value of intangible resources based on estimated market prices of a corporation's resource portfolio. These prices may be used for several purposes – for example, benchmarking for performance management, capital budgeting or knowledge-management practices. Moreover, by having methodological value, this study opens ways to evaluate any other intangibles which are not explicitly discussed in the empirical test of this particular study.Originality/valueThis study primarily contributes to the methodological advancement of evaluation of corporate intangible resources. It departs from the conventional hedonic-pricing mechanism to identify cogent estimates to intangibles in monetary terms. Importantly, this mechanism implies individual shadow prices for specific intangible resources which makes the contribution of this study unique for the existing literature, both within resource-based and value-based views.

The paper analyzes the recently initiated Financial Assistance Plan (FAP) of Government of Botswana within the framework of the incentives created for a profit-maximizing firm. The results suggest that it is very difficult to devise indirect second-best policies if there is considerable substitution in production possible. (DSE)