Faculty & Research

John R. Birge

Jerry W. and Carol Lee Levin Professor of Operations Management

Phone :
1-773-834-1701
Address :
5807 South Woodlawn Avenue
Chicago, IL 60637

John R. Birge studies mathematical modeling of systems under uncertainty, especially for maximizing operational and financial goals using the methodologies of stochastic programming and large-scale optimization. He was first drawn to this area by a need to use mathematics in a useful and practical way. "My research has shown how special problem structure can allow for efficient solution of complex problems of decision making under uncertainty," Birge explains. This research has been supported by the National Science Foundation, the Ford Motor Company, General Motors Corporation, the National Institute of Justice, the Office of Naval Research, the Electric Power Research Institute, and Volkswagen of America. He has published widely and is the recipient of the Best Paper Award from the Japan Society for Industrial and Applied Mathematics, the Institute for Operations Research and the Management Sciences Fellows Award, the Institute of Industrial Engineers Medallion Award and was elected to the National Academy of Engineering.

A former dean of the Robert R. McCormick School of Engineering and Applied Sciences at Northwestern University, he has worked as a consultant for a variety of firms including the University of Michigan Hospitals, Deutsche Bank, Allstate Insurance Company, and Morgan Stanley, and he uses cases from these experiences in his teaching.

Birge earned a bachelor's degree in mathematics from Princeton University in 1977 and a master's degree and a PhD in operations research from Stanford University in 1979 and 1980, respectively. He joined the Chicago Booth faculty in 2004.

He is a member of the Institute for Operations Research and the Management Sciences, the Mathematical Programming Society, the Mathematical Association of America, and Sigma Xi. He also speaks French, Russian, German, and English.

Outside of academia, Birge enjoys running, reading, and travel.

 

2014 - 2015 Course Schedule

Number Name Quarter
36600 Workshop in Operations/Management Science 2015 (Winter)
36901 Stochastic Programming 2015 (Winter)
40108 Revenue Management 2015 (Spring)

Other Interests

Running, reading, travel.

 

Research Activities

Methods and models for optimal decision making under uncertainty; emphasis on relationships between operations and finance.

With C.H. Rosa, "Incorporating investment uncertainty into greenhouse policy models," The Energy Journal (1996).

"Option methods for incorporating risk into linear planning models," Manufacturing and Services Operations Management (2000).

With C. Supatgiat and R.Q. Zhang, "Equilibrium value in a competitive power exchange market," Computational Economics (2001).

With J.W. Yen, "A Stochastic Programming Approach to the Airline Crew Scheduling Problem," Transportation Science (2006).

With S. Yang, "A Model for Tax Advantages of Portfolios with Many Assets," Journal of Banking & Finance(2007).

For a listing of research publications please visit ’s university library listing page.

New: Robustness of Renewable Energy Support Schemes Facing Uncertainty and Regulatory Ambiguity
Date Posted: Sep  13, 2014
Renewable portfolio standards, feed-in-tariffs, and market premia are widely used policy instruments to promote investments in renewable energy sources. Regulators continuously evaluate these instruments along the main electricity policy objectives of affordability, reliability, and sustainability. We develop a quantitative approach to assess these policies and their robustness to exogenous changes along these dimensions using a long-term dynamic capacity investment model. We compare their robustness in the light of uncertain renewable feed-in and ambiguous future regulation. We implement the robustness analysis employing different risk measures and find that renewable portfolio standards deliver most robust results, while feed-in-tariffs achieve target renewable buildup rates at least cost.

REVISION: How Inventory Is (Should Be) Financed: Trade Credit in Supply Chains with Demand Uncertainty and Costs of Financial Distress
Date Posted: Jul  21, 2014
As an integrated part of a supply contract, trade credit has intrinsic connections with supply chain contracting and inventory management. Using a model that explicitly captures the interaction of firms’ operations decisions and financial risks, this paper attempts to develop a deeper understanding of trade credit from an operational perspective. Revolving around the question of what role trade credit plays in channel coordination and inventory financing, we demonstrate that with demand uncertainty, trade credit enhances supply chain efficiency by serving as a risk-sharing mechanism. When offering trade credit, the supplier balances its impact on operational profit and costs of financial distress. Facing a trade credit contract, the retailer finances inventory using a portfolio of cash, trade credit, and short-term debt, where the structure of this inventory financing portfolio depends on the retailer’s financing need and bargaining power. Additionally, our model suggests that ...

REVISION: Response-Adaptive Designs for Clinical Trials: Simultaneous Learning from Multiple Patients
Date Posted: Jul  05, 2014
Clinical trials have traditionally followed a fixed design, in which patient allocation to treatments is fixed throughout the trial and specified in the protocol. The primary goal of this static design is to learn about the efficacy of treatments. Response-adaptive designs, on the other hand, allow clinicians to use the learning about treatment effectiveness to dynamically adjust patient allocation to treatments as the trial progresses. An ideal adaptive design is one where patients are treated as effectively as possible without sacrificing potential learning or compromising the integrity of the trial. We propose such a design, one that uses forward-looking algorithms to fully exploit learning from multiple patients simultaneously. Compared to the best existing implementable adaptive design (e.g. using Berry, 1978), we show that our proposed design improves patient outcomes by up to 8.6% under a set of considered scenarios. Further, we demonstrate our design's effectiveness using ...

REVISION: The Supply Chain Effects of Bankruptcy
Date Posted: Jul  01, 2014
This paper examines how a firm's financial distress and the legal environment regarding the ease of bankruptcy reorganization can alter product market competition and supplier-buyer relationships. We identify three effects, predation, bail-out, and abetment, that can change firms' behavior from their actions in the absence of financial distress. The predation effect increases competition before potential bankruptcy as the non-distressed competitor behaves as if it has some first-mover advantage, which could benefit a supplier with price control. The bailout effect reflects the supplier's incentive to grant the distressed firm concessions to preserve competition, improving supply chain efficiency and providing support for the exclusivity rule in Chapter 11 of the United States Bankruptcy Code when the supplier and the distressed firm are financially linked. The abetment effect is that the supplier may deliberately abet the competitor's predation, leading to increased operational ...

New: Index Tracking and Enhanced Indexation Using a Parametric Approach
Date Posted: Jun  19, 2014
Based on the work of Brandt et al. (2009), we formulate an index tracking and enhanced indexation model using a parametric approach. The portfolio weights are modeled as functions of assets characteristics and similarity measures of the assets with the index to track. This approach permits handling nonlinear and nonconvex objectives functions that are difficult to incorporate in existing index tracking and enhanced indexation models. Additionally, this approach gives the investor more information about the portfolio holdings since the optimization is performed over portfolio strategies. Finally, an empirical implementation and an analysis of selected characteristics are presented for the S&P500 index.

REVISION: Portfolio Optimization Under Generalized Hyperbolic Skewed t Distribution and Exponential Utility
Date Posted: Jun  14, 2014
In this paper, we show that if asset returns follow a generalized hyperbolic skewed t distribution, the investor has exponential utility function and a riskless asset is available, the optimal portfolio weights can be found either in closed-form or using a successive approximation scheme. We also derive lower bounds for the certainty equivalent return generated by the optimal portfolios. Finally, we present a study of the performance of mean-variance analysis and Taylor's series expected utility expansion (up to the fourth moment) to compute optimal portfolios in this framework.

New: Assessing the Long-Term Effects of Bank Policies
Date Posted: May  28, 2014
Current risk management frameworks are not suitable for testing the long-term implications of balance sheet policies. The current established methodologies, such as interest rate gap analysis or Credit Value-at-Risk are short-term and do not give a clear picture of the long-term risk of a bank. Backtesting is also difficult, given that the data is limited, thus not producing risk measures for long-term policies. Therefore, simulation is the best option for assessing the long-term implications of regulatory and management choices. In a previous note, we developed a scenario generation tool for simulating the long-term behavior of balance sheets of banks. In this note, we use this framework to quantify the long-term impact on risk and return of the leverage ratio, the core deposit ratio, operating costs and interest rates. As Basel III is being implemented, our tests confirm the benefits of holding a cushion of capital above the leverage ratio limit of 3%, a policy similar to the one ...

REVISION: Supply Chain Network Structure and Firm Returns
Date Posted: Apr  18, 2014
The complexity and opacity of the network of interconnections among firms and their supply chains inhibits understanding of the impact of management decisions concerning the boundaries of the firm and the number and intensity of its relationships with suppliers and customers. Using recently available data on the relationships of public US firms, this paper investigates the effects of supply chain connections on firm performance as reflected in stock returns. The paper finds that supply chain structure is closely related to firm returns at two levels, a first-order effect from direct connections and a second-order impact from systemic exposures through the network. For the first order effect, using a cross-sectional data set of the supply chain network and monthly returns, we show that a firm’s return can be explained by its concurrent supplier returns, concurrent customer returns, own momentum, and supplier momentum, whereas customer momentum has little impact. A long-short equity ...

New: Assessing Futures Odds in the NCAA Tournament
Date Posted: Apr  13, 2014
In this paper, we develop a simple model to characterize how NCAA Division I men’s basketball teams’ futures odds should change as teams progress through the NCAA tournament. Using NCAA men’s basketball data from STATS LLC, we construct a logistic regression model to predict the likelihood of a team reaching a given round in the NCAA tournament. Based on the model results, we are also able to draw conclusions about the NCAA tournament selection committee’s seeding of teams with differing strengths of schedule. Additionally, we observe the actual movement of futures odds in the betting market for the NCAA tournament and conclude the market may overreact to First Round games played by top seeds. Ultimately, we identify a successful betting strategy based on our results. As a secondary finding, we note that a team’s First Round game location has little influence over the team’s expected likelihood of reaching the Final Four.

New: The Structural Impact of Renewable Portfolio Standards and Feed-in-Tariffs on Electricity Markets
Date Posted: Apr  01, 2014
Renewable energy sources (RES) capacity has grown globally at a rapid rate benefiting from multiple support schemes such as renewable portfolio standards (RPS), feed-in-tariffs (FIT), and market premia (MP). While research concentrated on comparing the effectiveness of these policy instruments in driving RES investment, the focus is increasingly shifting towards assessments of the structural impact of these schemes on electricity markets. RES support schemes are continuously being assessed on how they help achieve the three main objectives of electricity policy, i.e., the affordability, reliability, and sustainability of electricity supply. In this work, we quantitatively compare RPS, FIT and MP schemes in these three dimensions by assessing their future impact on electricity prices, on generation portfolios and security of supply as well as on carbon emissions. We simulate the impact of all three support schemes using a long-term capacity expansion model with an hourly granularity ...

REVISION: Long-Term Bank Balance Sheet Management: Estimation and Simulation of Risk-Factors
Date Posted: Aug  01, 2012
We propose a dynamic framework which encompasses the main risks in balance sheets of banks in an integrated fashion. Our contributions are fourfold: 1) solving a simple one-period model that describes the optimal bank policy under credit risk; 2) estimating the long-term stochastic processes underlying the risk factors in the balance sheet, taking into account the credit and interest rate cycles; 3) simulating several scenarios for interest rates and charge-offs; and 4) describing the equations

REVISION: Trade Credit in Supply Chains: Multiple Creditors and Priority Rules
Date Posted: Jun  10, 2012
Priority rules determine the order of repayment when the debtor cannot repay all of his debt. In this paper, we study how different priority rules influence trade credit usage and supply chain efficiency when multiple creditors are present. We find that with only demand risk, when the wholesale price is exogenous, trade credit with high priority can lead to high chain efficiency, yet trade credit with low priority allows more retailers to obtain trade credit and suppliers to gain higher profits.

New: Firm Profitability, Inventory Volatility, and Capital Structure
Date Posted: Aug  23, 2011
Traditional theories of capital structure imply a consistent relationship between firm profitability and firm leverage. Empirical data, however, suggest that the relationship is not monotonic. In the cross-section of firms, non-profitable firms become significantly more leveraged as losses decrease; profitable firms become significantly less leveraged as profits increase until a point where the most profitable firms have again significantly greater leverage as profits increase. In this paper, w

REVISION: Index Tracking and Enhanced Indexation Using a Parametric Approach
Date Posted: Nov  03, 2009
Based on the work of Brandt, Santa-Clara and Valkanov (2009), we formulate an index tracking and enhanced indexation model using a parametric approach. The portfolio weights are modeled as functions of assets characteristics and similarity measures of the assets with the index to track. This approach permits to handle non-linear and non-convex objectives functions that are common in index tracking and enhanced indexation. An empirical implementation and analysis of the characteristics are presen

REVISION: Optimal Investment and Production Across Markets with Stochastic Exchange Rates
Date Posted: Jun  18, 2009
All multinational firms face foreign exchange fluctuations, which can create unstable cash flows and even bankruptcy. Managers of these firms face critical questions over how to reduce the risk due to income and expenses in multiple currencies. Traditional financial risk controls include futures and options, but firms also can use operational controls, such as foreign production capacity. In this paper, we study these alternatives for a simplified single-product firm operating in a home marke

New: Discrete-Time Optimization of Consumption and Investment Decisions Given Intolerance for a Decline i
Date Posted: Feb  19, 2008
We extend Samuelson's (1969) discrete-time dynamic consumption and investment optimization problem to the case where the investor is intolerant of any decline in her standard of living. This constraint represents a strong form of habit formation such that the consumption rate is non-decreasing over time. To achieve this objective, the investor first guarantees a consumption perpetuity at the current consumption rate and then allocates the remaining wealth under a state-dependent, adjusted coeffi

A Model for Tax Advantages of Portfolios with Many Assets
Date Posted: Sep  04, 2005
Taxable portfolios present challenges for optimization models with even a limited number of assets. Holding many assets, however, has a distinct tax advantage over holding few assets. In this paper, we develop a model that takes an extreme view of a portfolio as a continuum of assets to gain the broadest possible advantage from holding many assets. We find the optimal strategy for trading in this portfolio in the absence of transaction costs and develop bounding approximations on the optimal v

Equity Valuation, Production, and Financial Planning: A Stochastic Programming Approach
Date Posted: Jan  23, 2005
Most of the operations management literature assumes that the firm can always finance production decisions at an optimal level or borrow at a constant interest rate; however, operational decisions are constrained by limited capital and often critically depend on external financing. This paper proposes an integrated corporate planning model, which extends the forecasting-based discount dividend pricing method into an optimization-based valuation framework to make production and financial decision

Operational Decisions, Capital Structure, and Managerial Compensation: A News Vendor Perspective
Date Posted: Jan  23, 2005
While firm growth critically depends on financing ability and access to external capital, the operations management literature seldom considers the effects of financial constraints on the firms' operational decisions. Another critical assumption in traditional operations models is that corporate managers always act in the firm owners' best interests. Managers are, however, agents of the owners of the company, whose interests are often not aligned with those of equity-holders or debt-holders; h

Joint Production and Financing Decisions: Modeling and Analysis
Date Posted: Jan  23, 2005
This paper develops models to make production and financing decisions simultaneously in the presence of demand uncertainty and market imperfections. While the Modigliani and Miller propositions demonstrate that a firm's investment and financing decisions can be made independently in a perfect capital market, our models illustrate how a firm's production decisions are affected by the existence of financial constraints. We analyze the interactions between a firm's production and financing decision

Comparisons of Alternative Quasi-Monte Carlo Sequences for American Option Pricing
Date Posted: Dec  29, 2004
Quasi-Monte Carlo sequences have been shown to provide accurate option price approximations for a variety of options. In this paper, we apply quasi-Monte Carlo sequences in a duality approach to value American options. We compare the results using different low discrepancy sequences and estimate error bounds and computational effort. The results demonstrate the value of sequences using expansions of irrationals.

Error Bounds for Quasi-Monte Carlo Methods in Option Pricing
Date Posted: Dec  29, 2004
The classic error bounds for quasi-Monte Carlo approximation follow the Koksma-Hlawka inequality based on the assumption that the integrand has finite variation. Unfortunately, not all functions have this property. In particular, integrands for common applications in finance, such as option pricing, do not typically have bounded variation. In contrast to this lack of theoretical precision, quasi-Monte Carlo methods perform quite well empirically. This paper provides some theoretical justificati