Search Results

Evidence on the workings of annuity markets

Edmund Cannon and Ian Tonks

in Annuity Markets

This chapter reports the evidence of how annuities function. It discusses the evidence on selection effects and the factors that determine whether people purchase annuities.

Parliamentary Democracy and Delegatio n

Kaare Strøm

in Delegation and Accountability in Parliamentary Democracies

Identifies three motivations for political delegation (capacity, competence, collective action problems) and discusses agency problems and mechanisms of accountability. An ideal-typical form of ... More

Identifies three motivations for political delegation (capacity, competence, collective action problems) and discusses agency problems and mechanisms of accountability. An ideal-typical form of parliamentary democracy is introduced to reveal that singularity and indirect delegation are key ingredients of delegation and accountability. Develops a delegation model that reveals more agency loss (policy slippage) in parliamentary democracy than in two versions of presidentialism. Parliamentary democracies use ex ante screening by cohesive political parties to protect against adverse selection. Delegation and accountability make parliamentary democracies more efficient, but frequently less transparent. Identifies the implications of different forms of parliamentarism, such as Westminster parliamentarism, pivotal parliamentarism, and constrained parliamentarism.Less

Longevity Risk and Annuities in Singapore

Joelle H. Y. Fong, Olivia S. Mitchell, and Benedict S. K. Koh

in Reorienting Retirement Risk Management

This chapter explores the current annuity market in Singapore in view of the plan to mandate annuitization under the Singaporean Central Provident Fund (CPF). The authors evaluate the pricing of ... More

This chapter explores the current annuity market in Singapore in view of the plan to mandate annuitization under the Singaporean Central Provident Fund (CPF). The authors evaluate the pricing of various annuity policies in order to assess whether plan participants might benefit from higher annuity returns per dollar premium and lower adverse selection costs under the new annuitization mandate. Results indicate that private annuity providers currently offer good value‐for‐money annuities, with money's worth values in line with those found for other developed countries. This has implications for proposals to mandate annuitization.Less

Risk-based pricing

Lyn C. Thomas

in Consumer Credit Models: Pricing, Profit and Portfolios

This chapter builds models to determine the ‘price’ (interest rate) a lender should charge on a loan to maximize the expected profit, taking into account both the default risk of the borrower and the ... More

This chapter builds models to determine the ‘price’ (interest rate) a lender should charge on a loan to maximize the expected profit, taking into account both the default risk of the borrower and the relationship between response (take up) rate and the price charged. Starting with a simple two-price model, it extends the ideas to risk-based pricing, including how adverse selection and affordability of repayments can be included in the model. It investigates acceptance scoring where one determines what other non-price features should be offered as part of the loan to maximize the acceptance rate and hence the profitability of the loan. It develops a game theory model based on the Edgeworth market game, which allows for the trade-offs that lenders have between profit and market share, and that borrowers have between interest rate charged and credit limit.Less

Reasons for the annuity puzzle

Edmund Cannon and Ian Tonks

in Annuity Markets

This chapter discusses a variety of reasons why it may be rational to avoid full annuitization. It discusses the interaction of annuities with state pensions, deferring annuitization, expenditure ... More

This chapter discusses a variety of reasons why it may be rational to avoid full annuitization. It discusses the interaction of annuities with state pensions, deferring annuitization, expenditure patterns in retirement, and long-term care costs. It explains the different types of adverse selection that might arise in annuity markets. It stresses that the apparent dislike of annuitizing may be due to lack of comprehension or to psychological reasons that are not strictly rational.Less

 Applications

George J. Mailath and Larry Samuelson

in Repeated Games and Reputations: Long-Run Relationships

This chapter illustrates how the theory of repeated games with imperfect public monitoring can be used in economic applications. It examines collusion in oligopoly with imperfectly monitored demand, ... More

This chapter illustrates how the theory of repeated games with imperfect public monitoring can be used in economic applications. It examines collusion in oligopoly with imperfectly monitored demand, oligopoly games with privately observed costs and hence adverse selection, risk sharing and insurance, and repeated principal-agent problems. The latter example also illustrates review strategies.Less

Delegation and its Peril s

Arthur Lupia

in Delegation and Accountability in Parliamentary Democracies

Presents a formal theoretical framework that clarifies when principals can, and cannot, use delegation to accomplish desired ends. It shows the conditions (having to do with preferences and ... More

Presents a formal theoretical framework that clarifies when principals can, and cannot, use delegation to accomplish desired ends. It shows the conditions (having to do with preferences and information) under which agents will act in their principals’ interests and how political institutions can alleviate the perils of delegation. Finally, it discusses the implications of its theoretical insights on chains of political delegation.Less

 Reputations with Short-Lived Players

George J. Mailath and Larry Samuelson

in Repeated Games and Reputations: Long-Run Relationships

This chapter introduces the adverse-selection approach to reputations. The chapter considers a long-lived player facing a sequence of short-lived players. If there is some (perhaps very small) chance ... More

This chapter introduces the adverse-selection approach to reputations. The chapter considers a long-lived player facing a sequence of short-lived players. If there is some (perhaps very small) chance that the long-lived players is a commitment (or action) type, then the payoff for a sufficiently patient long-lived player (in any Nash equilibrium of the repeated game) must be close to the payoff he would receive if he was known to be that commitment type (the Stackelberg payoff). This result is established for perfect monitoring games using arguments based on Bayes’ rule and for imperfect monitoring games using martingale arguments (merging). A characterization of asymptotic play shows that for imperfect monitoring games, reputations are temporary.Less

Parliamentary Democracy: Promise and Problems

Kaare Strøm, Wolfgang C. Müller, and Torbjörn Bergman

in Delegation and Accountability in Parliamentary Democracies

Parliamentary government is the most common way to organize delegation and accountability in contemporary democracies. Parliamentary government is a system of government in which the prime minister ... More

Parliamentary government is the most common way to organize delegation and accountability in contemporary democracies. Parliamentary government is a system of government in which the prime minister and his or her cabinet are accountable to any majority of the members of parliament and can be voted out of office by the latter. Parliamentary democracy is a chain of delegation and accountability, from the voters to the ultimate policy makers, in which at each link (stage), a principal (in whom authority is originally) delegates to an agent, whom the principal has conditionally authorized to act in his or her name and place. The parliamentary chain of delegation is characterized by indirectness and singularity (i.e. at each link of the parliamentary chain, a single principal delegates to a single agent). At each stage of this chain, delegation problems (such as adverse selection and moral hazard) can occur.Less

France

Thomas Von Ungern-Sternberg

in Efficient Monopolies: The Limits of Competition in the European Property Insurance Market

Studies catastrophe insurance in France. The French system is fundamentally flawed. The state has fixed a compulsory nationwide uniform premium rate, and offers to reinsure all insurance companies at ... More

Studies catastrophe insurance in France. The French system is fundamentally flawed. The state has fixed a compulsory nationwide uniform premium rate, and offers to reinsure all insurance companies at similar conditions. There is a natural tendency for the good risk insurance companies to buy only little cover from the state. The bad risks make full use of the low cost reinsurance provided. The system has had to be recapitalized in the year 2000 but the fundamental flaws remain. The insurance companies are making a lot of money at the cost of the taxpayer.Less

Why Does It Matter? Allocating Risk and Reward Between Employer and Employee

Edward A. Zelinsky

in The Origins of the Ownership Society: How the Defined Contribution Paradigm Changed America

It is useful to divide retirement-related risks into three broad categories: investment risk, funding risk, and longevity risk. Investment risk is the risk that retirement resources will earn an ... More

It is useful to divide retirement-related risks into three broad categories: investment risk, funding risk, and longevity risk. Investment risk is the risk that retirement resources will earn an inadequate rate of return. Funding risk is the danger that the funds necessary to finance adequate retirement benefits will not be contributed to the plan. For both these categories, defined benefit arrangements place responsibility upon the employer for financing the benefits promised by the plan. Defined contribution arrangements shift the investment and funding risks to the employee. Longevity risk is the danger that a retiree will outlive his retirement resources. The traditional, annuity-paying defined benefit plan provides partial protection against this since such a pension disburses retirement payments periodically and continues such annuity-type payments until the participant's death, often with payments continuing to the participant's surviving spouse. While the defined contribution participant can eliminate his longevity risk by annuitizing his account balance, such individually-purchased annuities typically suffer from the cost-related problem of adverse selection.Less

Fragmented Credit Markets

Pranab Bardhan and Christopher Udry

in Development Microeconomics

One aspect of financial markets that is of great relevance to economic development is the study of credit mechanism design by lenders facing private information. This chapter first develops a model ... More

One aspect of financial markets that is of great relevance to economic development is the study of credit mechanism design by lenders facing private information. This chapter first develops a model of moral hazard in a rural credit market, beginning with the benchmark case of perfect competition under complete information. It then compares the loan contract offered by non‐local lenders who cannot monitor payoff‐relevant actions of borrowers with that offered by an informed local monopolistic moneylender and examines what happens in a fragmented market where villagers can choose between either contract. The next section develops, along similar lines, a model of adverse selection. The inefficiencies arising in these contracts, the potential mitigating role of collateral, and the possibility of local moneylenders earning informational rent are lessons that emerge from these models.Less

Laying the Theoretical Foundations for the Study of Development Aid

Clark C. Gibson

in The Samaritan's Dilemma: The Political Economy of Development Aid

This chapter focuses on the problem of collective action as it relates to development at the operational level. It first explores how individuals’ motivation may hamper their incentive to work ... More

This chapter focuses on the problem of collective action as it relates to development at the operational level. It first explores how individuals’ motivation may hamper their incentive to work together. Next, it looks at how missing or asymmetric information about the actions or characteristics of individuals may also inhibit their cooperation. This exploration of collective-action problems is undertaken using the Institutional Analysis and Development framework.Less

Litigation and the Evolution of Legal Remedies *

Francesco Parisi and Vincy Fon

in The Economics of Lawmaking

This chapter considers an often-overlooked ingredient of the creation of legal precedents and revisits the role of litigation in the evolution of judge-made law. It addresses one important ... More

This chapter considers an often-overlooked ingredient of the creation of legal precedents and revisits the role of litigation in the evolution of judge-made law. It addresses one important observation made by Posner (2006), who observed that judicial opinions and emotions play a relevant role in case decisions — a subjectivity that may render it desirable to promote an (ideologically) diverse judiciary. It examines the extent to which an increase in judges' diversity will actually avoid biases in the evolution of the common law. An adverse selection theory of litigation is developed, suggesting that the tendency toward increasing expansion of legal remedies, and more generally the entire process of creation and change of legal precedent in civil cases, is driven by a pervasive adverse selection mechanism.Less

 Taking Charge

Ken Binmore

in Playing for Real: Game Theory

This chapter introduces mechanism design, which is the subject wherein games are designed so that rational play results in socially desirable outcomes. The judgment of Solomon from the Bible is used ... More

This chapter introduces mechanism design, which is the subject wherein games are designed so that rational play results in socially desirable outcomes. The judgment of Solomon from the Bible is used as an introductory example. The principles of mechanism design are then described. The use of the revelation principle is illustrated with an extended analysis of the Street Lamp Problem. The Clarke-Groves mechanism is briefly described. Finally, a critical review of implementation theory is offered that emphasizes its differences from mechanism design and its shortcomings.Less

Uncertainty and health insurance

Jan Abel Olsen

in Principles in Health Economics and Policy

This chapter shows that there is a welfare gain from health insurance because people are risk averse with respect to the financial implications of the prospect of ill health. There are effectively ... More

This chapter shows that there is a welfare gain from health insurance because people are risk averse with respect to the financial implications of the prospect of ill health. There are effectively two main types of asymmetric information related to health insurance: adverse selection, where the asymmetry occurs before the insurance contract is made; and moral hazard, where the asymmetry occurs after the contract is made. Two different bases are presented for pricing health insurance: individual rating and community rating. The arguments in favour of individual rating are: i) it offers consumers a choice of contracts; ii) people have financial incentives for healthy behaviour; and iii) there is no forced cross-subsidy, i.e. it is actuarially ‘fair’. The arguments against individual rating are: i) it involves adverse selection (market failure); ii) transaction costs are high due to false signalling of risks; and iii) access depends on income (‘unfair’). The simplest policy solution to adverse selection, high transaction costs, and unequal access is compulsory public insurance, to which we now turn. Exercises and suggested readings are included at the end of the chapter.Less

Problems With Medical Insurance

Nicholas Barr

in The Welfare State as Piggy Bank: Information, Risk, Uncertainty, and the Role of the State

This chapter explores the wide‐ranging and well‐known problems of medical insurance, including uncertainty about future probabilities, adverse selection, and moral hazard, which lead to uninsurable ... More

This chapter explores the wide‐ranging and well‐known problems of medical insurance, including uncertainty about future probabilities, adverse selection, and moral hazard, which lead to uninsurable conditions and upward pressures on medical spending. The chapter goes on to discuss methods of cost containment, and to assess different strategies: private funding plus private production, public funding plus public production, and public funding plus private (or mixed) production. A key conclusion is that attempts to adapt private arrangements end up looking like social insurance, in the sense that premiums are not based on individual risk and insurers are not allowed to exclude high‐risk applicants. A second key conclusion is that different strategies for financing health care have different but largely predictable problems.Less

New York's Safety Fund System: America's First Bank Insurance Experiment

Howard Bodenhorn

in State Banking in Early America: A New Economic History

Economists and regulatory agencies justify deposit insurance because they consider banks unique among capitalist firms. Because banks hold highly idiosyncratic portfolios that are hard for outside ... More

Economists and regulatory agencies justify deposit insurance because they consider banks unique among capitalist firms. Because banks hold highly idiosyncratic portfolios that are hard for outside monitors to value correctly, macroeconomic shocks that threaten the viability of individual banks can threaten the entire system. Although deposit insurance diminishes the threat of bank runs and, thereby, creates a social benefit, deposit insurance also generates potentially large costs, which provides a justification for regulatory oversight and regulation. Like most bank insurance schemes, the Safety Fund was prone to moral hazard, or excessive risk taking by member banks and adverse selection, wherein better banks left the system, leaving only high‐risk banks as members. The system collapsed after only a small number of failures because of poor oversight, moral hazard, adverse selection, regulatory forbearance, and an under‐funded insurance.Less