a method for solving general equilibrium models with incomplete markets and many financial assets abstract this paper presents a numerical method for solving stochastic general equilibrium models with dynamic portfolio choice the method can be applied to models with heterogeneous agents time varying investment opportunity sets and incomplete asset markets we illustrate the method using a two country model with production we check the accuracy of our method by comparing the numerical solution to a complete markets version of the model against its known analytic properties we then apply the method to an incomplete markets version where no analytic solution is available in all versions the standard accuracy tests confirm the effectiveness of our method

asymmetric international minimum quality standards and vertical differentiation this paper develops a two country model of a vertically differentiated duopoly that spans two countries which are not integrated without additional costs equilibrium qualities prices profits and consumer s surplus are compared when 1 minimum quality standards are identical and 2 standards differ across countries both markets turn out to be connected by the quality choices of the two firms both firms prices in the two countries and their profits are lower whereas consumer s surplus and the two offered qualities are higher in both countries if no firm is forced out of the country s market with the more demanding minimum quality standard copyright 1995 by blackwell publishing ltd

solving exchange rate puzzles with neither sticky prices nor trade costs we present a simple framework in which both the exchange rates disconnect and forward bias puzzles are simultaneously resolved the flexible price two country monetary model is extended to include a consumption externality with habit persistence habit persistence is modeled using campbell cochrane preferences with deep habits along the lines of the work of ravn schmitt grohe and uribe by deep habits we mean habits defined over goods rather than countries the model is simulated using the artificial economy methodology it offers a neo classical explanation of the meese rogoff puzzle and mimics the failure of fundamentals to explain nominal exchange rates in a linear setting finally the model naturally generates the negative slope in the standard forward market regression

external balances trade and financial conditions abstract i present a new model for the u s external position that accounts for the accumulation of international debt over the past 60 years the model is based on the present value restriction that links a country s external position to future trade flows and financial conditions in the absence of arbitrage opportunities and ponzi schemes it features the role played by the stochastic discount factor the trade and valuation adjustment channels and provides a decomposition of the u s external position into secular and cyclical components the model shows that shocks operating via the valuation channel are the dominant drivers of cyclical dynamics accounting for approximately 80 of the variance over the 60 year sample this channel works primarily via capital gains and losses on u s foreign assets and is closely tied to the international value of the u s dollar in contrast there is no evidence that valuation channel adjustments contribute to the secular dynamics but differences between the average returns on foreign assets and liabilities raise the steady state debt to gdp ratio from approximately 12 to 15 the long term deterioration in the u s position represents a move towards the steady state before the early 1990s and a move away from the steady state thereafter i quantify the expected improvement in future u s trade balances needed to justify this as a sustainable path and show that they are very different from its actual behavior during the last 60 years i also study the behavior of the u s position during the 2007 2008 financial crisis

minimum quality standards with more than two firms abstract this paper studies the effects of introducing a minimum quality standard mqs in a vertically differentiated market it is shown that previous results indicating beneficial effects of a mqs heavily depend on the duopolistic set up they had been developed in an example with three firms is then provided showing that not all reaction functions in quality levels are increasing we also show that the introduction of the standard decreases the profit levels of all firms the maximum quality level and the average quality consumed as a consequence despite the increase in consumer surplus any effective mqs would reduce welfare

the risky steady state we propose a simple quantitative method to linearize around the risky steady state of a small open economy unlike when the deterministic steady state is used the net foreign asset position is well defined we allow for stochastic income and stochastic interest rate

the self regulating profession slayton and treblicock 1978 the formal analysis of the economics of the self regulating profession has received little attention from theorists if a profession is self regulating in the sense that its current members being the sole suppliers of a certain type of service are free to determine in one way or another whether or not to admit a potential recruit then it might seem prima facie that such a profession could simply be regarded as a monopolistic seller of the service in question so that the effects of self regulation would appear to involve an unambiguous welfare loss the whole rationale for self regulation however rests on the notion that it provides a vehicle through which the quality of the service may be maintained in markets where the consumer cannot readily measure this quality himself it is the analysis of the interplay of these two elements the enhanced price of such services associated with the monopolistic power of the profession and the improved quality of the service which may accompany a reduction in supply which forms the focus of the present paper it is tempting to begin the analysis of such a profession by first positing some particular

ethically flexible measures of poverty this paper introduces new measures of both relative and absolute poverty using the notion of representative income of a community corresponding to the censored income distribution these new measures satisfy the monotonicity and transfer axioms proposed by sen 1976 in all cases

a theory of credibility this paper presents models in which one agent must decide whether to trust another whose motives are uncertain reliability can only be communicated through actions in this context it pays for people to build a reputation based on reliable behaviour someone becomes credible by consistently providing accurate and valuable information or by performing useful services the theory provides a justification for long term arrangements without binding contracts it also describes those situations where it pays an agent to cash in on his reputation many decisions depend on trusting someone consumers must decide whether to believe advertisements banks need to judge the reliability of loan applicants and employers must decide how much responsibility to delegate to their employees this paper attempts to model situations that arise when someone is uncertain about whether to trust the people he deals with in this context reputations for reliability are valuable an agent becomes credible by consistently providing accurate valuable information or by always acting responsibly i analyse a series of simple abstract models of information transmission in the basic model there are two agents the sender s and the receiver r who are to play the game a known finite number of times at each stage both players learn the value of a parameter measuring the importance of that period s play of the game that is the value of making a correct decision and s obtains payoff relevant information s then sends a signal to r who makes a decision that affects the welfare of both players after both players learn the consequences of r s decision the process repeats at each stage r must decide what action to take in order to do that he must assess the credibility of s the difficulty arises because r is uncertain about s s preferences when play begins i model this by assuming that with positive probability s has identical preferences to r s is a friend and with positive probability s has completely opposed preferences to r s is an enemy this uncertainty creates a trade off for enemy senders at each stage providing honest information enhances s s reputation but only at the expense of foregoing an opportunity for immediate gain by duping r the possibility that s is a friend lends credibility to what he says but this credibility may also be exploited by an enemy s the principal equilibrium has the following form in the basic model where s has no control over the importance of a given play s typically conveys accurate information for the first several periods r raises the probability he places on s being friendly after receiving accurate information if he believes that an enemy would have lied to him with positive probability the more important the information the more likely an enemy will attempt to deceive r an enemy will eventually take advantage of r by misleading him when this happens the sender loses all opportunities for deception in the future i

a consistent multidimensional pigou dalton transfer principle abstract the unidimensional pigou dalton transfer principle demands that a regressive transfer in income a transfer from worse off poor to better off rich decreases social welfare in a multidimensional setting the direct link between income or any other attribute and individual well being is absent we interpret the social welfare level of a distribution in which each individual has the same bundle as the individual well being level we define regressivity on the basis of this individual well being ranking in a setting with both transferable and non transferable attributes the imposition of the ensuing consistent pigou dalton principle forces individual well being to have a quasi linear structure in the transferable attributes since we allow for transferable and non transferable attributes our result provides a normative underpinning for criteria in the distinct literatures of multidimensional inequality measurement only transferable attributes and of needs one transferable and one non transferable attribute

the public demand for smoking bans smoking bans are gaining widespread support in the united states and other countries while supporters argue that bans are necessary to resolve market failures associated with negative externalities the coase theorem predicts that under various conditions private markets internalize negative externalities we examine the smoking issue within the framework of the coase theorem and hypothesize that smoking bans misallocate air space resources shared by smokers and nonsmokers because smoking bans shift ownership of scarce resources they are also hypothesized to transfer income from one party smokers to another party nonsmokers supporting evidence for these hypotheses is provided by an examination of a comprehensive smoking ban imposed in san luis obispo ca

revisiting the sen poverty index a modification of the official sen poverty index yields an index which is not only continous in individual incomes and consistent with the transfer axiom but also admits a geometric interpretation in terms of the area beneath a graph called the inverse generalized lorenz curve for normalized poverty gaps by jenkins and lambert 1993 or the poverty gap profile by shorrocks 1994

counting and multidimensional poverty measurement this paper proposes a new methodology for multidimensional poverty measurement consisting of an identification method k that extends the traditional intersection and union approaches and a class of poverty measures m our identification step employs two forms of cutoff one within each dimension to determine whether a person is deprived in that dimension and a second across dimensions that identifies the poor by counting the dimensions in which a person is deprived the aggregation step employs the fgt measures appropriately adjusted to account for multidimensionality the axioms are presented as joint restrictions on identification and the measures and the methodology satisfies a range of desirable properties including decomposability the identification method is particularly well suited for use with ordinal data as is the first of our measures the adjusted headcount ratio we present some dominance results and an interpretation of the adjusted headcount ratio as a measure of unfreedom examples from the us and indonesia illustrate our methodology

home bias and high turnover dynamic portfolio choice with incomplete markets why do investors trade a lot in foreign assets and hold so little of them in their portfolios this paper shows that both observations can arise naturally in the presence of nondiversifiable nontraded consumption risk when each country specializes in production preferences exhibit consumption home bias and asset markets are incomplete using a general equilibrium two country two sector tradable and nontradable model of the world economy with production i show that low diversification occurs because variations in relative prices i increase the riskiness of foreign assets and ii facilitate risk sharing across countries large and volatile capital flows are necessary to take advantage of international risk premia differentials that occur in response to productivity changes in the nontradable sector i characterize the optimal portfolio holdings the evolution of the investment opportunity set the risk premium and the dynamics of capital flows using a new methodology for solving dynamic general equilibrium models with incomplete markets and portfolio choice

risk external adjustment and capital flows abstract this paper studies the process of external adjustment i develop an open economy model with endowment and preference shocks that can account for the empirical behavior of real exchange rates interest rates and consumption in the u s and europe the model includes cross border holdings of bonds and equity and financial frictions that impede international risk sharing i find that external adjustment following endowment shocks predominantly takes place via trade flows consistent with the intertemporal approach to the current account in contrast preference shocks that change investors risk aversion induce adjustment via the trade and valuation channels where the latter includes the effects of unexpected capital gains and loss on existing cross border holdings and changes in the expected future return differentials between foreign assets and liabilities the model estimates imply that the valuation channel of external adjustment is more important for the u s than the trade channel consistent with this implication i show that forecasts of future return differentials contributed most to the volatility of the u s net foreign asset position in the post bretton woods era

inequality measurement for ordered response health data because self reported health status srhs is an ordered response variable inequality measurement for srhs data requires a numerical scale for converting individual responses into a summary statistic the choice of scale is however problematic since small variations in the numerical scale may reverse the ordering of a given pair of distributions of srhs data in relation to conventional inequality indices such as the variance this paper introduces a parametric family of inequality indices founded on an inequality ordering proposed by allison and foster allison r a foster j 2004 measuring health inequalities using qualitative data journal of health economics 23 505 524 which satisfy a suitable invariance property with respect to the choice of numerical scale several key members of the parametric family are also derived and an empirical application using data from the swiss health survey illustrates the proposed methodology

on the form of transfers to special interests an important question in political economy concerns the form of transfers to special interests the chicago view is that political competition leads politicians to make such transfers efficiently the virginia position is that lack of information on the part of voters leads politicians to favor inefficient sneaky methods of redistribution this paper analyzes the form of transfers in a model of political competition in which politicians have incentives to make transfers to special interests it shows that when voters have imperfect information about both the effects of policy and the predispositions of politicians inefficient methods of redistribution may be employed

minimum quality standards as a barrier to innovation abstract most models of minimum quality standards do not deal with the dynamic nature of regulation this note shows that presence of minimum quality standards may reduce firm incentives to innovate leading to a lower level of social welfare under regulation

warning labels as cheap talk why regulators ban drugs abstract one explanation for drug bans is that regulators know more than consumers about product quality but why not just communicate the information in their ban perhaps via a would have banned label because product labeling is cheap talk any small market failure tempts regulators to lie about quality inducing consumers who suspect such lies to not believe everything they are told in fact when regulators expect market failures to result in under consumption of a drug and so would not ban it for informed consumers regulators ex ante prefer to commit to not banning this drug for uninformed consumers

cheap talk and burned money we augment the standard crawford sobel 1982 econometrica 50 1431 1451 model of cheap talk communication by allowing the informed party to use both costless and costly messages the issues on which we focus are the consequences for cheap talk signaling of the option to burn money and the circumstances under which both cheap talk and burned money are used to signal information

cheap talk with two audiences these problems have in common a simple structure an informed sender says something to two interested but uninformed receivers who then take actions based on their beliefs these actions affect the sender as well as the receivers in this paper we study how costless nonverifiable claims cheap talk can affect these beliefs and hence the actions and how the incentives for truthful revelation to one receiver are affected by the presence of the other we then ask how welfare is affected by whether claims are made in public or in private as some of the above examples suggest public messages may be more credible than private messages addressed to either audience one possibility is that the presence of one audience can discipline the sender s relationship with the other we call this one sided

what drives us foreign borrowing evidence on external adjustment to transitory and permanent shocks the joint dynamics of us net output consumption and valuation adjusted foreign assets and liabilities characterized empirically following lettau and ludvigson 2004 is shown to be strikingly consistent with current account theory while us consumption is virtually insulated from transitory shocks these contribute considerably to the variation in net output and even more so in gross foreign positions arguably smoothing temporary variations in returns a single permanent shock naturally interpreted as a productivity shock raises consumption swiftly while causing net output to adjust only gradually this leads to persistent procyclical external deficits but interestingly moves gross assets and liabilities in the same direction

home bias in open economy financial macroeconomics standard theory would predict that investors hold a well diversified portfolio of equities across the world but despite the process of financial globalization investors still hold a disproportionate share of local equities in their portfolio the equity home bias french and poterba 1991 we review the various explanations of this puzzling phenomenon in the context of recent developments in macroeconomic modelling that have allowed to incorporate sophisticated international portfolio choices in standard two country general equilibrium models we refer to this literature as open economy financial macroeconomics we focus on three broad classes of explanations i hedging motives in frictionless financial markets real exchange rate and non tradable income risk ii asset trade costs in international financial markets such as transaction costs differences in tax treatments between national and foreign assets iii informational frictions and behavioural biases these recent developments raise the need for new portfolio facts beyond the equity home bias and we will present some new evidence on cross border asset holdings across different types of assets equities bonds and bank lending we also present some new micro data on institutional holdings of equity at the fund level these data should inform macroeconomic modelling of the open economy and a growing literature of models of delegated investment

nontraded goods nontraded factors and international non diversification abstract can the presence of nontraded consumption goods or nontraded factors of production explain the high degree of home bias displayed by investor portfolios we find that the answer is no so long as individuals have access to free international trade in financial assets in particular it is never optimal to exhibit home bias with respect to domestic traded good equities by contrast holdings of nontraded good equities in an optimal portfolio will depend sensitively on the elasticity of substitution between traded and nontraded goods

on limiting the market for status signals abstract in many societies individuals care how others view them in their efforts to impress such individuals engage in consumption signals which attempt to establish higher levels of status than their true status type this leads to an inefficiency which offers the possibility of a pareto improving tax policy the impacts of tax policy and benefits on the signalling equilibrium are considered

can portfolio rebalancing explain the dynamics of equity returns equity flows and exchange rates we explore whether the pattern of international equity returns equity portfolio flows and exchange rate returns are consistent with the hypothesis that unhedged global investors rebalance their portfolio in order to limit their exchange rate exposure when there are 1 relative equity return and 2 exchange rate shocks we also explore whether 3 equity flow shocks influence the exchange rates and relative equity prices in the estimation of the var system we do not impose any causal ordering upon the primitive shocks but instead identify the system based on theoretical priors about the contemporaneous conditional correlations between the three variables international data for the five largest equity markets are consistent with a theory in which equity returns and portfolio rebalancing are an important source of exchange rate dynamics

consumption and real exchange rates in dynamic economies with non traded goods abstract we examine the possibility that non traded goods may account for several striking features of international macroeconomic data large persistent deviations from purchasing power parity small correlations of aggregate consumption fluctuations across countries and substantial international real interest rate differentials a dynamic exchange economy is used to show that non traded goods in principle can account for each of these phenomena in the theory there is a close relation between fluctuations in consumption ratios and those in bilateral real exchange rates but we find little evidence for this relation in time series data for eight oecd countries

cheap talk and the fed a theory of imprecise policy announcments this paper examines the problem faced by the federal reserve in announcing its private information about its future policies because it would like to manipulate expectations and pursue a time inconsistent policy the fed cannot reveal its policy objectives precisely and credibly it can however communicate some information about its goals through the cheap talk mechanism of vincent crawford and joel sobel making announcements that are imprecise and only giving ranges within which these goals may lie copyright 1989 by american economic association

what do normative indices of multidimensional inequality really measure we argue that normative indices of multidimensional inequality do not only measure a distribution s extent of inequity i e the gaps between the better off and the worse off but also its extent of inefficiency i e the non realized mutually beneficial exchanges of goods we provide a decomposition that allows quantifying these two parts of inequality exact formulas of the inequity and inefficiency components are provided for a generic class of social welfare functions the inequity component turns out to be a two stage measure which applies a unidimensional inequality measure to the vector of well being levels we critically discuss two prominent transfer principles viz uniform majorization and correlation increasing majorization in the light of the decomposition a decomposition of inequality in human development illustrates the analysis

international capital flows abstract the surge in international asset trade since the early 1990s has lead to renewed interest in models with international portfolio choice we develop the implications of portfolio choice for both gross and net international capital flows in the context of a simple two country dynamic stochastic general equilibrium dsge model we focus on the time variation in portfolio allocation following shocks and resulting capital flows endogenous time variation in expected returns and risk which are the key determinants of portfolio choice affect capital flows in often subtle ways the model is consistent with a broad range of empirical evidence an additional contribution of the paper is to overcome the technical difficulty of solving dsge models with portfolio choice by developing a broadly applicable solution method

assessing deprivation with an ordinal variable theory and application to sanitation deprivation in bangladesh the challenges associated with poverty measurement with a cardinal variable have received due attention during the last four decades but there is a dearth of literature studying how to meaningfully assess poverty with an ordinal variable this paper first proposes a class of simple intuitive and policy relevant poverty measures for ordinal variables these measures are sensitive to depth of deprivations unlike the headcount ratio moreover under appropriate restrictions the measures ensure that priority is given to the poorest among the poor while targeting monitoring and evaluating poverty alleviation programs to assess the robustness of poverty comparisons to alternative choices of parameters various stochastic dominance tests are developed some of which are themselves novel contributions to the stochastic dominance literature the empirical illustration documenting changes in sanitation deprivation in bangladesh showcases the measures ability to identify instances in which overall sanitation deprivation improved while leaving the poorest behind

prioritarian poverty comparisons with cardinal and ordinal attributes the ethical view of prioritarianism holds the following if an extra bundle of attributes is to be allocated to either of two individuals then priority should be given to the worse off among the two we consider multidimensional poverty comparisons with cardinal and ordinal attributes and propose three axioms that operationalize the prioritarian view each priority axiom in combination with a handful of standard properties characterizes a class of poverty measures this article is protected by copyright all rights reserved

an empirical examination of information barriers to trade in insurance this paper uses direct evidence to evaluate whether asymmetric information is a barrier to trade in the largest market for private insurance in the world life insurance we report several findings that seem difficult to reconcile with the conventional theory of insurance under asymmetric information we conjecture that sellers may know their costs of production better than consumers in this market as in those for most other products

the comparison of multi dimensioned distributions of economic status the literature on inequality measurement has been largely concerned with single dimensioned indicators this paper explores some of the issues which arise when there are several dimensions to inequality and these are not readily reduced to a single index concentrating particularly on the two dimensioned case we make use of results on multi variate stochastic dominance in portfolio theory extending these and applying them to the measurement of inequality the use of the dominance conditions is illustrated by an application to the international distribution of income and life expectancy

investment moral hazard and occupational licensing i analyse occupational licensing as an input regulation that requires minimum levels of human capital investment by professionals by raising professionals training levels licensing helps alleviate moral hazard problems associated with the provision of high quality services i also consider certification whereby consumers are provided information about professionals training levels i show that licensing and certification tend to benefit consumers who value quality highly at the expense of those who do not licensing may raise total surplus if sellers investments are not observable but is pareto worsening if training levels are observable certification may however lead to excessive investment as a signalling device and thus be pareto inferior to either licensing or to a policy of laissez faire

asset prices and real exchange rates with deep habits i introduce an external habit for each consumption good known as deep habits into an otherwise standard international equilibrium model with multiple consumption goods and multiple countries i show that deep habits coupled with consumption home bias account for a wide range of asset pricing and exchange rate moments calibrated to a set of ten countries the model reproduces the cross sectional evidence on currency risk premiums when sorting on interest rates interest rate volatility innovations to global exchange rate volatility and value hence the model provides an equilibrium interpretation of these empirical regularities

income taxation and job market signaling abstract this paper develops a model of taxation with asymmetric information between the worker and the employer as well as between the worker and the tax collector we show that if the informational asymmetry in the labour market is solved through signaling implications for taxation are strong taxing the signal directly as well as imposing a progressive tax on income are both shown to have favourable welfare consequences locally in contrast to the results obtained for the progressive income tax we show that taxing the signal directly is likely to reduce other distortions the optimal tax fully exploits the possibilities to tax the signal directly before using progression

country portfolios in open economy macro models this paper develops a simple approximation method for computing equilibrium portfolios in dynamic general equilibrium open economy macro models the method is widely applicable simple to implement and gives analytical solutions for equilibrium portfolio positions in any combination or types of asset it can be used in models with any number of assets whether markets are complete or incomplete and can be applied to stochastic dynamic general equilibrium models of any dimension so long as the model is amenable to a solution using standard approximation methods we first illustrate the approach using a simple two asset endowment economy model and then show how the results extend to the case of any number of assets and general economic structure

accounting for u s real exchange rate changes this study measures the proportion of u s real exchange rate movements that can be accounted for by movements in the relative prices of nontraded goods the decomposition is done at all possible h

aggregate poverty measures the way poverty is measured is important for an understanding of what has happened to poverty as well as for anti poverty policy evaluation sen s 1976 pathfinding work has motivated many researchers to focus on the way poverty should be measured a poverty measure argued by sen should satisfy certain properties or axioms and the desirability of a poverty measure should be evaluated by these axioms during the last two decades many researchers have adopted the axiomatic approach pioneered by sen to propose additional axioms and develop alternative poverty measures the objective of this survey is to provide a clarification on the extensive literature of aggregate poverty measures in this survey we first examine the desirability of each axiom the properties of each poverty measure and the interrelationships among axioms the desirability of an axiom cannot be evaluated in isolation and some combination of axioms may make it impossible to devise a satisfactory poverty measure some axioms can be implied by other axioms combined and so are not independent some others are ad hoc and are disqualified as axioms for poverty measurement based on the interactions among axioms we identify the core axioms which together have a strong implication on the functional form of a poverty measure we then review poverty measures that have appeared in the literature evaluating the interrelationships among different measures and examining the properties of each measure the axioms each measure satisfies violates are also summarized in a tabular form several good poverty measures which have not been documented by previous surveys are also included

on the measurement of poverty official statistics in the united states and the united kingdom show a rise in poverty between the 1970 s and the 1980 s but scepticism has been expressed with regard to these findings in particular the methods employed in the measurement of poverty have been the subject of criticism this paper re examines three basic issues in measuring poverty the choice of the poverty line the index of poverty and the relation between poverty and inequality one general theme running through the paper is that there is a diversity of judgments which enter the measurement of poverty and that it is necessary to recognize these explicitly in the procedures adopted there is likely to be disagreement about the choice of poverty line affecting both its level and its structure in this situation we may only be able to make comparisons and not to measure differences and the comparisons may lead only to a partial rather than a complete ordering the first section of the paper discusses the stochastic dominance conditions which allow such comparisons illustrating their application by reference to data for the united states the choice of poverty measure has been the subject of an extensive literature and a variety of measures have been proposed in the second section of the paper a different approach is suggested considering a class of measures satisfying certain general properties and seeking conditions under which all members of the class which includes many of those proposed give the same ranking those sceptical about measures of poverty often assert that poverty and inequality are being confounded the third section of the paper distinguishes four different viewpoints and relates them to theories of justice and views of social welfare

rat race redux adverse selection in the determination of work hours in law firms this paper describes an organizational setting in which professional employees are required to work inefficiently long hours the focus of the authors investigation is large law firms the income sharing that characterizes legal partnerships creates incentives to promote associates who have a propensity to work very hard law firms use indicators of this propensity especially an associate s record of billable hours in promotion decisions reliance upon work hours as an indicator leads to a rat race equilibrium in which associates work too many hours the authors find evidence in support of this conclusion with data they collected from two large law firms copyright 1996 by american economic association

organizing the health insurance market this paper presents a new approach to organizing universal health insurance first the government divides the entire population into many large groups then the government creates a federal health insurance system healthfed modeled on the federal reserve system to fill the role now played by the benefits office of a large firm the healthfed would create a short menu of alternatives solicit bids for insuring the entire group and price alternatives there would be redistribution between groups and pricing of alterna tives to reflect optimal social insurance principles there would be no connection between health insurance and employment it may seem odd that this presidential address is my first publication in health economics at the time when i might have been working on an alternative address i was chair of an expert panel for the advisory council on social security looking at issues in both retirement income and medical care 2 in the process of this work i have come up with a new approach to organizing universal health insurance that is the subject of this paper before starting on health insurance i will say a few words about a wider context offering what i will say as an example in that setting 3 a great deal of attention has been focused on the exciting issue of reorganizing economies dropping central planning commonly economists from those countries em brace capitalism or more specifically laissez faire competition with an enthusi asm which exceeds that ofwestern economists although not necessarily western businessmen yet laissez faire capitalism has received little serious support in the west for a very long time we all know the fundamental welfare theorem which shows many ways that capitalism can be imperfect we have also seen a growth in discussion and analysis of the many ways governments can mess up resource allocation the real question is the design of arrangements that try to integrate the things that each type of institution does better this is hard for two reasons one is that it is in the realm of second best with many constraints the more the constraints the harder the analysis the second is that we do not have good positive theories of government behavior good examples yes good theories no thus the analysis is more intuitive less theory driven than in our picture of private markets but also in our private market analyses we have been greatly complicating our picture recognizing all sorts of information imperfec tions that affect the way that private markets work so i will present to you a proposal for universal health insurance meant to combine something that