mexico and the brady plan mexico has throughout the 1980s been centre stage in the debates and events shaping the sovereign debt problem caught between a sudden collapse of its terms of trade and rising world interest rates mexico suspended debt service payments in august 1982 and ushered in what has since become known as the debt crisis in the following years lending to ldcs dried up and debtor countries were increasingly forced to run high trade surpluses to effect ever growing transfers from poor back to rich countries in the face of falling growth rates and rising inflation in the high debt countries then secretary of the treasury baker proposed the baker plan in return for economic reforms high debt countries would get new access to medium term new loans in addition to rolling over of amortization of old loans new loans had to come both from commercial creditors and the official lending institutions with access to capital markets restored the economic reforms would it was hoped allow the debtors to grow out of debt but experience in the high debt countries showed that the original hopes of the proponents of the baker plan went unfulfilled net transfers out of the borrowing countries went up rather than down as

the limits of competition housing insurance in switzerland abstract in switzerland there are seven cantons where the housing insurance market is competitive while in the 19 others there are local state monopolies this paper compares the price performance relationship of these different market forms it is shown that for a very similar product the state monopolies charge 70 lower prices that they spend substantially more on fire prevention and that they have much lower damage rates one of the main reasons for the higher prices of the private insurance companies is the fact that they spend considerably more on sales and administrative costs the housing insurance market is thus a classic example of a situation where state monopoly outperforms private sector competition

a comparison of determinants of urban rural and farm poverty in costa rica abstract the lack of progress on reducing poverty in third world countries and its growth during the 1980s show that one of the fundamental goals of development has not been met addressing the renewed concern with poverty requires knowledge about the factors affecting poverty this paper uses logistic regression analysis to estimate the effects of variables on urban rural farm and nonfarm poverty among households in costa rica results show the complexity of the issue and imply policies to expand education through the secondary level to create more opportunities for rural off farm employ

equilibrium and agency inadmissible agents in the public agency problem an agency relationship arises when one party the agent takes actions on behalf of another party a principal the theory of agency was first developed in different contexts by robert wilson 1968 1969 a michael spence and richard zeckhauser and the author 1973 1974 and has been extended in a number of different directions steven shavell for example has examined moral hazard issues associated with imperfectly monitoring the agent s effort and milton harris and artur raviv have looked at optimal contract structures this paper takes up some different issues motivated by the desire to study the qualitative properties of equilibrium in markets for agents

pure strategy nash equilibrium in a group formation game with positive externalities abstract this paper identifies a domain of payoff functions in no spillover noncooperative games with positive externality which admit a pure strategy nash equilibrium since in general a nash equilibrium may fail to exist in order to guarantee the existence of an equilibrium we impose two additional assumptions anonymity and order preservation the proof of our main result is carried out by constructing for a given game g a potential function over the set of strategy profiles in such a way that the maximum of yields a nash equilibrium in pure strategies of g journal of economics literature classification numbers c72 d62 h73

pricing and capital allocation in catastrophe insurance abstract this paper studies multi line pricing and capital allocation by insurance companies when solvency matters to consumers capital is costly to hold and the average loss is uncertain in this environment product quality concerns lead firms to diversify across markets and charge high prices for risk that threatens company solvency even if the risk is unrelated to other asset risk price differences across markets are traced to differences in capital required at the margin to maintain solvency finally the paper shows that capital costs have significant effects on catastrophe insurance markets because of high marginal capital requirements

mexico stabilization debt and growth mexico rudiger dornbusch mexico today is at a crossroads as the de la madrid presidency which has been dominated by the debt crisis comes to an end a number of major policy difficulties remain inflation is still a problem and the continuation of stagnation in a country where the population grows by 3 a year is clearly unsustainable the outlook for inflation is dependent on the government s ability to keep its budget under control the stabilization programme has been quite successful in this respect but the cost in terms of foregone growth is staggering the issue here is how to collect the disinflation benefits of policy restraint analysing the peculiar process of rapid inflation both in mexico and elsewhere the author calls for an incomes policy as for growth it is closely linked to the external situation mexico which triggered the debt crisis in 1982 has made remarkable progress in achieving a non interest current account surplus yet its external debt remains huge and requires a continuation of net transfers abroad the experience though is that debt service comes at the expense of productive investment and growth the author proposes to escape from the unacceptable choice between debt service and growth by adopting what he calls interest rescheduling a debt equity swap applied to interest payments rather than to the principal

economic crisis adjustment and living standards in mexico 1982 85 abstract this paper presents an estimate of the impact of economic crisis and adjustment on the living standards of the mexican population between 1982 and 1985 the analysis is based on information on wage and nonwage incomes unemployment functional income distribution changes in public expenditures and social indicators the specific questions addressed are what happened to agricultural and nonagricultural wage and nonwage incomes how did unemployment and the composition of employment change what was the impact of fiscal cuts on social expenditures and food subsidies were social services affected by declining resources did social indicators worsen in addition households strategies in response to declining incomes are briefly discussed finally conjectures are made regarding which population groups were hurt most by the crisis the results indicate that the crisis and adjustment process left mexico with a relatively impoverished middle class and with rising poverty

mexico s investment collapse debt or oil abstract this paper tests three explanations for mexico s investment collapse in the early 1980s the oil price decline the termination of capital inflows and debt overhang uncertainty effects using previously ignored investment data on private sector industries the data consistently point to the importance of the rise in the relative price of investment goods driven in large part by falling world oil prices but the data also allow a role for the termination of capital inflows however after controlling for these effects the paper finds little evidence for debt overhang effects heightened uncertainty or other commonly cited explanations in the literature jel f34

external shocks structural change and economic growth in mexico 1979 2007 summary this article finds that shocks to net financial inflows world oil prices the us growth rate and the lagged real exchange rate explain most of the fluctuations in mexico s annual growth since 1979 the article also estimates how the effects of these external constraints have changed since mexico s liberalization policies of the late 1980s and the formation of nafta in 1994 estimates of an investment function and other tests show that growth drives investment but not conversely in the short run investment is driven mainly by oil prices and the accelerator effect foreign direct investment has no significant impact 2008 elsevier ltd all rights reserved

inflation stationarity during latin american inflation insights from unit root and structural break analysis inflation stationarity has important theoretical and policy implications yet most of the literature has focused on low inflation countries this article investigates inflation stationarity in brazil argentina chile mexico and bolivia during a hyperinflationary period from 1980 to 2004 we test for structural breaks in inflation discuss the breaks in terms of changes in monetary regimes and test if accounting for these structural breaks changes the nonstationarity results for those nations that fail the traditional augmented dickey fuller adf test for inflation all five are found to have inflation rates that are i 0 once the structural breaks analysis is incorporated into our unit root tests

below the line poverty in latin america abstract despite gains in basic welfare indicators poverty remains prevalent in latin america this paper surveys existing data on poverty in the region and discusses the relationship between growth inequality and poverty given the inequality of income distribution in latin america and the slow growth of output policies to overcome poverty must involve more efficient allocation of government resources redistribution and foreign aid

asymmetric information in insurance general testable implications several recent articles on empirical contract theory and insurance have tested for a positive correlation between coverage and ex post risk as predicted by standard models of pure adverse selection or pure moral hazard we show here that the positive correlationproperty can be extended to general setups competitive insurance markets and cases where risk aversion is public we test our results on a french dataset our tests confirm that the estimated correlation is positive they also suggest the presence of market power

price regulation in property liability insurance a contingent claims approach a discrete time option pricing model is used to derive the fair rate of return for the property liability insurance firm the rationale for the use of this model is that the financial claims of shareholders policyholders and tax authorities can be modeled as european options written on the income generated by the insurer s asset portfolio this portfolio consists mostly of traded financial assets and is therefore relatively easy to value by setting the value of the shareholders option equal to the initial surplus an implicit solution for the fair insurance price may be derived unlike previous insurance regulatory models this approach addresses the ruin probability of the insurer as well as nonlinear tax effects

the equilibrium configuration of pure risk sharing contracts in markets with diverse transactors the equilibrium set of pure risk sharing contracts obtained through simultaneous bilateral bargaining in markets with multiple transactors having diverse risk aversion is defined and investigated an analogy is established between the equilibrium configuration of pure risk sharing contracts and the competitive equilibrium of interregional trade in a single commodity it is also shown that in equilibrium the risk aversion of the parties to the contracts are negatively correlated and that the equilibrium configuration of contracts is pareto efficient

resource based industry in boom downswing and liberalization mexico abstract mexico s oil windfall was advantageously later and smaller than that of most oil exporters but it was still absorbed too quickly inflation accelerated the exchange rate appreciated and diversification into competitive non oil tradeables like resource based industry rbi was retarded too much rbi investment was channelled through state enterprises whose performance deteriorated it relied heavily on the protected domestic market which fell short of projections excess capacity and inadequate revenues then made rbi vulnerable as mexico rapidly liberalized its economy in the late 1980s

moral hazard agency costs and asset prices in a competitive equilibrium the behavior of economic agents in the presence of uncertainty about exogenous events and imperfect information about the endogenously influenced actions of other agents with whom they contract has been receiving growing attention in particular the economic theory of agency explicitly recognizes that when agents enter into synergistic relationships each agent will act in a manner consistent with the maximization of its personal welfare thus giving rise to a phenomenon called moral hazard harris and raviv 8 holmstra m 10 and shavell 21 have analyzed the nature of pareto optimal contractual mechanisms designed to ameliorate moral hazard and achieve efficient risk sharing jensen and meckling 12 grossman and hart 6 and thakor and gorman 22 have explored the impact of moral hazard on the capital structure decisions of firms arrow 1 explained the absence of complete contingent claims markets on the basis of moral hazard and harris and raviv 7 have examined the impact of moral hazard on the structure of health insurance contracts

limited liability contracts between principal and agent abstract the optimal strategy of the principal is examined in an environment where there are ex post limitations on the maximum penalty that can be imposed on a riskneutral agent contrary to the case in which such limitations are not imposed it is in the principal s interest to deliberately forego the opportunity to induce socially efficient behavior and to instead design a contract that induces the agent to realize an efficient outcome only in the most productive state of nature and perhaps in certain very unproductive states the properties of the contract are examined in detail

external shocks and growth prospects the case of brazil 1973 1989 this is a study of the factors underlying the current account deficits experienced by brazil since the mid 1970s it also explores the country s economic prospects through 1989 with the help of a simple macro simulations model the current account deficit is identically equal to the excess of domestic spending over national income provided that net external financing is available this excess may increase for a number of reasons prominent among them is an expansion of real domestic spending associated with increases either of real consumption expenditures or of real domestic capital formation even if domestic absorption is invariant the external deficit may worsen because of inadequate domestic pricing policies these may make it impossible for local firms to compete with cheaper foreign products thus forcing a contraction of national income and employment a temporary reduction of gnp below its potential value may also be caused by domestic supply shocks of a climatic or other nature however other factors can also cause a deterioration of the current account in this context this study investigates the factors underlying the evolution of the external accounts of brazil since the mid 1970s following an approach suggested in the dell report and elaborated by balassa the reasons for a deterioration of the current account are divided into three groups external shocks burden of accumulated debt and domestic policy actions the first group comprises terms of trade international interest rates and world recession the second includes the accumulated effect of past shocks and domestic policy actions finally the third group encompasses the variables supposedly under the control of local policy makers domestic absorption and the economy s tradability

estimating welfare in insurance markets using variation in prices we provide a graphical illustration of how standard consumer and producer theory can be used to quantify the welfare loss associated with inefficient pricing in insurance markets with selection we then show how this welfare loss can be estimated empirically using identifying variation in the price of insurance such variation together with quantity data allows us to estimate the demand for insurance the same variation together with cost data allows us to estimate how insurers costs vary as market participants endogenously respond to price the slope of this estimated cost curve provides a direct test for both the existence and the nature of selection and the combination of demand and cost curves can be used to estimate welfare we illustrate our approach by applying it to data on employerprovided health insurance from one specific company we detect adverse selection but estimate that the quantitative welfare implications associated with inefficient pricing in our particular application are small in both absolute and relative terms

natural catastrophe insurance when should the government intervene this paper develops a theoretical framework for analyzing the decision to provide or buy insurance against the risk of natural catastrophes in contrast to conventional models of insurance the insurer has a non zero probability of insolvency which depends on the distribution of the risks the premium rate and the amount of capital in the company when the insurer is insolvent each loss reduces the indemnity available to the victims thus generating negative pecuniary externalities our model shows that government provided insurance will be more attractive in terms of expected utility as it allows these negative pecuniary externalities to be spread equally among policyholders however when heterogeneous risks are introduced a government program may be less attractive in safer areas which could yield inefficiency if insurance ratings are not chosen appropriately

rational insurance purchasing consideration of contract nonperformance much of the analysis of rational insurance purchasing and hedging strategies has been undertaken on the basis of the expected utility hypothesis this decision framework has been used to reformulate the bernoulli principle that a risk averter rationally would fully insure at a fair premium other applications include the analysis of insurance at unfair premiums mossin 1968 and smith 1968 the effects of state dependent utility on the rational insurance purchase cook and graham 1977 the effects of risky background wealth doherty and schlesinger 1983 and mayers and smith 1983 and the design of the optimal insurance policy raviv 1979 such analyses have been conducted on the assumption that insurance policies are free of insolvency default risk this assumption stands in sharp contrast to the actuarial literature in which the insolvency risk or probability of ruin is a central focus of attention

the transition from monopoly to competition the case of housing insurance in baden wurttemberg abstract in 1992 the european community decided to abolish the housing insurance monopolies in germany in baden wurttemberg this has led to the end of an institution that was more than two centuries old the purpose of the paper is to analyse the very negative consequences this step has had for consumers particular emphasis is placed on two points 1 a the important increase in prices due to the additional costs imposed by competition and 2 b the difficulty of maintaining the global coverage against natural damages that was one of the hallmarks of the monopoly situation

market discipline in property casualty insurance evidence from premium growth surrounding changes in financial strength ratings analysis of abnormal premium growth surrounding changes in financial strength ratings for a large panel of property casualty insurers generally indicates significant premium declines in the year of and the year following rating downgrades consistent with greater risk sensitivity of demand premium declines were concentrated among commercial insurance which has narrower guaranty fund protection than personal insurance premium declines were greater for firms with low pre downgrade ratings and especially pronounced for firms falling below an a rating there is no evidence of moral hazard in the form of rapid commercial or personal lines premium growth following downgrades of a or low rated insurers

the pricing of options with default risk this paper considers the pricing of options with default risk the comparative statics of such options can differ from those of ordinary options and early exercise of such american call options can be optimal several examples of options with default risk are considered traditionally it has been assumed that options have no default risk such an assumption is reasonable when one studies options traded on an organized exchange in the u s default on such options would require as cox and rubinstein 5 put it a very sudden and strong movement in stock prices one considerably more extreme than any on record p 71 however many options and financial assets containing option like payoffs are sold by firms that have limited assets for such options default is often a possibility that must be taken seriously in this paper we study how options subject to default risk which we hereinafter call vulnerable options are priced it turns out that many of the well established results of the option pricing literature see e g smith 12 and references therein do not hold for vulnerable options in particular the value of a vulnerable european option can fall with time to maturity with the interest rate and with the variance of the underlying asset furthermore it may pay to exercise early a vulnerable american option on a non dividend paying asset

estimation risk and incentive contracts for portfolio managers the fiduciary relationship between portfolio managers and the investors they represent may be viewed as a principal agent relationship and therefore we have used the methodology from the agency literature in economics and finance to study the impact of existing compensation arrangements on the conflicts of interest between these two groups in this paper we employ the assumptions of the capital asset pricing model and of estimation risk concerning beta to develop a model in which portfolio managers can through effort choose the parameters of the beta distribution our model entails moral hazard because the investor cannot observe the manager s action given certain utility functions we show that the presence of estimation risk leads the manager to choose a lower beta portfolio than otherwise and that no first best optimal contract exists we also show that managerial divergent behavior is related to the divergence in risk preferences between the manager and the investor by making slightly more stringent assumptions about preferences we show that there exist some conditions under which the manager will provide more effort but also a riskier portfolio than the investor prefers finally we show that the investor will prefer a manager who is less risk averse than the investor

fire insurance in germany a comparison of price performance between state monopolies and competitive regions abstract up until 1994 there were two different forms of organizing the fire insurance market in germany while a state monopoly applied in 13 regions a competitive market system combined with government regulation existed in the rest of the country this study identifies the effects of market forms on the price performance of insurance companies it is based on annual company data including premium revenues damage payments and general expenses for the period 1980 1994 the estimation results indicate that monopolies had a 22 percent lower markup on damage payments compared to companies in competitive regions with an average markup of 42 percent the difference may be explained by higher selling costs for companies in competitive markets indicated by a high share of commissions in total expenses

portfolio performance and agency the evaluation and compensation of portfolio managers is an important problem for practitioners optimal compensation will induce managers to expend eort to generate information and to use it appropriately in an informed portfolio choice our general model points the way towards analysis of optimal performance evaluation and contracting in a rich model optimal contracting in the model includes an important role for portfolio restrictions that are more complex than the sharing rule the agent s compensation gives the agent approximately to a benchmark return plus an incentive fee equal to a portfolio measure that is approximately the excess of return above the benchmark this measure is often used by practitioners but is simpler than the jensen measure and other measures commonly recommended in the academic literature in addition to the excess return above the xed benchmark the manager is given some additional incentive to take a position that deviates from the benchmark to remove an incentive to tend towards being a closet indexer ecient contracting involves restrictions on what portfolio strategies can be pursued and prior communication of the information gathered