the nature of social learning experimental evidence in the wide economic literature on social learning many types of behavior rational and non rational have been proposed i suggest a level k model that unifies many of them in one framework this paper analyzes experimental data that is able to distinguish between levels of reasoning at the individual level it relies on rich existing data from celen and kariv 2004 as well as new experimental data that includes written accounts of reasoning from incentivized intra team communication three datasets provide consistent evidence that naive inference in form of the best response to truthful play is the most common approach to social learning the empirical type distributions feature heterogeneity similar to other level k applications

implicit collusion in non exclusive contracting under adverse selection this paper studies how implicit collusion may take place through simple non exclusive contracting under adverse selection when multiple buyers e g entrepreneurs with risky projects non exclusively contract with multiple firms e g banks it shows that any price schedule can be supported as equilibrium terms of trade in the market if each firm s expected prot is no less than its reservation profit firms sustain collusive outcomes through the triggering trading mechanism in which they change their terms of trade contingent only on buyers reports on the lowest average price that the deviating firm s trading mechanism would induce it suggests that a good can be overpriced in a competitive market even with fully rational traders and without firms explicit collusive agreement

are health insurance markets competitive to gauge the competitiveness of the group health insurance industry i investigate whether health insurers charge higher premiums ceteris paribus to more profitable firms such direct price discrimination is feasible only in imperfectly competitive settings using a proprietary national database of health plans offered by a sample of large multisite firms from 1998 2005 i find firms with positive profit shocks subsequently face higher premium growth even for the same health plans moreover within a given firm those sites located in concentrated insurance markets experience the greatest premium increases the findings suggest health care insurers are exercising market power in an increasing number of geographic markets

market contagion evidence from the panics of 1854 and 1857 to test a model of contagion where individuals hear some bad news and communicate it to their acquaintances who then pass it on leading to a market panic requires a knowledge of the information networks of participants something hitherto unavailable for two panics in the 1850s this paper examines the behavior of irish depositors in a new york bank as recent immigrants their social network was determined largely by their place of origin in ireland and where they lived in new york during both panics this social network turns out to be the prime determinant of behavior

adverse selection commitment and renegotiation extension to and evidence from insurance markets with asymmetric information full commitment to long term contracts may permit markets to approach first best allocations however commitment can be undermined by opportunistic behavior notably renegotiation we reexamine commitment in insurance markets we present an alternative model which extends laffont and tirole s procurement model to address uncertainty and competition which involves semipooling in the first period followed by separation this and competing models e g single period models and no commitment models have different predictions concerning temporal patterns of insurer profitability a test using california data suggests that some automobile insurers use commitment to attract selective portfolios comprising disproportionate numbers of low risks

a dynamic theory of the banking firm dynamic analysis has greatly increased our understanding of the microfoundations of the general firm unfortunately however little attention has been focussed on the dynamic nature of the banking firm instead most theoretical work has derived the optimal behavior for the bank in a single period context this approach while yielding insight into the function of the bank as a broker between borrowers and lenders has proven incapable of capturing many essential elements of the banking firm the role of capital for example is understated if the risk of bankruptcy is not considered perhaps more importantly the role of banks in transforming risks in an uncertain environment cannot be captured if the problem of handling these risks over time is not considered this paper incorporates these dual roles of brokerage and risk transformation in a cohesive model of the banking firm

facilitating consumer learning in insurance markets what are the welfare effects we model a monopoly insurance market where consumers can learn their accident risks at a cost c we then ask what are the welfare effects of a policy that reduces c if c is sufficiently small c c marginally reducing c hurts the insurer and weakly benefits the consumer finally a reduction in c that is successful meaning that the consumer gathers information after the reduction but not before it can hurt both parties this article is protected by copyright all rights reserved

input demand under yield and revenue insurance previous studies disagree on the effects of insurance on fertilizer application rates the effect of increased fertilizer on the probability of low yields primarily determines whether fertilizer and insurance are substitutes or complements we estimate conditional distributions of corn yields to determine if the technical relationship between yields and fertilizer supports the hypothesis that insurance increases optimal application rates our results indicate no support for this hypothesis at all nitrogen fertilizer rates and reasonable levels of risk aversion nitrogen fertilizer and insurance are substitutes suggesting that those who purchase insurance are likely to decrease nitrogen fertilizer applications

incentive effects in the demand for health care a bivariate panel count data estimation this paper contributes in three dimensions to the literature on health care demand first it features the first application of a bivariate random effects estimator in a count data setting to permit the efficient estimation of this type of model with panel data second it provides an innovative test of adverse selection and confirms that high risk individuals are more likely to acquire supplemental add on insurance third the estimations yield that in accordance with the theory of moral hazard we observe a much lower frequency of doctor visits among the self employed and among mothers of small children copyright 2002 john wiley sons ltd

quasi option value some misconceptions dispelled abstract we discuss a couple of important issues in the recent literature on quasi option value we show that the assertion that quasi option value can be negative in a model with independent learning is based on confusion between quasi option value which is always positive and the net benefit of preservation of a natural environment subject to development which is not we also explore the significance of different assumptions about the nature of learning and show that the result that quasi option value is positive is surprisingly robust

an evolutionary analysis of insurance markets with adverse selection abstract the equilibrium nonexistence problem in rothschild and stiglitz s insurance market is reexamined in a dynamic setting insurance firms are boundedly rational and offer menus of insurance contracts which are periodically revised profitable competitors contracts are imitated and loss making contracts are withdrawn occasionally a firm experiments by withdrawing or innovating a random set of contracts we show that rothschild and stiglitz s candidate competitive equilibrium contracts constitute the unique long run market outcome if innovation experiments are restricted to contracts which are sufficiently similar to those currently on the market

input use decisions with greater information on crop conditions implications for insurance moral hazard and the environment emerging precision agriculture technologies allow farms to make input decisions with greater information on crop conditions this greater information occurs by providing improved predictions of crop yields using remote sensing and crop simulation models and by allowing farms to apply inputs within the growing season when some crop conditions are already realized we use a stylized model with uncertainty in yield and price to examine how greater information on crop conditions i e a forecast affects input use for insured and uninsured farms we show that moral hazard decreases farms apply more inputs as the forecast accuracy improves when the forecast indicates good yields and vice versa when the forecast indicates bad yields in the long run moral hazard decreases in response to an improvement in forecast accuracy even though moral hazard decreases in the long run indemnity payments are likely to increase in the long run driven by the increase in moral hazard when the forecast indicates bad crop conditions we use the results of our model to discuss the potential impact of different technologies and types of inputs on the federal crop insurance program and the environment

contracts with endogenous information abstract i study covert information acquisition and reporting in a principal agent problem allowing for general technologies of information acquisition when posteriors satisfy two dimensional versions of the standard first order stochastic dominance and concavity convexity of the distribution function conditions a first order approach is justified under the same conditions informativeness and riskiness of reports are equivalent high powered contracts that make the agent s informational rents more risky are used to increase incentives for information acquisition insensitive contracts are used to reduce incentives for information gathering the value of information to the agent is always positive the value of information to the principal is ambiguous

on the role of information in decision making the case of sorghum yield in burkina faso this paper investigates the role of temporal uncertainty and information issues in economic decisions it shows that the nature of the economic environment e g the production technology can influence the valuation of information which in turn affects the choice functions this is illustrated by an empirical application to sorghum yield response analysis in burkina faso the paper stresses the importance of technology and information valuation in risk behaviour

the impact of regulation on bank equity infusions abstract this article examines the extent to which regulatory capital standards influence infusions of external equity into commercial banks while such infusions occur infrequently they result in large adjustments to overall bank capital and provide important signals to regulators of managerial intent using a sample of 753 equity capital issues occurring during 1986 and 1987 we find evidence that regulatory minimum capital constraints are instrumental in influencing the financing decisions made by a significant subset of banks

insurance moral hazard and chemical use in agriculture this paper examines how crop insurance affects corn farmers fertilizer and pesticide use in the u s midwest crop insurance might be expected to affect chemical use because of moral hazard insured farmers may undertake riskier production than do uninsured farmers results suggest that insurance exerts considerable influence on corn farmers chemical use decisions those purchasing insurance applied significantly more nitrogen per acre 19 spent more on pesticides 21 and treated more acreage with both herbicides and insecticides 7 and 63 than did those not purchasing insurance these results suggest that both fertilizer and pesticides may be risk increasing inputs

learning by doing and learning from others human capital and technical change in agriculture household level panel data from a nationally representative sample of rural indian households describing the adoption and profitability of high yielding seed varieties hyvs associated with the green revolution are used to test the implications of a model incorporating learning by doing and learning spillovers the estimates indicate that i imperfect knowledge about the management of the new seeds was a significant barrier to adoption ii this barrier diminished as farmer experience with the new technologies increased iii own experience and neighbors experience with hyvs significantly increased hyv profitability and iv farmers do not fully incorporate the village returns to learning in making adoption decisions

complementarity and substituability in multiple risk insurance markets we study imperfect competition between insurers in a multiple risk environment in the absence of asymmetric information equilibria are efficient and we determine the degrees of specialization under which the specialized insurers are able or unable to capture the surplus we show in contrast that under adverse selection specialization systematically prevents second best efficiency concluding on the role of our notions of strategic complementarity substituability on the tradeoff between efficiency and fairness of the allocation we give indications on the desirable structure of the insurance industry

learning from neighbours when payoffs from different actions are unknown agents use their own past experience as well as the experience of their neighbours to guide their decision making in this paper we develop a general framework to study the relationship between the structure of these neighbourhoods and the process of social learning we show that in a connected society local learning ensures that all agents obtain the same payoffs in the long run thus if actions have different payoffs then all agents choose the same action and social conformism obtains we develop conditions on the distribution of prior beliefs the structure of neighbourhoods and the informativeness of actions under which this action is optimal in particular we identify a property of neighbourhood structures local independencewhich greatly facilitates social learning simulations of the model generate spatial and temporal patterns of adoption that are consistent with empirical work

job information networks neighborhood effects and inequality this paper explores the theoretical and empirical literature to examine the use by different social groups of informal sources of information provided by friends relatives and acquaintances during job search and its consequences for the job market it also addresses the role of network structure and size the resource endowments of contacts and nature of the links between contacts to explain differences in the effects of job information networks in doing so the paper also turns to the sociology literature on job information networks and provides an economic perspective on such sociological concepts as strong versus weak ties inbreeding distance from structural holes etc the paper distinguishes between models of exogenous job information networks that is where individuals obtain job related information through a given social structure and endogenous job information networks which are social networks that result from individuals uncoordinated actions the paper pays special attention to such issues as physical and social proximity and sharing of information and discusses them in the context of the recent social interactions and neighborhood effects literature finally the paper outlines a model that integrates job information networks where interactions occur in business cycle frequencies with the dynamics of human capital formation which include the joint effects of parental community and neighborhood human capital and are set in life cycle frequencies for the purpose of organizing suggestions for future research and examining earned income inequality

the value of information in efficient risk sharing arrangements suppose that agents share risks in competitive markets we show that better information makes everyone worse off if the economy has a representative agent that is the economy s demand for state contingent consumption equals the demand of a hypothetical agent who owns all the economy s wealth the representative agent moreover is normatively unrepresentative although each agent dislikes information the representative agent is indifferent although we emphasize pure exchange our results imply that a representative agent model might seriously misstate the welfare effects of improved information in an economy with production and risk sharing even if it performs well otherwise

gathering information before signing a contract after being offered a contract an agent has the possibility to observe the state of nature this enables him to refuse the contract in unfavorable states but burdens him with an observation cost the authors show that the principal offers a contract in which the agent has no incentive to observe the state of nature and they explore its terms later they show that the principal finds it profitable to organize competition between several agents even though he has monopoly power and can push a single agent down to his reservation utility copyright 1992 by american economic association

social learning through endogenous information acquisition an experiment this paper provides a test of a theory of social learning through endogenous information acquisition a group of subjects face a decision problem under uncertainty subjects are endowed with private information about the fundamentals of the problem and make decisions sequentially the key feature of the experiment is that subjects can observe the decisions of predecessors by forming links at a cost the model predicts that the average welfare is enhanced in the presence of a small cost our experimental results support this prediction when the informativeness of signals changes across treatments behavior changes in accordance with the theory however within treatments there are important deviations from rationality such as a tendency to conform and excessive link formation given these biases our results indicate that subjects would except when faced with a small cost have been better off not forming any links this paper was accepted by teck ho behavioral economics

endogenous information adverse selection and prevention implications for genetic testing policy we examine public policy toward the use of genetic information by insurers individuals engage in unobservable primary prevention and have access to different prevention technologies thus insurance markets are affected by moral hazard and adverse selection individuals can choose to take a genetic test to acquire information about their prevention technology information has positive decision making value that is individuals may adjust their behavior based on the result of the test however testing also exposes individuals to uncertainty over the available insurance contract so called classification risk which lowers the value of information in our analysis we distinguish between four different policy regimes determine the value of information under each regime and associated equilibrium outcomes on the insurance market we show that the policy regimes can be pareto ranked with a duty to disclose being the preferred regime and an information ban the least preferred one

learning from the behavior of others conformity fads and informational cascades learning by observing the past decisions of others can help explain some otherwise puzzling phenomena about human behavior for example why do people tend to converge on similar behavior why is mass behavior prone to error and fads the authors argue that the theory of observational learning and particularly of informational cascades has much to offer economics business strategy political science and the study of criminal behavior

on matching book a problem in banking and corporate finance in each of the asset and liability markets in which the banking firm is an intermediary typically there are instruments with differing maturities the bank matching book problem is to manage the term structures of assets and liabilities in our first model the bank borrows and lends only short run in our second model the bank borrows only short run but can lend short run and long run the criterion in both models is the expected value of the present value of dividends issued both models yield dynamic programming problems broad aspects of optimal policies are indicated

genetic adverse selection evidence from long term care insurance and huntington disease abstract individual personalized genetic information is increasingly available leading to the possibility of greater adverse selection over time particularly in individual payer insurance markets we use data on individuals at risk for huntington disease hd a degenerative neurological disorder with significant effects on morbidity to estimate adverse selection in long term care insurance we find strong evidence of adverse selection individuals who carry the hd genetic mutation are up to 5 times as likely as the general population to own long term care insurance this finding is supported both by comparing individuals at risk for hd to those in the general population and by comparing across tested individuals in the hd risk population with and without the hd mutation

information and the concept of option value this paper examines the arrow fisher henry concept of option value and analyzes its properties including its relationship to the value of information and the effects of increasing uncertainty about the future consequences of irreversible development it is shown that this option value is distinct from but bounded by the value of information in the overall decision problem also it is distinct from a concept of option value that appears in b s bernanke quart j econom 98 85 106 1983 however when there is a continuum of development levels rather than a binary choice between full development and no development some of these conclusions need to be modified

rainfall forecasts weather and wages over the agricultural production cycle we look at the effects of rainfall forecasts and realized rainfall on equilibrium agricultural wages over the course of the agricultural production cycle we show theoretically that a forecast of good weather can lower wages in the planting stage by lowering ex ante out migration and can exacerbate the negative impact of adverse weather on harvest stage wages using indian household panel data describing early season migration and district level planting and harvest stage wages over the period 2005 2010 we find results consistent with the model indicating that rainfall forecasts improve labor allocations on average but exacerbate wage volatility because they are imperfect

gathering information before the contract is offered the case with two states of nature abstract focusing on a baron myerson model with two states of nature in the first part of the paper we study the contract that a principal would offer to an agent when he does not know whether the agent is informed or not about the state of nature in the second we endogenize the information of acquisition and show that in equilibrium a baron myerson type contract will never be offered

an empirical analysis of acreage effects of participation in the federal crop insurance program the extent to which crop insurance programs have resulted in additional land being brought into production has been a topic of considerable debate we consider multiequation structural models of acreage response insurance participation crp enrollment and input usage our analysis focuses on corn and soybean production in the corn belt and wheat and barley production in the upper great plains our results confirm that increased participation in insurance programs provokes statistically significant acreage responses in some cases though the response is very modest in every case in the most extreme cases 30 decreases in premiums as a result of increased subsidies provoke acreage increases ranging from 0 2 to 1 1 a number of policy simulations involving increases in premium subsidies are considered

advantageous effects of regulatory adverse selection in the life insurance market we analyse the effects of regulations prohibiting the use of information to risk rate premiums in a life insurance market new information derived from genetic tests is likely to become increasingly relevant in the future many governments prohibit the use of this information thereby generatingregulatory adverse selection in our model individuals early in their lives know neither their desired level of life insurance later in life nor their mortality risk but learn both over time we obtain both positive and normative results that differ qualitatively from those in standard static models legislation prohibiting the use of genetic tests for ratemaking may increase welfare the effort to sequence the human genome completely is now effectively com pleted although a comprehensive understanding of the effects of most genes on health and mortality risks will still take substantial further effort it is likely that in the medium term future more and more information relevant to ratemaking in the life health and long term care insurance markets will become available in particular we will learn the effects of many genes on the likelihood of various illnesses and consequently individualslife expectancy 1 moreover new genetic tests for these genes will likely become much cheaper 2 allowing this information to be used by insurers raises the prospect of substantial changes in future pricing

observational learning under imperfect information abstract we explore bayes rational sequential decision making in a game with pure information externalities where each decision maker observes only her predecessor s binary action under perfect information the martingale property of the stochastic learning process is used to establish convergence of beliefs and actions under imperfect information in contrast beliefs and actions cycle forever however despite the stochastic instability over time the private information is ignored and decision makers become increasingly likely to imitate their predecessors consequently we observe longer and longer periods of uniform behavior punctuated by increasingly rare switches

on the status of the nash type of noncooperative equilibrium in economic theory in economic theory the nash type of noncooperative equilibrium is a widely used equilibrium concept nevertheless the concept is frequently misunderstood and misleading explanations and interpretations are often given this paper presents a sample of such frequently appearing misleading explanations and goes on to explain why they are misleading the case for using the nash noncooperative equilibrium concept is stronger than what is implied by the many misleading statements found in the literature a basic issue is whether it can be argued that decisions in accordance with the noncooperative equilibrium theory are individually rational decisions this issue is not covered by the classical rationality postulate in economic theory this problem is tackled by stating certain postulates which may be taken as defining individual rationality in situations of noncooperative interaction it is shown that nash behavior satisfies these postulates

non exclusive competition in the market for lemons in order to check the impact of the exclusivity regime on equilibrium allocations we set up a simple akerlof like model in which buyers may use arbitrary taris under exclusivity we obtain the zero profit separating riley rothschilds stiglitz allocation under non exclusivity there is also a unique equilibrium allocation that involves a unique price as in akerlof 1970 these results can be applied to insurance in the dual model in yaari 1987 and have consequences for empirical tests of the existence of asymmetric information

optimal health insurance for multiple goods and time periods we examine the efficiency based arguments for second best optimal health insurance with multiple treatment goods and multiple time periods correlated shocks across health care goods and over time interact with complementarity and substitutability to affect optimal cost sharing health care goods that are substitutes or have positively correlated demand shocks should have lower optimal patient cost sharing positive serial correlations of demand shocks and uncompensated losses that are positively correlated with covered health services also reduce optimal cost sharing our results rationalize covering pharmaceuticals and outpatient spending more fully than is implied by static one good or one period models

bayesian learning in social networks we study the perfect bayesian equilibrium of a sequential learning model over a general social network each individual receives a signal about the underlying state of the world observes the past actions of a stochastically generated neighbourhood of individuals and chooses one of two possible actions the stochastic process generating the neighbourhoods defines the network topology we characterize pure strategy equilibria for arbitrary stochastic and deterministic social networks and characterize the conditions under which there will be asymptotic learning convergence in probability to the right action as the social network becomes large we show that when private beliefs are unbounded meaning that the implied likelihood ratios are unbounded there will be asymptotic learning as long as there is some minimal amount of expansion in observations we also characterize conditions under which there will be asymptotic learning when private beliefs are bounded

sequential decision making in production models single equation estimates of production models usually are justified by the assumption that production inputs are chosen as part of a one period decision problem yet most production decisions in agriculture are made sequentially in this paper the farmer s optimal input choices are modeled as optimal controls in a stochastic control problem a two period cobb douglas example is used to show that sequential solutions to production problems may yield models which require either single equation or simultaneous equation estimators functional separability stochastic specification and behavior under uncertainty are discussed in the context of dynamic production models

signalling and renegotiation in contractual relationships this paper examines how the possibility of renegotiation affects contractual outcomes in signaling games when an infinite number of rounds of renegotiations are allowed before contracts are executed the main results of the paper are 1 contracts may still contain distortions 2 the popular efficient separating equilibrium outcome is never an equilibrium outcome with renegotiation 3 incentive compatibility constraints can be generalized to incorporate renegotiation 4 equilibrium outcomes can be separating and nevertheless depend on the uninformed player s prior and 5 renegotiation in signaling games may lead to outcomes similar to equilibrium outcomes of screening games in which multiple contract purchases are allowed copyright 1993 by the econometric society

ricardian equivalence in the presence of capital market imperfections abstract it is a common claim that ricardian equivalence fails if capital markets are imperfect the validity of this claim is examined for the case of informationally imperfect capital markets we present three alternative models of adverse selection and analyze the effects of debt finance in these models it is shown that a debt financed tax cut can lead to pareto improvement in some cases in the theoretically most preferable model however ricardian equivalence survives in spite of genuine imperfections in the capital market the results point to the importance of specifying the exact nature of imperfection

the social value of hidden information in adverse selection economies abstract when agents possess imperfect hidden knowledge at the time contracts are negotiated the social value of agents having access to additional hidden knowledge before contracts are implemented is positive to the extent that incentive constrained agents are sorted more finely but is negative to the extent that incentive constraining agents impose more stringent signalling requirements on others hence the intuition developed by hirshleifer 1971 marshall 1974 and milgrom and stokey 1982 that privately acquired information has neither positive nor negative social value when agents possess no prior hidden knowledge does not apply when agents possess imperfect hidden knowledge during contractual negotiations

financial intermediary s choice of borrowing this research investigates several dynamic stochastic models of a bank s management problem of the term structures of its assets and liabilities a bank can either eliminate most of its interest risk with appropriate options or it can utilize its expertise in its core business and seek extraordinary profits this research concerns a bank with the latter goal in this model the bank seeks to maximize the expected present value of dividend issued subject to the federal reserve s regulatory constraint and liquidity constraint with this model we find that if the available deposits are not too high and the level of liquid assets is high enough then it is optimal for a bank to accept all of the available deposits however if the level of liquid assets is too low then a bank should not issue a dividend or to accept any deposits the properties are still valid even if the bank is not risk neutral

adverse selection with endogenous information in insurance markets abstract models of adverse selection assume that risk type is known to the consumer but not to the insurer many analyses suggest that information has zero social value and negative prior value why then would consumers become informed what is the incentive to gather information and why does adverse selection arise we show that the private value of information is non negative only if insurers cannot observe consumers information status or if consumers can conceal their informational status we examine the existence and characterization of equilibria under different configurations of information costs and benefits finally we examine some welfare implications of the endogenous information model for public policy regarding genetic testing and for state regulations concerning hiv testing

the value of genetic information in the life insurance market abstract this paper analyzes the effects of additional information in a life insurance market under adverse selection individuals have an incentive to acquire information about their risk type if their informational status cannot be observed by insurers in aggregate however the existence of a testing opportunity has an effect on the equilibrium premium we describe the conditions under which from an ex ante standpoint all individuals gain all lose or in which some gain and some lose from the existence of the test

the value of weather information in market equilibrium increased accuracy of weather forecasts does not necessarily increase commodity supply or farmer welfare this study presents a stylized model of competitive production with rational expectations and demonstrates that improved weather information harms farmers facing an inelastic demand contrary to the conclusions of previous studies the decline in farmer welfare does not require an expansion in expected supply better weather information may signal farmers to produce less on average under an inelastic demand a supply decrease occurs when increases in the physical productivity of applied inputs are dominated by adverse price consequences

competitive insurance markets under adverse selection and capacity constraints abstract ever since the seminal work by rothschild and stiglitz q j econom 90 1976 629 on competitive insurance markets under adverse selection the problem of non existence of equilibrium in pure strategies has received much attention in the literature we extend the original analysis by considering firms which face capacity constraints which might be due to limited capital we show that under mild assumptions an equilibrium exists where every consumer obtains his appropriate rothschild stiglitz contract

insurability and moral hazard in agricultural insurance markets pareto optimal and constrained pareto optimal all risk insurance contracts are studied conditions required for emergence of competitive insurance markets are isolated and discussed full insurance contracts are shown to be dominated by contracts involving coinsurance and deductibles if insurers are pseudo risk averse the effect of moral hazard on all risk agricultural insurance indemnity schedules is examined results for indemnity schedules under moral hazard and constant absolute risk aversion show that providing farmers with the incentives to take appropriate actions may imply lower deductibles in the presence of moral hazard than in the absence of moral hazard

genetic testing in competitive insurance markets with repulsion from chance a welfare analysis a central theme in the international debate on genetic testing concerns the extent to which insurance companies should be allowed to use genetic information when offering insurance contracts we provide a welfare analysis of this issue within a model of an insurance market with asymmetric information having the following crucial feature in addition to a state contingent consumption profile a person s well being depends on her attitude towards resolution of future health uncertainty and this attitude varies across the population we present stylized facts that motivate this approach in the formal analysis we find that both tested high risks and untested individuals are equally well off whether or not test results can be used by insurers individuals who test for being low risks on the other hand are made worse off by not being able to verify this to insurers this implies that in terms of welfare a regulatory regime in which the use of genetic information by insurers is allowed is better than one in which it is not allowed

pessimistic information gathering an agent gathers information on productivity shocks and accordingly produces on behalf of a principal information gathering is imperfect and whether it succeeds or not depends on the agent s effort contracting frictions come from the fact that the agent is pessimistic on the issue of information gathering and there are both moral hazard in information gathering private information on productivity shocks and moral hazard on operating effort an optimal menu of linear contracts mixes high powered productivity dependent screening options following good news with a fixed low powered option otherwise

a note on the specification of inter firm communication in insurance markets with adverse selection abstract this paper reconsiders the proposition due to jaynes that the rothschild stiglitz wilson insurence market with adverse selection has a nash equilibrium once the sharing of information about customers is treated endogenously as part of the game among firms the proposition is shown to be correct if and only if each firm s communication behaviour is conditioned on the set of contracts that are offered by the other firms this type of conditioning introduces a reactive element which is akin to the alternative approach of wilson

regulating a monopolist with unknown costs we consider the problem of how to regulate a monopolistic firm whose costs are unknown to the regulator the regulator s objective is to maximize a linear social welfare function of the consumers surplus and the firm s profit in the optimal regulatory policy prices and subsidies are designed as functions of the firm s cost report so that expected social welfare is maximized subject to the constraints that the firm has nonnegative profit and has no incentive to misrepresent its costs we explicitly derive the optimal policy and analyze its properties in their classic papers dupuit 2 and hotelling 5 considered pricing policies for a bridge that had a fixed cost of construction and zero marginal cost they demonstrated that the pricing policy that maximizes consumer well being is to set price equal to marginal cost and to provide a subsidy to the supplier equal to the fixed cost so that a firm would be willing to provide the bridge this first best solution is based on a number of informational assumptions first the demand function is assumed to be known to both the regulator and to the firm while the assumption of complete information may be too strong the assumption that information about demand is as available to the regulator as it is to the firm does not seem unnatural a second informational assumption is that the regulator has complete information about the cost of the firm or at least has the same information about cost as does the firm this assumption is unlikely to be met in reality since the firm would be expected to have better information about costs than would the regulator as weitzman has stated an essential feature of the regulatory environment i am trying to describe is uncertainty about the exact specification of each firm s cost function in most cases even the managers and engineers most closely associated with production will be unable to precisely specify beforehand the cheapest way to generate various hypothetical output levels because they are yet removed from the production process the regulators are likely to be vaguer still about a firm s cost function 12 p 684 as this observation suggests it is natural to expect that a firm would have better information regarding its costs than would a regulator the purpose of this paper is to develop an optimal regulatory policy for the case in which the regulator does not know the costs of the firm one strategy that a regulator could use in the absence of full information about costs is to give the firm the title to the total social surplus and to delegate the pricing decision to the firm in pursuing its own interests which would then be to maximize the total social surplus the firm would adopt the same marginal cost pricing strategy that the regulator would have imposed if the regulator had

tax and regulatory motivations for issuing non voting non convertible preferred stock this paper extends prior studies that attempt to explain the existence of unique securities particularly engel erickson and maydew 1999 by investigating why firms issue non voting non convertible preferred stock ps instead of other securities we find that the choice of ps is influenced by tax and regulatory changes imposed by the tax reform act of 1986 tra86 and the 1989 basle banking accord as well as various firm specific incentives we find that industrials issue ps to preserve tax attributes by avoiding an ownership change and to maximize foreign tax credit utilization in addition we find that the regulatory requirements of the basle accord influence the choice by banks to issue ps finally we show that although firms could have issued alternative securities that would have allowed them to achieve the same tax or regulatory goals firm specific factors limit their ability to do so for example firms can also avoid triggering an ownership change by issuing straight debt however financial distress considerations may constrain their ability to issue additional debt therefore we demonstrate that the final choice of ps is influenced by a combination of tax regulatory and firm specific incentives