testing for asymmetric information in insurance markets the first goal of this paper is to provide a simple and general test of the presence of asymmetric information in contractual relationships within a competitive context we also argue that insurance data are particularly well suited to such empirical investigations to illustrate this claim we use data on contracts and accidents to investigate the extent of asymmetric information in the french market for automobile insurance using various parametric and nonparametric methods we find no evidence for the presence of asymmetric information in this market

monopoly insurance under adverse selection when agents differ in risk aversion abstract this paper considers a profit maximizing monopolistic insurer who offers insurance to two types of risk averse agents in an environment where the uninsured position has the same distribution across types agents utility functions are private information and types are independently and identically distributed we prove that if there is no lower bound on liability and the types differ markedly in their attitudes to heavy losses the insurer can extract almost all rent by offering full insurance to agents who are more risk averse and two valued partial insurance to the others under limited liability separating insurance contracts have a similar structure but it may be impossible to approximate the first best unless the uninsured position is supported by two atoms insurance is provided to all agents journal of economic literature classification numbers d42 d82

bank risk taking securitization supervision and low interest rates evidence from the euro area and the u s lending standards using a unique dataset of the euro area and the u s bank lending standards we find that low monetary policy short term interest rates soften standards for household and corporate loans this softening especially for mortgages is amplified by securitization activity weak supervision for bank capital and low monetary policy rates for an extended period conversely low long term interest rates do not soften lending standards finally countries with softer lending standards before the crisis related to negative taylor rule residuals experienced a worse economic performance afterward these results help shed light on the origins of the crisis and have important policy implications the author 2011 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

the welfare implications of moral hazard and adverse selection in competitive insurance markets i model a competitive insurance market with both moral hazard and adverse selection and analyze the effect on welfare when both problems are present simultaneously an examination of the interaction between these two problems leads to two hypotheses first the nature of the equilibrium contracts is such that each problem partially offsets the welfare loss associated with the other and second the degree to which this occurs increases as agents become more heterogeneous simulation results overwhelmingly support both hypotheses

individual risk attitudes measurement determinants and behavioral consequences this paper studies risk attitudes using a large representative survey and a complementary experiment conducted with a representative subject pool in subjects homes using a question asking people about their willingness to take risks in general we find that gender age height and parental background have an economically significant impact on willingness to take risks the experiment confirms the behavioral validity of this measure using paid lottery choices turning to other questions about risk attitudes in specific contexts we find similar results on the determinants of risk attitudes and also shed light on the deeper question of stability of risk attitudes across contexts we conduct a horse race of the ability of different measures to explain risky behaviors such as holdings stocks occupational choice and smoking the question about risk taking in general generates the best all round predictor of risky 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

health shocks and risk aversion we empirically assess whether a health shock influences individual risk aversion we use grip strength data to obtain an objective health shock indicator in order to account for the non random nature of our data regression adjusted matching is employed risk preferences are traditionally assumed to be constant however we find that a health shock increases individual risk aversion the finding is robust to a series of sensitivity analyses and persists for at least four years after the shock income changes do not seem to be the driving mechanism

longitude matters time zones and the location of foreign direct investment abstract using bilateral foreign direct investment fdi data we find that differences in time zones have a negative and significant effect on the location of fdi we show that this finding is robust across different specifications estimation methods and proxies for time zone differences time zones also have a negative effect on trade but this effect is smaller than that on fdi finally the impact of the time zone effect has increased over time suggesting that it is not likely to vanish with the introduction of new information technologies

the deadweight gain of insurance taxation when risky activities are optional abstract some risky activities are optional for example motoring participation in them is most attractive for good risks creating a tendency for advantageous selection in the associated insurance market taxing insurance consequently yields deadweight gains when type is hidden results are strengthened if optimism is present finally endogenising participation implies that the standard positive correlation test for the presence of policy relevant asymmetric information may fail

trying to explain home bias in equities and consumption investors hold a substantially larger proportion of their wealth portfolios in domestic assets than standard portfolio theory would suggest a phenomenon called equity home bias in the absence of this bias investors would optimally diversify domestic output risk using foreign equities therefore consumption growth rates would tend to co move across countries even when output growth rates do not empirically however consumption growth rates tend to have a lower correlation across countries than do output growth rates a phenomenon i call consumption home bias in this paper i discuss these two biases and their potential relationship as suggested by the literature

breaking free of the triple coincidence in international finance the traditional approach to international finance is to view capital flows as the financial counterpart to savings and investment decisions assuming further that the gdp boundary defines both the decision making unit and the currency area this triple coincidence of gdp area decision making unit and currency area is an elegant simplification but misleads when financial flows are important in their own right first the neglect of gross flows when only net flows are considered can lead to misdiagnoses of financial vulnerability second inattention to the effects of international currencies may lead to erroneous conclusions on exchange rate adjustment third sectoral differences between corporate and official sector positions can distort welfare conclusions on the consequences of currency depreciation as macroeconomic risks may be underestimated this paper illustrates the pitfalls of the triple coincidence through a series of examples from the global financial system in recent years and examines alternative analytical frameworks based on balance sheets as the unit of analysis

gravity and culture in foreign portfolio investment abstract using panel regression estimates from the imf s cpis survey of foreign debt and equity portfolios across 174 originating and 50 destination countries from 2001 to 2007 we clarify the role of culture and extend the set of cultural variables that have been investigated in gravity models of foreign portfolio investment fpi incorporating hofstede s cultural dimensions of individualism masculinity power distance and uncertainty avoidance we show how cultural traits in both originating and destination countries as well as the cultural distances that separate them interact with geographic distance and other gravity variables to determine global fpi patterns we find hitherto unreported effects and show that while gravity always deters fpi aspects of culture and cultural distance can offset this by supporting fpi

preference heterogeneity and insurance markets explaining a puzzle of insurance the textbook approach to insurance markets emphasizes the role of private information about risk in determining who purchases insurance in the classic adverse selection model of michael rothschild and joseph stiglitz 1976 individu als with higher expected claims buy more insur ance than those with lower expected claims who may be out of the market entirely this basic prediction of asymmetric information models of a positive correlation between insurance cov erage and accident occurrence has been shown to be robust to a variety of extensions to the stan

the currency dimension of the bank lending channel in international monetary transmission abstract we investigate how the use of a currency transmits monetary policy changes in the global banking system we use a newly available rarely accessed dataset on the bilateral cross border lending flows of 27 bis reporting lending banking systems to borrowers in 51 countries broken down by currency denomination usd eur and jpy we have three main findings first we identify a currency dimension of the international bank lending channel monetary changes in a currency significantly affect cross border lending flows in that currency even when neither the lending banking system nor the target country uses that currency as their own second this transmission works mainly through lending to non banks third the currency dimension of the bank lending channel works similarly across the three currencies suggesting that the usd may not be unique in this respect

markets and institutions in financial intermediation national characteristics as determinants abstract given the importance of financial intermediation and the rise of globalization there is little prior research on how national preferences for financial intermediation markets versus institutions are determined by cultural legal and other national characteristics using panel analysis for data on a recent 8 year period for 30 countries this paper documents that national preferences for market financing increase with political stability societal openness economic inequality and equity market concentration and decreases with regulatory quality and ambiguity aversion we confirm with robustness tests that our result for regulatory quality is independent of differences in national wealth and that our result for political stability is independent of both wealth and political legitimacy these results should be of much interest to managers scholars regulators and policy makers

taking gravity online the role of virtual proximity in international finance abstract this paper analyses international patterns of bilateral portfolio equity and debt investment in a gravity model framework we contribute to the literature by exploring the role of virtual proximity measured by bilateral internet hyperlinks between countries as a novel proxy for cross border information flows and cultural proximity more generally our findings show that bilateral portfolio investment is significantly affected by virtual proximity indicating that countries which are more closely connected in terms of web content are more integrated financially the effect is stronger for equity than for debt investment highlighting the larger information sensitivity of equity investments and is largest for investments among advanced economies moreover including virtual proximity in estimations reduces the importance of traditionally used proxies for information asymmetries and cultural proximity

health insurance without single crossing why healthy people have high coverage standard insurance models predict that people with high risks have high insurance coverage it is empirically documented that people with high income have lower health risks and are better insured we show that income differences between risk types lead to a violation of single crossing in an insurance model where people choose treatment intensity we analyse different market structures and show the following if insurers have market power the violation of single crossing caused by income differences and endogenous treatment choice can explain the empirically observed outcome our results do not rely on differences in risk aversion between types

the past is prologue moving on from culture s consequences in this article we examine the theoretical and empirical understanding of culture within the international business discipline post the publication of kirkman lowe gibson 2006 in their paper kirkman et al 2006 provide a comprehensive retrospective on the impact of hofstede s seminal publication culture s consequences in addition to looking at what followed on from hofstede they laid out a research program they believed was necessary to move the study of culture forward unfortunately in their current review published in this issue they outlined how little if any of their thoughtful guidance was taken to heart in our perspective we believe that this signals that the study and use of culture in the international business field has become stuck in a theoretical and methodological rut and more radical thinking is necessary if we are going to advance beyond more of the same science that simply reiterates repeatedly that that culture matters without any coherent advancement of the key role that it plays in the international arena

harmful competition in insurance markets there is a general presumption that competition is a good thing in this paper we show that competition in the insurance markets can be bad and that adverse selection is in general worse under competition than under monopoly the reason is that monopoly can exploit its market power to relax incentive constraints by cross subsidization between different risk types cream skimming behavior on the contrary prevents competitive firms from using implicit transfers in effect monopoly is shown to provide better coverage to those buying insurance but at the cost of limiting participation to insurance performing simulation for different distributions of risk we find that monopoly in general performs much better than competition in terms of the realization of the gains from trade across all traders in equilibrium

the psychic distance paradox companies tend to begin their internationalization process in countries that are psychically close researchers describe the sequence of entry that firms follow and the mode of entry they choose they suggest that psychically close countries are more easily understood than distant ones and offer more familiar operating environments although not prescriptive an unstated conclusion can be drawn linking sequence of entry to performance evidence from thirty two canadian retail companies shows that only seven 22 were functioning successfully in the united states the psychic distance paradox is that operations in psychically close countries are not necessarily easy to manage because assumptions of similarity can prevent executives from learning about critical differences moreover empirical evidence from 271 ceos confirms greater cultural differences between canada and the u s than assumed previously modifications are suggested to improve the psychic distance concept

the effect of unconventional monetary policy on cross border bank loans evidence from an emerging market abstract we analyze the impact of quantitative easing by the federal reserve european central bank and bank of england on cross border credit flows relying on comprehensive loan level data we find that fed qe strongly boosts cross border credit granted to turkish banks by banks located in the us euro area and uk while ecb and boe qes work only moderately through banks in the ea and uk respectively in general qe works at short maturities across bank locations and loan currencies more strongly for weaker lenders and borrowers and may have resulted in maturity mismatches in turkish banks searching for yield 99 words

direct evidence on risk attitudes and migration geographic mobility is important for the functioning of labor markets because it brings labor resources to where they can be most efficiently used it has long been hypothesized that individuals migration propensities depend on their attitudes towards risk but the empirical evidence to the extent that it exists has been indirect in this paper we use newly available data from the german socio economic panel to measure directly the relationship between migration propensities and attitudes towards risk we find that individuals who are more willing to take risks are more likely to migrate between labor markets in germany this result is robust to stratifying by age sex education national origin and a variety of other demographic characteristics as well as to the level of aggregation used to define geographic mobility the effect is substantial relative to the unconditional migration propensity and compared to the conventional determinants of migration we also find that being more willing to take risks is more important for the extensive than for the intensive margin of migration

political economy of pension plans impact of institutions gender and culture abstract national pension systems are an important part of financial intermediation and worker welfare in most countries but how and why do they differ internationally controlling for important political economic and social institutions we document that international differences in pension progressivity or how pensions reflect lifetime earnings are negatively related to masculinity uncertainty avoidance individualism long term orientation employment rights average pension levels social trust and economic inequality we also find that pension progressivity is positively related to the economic and societal role of women the extent of catholicism as well as political voice and accountability these results provide important insights for both public policy and mnc managers

bouncing back from health shocks locus of control and labor supply abstract many studies have demonstrated a causal effect of ill health on labor supply in this study i explore the personality related heterogeneity measured by differences in control beliefs in the labor supply response to health shocks to identify such behavioral differences i follow the labor supply trajectories of 649 initially full time employed and healthy men who experience at some point in time an episode of ill health when compared with men who have positive control beliefs men with negative control beliefs are on average 100 more likely to drop out of the labor force a drop out unrelated to early retirement and work on average 12 less hours per week the year after the health shock these behavioral differences remain robust to alternative estimation samples and health shock definitions they are strongest for men from low socioeconomic backgrounds who do not have access to private health insurance or who experience high intensity shocks heterogeneous labor supply responses are also observed for conscientiousness and risk tolerance traits that have been linked with willingness to invest and treatment compliance an important conclusion from the findings is that a small set of non cognitive skills produces long term labor market benefits in the advent of adversity

the determinants of cross border equity flows abstract we explore a new panel data set on bilateral gross cross border equity flows between 14 countries 1989 1996 we show that a gravity model explains international transactions in financial assets at least as well as goods trade transactions gross transaction flows depend on market size in source and destination country as well as trading costs in which both information and the transaction technology play a role distance proxies some information costs and other variables explicitly represent information transmission an information asymmetry between domestic and foreign investors and the efficiency of transactions the geography of information is the main determinant of the pattern of international transactions while there is weak support in our data for the diversification motive once we control for the informational friction we broaden the scope of our results by presenting some evidence linking the results on equity transactions to equity holdings

health and mortality delta assessing the welfare cost of household insurance choice we develop a pair of risk measures health and mortality delta for the universe of life and health insurance products a life cycle model of insurance choice simplifies to replicating the optimal health and mortality delta through a portfolio of insurance products we estimate the model to explain the observed variation in health and mortality delta implied by the ownership of life insurance annuities including private pensions and long term care insurance in the health and retirement study for the median household aged 51 to 57 the lifetime welfare cost of market incompleteness and suboptimal choice is 3 2 of total wealth

information asymmetry and international strategic alliances abstract this paper examines how information asymmetry affects cross border strategic alliance formation by us firms over the period 2000 2008 we construct a measure information costs based on both geographical distance and the proportion of worldwide gdp the partner s home country represents consistent with our expectations we find an inverse association between information costs and cross border strategic alliances when considering the proportion of alliances formed with publicly quoted overseas partners we find this is unaffected by the level of information costs but rather the level of stock market development tax rate and general economic conditions information costs are however significantly negatively related to alliances with overseas private organizations our results offer clear support for the on going importance of information asymmetry in corporate decision making

the international transmission of bank capital requirements evidence from the uk abstract we use data on uk banks minimum capital requirements to study the impact of changes to bank specific capital requirements on cross border bank loan supply from 1999q1 to 2006q4 by examining a sample in which each recipient country has multiple relationships with uk resident banks we are able to control for demand effects we find a negative and statistically significant effect of changes to banks capital requirements on cross border lending a 100 basis point increase in the requirement is associated with a reduction in the growth rate of cross border credit of 5 5 percentage points we also find that banks tend to favor their most important country relationships so that the negative cross border credit supply response in core countries is significantly less than in others banks tend to cut back cross border credit to other banks including foreign affiliates more than to firms and households consistent with shorter maturity wholesale lending which is easier to roll off and may be associated with weaker borrowing relationships

advantageous selection in insurance markets this article reverses the standard conclusion that asymmetric information plus competition results in insufficient insurance provision risk tolerant individuals take few precautions and are disinclined to insure but they are drawn into a pooling equilibrium by the low premiums created by the presence of safer more risk averse types taxing insurance drives out the reckless clients allowing a strict pareto gain this result depends on administrative costs in processing claims and issuing policies as does the novel finding of a pure strategy partial pooling subgame perfect nash equilibrium in the insurance market copyright 2001 by the rand corporation

do bad risks know it experimental evidence on optimism and adverse selection abstract subjects who overestimate their performance in experimental tasks unrelated to travel are less willing to insure against failing in the task and also less inclined to buy travel insurance this suggests intrinsic optimism influences insurance demand and diminishes adverse selection

national culture and life insurance consumption this cross disciplinary study examines the way national culture affects consumption patterns of life insurance across countries life insurance is a service that is abstract complex and focused on unsure future benefits because of the uncertainty and ambiguity inherent in the life insurance product consumers are more likely to respond according to their cultural prescriptions our research hypotheses are tested empirically using hofstede s cultural dimensions and data from 1976 2001 across 41 countries the findings show that individualism indeed has a significant positive effect on life insurance consumption whereas power distance and masculinity femininity have significant negative effects the results are robust even after controlling for economic institutional and demographic determinants

religious holidays investor distraction and earnings announcement effects abstract we examine price reactions to u s firms earnings announcements during easter week in order to analyze whether and how the religious holiday calendar impacts investors information processing we find that there is an asymmetric pattern of immediate and delayed responses to earnings surprises experienced during easter entailing similar immediate reactions to both good and bad news and a stronger delayed response to bad news moreover local religious characteristics affect investor s response to firm news the results are consistent with a religion induced distraction effect on investors information processing ability we also show that this effect can form the basis for a profitable trading strategy the findings highlight the importance of religion for firms information environment and for the local component of stock prices

equity home bias a review essay this paper reviews the relatively more recent literature on equity home bias the empirical finding that people overinvest in domestic stocks relative to the optimal investment portfolio implied by the modern portfolio theory it reviews six broad classes of explanation of this puzzling phenomenon 1 hedging home risks 2 barriers to foreign investments 3 information asymmetries and 4 behavioral factors the consensus is that none of the explanations can account for the full extent of the bias by itself thus the home bias should be explained by a combination of rational and behavioral factors

financial crises and the composition of cross border lending abstract we examine the composition and drivers of cross border bank lending between 1995 and 2012 distinguishing between syndicated and non syndicated loans we show that on balance sheet syndicated loan exposures which account for almost one third of total cross border loan exposures increased during the global financial crisis due to large drawdowns on credit lines extended before the crisis our empirical analysis of the drivers of cross border loan exposures in a large bilateral dataset leads to three main results first banks with lower levels of capital favor syndicated over other kinds of cross border loans second borrower country characteristics such as level of development economic size and capital account openness are less important in driving syndicated than non syndicated loan activity suggesting a diversification motive for syndication third information asymmetries between lender and borrower countries became more binding for both types of cross border lending activity during the recent crisis

liquidity management of u s global banks internal capital markets in the great recession abstract the recent crisis highlighted the importance of globally active banks in linking markets one channel for this linkage is through how these banks manage liquidity across their entire banking organization we document that funds regularly flow between parent banks and their affiliates in diverse foreign markets we show that parent banks when hit by a funding shock reallocate liquidity in the organization according to a locational pecking order affiliate locations that are important for the parent bank revenue streams are relatively protected from liquidity reallocations in the organization while traditional funding locations are more extensively used to buffer shocks to the parent bank balance sheets

preference heterogeneity and selection in private health insurance the case of australia a basic prediction of theoretical models of insurance is that if consumers have private information about their risk of suffering a loss there will be a positive correlation between risk and the level of insurance coverage we test this prediction in the context of the market for private health insurance in australia despite a universal public system that provides comprehensive coverage for inpatient and outpatient care roughly half of the adult population also carries private health insurance the main benefit of which is more timely access to elective hospital treatment like several studies on different types of insurance in other countries we find no support for the positive correlation hypothesis because strict underwriting regulations create strong information asymmetries this result suggests the importance of multi dimensional private information additional analyses suggest that the advantageous selection observed in this market is driven by the effect of risk aversion the ability to make complex financial decisions and income

the double edged sword of cultural distance in international acquisitions this study aims to bring together seemingly contradicting arguments in the literature about the role of cultural distance in international acquisitions we offer a model that postulates that cultural distance relates negatively to international acquisition performance because it taxes integration capabilities during international acquisitions but that cultural distance also elevates the positive association of integration capabilities and international acquisition performance because it provides more learning opportunities that can only be exploited with strong integration capabilities empirical tests with a sample of international acquisitions by 118 us multinational companies provide support for the proposed model on one hand we find that cultural distance impedes understandability of key capabilities that need to be transferred and constrains communication between acquirers and their acquired units bringing about a negative indirect effect on acquisition performance on the other hand we find that cultural distance enriches acquisitions by enhancing the positive effects of understandability and communication on acquisition performance acquirers that can overcome the impeding effects of cultural distance on understanding key capabilities and effective communication appear to reap significant performance gains our study provides initial support for a double edged sword effect of cultural differences on acquisition performance and illustrates the importance of integration capabilities

genetic variation in financial decision making individuals differ in how they construct their investment portfolios yet empirical models of portfolio risk typically account only for a small portion of the cross sectional variance this paper asks whether genetic variation can explain some of these individual differences following a major pension reform swedish adults had to form a portfolio from a large menu of funds we match data on these investment decisions with the swedish twin registry and find that approximately 25 of individual variation in portfolio risk is due to genetic variation we also find that these results extend to several other aspects of financial decision making

the impact of institutional hazards on foreign multinational activity a contingency perspective prior studies have shown that institutional hazards in the form of formal governance deficiencies and informal cultural distance are both negatively related to the amount of foreign multinational activity in countries we argue that the strength of these negative relationships varies systematically with the type of foreign activity horizontal or vertical and the type of institutional hazard governance or cultural because institutional hazards striking vertical affiliates generally also have negative consequences for other parts of a multinational enterprise mne while those striking horizontal affiliates do not we hypothesize that institutional hazards are more negatively related to vertical foreign activity than to horizontal foreign activity since cultural hazards can generally be reduced or resolved once they materialize while governance hazards cannot we also hypothesize that the impact of governance hazards on each type of foreign activity is more negative than the impact of cultural hazards on that type of activity a panel data analysis of sales by us foreign affiliates to affiliated and local unaffiliated customers over the period 1996 2004 lends support to these hypotheses our findings thus show that the impact of institutional hazards on foreign mne activity is more complex than previously assumed

a note of caution on shadow rate estimates shadow short rate ssr estimates are generated regressors proposed as a proxy for policy interest rates during unconventional monetary policy ump periods however using the wu and xia 2016 shadow lower bound model i show that ssr estimates can be sensitive to minor choices in their estimation used subsequently in a small macroeconomic model those sensitivities lead to wide variations in the inferred effects of ump on inflation and unemployment outcomes therefore it should not be presumed that any ssr series will necessarily be quantitatively useful vetting ssr series allows appropriate ssr series to be retained within the suite of ump indicators

the effect of national culture on the choice of entry mode characteristics of national cultures have frequently been claimed to influence the selection of entry modes this article investigates this claim by developing a theoretical argument for why culture should influence the choice of entry two hypotheses are derived which relate culture to entry mode choice one focusing on the cultural distance between countries the other on attitudes towards uncertainty avoidance using a multinomial logit model and controlling for other effects the hypotheses are tested by analysing data on 228 entries into the united states market by acquisition wholly owned greenfield and joint venture empirical support for the effect of national culture on entry choice is found

moral hazard and selection among the poor evidence from a randomized experiment not only does economic theory predict high risk individuals to be more likely to purchase insurance but insurance coverage is also thought to crowd out precautionary activities in spite of stark theoretical predictions there is conflicting empirical evidence on adverse selection and evidence on ex ante moral hazard is very scarce using data from the seguro popular experiment in mexico this paper documents patterns of selection on observables into health insurance as well as the existence of non negligible ex ante moral hazard more specifically the findings indicate that i agents in poor self assessed health prior to the intervention have all else equal a higher propensity to take up insurance and ii insurance coverage reduces the demand for self protection in the form of preventive care curiously however individuals do not sort based on objective measures of their health

evidence on adverse selection equilibrium signaling and cross subsidization in the insurance market the configuration of equilibrium in the market for automobile collision insurance is examined empirically by representing the premium deductible menu and the demand function as a standard hedonic system using contractual data from a representative insurer we estimate a reduced form hedonic premium equation and the inverse of the marginal bid equation for insurance coverage the data reveal an equilibrium with adverse selection and market signaling but lead us to reject the hypothesis that high risks receive contracts subsidized by low risks

history gravity and international finance abstract we analyse patterns of bilateral financial investment using data on us holdings of foreign bonds we document a history effect in which holdings seven decades ago continue to influence holdings today 10 15 of the cross country variation in us investors foreign bond holdings is explained by holdings 70 years ago plausibly reflecting fixed costs of market entry and exit and endogenous learning this effect is twice as large for bonds denominated in currencies other than the dollar suggesting the existence of even higher fixed costs of initiating us foreign investment in such currencies our findings point to history and path dependence as key sources of financial market segmentation

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

real interest rates leverage and bank risk taking do low interest rate environments lead to greater bank risk taking we show that when banks can adjust their capital structures reductions in real interest rates lead to greater leverage and higher risk for any downward sloping loan demand function however if the capital structure is fixed the effect depends on the degree of leverage following a decrease in interest rates well capitalized banks increase risk while highly levered banks may decrease it if loan demand is linear or concave further the capitalization cutoff depends on the degree of bank competition this effect therefore should vary across countries and over time

domestic credit growth and international capital flows during the pre crisis period europe experienced substantial cross country variation in domestic credit growth and cross border capital flows we investigate the inter relations between domestic credit growth and international capital flows during the period 1993 2008 with a special focus on the boom period of 2003 2008 we establish that domestic credit growth in european countries is strongly related to net debt inflows but not to net equity inflows this pattern also holds for an extended sample of 54 advanced and emerging economies

drivers of structural change in cross border banking since the global financial crisis abstract the paper analyzes the effects of changes to regulatory policy and to monetary policy on cross border bank lending since the global financial crisis cross border bank lending has decreased and the home bias in the credit portfolio of banks has risen sharply especially among banks in the euro area our results suggest that expansionary monetary policy in the source countries as measured by the change in reserves held at central banks has encouraged cross border lending both in euro area and non euro area countries regarding regulatory policy increases in financial supervisory power or independencve of the supervisory authorities have encouraged credit outflows from source countries the findings thus underline the importance of regulatory arbitrage as a driver of cross border bank flows since the global financial crisis however in the euro area arbitrage in capital stringency was linked to lower cross border lending since the crisis

the effect of cultural distance on entry mode choice international diversification and mne performance a meta analysis although a growing literature indicates that cultural distance that is differences between national cultures is an important determinant of organizational actions and performance both empirical and theoretical concerns abound in this study the relationships of cultural distance with entry mode choice international diversification and mne performance are examined by meta analyzing data from 66 independent samples with cumulative sample sizes ranging from 2 255 to 24 152 regression results failed to provide statistical evidence of significant relationships between cultural distance and entry mode choice international diversification and mne performance the examination of moderator effects however yielded important results we found a strong negative association between cultural distance and entry mode choice for us based mnes the cultural distance international diversification relationship was negative for high technology industries while it was positive for other industries cultural distance also had a strong positive effect on mne performance for developed country investments a similar strong positive relationship was found between cultural distance and international diversification in studies with more recent samples results of this study indicate that substantial additional research is needed before the role of cultural distance is fully understood

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 geography of trade in goods and asset holdings gravity models have been widely used to describe bilateral trade in goods portes and rey portes r rey h 2005 the determinants of cross border equity flows journal of international economics 65 2 269 296 applied this framework to cross border equity flows and found that distance which proxies information asymmetries is a surprisingly very large barrier to cross border asset trade we adopt a different point of view and explore the complementarity between bilateral trade in goods and bilateral asset holdings in a simultaneous gravity equations framework providing different instruments for both endogenous variables we show that a 10 increase in bilateral trade raises bilateral asset holdings by 6 to 7 the reverse causality is also significant albeit smaller controlling for trade the impact of distance on asset holdings is drastically reduced keywords gravity models international finance international trade simultaneous equations

the great retrenchment international capital flows during the global financial crisis the current crisis saw an unprecedented collapse in international capital flows after years of rising financial globalization we identify the stylized facts and main drivers of this development the retrenchment in international capital flows is a highly heterogeneous phenomenon first across time being especially dramatic in the wake of the lehman brothers failure secondly across types of flows with banking flows being the hardest hit due to their sensitivity of risk perception and thirdly across regions with emerging economies experiencing a shorter lived retrenchment than developed economies our econometric analysis shows that the magnitude of the retrenchment in capital flows across countries is linked to the extent of international financial integration its specific nature with countries relying on bank flows being the hardest hit as well as domestic macroeconomic conditions and their connection to world trade flows gian maria milesi ferretti and cedric tille

a cultural explanation of the foreign bias in international asset allocation abstract this paper examines the foreign bias in international asset allocation following extant literature in behavioral finance we argue that a society s culture and the cultural distance between two markets play an important role in explaining the foreign bias in particular we hypothesize that the degree of a nation s uncertainty avoidance affects the foreign bias more uncertainty avoiding countries allocate less to foreign markets as does the degree of a country s individualism in individualistic countries performance is more directly attributed to a person and less to teams causing these individuals to be more aggressive in their foreign asset allocations we further expect that the degree of cultural distance between two countries affects the amount of money allocated to that market based on extensive robustness analyses we find support for our hypotheses on the role of culture in international asset allocation

the spillovers interactions and un intended consequences of monetary and regulatory policies abstract have bank regulatory policies and unconventional monetary policies and any possible interactions been a factor behind the recent deglobalisation in cross border bank lending to test this hypothesis we use bank level data from the uk a country at the heart of the global financial system our results suggest that increases in microprudential capital requirements tend to reduce international bank lending and some forms of unconventional monetary policy can amplify this effect specifically the uk s funding for lending scheme fls significantly amplified the effects of increased capital requirements on cross border lending quantitative easing did not appear to have a similar effect and countries with stronger prudential capital regulations were partially insulated against the effects of these changes in uk policy we find that this interaction between microprudential regulations and the fls can explain roughly 30 of the contraction in aggregate uk cross border bank lending between mid 2012 and end 2013 corresponding to around 10 of the global contraction in cross border lending this suggests that unconventional monetary policy designed to support domestic lending can have the unintended consequence of reducing foreign lending

multinational banks and the global financial crisis weathering the perfect storm we use data on the 48 largest multinational banking groups to compare the lending of their 199 foreign subsidiaries during the great recession with lending by a benchmark group of 202 domestic banks contrary to earlier more contained crises parent banks were not a significant source of strength to their subsidiaries during the 2008 09 crisis as a result multinational bank subsidiaries had to slow down credit growth about twice as fast as domestic banks this was particularly the case for subsidiaries of banking groups that relied more on wholesale market funding domestic banks were better equipped to continue lending because of their greater use of deposits a relatively stable funding source during the crisis we conclude that while multinational banks may contribute to financial stability during local bouts of financial turmoil they also increase the risk of importing instability from abroad

estimating risk preferences from deductible choice we develop a structural econometric model to estimate risk preferences from data on deductible choices in auto insurance contracts we account for adverse selection by modeling unobserved heterogeneity in both risk claim rate and risk aversion we find large and skewed heterogeneity in risk attitudes in addition women are more risk averse than men risk aversion exhibits a u shape with respect to age and proxies for income and wealth are positively associated with absolute risk aversion finally unobserved heterogeneity in risk aversion is greater than that of risk and as we illustrate has important implications for insurance pricing

culture openness and finance abstract differences in culture proxied by differences in religion and language cannot be ignored when examining why investor protection differs across countries we show that a country s principal religion predicts the cross sectional variation in creditor rights better than a country s natural openness to international trade its language its income per capita or the origin of its legal system catholic countries protect the rights of creditors less well than protestant countries a country s natural openness to international trade mitigates the influence of religion on creditor rights culture proxies are also helpful in understanding how investor rights are enforced across countries

direct evidence of risk aversion as a source of advantageous selection in health insurance abstract using the self stated degree of risk aversion regarding health from the gsoep we find some evidence for risk aversion being a source of advantageous selection risk averse men more often procure supplementary insurance for hospital visits despite needing the additional coverage less

the international transmission of monetary policy abstract this paper presents the novel results from an internationally coordinated project by the international banking research network ibrn on the cross border transmission of conventional and unconventional monetary policy through banks teams from seventeen countries use confidential micro banking data for the years 2000 through 2015 to explore the international transmission of monetary policies of the united states euro area japan and united kingdom two other studies use international data with different degrees of granularity international spillovers into lending to the private sector do occur especially for us policies and bank specific heterogeneity influences the magnitudes of transmission the effects are supportive of the international bank lending channel and the portfolio channel of monetary policy transmission they also show that the frictions that banks face matter in particular foreign currency funding and hedging considerations can be a key source of heterogeneity the forms of bank balance sheet heterogeneity that differentiate spillovers across banks are not uniform across countries international spillovers into lending can be large for some banks even while the average international spillovers of policies into nonbank lending generally are not large