additional aspects of rational insurance purchasing the purchase of insurance provides an individual with the ability to shift risk associated with either timeless or temporal uncertain prospects see dreze and modigliani 1972 previous insurance decision analysis can be further divided into cases in which the insurance contract is exogenously specified see mossin 1968 smith 1968 and cases in which the optimal form of contract is to be determined see raviv 1979 brennan and solanki 1981 this note is concerned with extending some of the results for timeless uncertain prospects with the insurance contract exogenously specified many of the properties associated with the purchase of insurance for timeless uncertain prospects are analyzed by mossin 1968 for different forms of contracts see also gould 1969 utilizing the arrow pratt measure of absolute risk aversion the effect of wealth upon the optimal amount of insurance is determined for the different forms of contracts recent work by ross 1981 demonstrates that in situations where individuals face more than one timeless uncertain prospect and they can purchase insurance only for a subset of these prospects then a more risk averse individual in the arrow pratt this paper examines the use of the arrowpratt and ross measures of risk aversion it is shown that in situations where the individual faces more than one uncertain prospect and can purchase insurance only for a subset of these prospects then in many cases the arrow pratt and ross measures of risk aversion are not sufficient to describe the behavior of the individual in purchasing insurance

relative deprivation and internal migration in the united states a comparison of black and white men while the link between geographic and social mobility has long been a cornerstone of sociological approaches to migration recent research has cast doubt on the economic returns to internal u s migration moreover important racial disparities in migration patterns remain poorly understood drawing on data from the 2000 census the author reappraises the link between migration and social mobility by taking relative deprivation into consideration she examines the association between migration disaggregated by region of origin and destination and absolute and relative earnings and occupational prestige separately by race findings lend new insight into the theoretical and stratification implications of growing racial disparities in migration patterns while both blacks and whites who move north south generally average lower absolute incomes than their stationary northern peers they enjoy significantly higher relative social positions moreover the relative gains to migration are substantially large

evolution of the economics of agricultural policy agricultural economists helped develop farm programs to respond to the dire economic situation of the 1920s and 1930s some early authors appreciated that such policies created problems in markets for commodities and inputs over time our understanding of agricultural issues and policies has deepened through the application of improved models and tools of analysis to more extensive data we have developed better answers to old questions and have responded to changing policy instruments market contexts and policy concerns this article traces the evolution of our deepening economic understanding of the causes and consequences of agricultural policy

decomposing input adjustments under price and production uncertainty a decomposition of input adjustments for stochastic technologies is developed and applied to the case of actuarially fair production insurance the decomposition consists of a pure risk effect and an expansion effect which are analagous to the hicks allen decomposition familiar from consumer theory

price indexes inequality and the measurement of world poverty i discuss the measurement of world poverty and inequality with particular attention to the role of purchasing power parity ppp price indexes from the international comparison project global inequality increased with the latest revision of the icp and this reduced the global poverty line relative to the us dollar the recent large increase of nearly half a billion poor people came from an inappropriate updating of the global poverty line not from the icp revisions even so ppp comparisons between widely different countries rest on weak theoretical and empirical foundations i argue for wider use of self reports from international monitoring surveys and for a global poverty line that is truly denominated in us dollars

optimal insurance in incomplete markets this paper examines the theory of optimal insurance purchasing in the presence of uninsurable background risk existing theorems concerning the optimal level of insurance and the optimal form of an insurance contract are shown to hold only under restricted market and risk assumptions in particular conditions sufficient for the optimality of full coverage or sufficient for the optimality of deductible policies depend on the correlation between insurable and uninsurable risks these results may provide a partial explanation why existing theory is often contradicted by observable behavior

constrained efficient contracts for area yield crop insurance with area yield crop insurance indemnification occurs when area yield falls below a yield trigger that is chosen by the producer the maximum value for this yield trigger is generally restricted e g 80 of the long term area average yield the impact of this trigger constraint on the optimal design of an area yield insurance contract is examined within the constrained efficient contract indemnities consist of both a lump sum payment and a payment that is proportional to the yield shortfall because lump sum payments may not be feasible to implement efficiency enhancing modifications to standard contracts are also proposed copyright 2000 oxford university press

optimal insurance design with random initial wealth abstract an optimal insurance policy is designed when the policyholder faces both insurable and uninsurable risks under a realistic behavioral assumption it may display a disappearing deductible if the uninsurable loss becomes riskier according to any degree of stochastic dominance as the insurable loss increases

lotteries insurance and star shaped utility functions abstract most agents insure against risks which entail large losses but few insure against small losses the fact that organized lotteries charge low ticket prices examplifies this spirit this weakly risk averse behavior pattern seems to be well structured but is at variance with concavity we derive axiomatically a class of utility functions star shaped which accommodate these phenomena concavity yields risk aversion everywhere and decreasing marginal utility star shaped utility functions exhibit risk aversion at some wealth positions and average utility from any of these is a decreasing function of wealth

optimum area yield crop insurance cet article determine le contrat optimal d assurance dont l indemnite depend du rendement agrege sur recoltes d un bassin de production le schema optimal d assurance est base sur le coefficient individuel de regression qui mesure la sensibilite du rendement agrege a des variations du rendement agrege une indemnite est versee lorsque le rendement agrege est inferieur superieur a un rendement critique si le coefficient de regression est positif negatif le contrat optimal contient une franchise evanescente si le coefficient de regression est superieur a l unite

married women s allocation of time to employment and care of elderly parents married women who have been shown in past research to exhibit relatively elastic labor supply constitute a group of particular interest with respect to decisions concerning time spent in parental care and time spent in market work this paper presents estimates of a simultaneousequations model of employment hours of work and the provision of care to an older parent the results provide no evidence of reduced propensities to be employed or of reduced conditional hours of work due to the provision of parent care these findings are consistent with other research on women s allocation of time to competing productive uses

an adverse social welfare effect of a doubly gainful trade abstract acknowledging individuals distaste for low relative income renders trade less appealing when trade is viewed as a technology that integrates economies by merging separate social spheres into one we define a trembling trade as a situation in which gains from trade are overtaken by losses of relative income with the result that global social welfare is reduced a constructive example reveals that a trembling trade can arise even when trade is doubly gainful in that it increases the income of every individual and narrows the income gap between the trading populations

a century of research on agricultural markets this article provides a perspective on major innovations in research on agricultural markets over the past century we review research on market structure and performance vertical coordination arrangements and institutions for producer collective action contributions to empirical modeling of agricultural price determination and marketing margins are also evaluated as are innovations in research on spatial market relationships and the role of storage finally we discuss contributions to understanding market information systems and the functioning of market based mechanisms for agri

optimal risk sharing with background risk this paper examines qualitative properties of efficient insurance contracts in the presence of background risk in order to get results for all strictly risk averse expected utility maximizers the concept of stochastic increasingness is used different assumptions on the stochastic dependence between the insurable and uninsurable risk lead to different qualitative properties of the efficient contracts the new results obtained under hypotheses of dependent risks are compared to classical results in the absence of background risk or to the case of independent risks the theory is further generalized to nonexpected utility maximizers

does relative deprivation induce migration evidence from sub saharan africa this analysis revisits the decades old relative deprivation theory of migration in contrast to the traditional view that migration is driven by absolute income maximization we test whether relative deprivation induces migration in the context of sub saharan africa taking advantage of the internationally comparable longitudinal data from integrated household and agriculture surveys from tanzania ethiopia malawi nigeria and uganda we use panel fixed effects to estimate the effects of relative deprivation on migration decisions using per capita consumption expenditure and multidimensional wealth index as well being measures we find that a household s migration decision is based not only on its absolute well being level but also on the relative position of the household in the well being distribution of the community in which it resides we also discover that the effect of relative deprivation on migration is amplified in rural agricultural and male headed households results are robust to alternative specifications including the use of hausman taylor instrumental variable htiv estimator and pooled data across the five countries results confirm that the migration relative deprivation relationship also holds in the context of sub saharan africa we argue that policies designed to check rural urban migration through rural transformation and poverty reduction programs should use caution because such programs can increase economic inequality which further increases migration flow

moving out but not up economic outcomes in the great migration the migration of millions of southerners out of the south between 1910 and 1970 is largely attributed to economic and social push factors in the south combined with pull factors in other regions o

insurance with multiple insurers a game theoretic approach this paper studies the set of pareto optimal insurance contracts and the core of an insurance game our setting allows multiple insurers with translation invariant preferences we characterise the pareto optimal contracts which determines the shape of the indemnities closed form and numerical solutions are found for various preferences that the insurance players might have determining associated premiums with any given optimal pareto contract is another problem for which economic based arguments are further discussed we also explain how one may link the recent fast growing literature on risk based optimality criteria to the pareto optimality criterion and we show that the latter is much more general than the former one which according to our knowledge has not been pointed out by now further we extend some of our results when model risk is included i e there is some uncertainty with the risk model and or the insurance players make decisions based on divergent beliefs about the underlying risk these robust optimal contracts are investigated and we show how one may find robust and pareto efficient contracts which is a key decision making problem under uncertainty

the impacts of multiperil crop insurance on indonesian rice farmers and production this article analyzes the effect of multiperil crop insurance policy for risk averse indonesian rice farmers located in tuban and gresik regencies of the east java province based on the model comparative static analysis of a change in policy variables coverage levels and premium subsidies on input use through the coupling wealth and insurance effects are presented the comparative static results are largely ambiguous and left as empirical questions consequently the model is numerically simulated to quantify the effects of different coverage levels and subsidy rates on input use expected net insurance payments and certainty equivalents the empirical analysis shows that mpci crop insurance results in a decline in expected yield for coverage levels above about 82 5 for both regencies furthermore higher subsidy rates amplify the reduction in input use and yield therefore incomplete coverage with relatively low premium subsidies is the best policy to minimize the impact on input use and yield however from the farmers perspective the optimal policy combination results from the highest coverage level and subsidy which offer the largest expected net insurance payments and certainty equivalent

optimal transmission planning under the mexican new electricity market abstract this paper addresses electricity transmission planning under the new industry and institutional structure of the mexican electricity market which has engaged in a deep reform process after decades of a state owned vertically integrated non competitive closed industry under this new structure characterized by a nodal pricing system and an independent system operator iso we analyze welfare optimal network expansion with two modeling strategies in a first model we propose the use of an incentive price cap mechanism to promote the expansion of mexican networks in a second model we study centrally planned grid expansion in mexico by an iso within a power flow model we carry out comparisons of these models which provide us with hints to evaluate the actual transmission planning process proposed by mexican authorities prodesen we obtain that the prodesen plan appears to be a convergent welfare optimal planning process

wealth inequality and asset pricing in an arrow debreu exchange economy with identical agents except for their initial endowment we examine how wealth inequality affects the equilibrium level of the equity premium and the risk free rate we first show that wealth inequality raises the equity premium if and only if the inverse of absolute risk aversion is concave in wealth we then show that the equilibrium risk free rate is reduced by wealth inequality if the inverse of the coefficient of absolute prudence is concave we also prove that the combination of a small uninsurable background risk with wealth inequality biases asset pricing towards a larger equity premium and a smaller risk free rate the model of the representative consumer a la lucas 1978 failed to explain observed security prices more specifically as first stated by mehra and prescott 1985 the model predicts an equity premium that is too low and a risk free rate that is too high given the observed low variability of consumption growth a recent strand of the literature with papers by constantinides and duffie 1996 heaton and lucas 1996 and krusell and smith 1997 for example explores whether incomplete asset markets and heterogeneity among consumers can explain these puzzles constantinides and duffie 1996 in particular conclude that it is at least in principle possible to generate larger equity premia when such ingredients are introduced the aim of this paper is not to provide another explanation of the puzzles but rather to better understand the relationship between asset prices the heterogeneity of consumers wealth and the market incompleteness when markets are complete heterogeneous consumers are able to equalize their marginal rates of substitution across states and across time as shown by constantinides 1982 this implies that the equilibrium of the heterogeneous consumer economy can be duplicated by the equilibrium in a lucas economy with a representative agent this means that taking account of the heterogeneity in the population alone cannot explain why the representative agent model is rejected hansen and singleton 1982 this does not mean however that the distribution of wealth in the population for example has no effect on asset prices in general in order to understand this consider the departure from an egalitarian distribution of wealth by introducing a mean preserving transfer of endowment under decreasing absolute risk aversion poorer agents will be more risk averse whereas wealthier people will be less risk averse there is no reason a priori for that the group s attitude towards risk be unaffected by this transfer we first show that if absolute risk tolerance i e the inverse of the arrow pratt coefficient of absolute risk aversion is concave then the risk aversion of the agent with the mean wealth will be smaller than the risk aversion of the representative agent thus if an outside observer overlooks wealth inequality he consequently underestimates the aversion to risk of society this leads to

crop insurance in a political economy an alternative perspective on agricultural policy lawmakers often subsidize farmers in times of financial distress this article models this political impulse as a constraint on government farm policy describing how ex ante government farm insurance can deter ex post disaster relief and improve production incentives by countering the moral hazard that otherwise prevails absent ex ante government policy ex post relief takes the form of revenue insurance which prompts excessive entry into farm production and under production by operating farmers ex ante government policy can raise economic and political welfare by buying out low productivity farmers and offering profitable farmers a combination of revenue insurance price supports and a program participation fee copyright 2003 oxford university press

migration when social preferences are ordinal steady state population distribution and social welfare this paper adds three dimensions to the received literature it models migration when the individuals preferences regarding their relative incomes are ordinal it works out the resulting spatial steady state distribution of the individuals and it shows that the aggregate of the individuals migration choices in the spatial steady state distribution sums to the social optimum this finding does not apply when the individuals preferences regarding their relative incomes are cardinal we highlight the importance of the assumption about the nature of the individuals social preferences whether ordinal or cardinal to studying and predicting their migration behaviour and to elucidating the consequences of that behaviour for social welfare

increases in risk and deductible insurance abstract this paper examines how mean preserving transformations in the loss distribution affect the optimal level of deductibility in an insurance contract if marginal utility is convex increases in risk affecting losses only below the deductible are shown to lead to a reduction in coverage higher deductible which can be viewed as an increase in precautionary savings on the other hand a transformation that spreads losses more towards the tails of the distribution leads to an increase in coverage lower deductible whenever preferences exhibit nonincreasing absolute risk aversion

crop insurance acreage decisions and nonpoint source pollution the redirection of farm policy in the 1996 farm bill has generated much interest in seeking environmentally friendly and economically viable ways to protect farm income agricultural insurance has been suggested as such an instrument this article estimates the effect of crop insurance on crop mix and the resulting change in chemical use in the central nebraska basin providing corn insurance will shift land from hay and pasture to corn which will increase chemical use at the extensive margin this extensive margin effect dominates the effect of crop insurance on the application rate leading to an increase in total chemical use

risks and farmers investment in productive assets in nigeria the majority of farmers in sub saharan africa ssa lack the means to mitigate the impact of risks associated with rainfall and commodity prices due to capital constraints and the imperfect insurance market in these countries because most ssa farmers are risk averse they may be willing to invest in productive assets that can mitigate the impacts of such risks if their capital constraints are relaxed through external financial assistance we test this hypothesis by using panel data on investment behavior of nigerian farmers who received financial assistance on productive assets the empirical results show that farmers facing higher rainfall risks are more likely to invest in irrigation pumps that can mitigate the impact of rainfall risks while those facing higher risks of white gari price are more likely to invest in milling machines that enable them to process cassava into flour instead of gari which supports our hypothesis

an incentive mechanism for electricity transmission expansion in mexico abstract this study proposes an incentive regulatory framework for expanding electricity transmission in mexico a two part pricing model is implemented within a combined merchant regulatory structure three cases are considered in the first a monopolist with postage stamp tariffs serves the whole country using uniform prices in the second case one firm holds a regional monopoly in each of the five electricity areas in the third a monopolist operates in all areas of the national electricity system and discriminates in the prices it charges in each of the regions this approach is described and then applied to the mexican electricity transmission network using real data the study compares all three cases in terms of profits capacity increases and network expansion the results are found to depend on two effects the economies of scale effect in which the maximum level is reached with a single network and the discriminatory effect that results when a firm can discriminate among types of consumers the economies of scale effect produces greater capacity and network expansion whereas the discriminatory effect increases profits

livestock disease indemnity design when moral hazard is followed by adverse selection averting or limiting the outbreak of infectious disease in domestic livestock herds is an economic and potential human health issue that involves the government and individual livestock producers producers have private information about preventive biosecurity measures they adopt on their farms prior to outbreak ex ante moral hazard and following outbreak they possess private information about whether or not their herd is infected ex post adverse selection we investigate how indemnity payments can be designed to provide incentives to producers to invest in biosecurity and report infection to the government in the presence of asymmetric information we compare the relative magnitude of the first and second best levels of biosecurity investment and indemnity payments to demonstrate the tradeoff between risk sharing and efficiency and we discuss the implications for status quo u s policy

optimal area yield crop insurance reconsidered the implementability of area yield insurance contracts in the presence of symmetric and asymmetric information about the farmer s beta linking his yield to the risk pool s yield is examined in the presence of fixed costs and symmetric information mahul s result that optimality requires setting the slope of the indemnity schedule equal to each farmer s beta is confirmed when there is asymmetric information between the insurer and the farmer however this full insurance contract is vulnerable to adverse selection and therefore may not be implementable for general cost structures the optimal area yield insurance contract under asymmetric information is characterized

second best insurance contract design in an incomplete market the optimal form of insurance contracts for multiple risks is examined a well known result in the literature is that under fairly general conditions an insurance policy with a deductible for aggregate losses is optimal real world markets however are typically incomplete in that they require separate contracts for separate loss exposures for instance insurable damage to one s home is not generally allowed to affect the insurance indemnity for unrelated insurable damage to one s automobile we show that separate deductibles are second best optima in this setting we compare the indemnity provided in this second best setting with first best solutions the effect of second best contracts on the individual s total insurance demand is also examined

categorizing risks in the insurance industry this paper analyzes the welfare implications of imperfectly categorizing risks in the insurance industry under conditions of asymmetric information firms initially unable to distinguish the risk type of individuals are provided with imperfect information concerning risk membership the paper then compares various wilson type equilibria to determine the welfare implications of firms imperfectly categorizing risks it is shown that only in the case where the initial equilibrium is of the nash no subsidy type is there a pareto type improvement in welfare

the design of an optimal insurance policy almost every phase of economic behavior is affected by uncertainty the economic system has adapted to uncertainty by developing methods that facilitate the reallocation of risk among individuals and firms the most apparent and familiar form for shifting risks is the ordinary insurance policy previous insurance decision analyses can be divided into those in which the insurance policy was exogenously specified see john gould jan mossin and vernon smith and those in which it was not see karl borch 1960 and kenneth arrow 1971 1973 in this paper the pioneering work of borch and arrow the derivation of the optimal insurance contract form from the model is synthesized and extended

marginal pricing of transmission services an analysis of cost recovery this paper presents an in depth analysis of network revenues computed with marginal pricing and in particular it investigates the reasons why marginal prices fail to recover the total incurred network costs in actual power systems the basic theoretical results are presented and the major causes of the mismatch between network costs and marginal revenues are identified and illustrated with numerical examples some tutorial and others of realistic size the regulatory implications of marginal network pricing in the context of competitive electricity markets are analyzed and suggestions are provided for the meaningful allocation of the costs of the network among its users

optimal insurance against climatic experience an optimal insurance contract against a climatic risk is derived in the presence of an uninsurable and dependent aggregate production risk the optimaldesign depends on the stochastic dependency between both sources of uncertainty and on the producer s attitude towards risk especially on his prudent behavior rationalweather insurance purchasing decisions are al so derived the prudent producer responds to actuarially fair weather insurance by increasing his exposure towards risk the u s multiple peril crop insurance program in which indemnity payments are based on the producer s individualyiel ds has been disappointing in that premiums have not been sufficient to cover indemnity payments and administrative costs this failure has induced the u s government to promote alternative insurance policies since 1993 the risk management agency has offered areayield contracts under its group risk plan in selected counties skees black and barnett another alternative is to base the indemnity on a weather index such as rainfall or temperature this policy was proposed in the past by sanderson but has failed to gain acceptance among policy makers the difficulties of rainfall insurance were a subject of debate in australia e g bardsley abey and davenport quiggin 1986 patrick the recent development of weather based instruments on financialmarkets known as weather derivatives for which the payoff depends on the cause of risk rather than on its effect on yield provide new opportunities for covering exposure to unfavorable weather events the objective of this article is threefold first a stochastic production function affected by a climatic risk and by an aggregate production risk where both sources of risk are stochastically dependent is de

a utility and cpt based comparison of life insurance contracts with guarantees abstract some recent literature studies whether contracts including financial guarantees can be preferred by a utility maximizing investor the main result for contracts exposed solely to financial risk e g doskeland and nordahl 2008 dichtl and drobetz 2011 is that expected utility theory eut fails to interpret demand for guarantees while cumulative prospect theory cpt is able to support the demand while the development of the financial market has a significant impact on the portfolio choice some other non financial risk might play an important role too in the present paper we take life insurance products as an example where the long term nature of these contracts places a special emphasis on the uncertain lifetime of the investor we incorporate the mortality risk and investigate its effect on the attractiveness of contracts offering minimum interest rate guarantees to eut and cpt investors for this purpose we introduce two approaches for the consideration of multiple risk sources within cpt we illustrate the theoretical framework with numerous simulations and our numerical results show that a long term risk averse eut investor prefers products with guarantees

the design of an optimal insurance policy note in an article in this review arthur raviv 1979 examines pareto optimal insurance policies when an insurer incurs settlement costs c induced by indemnity i for loss x raviv s main result is that a necessary and sufficient condition for the pareto optimal deductible to equal zero is c i 0 this implies that deductible policies give the best tradeoff between risk sharing and economizing on costly claim settlements since in practice these costs are significant the theorem is of considerable importance among others this has been recognized by robert townsend 1979 michael brennan and ray solanki 1981 david mayers and clifford smith 1981 gur huberman mayers and smith 1983 harris schlesinger 1981 and stuart turnbull 1983 the theorem is correct but raviv s proof is not in this note a corrected proof for the theorem is given the corrected proof is important in itself because it allows for a generalization to a greater variety of transactions costs than has previously been considered see my 1984 paper for details section i develops the setting for the problem and the notation to be subsequently used raviv s error and the corrected proof are presented in section ii

pricing in microinsurance markets summary microinsurance markets have exhibited strong growth rates in recent years great parts of the industry are however challenged by fundamental issues of providing insurance products one of the most significant of which is pricing risk in this paper we provide a nontechnical analysis of insurance pricing problems and a review of the set of opportunities that can address some of the specific pricing constraints in microinsurance markets a key contribution of this paper is the investigation of conventional techniques as potential solutions for improving the pricing of insurance risk in microinsurance markets

valuing agricultural insurance this paper proposes a method for estimating a farmer s stochastic discount factor that is independent of his or her risk preferences and shows that that stochastic discount factor is appropriate for calculating a farmer s willingness to pay for a crop insurance product an empirical example illustrates how production and price data might be combined with returns data to permit econometric estimation of the stochastic discount factor and the implications of those illustrative results are briefly discussed

income tax deductions for losses as insurance the federal income tax allows deductions for some categories of personal losses notably for casualty losses such as destruction of one s home or car and medical expenses above a threshold the latter even with lower marginal rates and further restrictions brought about by the 1986 tax reform involves more than a 3 billion annual revenue loss office of management and budget 1990 1 deductions like these act as partial insurance individuals receive a tax benefit equal to their marginal rate multiplied by the magnitude of their loss however this form of insurance is unnecessary when private insurance is available moreover as will be emphasized here these deductions have a perverse effect because they are allowed only for the uninsured portion of losses this induces individuals to be less protected against risk in the aggregate than if the implicit insurance provided by the tax system were unavailable if the tax rate is sufficiently high individuals would forgo insurance coverage altogether 2 it will be demonstrated that a tax system with no deductions for personal losses pareto dominates the current system these conclusions are demonstrated in section i using a simple model in which risk averse individuals may purchase actuarially fair insurance against loss and individual behavior does not affect the risk of loss no moral hazard section ii considers the applicability of the results when one allows for moral hazard administrative costs and other imperfections it also discusses the applicability of traditional notions of tax equity

risk sharing in the adjustable rate loan market are existing contracts efficient abstract a previous paper arvan and brueckner 1986 showed that in an optimal loan contract interest rate risk should be shared between lender and borrower with the slope of the loan rate function which relates the loan interest rate to the lender s uncertain cost of funds lying between zero and one existing adjustable rate mortgage arm contracts violate this rule since they require complete risk absorption by the borrower when interest rate caps are not binding the present paper shows that when the earlier model is modified by adding a second type of borrower efficient loan contracts look more like existing arms

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

a state contingent production approach to principal agent problems with an application to point source pollution control two basic representations of principal agent relationships the state space and parameterized distribution formulations have emerged although the state space formulation appears more natural analytical studies using this formulation have had limited success this paper develops a state space formulation of the moral hazard problem using a general representation of production under uncertainty a closed form solution for the agency cost problem is derived comparative static results are deduced next we solve the principal s problem of selecting the optimal output given the agency cost function the analysis is applied to the problem of point source pollution control c 1998 published by elsevier science s a all rights reserved

regulation competition and liberalization in many countries throughout the world regulators are struggling to determine whether and how to introduce competition into regulated industries this essay examines the complexities involved in the liberalization process while stressing the importance of case specific analyses this essay distinguishes liberalization policies that generally are procompetitive from corresponding anticompetitive liberalization policies

further toward a theory of agricultural insurance the economic theory of contracts is applied to agricultural insurance to show that given full information pareto optimal insurance contracts are actuarially fair provide full coverage and differ for each individual the information problems of moral hazard and adverse selection prevent pareto optimality from being attained several second best solutions to these problems are applied to agricultural insurance it is shown that information collection and the application of contract design principles are second best solutions which may achieve the benefits of insurance at less cost than the current practice of public subsidies in theory agricultural insurance is an efficient risk sharing mechanism in practice however agricultural insurance has been a costly means of transferring risk from farmers to governments and or other insurers to induce farmers to participate in agricultural insurance governments have borne significant subsidy costs hazell pomareda and valdes p 295 in a recent study ahsan ali and kurian aak concluded that public subsidies are necessary to make agricultural insurance viable they also showed that insurance will increase output relative to a case with no insurance thus insurance is beneficial particularly in less developed countries where increasing food supplies is a policy goal for this reason they concluded that public subsidization of insurance also is desirable their conclusions are derived from a simplified model of production with one output and one input in this article we consider a more general production model with multiple inputs and outputs we show that aak s conclusion about the benefits of insurance may not hold depending on the nature of the inputs and outputs as defined by the production function carl h nelson is an assistant professor of agricultural economics

designing optimal crop revenue insurance when the indemnity schedule is contingent on the farmer s price and individual yield an optimal crop revenue insurance contract depends only on the farmer s gross revenue however this design is not efficient if as is the case with available contracts the coverage function is based on imperfect estimators of individual yield and or price the producer s degree of prudence and the extent of basis risks have important influences on the optimal indemnity schedule in this broader context optimal protection is not provided by available u s crop insurance contracts and may include combinations of revenue insurance yield insurance futures and options contracts

the pricing of revenue assurance a theoretical model to value gross revenue assurance under one of the popular proposals facing u s policy makers is developed the approach makes use of a fundamental paradigm of asset valuation and stochastic calculus because farm level gross revenue is not a traded asset equilibrium arguments must be made to specify the partial differential equation characterizing the value of the assurance an example solution is presented under the assumption of lognormally distributed gross revenue county level data for a variety of crops are used to examine empirically the pricing ability of the model

toward a theory of agricultural insurance in this paper we develop a theory of crop insurance we start by reaffirming the risk spreading role of competitive crop insurance markets it is argued however that once the problems of imperfect information are recognized a competitive crop insurance market may not exist at all two candidates present themselves first is market insurance with the public sector as a source of costly information gathering and dissemination and second is the direct provision of crop insurance by the public sector we focus on the latter and develop a model of public insurance as a decentralized plan where the farmer determines factor utilization taking the insurance contract as given in turn the insurance agency taking factor utilization as determined by the farmer chooses the optimal contract so as to maximize the value of aggregate output in the economy

implications of incomplete performance for optimal insurance we investigate the demand for insurance when contracts are subject with positive probability to two distinct types of incomplete performance when partial performance means payment of some fraction of the indemnity under full performance the latter exhibits a disappearing deductible when partial performance is due to insufficient financial capacity optimal insurance contracts for any given level of financial capacity offer full marginal coverage above a deductible for either type of non performance the optimal deductible under full performance is positive when insurance is offered at an actuarially fair price

the basis risk of catastrophic loss index securities abstract using a windstorm simulation model developed by applied insurance research we analyze the effectiveness of catastrophic loss index options in hedging hurricane losses for florida insurers the results suggest that insurers in the two largest size quartiles can hedge losses almost as effectively using contracts based on four intrastate indices as they can using contracts that settle on their own losses many insurers in the third largest size quartile also can hedge effectively using the intrastate indices but most insurers in the smallest quartile would encounter significant basis risk hedging using a statewide loss index is effective only for the largest insurers

technological uncertainty and the theory of the firm several recent articles 1 6 have generalized the theory of the firm to incorporate price uncertainty and risk aversion it is now well known that the risk averse entrepreneur will select that level of output at which the expected price equals the marginal cost plus the marginal risk premium leland 5 provides a similar generalization given demand uncertainty however in each case the assumption of a well specified technology is maintained this paper complements and generalizes the earlier work on the theory of the firm by investigating the effect which technological uncertainty has on the firm s optimal production decision like the earlier work on the theory of the firm we show that the firm selects the level of input at which the expected marginal productivity equals the factor price plus the marginal risk premium unlike the earlier work we show that the sign of the marginal risk premium is not always positive and that it depends on the structure of the firm s technology we show that the distinction between price and technological uncertainty is important because each can lead to different implications for firm behavior like its predecessors the model of the firm presented here assumes a single ownerentrepreneur who makes the production decision we modify the baron and sandmo models by assuming that the entrepreneur knows the cost of each production decision but not the output as a result the entrepreneur s decision yields a random variable denoting output and a linear transformation of it denoting profit the entrepreneur chooses the random variable denoting profit to maximize his expected utility there are at least three distinct ways in which our notion of technological uncertainty may be interpreted first the entrepreneur may not know the location of the production surface in this case each production decision yields a random output an increase in the

career migration self selection and the earnings of married men and women in the netherlands 1981 93 the relationship between career migration and earnings is studied for married men and women in the netherlands the hourly wages of married men and women who made a recent long distance move are found to be higher than those of married men and women who did not move or who moved only over a small distance this earning difference between migrants and non migrants seems to be due completely to the fact that the migrants are a favorable self selected group both with regard to their measured characteristics and with regard to their unmeasured characteristics if this favorable self selection is taken into account the male and female migrants turn out to earn significantly less than their non migrating counterparts for the males this finding suggests that before the move they were in relatively unfavorable labor market situations compared with the non migrants with the same measured and unmeasured characteristics for the females the negative effect of migration merely indicates that most long distance moves are still made for the career of their husband authors

agricultural insurance and soil depletion in a simple dynamic model we study the effects of agricultural insurance on farm production choices soil depletion and the environment when there are two related risks one in short to medium run production revenues and the other in land value the analysis considers pure and truncating insurance programs that stabilize linear combinations of short run revenue risk and land price risk production revenue stabilizing insurance is often found to elicit increased farmer output thus exacerbating environmental externalities and causing further soil depletion land value stabilizing insurance typically elicits lower output thus mitigating environmental externalities and pushing farmers closer to their complete insurance output levels

repeated insurance contracts and moral hazard abstract an attempt is made to account for the frequently observed phenomenon of insurance companies offering discounts to clients who possess a favorable record of past claims we argue that such discounts provide a mechanism which enables both insurer and insured to counteract the inefficiency which arises from moral hazard

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

the heckman correction for sample selection and its critique this paper gives a short overview of monte carlo studies on the usefulness of heckman s 1976 1979 two step estimator for estimating selection models such models occur frequently in empirical work especially in microeconometrics when estimating wage equations or consumer expenditures it is shown that exploratory work to check for collinearity problems is strongly recommended before deciding on which estimator to apply in the absence of collinearity problems the full information maximum likelihood estimator is preferable to the limited information two step method of heckman although the latter also gives reasonable results if however collinearity problems prevail subsample ols or the two part model is the most robust amongst the simple to calculate estimators

transmission investment in the peruvian electricity market theory and applications abstract this research presents an application of the mechanism in hogan et al 2010 hrv to promote electricity transmission network expansion in the peruvian electricity transmission system known as sein sistema electrico interconectado nacional the hrv mechanism combines the merchant and regulatory approaches to promote investment into transmission grids this mechanism gives incentives for efficient investment in expansion of the network by rebalancing over time the fixed and variable charges of a two part tariff in the framework of a wholesale electricity market with locational pricing the expansion of the network is carried out through the sale of financial transmission rights ftrs for the congested lines the mechanism is applied for 103 nodes of the sein using detailed characteristics of generators nodes and transmission lines under laspeyres weights and linear cost of expansion of transmission capacity it is shown that prices converge to lower price levels as a result of increased transmission capacity

efficient contracts in credit markets subject to interest rate risk an application of raviv s insurance model interest rate risk borne by financial institutions has increased markedly as the credit markets have become more unstable in recent years the burden of this new instability has been especially severe for lending institutions whose balance sheets show the greatest mismatch between the maturities of assets and liabilities the savings and loan industry for example which borrows short and lends long suffered serious losses in recent years as income from its portfolio of old mortgages failed to keep pace with the escalating cost of short term funds the specter of such losses has led to the emergence of adjustable rate mortgages arms as well as other types of variable rate contracts these contracts often specify a complex functional relationship between the future loan interest rate and the lender s uncertain future cost of funds in view of the growing popularity of variable rate loans it is important to know what features an efficient contract of this type would possess to answer this question the present paper derives the form of the optimal variable rate contract focusing especially on the contractual relationship between the loan rate and the future cost of funds the framework used in the analysis is very similar to artur raviv s 1979 optimal insurance model section i derives the form of the optimal loan contract and evaluates the risk sharing efficiency of arms in light of the results subsequent sections discuss extensions of the model and offer conclusions 1 i analysis

systemic risk reinsurance and the failure of crop insurance markets without affordable reinsurance private crop insurance markets are doomed to fail because systemic weather effects induce high correlation among farm level yields defeating insurer efforts to pool risks across farms using an empirical model of the u s crop insurance market we find that u s crop insurer portfolios are twenty to fifty times riskier than they would be otherwise if yields were stochastically independent across farms we also find that area yield reinsurance contracts would enable crop insurers to cover most of their systemic crop loss risk reducing their risk exposure to levels typically experienced by more conventional property liability insurers copyright 1997 oxford university press

migration incentives migration types the role of relative deprivation the authors explore the role of relative deprivation versus absolute income as an incentive for migration in developing countries in section i of this paper we outline the relative deprivation model of migration and present an illustration of the divergent policy implications of a relative deprivation model versus an absolute income model an attempt is made to identify distinct empirical implications of relative and absolute income motives for migrating in section ii a migration decision model is estimated and is used to explore absolute and relative income motives for internal and international migration in a sample of rural mexican households as well as to test the extent to which discontinuity in labour markets shapes the choice of migrant destination in section iii we present our conclusions excerpt