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Risk Sharing (risk + sharing)
Selected AbstractsOPTIMAL RISK SHARING FOR LAW INVARIANT MONETARY UTILITY FUNCTIONSMATHEMATICAL FINANCE, Issue 2 2008E. Jouini We consider the problem of optimal risk sharing of some given total risk between two economic agents characterized by law-invariant monetary utility functions or equivalently, law-invariant risk measures. We first prove existence of an optimal risk sharing allocation which is in addition increasing in terms of the total risk. We next provide an explicit characterization in the case where both agents' utility functions are comonotone. The general form of the optimal contracts turns out to be given by a sum of options (stop-loss contracts, in the language of insurance) on the total risk. In order to show the robustness of this type of contracts to more general utility functions, we introduce a new notion of strict risk aversion conditionally on lower tail events, which is typically satisfied by the semi-deviation and the entropic risk measures. Then, in the context of an AV@R-agent facing an agent with strict monotone preferences and exhibiting strict risk aversion conditional on lower tail events, we prove that optimal contracts again are European options on the total risk. [source] Formal and Informal Risk Sharing in LDCs: Theory and Empirical EvidenceECONOMETRICA, Issue 4 2008Pierre Dubois We develop and estimate a model of dynamic interactions in which commitment is limited and contracts are incomplete to explain the patterns of income and consumption growth in village economies of less developed countries. Households can insure each other through both formal contracts and informal agreements, that is, self-enforcing agreements specifying voluntary transfers. This theoretical setting nests the case of complete markets and the case where only informal agreements are available. We derive a system of nonlinear equations for income and consumption growth. A key prediction of our model is that both variables are affected by lagged consumption as a consequence of the interplay of formal and informal contracting possibilities. In a semiparametric setting, we prove identification, derive testable restrictions, and estimate the model with the use of data from Pakistani villages. Empirical results are consistent with the economic arguments. Incentive constraints due to self-enforcement bind with positive probability and formal contracts are used to reduce this probability. [source] The Mirrlees Approach to Mechanism Design with Renegotiation (with Applications to Hold-up and Risk Sharing)ECONOMETRICA, Issue 1 2002Ilya Segal The paper studies the implementation problem, first analyzed by Maskin and Moore (1999), in which two agents observe an unverifiable state of nature and may renegotiate inefficient outcomes following play of the mechanism. We develop a first-order approach to characterizing the set of implementable utility mappings in this problem, paralleling Mirrlees's (1971) first-order analysis of standard mechanism design problems. We use this characterization to study optimal contracting in hold-up and risk-sharing models. In particular, we examine when the contracting parties can optimally restrict attention to simple contracts, such as noncontingent contracts and option contracts (where only one agent sends a message). [source] Investing Public Pensions in the Stock Market: Implications for Risk Sharing, Capital Formation and Public Policy in the Developed and Developing WorldINTERNATIONAL REVIEW OF FINANCE, Issue 3 2001Deborah Lucas Concerns that existing public pension systems will be unable to pay benefits to a rapidly ageing population without sharp tax increases, and the prospect of higher average returns on stocks than on government securities, are drawing the attention of policy,makers worldwide to the option of investing public pension assets in stocks. Including stock market investments in public pension plans could improve risk sharing within and between generations, and could perhaps lead to faster market development in some countries. It could also result in excessive risk,taking, higher transactions costs and a false sense of increased financial security. This paper assesses these issues, with an emphasis on the considerations that are of special importance to developing markets. A contrast is drawn between the demographic outlook in East Asia and the major industrialized countries. Some lessons are drawn from the reform experience in Chile and elsewhere in Latin America. [source] Venture Capitalists' Decision to SyndicateENTREPRENEURSHIP THEORY AND PRACTICE, Issue 2 2006Sophie Manigart Financial theory, access to deal flow, selection, and monitoring skills are used to explain syndication in venture capital firms in six European countries. In contrast with U.S. findings, portfolio management motives are more important for syndication than individual deal management motives. Risk sharing, portfolio diversification, and access to larger deals are more important than selection and monitoring of deals. This holds for later stage and for early stage investors. Value adding is a stronger motive for syndication for early stage investors than for later stage investors, however. Nonlead investors join syndicates for the selection and value-adding skills of the syndicate partners. [source] Efficiency, Equilibrium, and Asset Pricing with Risk of DefaultECONOMETRICA, Issue 4 2000Fernando Alvarez We introduce a new equilibrium concept and study its efficiency and asset pricing implications for the environment analyzed by Kehoe and Levine (1993) and Kocherlakota (1996). Our equilibrium concept has complete markets and endogenous solvency constraints. These solvency constraints prevent default at the cost of reducing risk sharing. We show versions of the welfare theorems. We characterize the preferences and endowments that lead to equilibria with incomplete risk sharing. We compare the resulting pricing kernel with the one for economies without participation constraints: interest rates are lower and risk premia depend on the covariance of the idiosyncratic and aggregate shocks. Additionally, we show that asset prices depend only on the valuation of agents with substantial idiosyncratic risk. [source] INFORMATION GATHERING BY A PRINCIPAL,INTERNATIONAL ECONOMIC REVIEW, Issue 4 2006Ed Nosal In the standard principal,agent model, the information structure is fixed. In this article the principal can choose to acquire additional information about the state of the world before he contracts with an agent. In the event that the principal acquires this information, the agent never learns what the principal knows about the state of the world. I examine cases where the agent can and cannot observe whether the principal has acquired the additional information. The implications for risk sharing, information acquisition, investment, and welfare are examined for both cases. [source] Networking and innovation: a systematic review of the evidenceINTERNATIONAL JOURNAL OF MANAGEMENT REVIEWS, Issue 3-4 2004Luke Pittaway Recent work on competitiveness has emphasized the importance of business networking for innovativeness. Until recently, insights into the dynamics of this relationship have been fragmented. This paper presents a systematic review of research linking the networking behaviour of firms with their innovative capacity. We find that the principal benefits of networking as identified in the literature include: risk sharing; obtaining access to new markets and technologies; speeding products to market; pooling complementary skills; safeguarding property rights when complete or contingent contracts are not possible; and acting as a key vehicle for obtaining access to external knowledge. The evidence also illustrates that those firms which do not co-operate and which do not formally or informally exchange knowledge limit their knowledge base long term and ultimately reduce their ability to enter into exchange relationships. At an institutional level, national systems of innovation play an important role in the diffusion of innovations in terms of the way in which they shape networking activity. The paper provides evidence suggesting that network relationships with suppliers, customers and intermediaries such as professional and trade associations are important factors affecting innovation performance and productivity. Where networks fail, it is due to inter-firm conflict, displacement, lack of scale, external disruption and lack of infrastructure. The review identifies several gaps in the literature that need to be filled. For instance, there is a need for further exploration of the relationship between networking and different forms of innovation, such as process and organisational innovation. Similarly, we need better understanding of network dynamics and network configurations, as well as the role of third parties such as professional and trade associations. Our study highlights the need for interdisciplinary research in these areas. [source] Cross-Border Exposures and Financial ContagionINTERNATIONAL REVIEW OF FINANCE, Issue 2 2010HANS DEGRYSE ABSTRACT Integrated financial markets provide opportunities for expansion and improved risk sharing, but also pose threats of contagion risk through cross-border exposures. This paper examines cross-border contagion risk over the period 1999,2006. To that purpose we use aggregate cross-border exposures of 17 countries as reported in the Bank for International Settlements Consolidated Banking Statistics. We find that a shock that affects the liabilities of one country may undermine the stability of the entire financial system. Particularly, a shock wiping out 25% (35%) of US (UK) cross-border liabilities against non-US (non-UK) banks could lead to bank contagion eroding at least 94% (45%) of the recipient countries' banking assets. We also find that since 2006 a shock to Eastern Europe, Turkey and Russia affects most countries. Our simulations also reveal that the ,speed of propagation of contagion' has increased in recent years resulting in a higher number of directly exposed banking systems. Finally, we find that contagion is more widespread in geographical proximities. [source] Investing Public Pensions in the Stock Market: Implications for Risk Sharing, Capital Formation and Public Policy in the Developed and Developing WorldINTERNATIONAL REVIEW OF FINANCE, Issue 3 2001Deborah Lucas Concerns that existing public pension systems will be unable to pay benefits to a rapidly ageing population without sharp tax increases, and the prospect of higher average returns on stocks than on government securities, are drawing the attention of policy,makers worldwide to the option of investing public pension assets in stocks. Including stock market investments in public pension plans could improve risk sharing within and between generations, and could perhaps lead to faster market development in some countries. It could also result in excessive risk,taking, higher transactions costs and a false sense of increased financial security. This paper assesses these issues, with an emphasis on the considerations that are of special importance to developing markets. A contrast is drawn between the demographic outlook in East Asia and the major industrialized countries. Some lessons are drawn from the reform experience in Chile and elsewhere in Latin America. [source] On the Relation between Conservatism in Accounting Standards and Incentives for Earnings ManagementJOURNAL OF ACCOUNTING RESEARCH, Issue 3 2007QI CHEN ABSTRACT This paper studies the role of conservative accounting standards in alleviating rational yet dysfunctional unobservable earnings manipulation. We show that when accounting numbers serve both the valuation role (in which potential investors use accounting reports to assess a firm's expected future payoff) and the stewardship role (in which current shareholders rely on the same reports to monitor their risk-averse manager), current firm owners have incentives to engage in earnings management. Such manipulation reduces accounting numbers' stewardship value and leads to inferior risk sharing. We then show that risk sharing, and hence contract efficiency, can be improved under a conservative accounting standard where, absent earnings management, accounting earnings represent true economic earnings with a downward bias, compared with under an unbiased standard where, absent earnings management, accounting earnings represent true economic earnings without bias. [source] International dynamic risk sharingJOURNAL OF APPLIED ECONOMETRICS, Issue 1 2008Giuseppe Cavaliere In this paper we examine the implications of international risk sharing among a set of countries in the presence of market frictions which complicate the instantaneous adjustment to the first-order conditions. We suggest approximating the consumption streams of countries belonging to the risk sharing coalition in terms of a disequilibrium dynamic model embodying forward-looking adjustment. Econometric methods for estimating and testing the model are discussed. Empirical analysis of a set of core European countries suggests that once preference parameters are allowed to vary across countries, we are able to identify a group of nations that share risks against idiosyncratic permanent income shocks. The equilibrium position, however, is reached after a long adjustment period. Copyright © 2008 John Wiley & Sons, Ltd. [source] Venture-Capital Syndication: Improved Venture Selection vs.JOURNAL OF ECONOMICS & MANAGEMENT STRATEGY, Issue 3 2002The Value-Added Hypothesis Syndication arises when venture capitalists jointly invest in projects. We model and test two possible reasons for syndication: project selection, as an additional venture capitalist provides an informative second opinion; and complementary management skills of additional venture capitalists. The central question is whether venture capitalists are engaged primarily in selection or in managerial value added. These alternatives imply contrasting predictions about comparative returns to syndicated and standalone investments. Our empirical analysis, using Canadian data, finds that syndicated investments have higher returns, favoring the value-added interpretation. We also discuss risk sharing and project scale as possible reasons for syndication. [source] Floating without flotations,the exchange rate and the Mexican stock market: 1995,2001JOURNAL OF INTERNATIONAL DEVELOPMENT, Issue 3 2006Jesús Muñoz Abstract Pegged exchange rates in capital importing countries partially ,socialised' the risks of international borrowing. A corollary of managed floating, therefore, is a reallocation of risk bearing to private capital markets. Equity finance offers explicit risk sharing but Mexican experience since 1995 confirms that it may not expand spontaneously under a floating regime, despite buoyant international conditions. As an explanation for this disappointing outcome, the analysis highlights the implications of managed floating for equity demand when corporate debt is high. Policy must recognize that while firms need to reduce gearing, investors may not be attracted to the shares of indebted companies. Copyright © 2006 John Wiley & Sons, Ltd. [source] The Performance Effects of Business Groups in RussiaJOURNAL OF MANAGEMENT STUDIES, Issue 3 2009Saul Estrin abstract This study analyses the impact of business group affiliation on firm performance during a time when business groups are newly formed, when the economic and institutional environment is changing, and when group survival is uncertain. Based primarily on a transaction cost approach, we develop two hypotheses, concerning profitability and risk sharing (redistribution) respectively. The positive profitability hypothesis proposes that company affiliation with a business group directly and positively affects the profitability of each affiliate. A positive direct effect emerges when each affiliate benefits from access to group resources. The redistribution hypothesis considers the simultaneous possibility that inter-affiliate transfers of resources through internal markets are designed to redistribute profits among group members. We argue that variance-reducing redistribution from strong to weak group members is linked to group survival in times of institutional change. Our empirical approach focuses on testing these two linked hypotheses (and their alternatives) using a relatively large, contemporary and time varying database of Russian firms. We also develop a framework that distinguishes among the four possible empirical outcomes associated with the hypotheses. Our results provide unambiguous support for the case where the impact of group membership on profitability is positive and redistribution is variance-reducing. We term this outcome Business Group Robustness, and contrast it with other possible empirical outcomes. [source] Utility transversality: a value-based approachJOURNAL OF MULTI CRITERIA DECISION ANALYSIS, Issue 5-6 2005James E. Matheson Abstract We examine multiattribute decision problems where a value function is specified over the attributes of a decision problem, as is typically done in the deterministic phase of a decision analysis. When uncertainty is present, a utility function is assigned over the value function to represent the decision maker's risk attitude towards value, which we refer to as a value-based approach. A fundamental result of using the value-based approach is a closed form expression that relates the risk aversion functions of the individual attributes to the trade-off functions between them. We call this relation utility transversality. The utility transversality relation asserts that once the value function is specified there is only one dimension of risk attitude in multiattribute decision problems. The construction of multiattribute utility functions using the value-based approach provides the flexibility to model more general functional forms that do not require assumptions of utility independence. For example, we derive a new family of multiattribute utility functions that describes richer preference structures than the usual multilinear family. We also show that many classical results of utility theory, such as risk sharing and the notion of a corporate risk tolerance, can be derived simply from the utility transversality relations by appropriate choice of the value function. Copyright © 2007 John Wiley & Sons, Ltd. [source] OPTIMAL RISK SHARING FOR LAW INVARIANT MONETARY UTILITY FUNCTIONSMATHEMATICAL FINANCE, Issue 2 2008E. Jouini We consider the problem of optimal risk sharing of some given total risk between two economic agents characterized by law-invariant monetary utility functions or equivalently, law-invariant risk measures. We first prove existence of an optimal risk sharing allocation which is in addition increasing in terms of the total risk. We next provide an explicit characterization in the case where both agents' utility functions are comonotone. The general form of the optimal contracts turns out to be given by a sum of options (stop-loss contracts, in the language of insurance) on the total risk. In order to show the robustness of this type of contracts to more general utility functions, we introduce a new notion of strict risk aversion conditionally on lower tail events, which is typically satisfied by the semi-deviation and the entropic risk measures. Then, in the context of an AV@R-agent facing an agent with strict monotone preferences and exhibiting strict risk aversion conditional on lower tail events, we prove that optimal contracts again are European options on the total risk. [source] Stock Market Liberalization, Economic Reform, and Emerging Market Equity PricesTHE JOURNAL OF FINANCE, Issue 2 2000Peter Blair Henry A stock market liberalization is a decision by a country's government to allow foreigners to purchase shares in that country's stock market. On average, a country's aggregate equity price index experiences abnormal returns of 3.3 percent per month in real dollar terms during an eight-month window leading up to the implementation of its initial stock market liberalization. This result is consistent with the prediction of standard international asset pricing models that stock market liberalization may reduce the liberalizing country's cost of equity capital by allowing for risk sharing between domestic and foreign agents. [source] | ||||||||||||||||||||||