Social and Behavioral Sciences Commons^™

Suggested Versus Extended Gifts: How Alternative Market Institutions Mitigate Moral Hazard, Daniel Houser, Jason Shachat, Weiwei Zheng

ESI Working Papers

Gift exchange can partially mitigate supply-side moral hazard, even in anonymous market interactions. In a market where quality is not fully contractable, the amount that a price exceeds the market-clearing price for the lowest quality is a gift from the buyer. We show that the gift formation process, inextricably linked with a market institution’s price formation process, greatly influences the size and effectiveness of the gift. When the market institution dictates that prices are formed by bids posted by buyers, the gift is extended to the seller. When the market institution dictates that prices are formed by offers posted by …

Lessons Learned: Nathan Sheets, Yasemin Sim Esmen, Rosalind Z. Wiggins

Journal of Financial Crises

Between 2007 and 2011, Nathan Sheets was director of the Division of International Finance at the Board of Governors of the Federal Reserve System. He oversaw the operations of the division and advised the Federal Open Market Committee (FOMC) on economic and financial developments in foreign countries. Sheets also regularly represented the Federal Reserve Board at international meetings and in its contacts with foreign central banks. Under his helm, the division was involved in helping establish and manage the US dollar liquidity swap lines with foreign central banks. This Lessons Learned abstract is based on an interview with Sheets on …

Broad-Based Emergency Liquidity Programs, Rosalind Z. Wiggins, Sean Fulmer, Greg Feldberg, Andrew Metrick

Journal of Financial Crises

In this paper, we analyze broad-based emergency liquidity (BBEL) programs. Our main purpose is to assist policymakers who are considering establishing a BBEL program in designing the most effective program possible as efficiently as possible. Our insights are derived from 33 case studies the Yale Program on Financial Stability produced and existing literature on the topic.

Liquidity provision is a long-established mandate of central banks and was a function that private entities performed even before the establishment of central banks. We survey a sampling of cases from the 19th through 21st centuries, drawn from 10 countries and regions, to distill …

Consumer Bankruptcy, Mortgage Default And Labor Supply, Wenli Li, Costas Meghir, Florian Oswald

Cowles Foundation Discussion Papers

We specify and estimate a lifecycle model of consumption, housing demand and labor supply in an environment where individuals may file for bankruptcy or default on their mortgage. Uncertainty in the model is driven by house price shocks, education specific productivity shocks, and catastrophic consumption events, while bankruptcy is governed by the basic institutional framework in the US as implied by Chapter 7 and Chapter 13. The model is estimated using micro data on credit reports and mortgages combined with data from the American Community Survey. We use the model to understand the relative importance of the two chapters (7 …

Employee Ownership And Moral Hazard: How Broad-Based Equity Sharing Can Lower Agency Costs And Reduce Inequality, Colin Clinton Hudson

Electronic Theses and Dissertations

Providing incentives to top managers by offering equity has become the norm; this practice, however, does not hold for all levels of employees. After tax incentives for employee ownership were introduced through the Employee Retirement Income Security Act of 1974, there has been little legislative support to encourage companies to implement broad-based equity sharing programs. Moreover, decades of neoliberal policies have incentivized the pursuit of short-term profits and speculation, which contribute to economic instability and explain the growing gap between productivity and real wages observed since the late 1970s. Developments in the literature contend that employee ownership aligns the goals …

The Conservatism Principle And Asymmetric Preferences Over Reporting Errors, Jivas Chakravarthy, Timothy W. Shields

ESI Working Papers

At present, accounting conservatism is generally viewed from a measurement or reporting perspective. In contrast, we consider whether it relates to a moral rule of conduct. Conservatism has been described as deriving from a preference for reporting errors to be in the direction of understatement rather than overstatement. We experimentally pair Reporters who provide information with Users who rely on the information. We posit that under misaligned incentives that motivate aggressive reporting, Users view an aggressive report as reflecting Reporters’ exploitative intent and expect that a social norm prohibiting aggressive reporting applies. We predict that Users use noisy reporting errors …

Data For "An Experimental Investigation Of Health Insurance Policy And Behavior", J. Dustin Tracy, Hillard Kaplan, Kevin James, Stephen Rassenti

ESI Data Sets

We introduce a new experimental approach to measuring the effects of health insurance policy alternatives on behavior and health outcomes over the life course. Cash-motivated subjects are placed in a virtual environment where they earn income and allocate it across multi-period lives. We compare behavior across age, income and insurance plans---one priced according to an individual's expected cost and the other uniformly priced through employer-implemented cost sharing. We find that 1) subjects in the employer-implemented plan purchased insurance at higher rates; 2) the employer-based plan reduced differences due to income and age; 3) subjects in the actuarial plan engaged in …

An Experimental Investigation Of Health Insurance Policy And Behavior, J. Dustin Tracy, Hillard Kaplan, Kevin A. James, Stephen Rassenti

ESI Working Papers

We introduce a new experimental approach to measuring the effects of health insurance policy alternatives on behavior and health outcomes over the life course. Cash-motivated subjects are placed in a virtual environment where they earn income and allocate it across multi-period lives. We compare behavior across age, income and insurance plans—one priced according to an individual’s expected cost and the other uniformly priced through employer-implemented cost sharing. We find that 1) subjects in the employer-implemented plan purchased insurance at higher rates; 2) the employer-based plan reduced differences due to income and age; 3) subjects in the actuarial plan engaged in …

Trust And Trustworthiness In Procurement Contracts With Retainage, Matthew J. Walker, Elena Katok, Jason Shachat

ESI Working Papers

In complex procurement projects, it is difficult to write enforceable contracts that condition price upon quality. Supplier non-performance becomes an acute risk, particularly when there is intense competition for the contract. An established incentive mechanism used to mitigate the problem of supplier non-performance is retainage, in which the buyer sets aside a portion of the purchase price. After project completion, the buyer determines the amount of retainage that is released to the seller, considering any defects that arise. While generally a feasible contract form to implement, the practical difficulties in assessing completion introduce a moral hazard for the buyer. We …

Estimating The Benefits And Costs Of Forming Business Partnerships, Jungho Lee

Research Collection School Of Economics

I estimate a matching model of business‐partnership formation to quantify the relative importance of productivity gains, financing gains, and the coordination failure of effort provision (moral hazard) among partners. Productivity gains account for 61% of the gain from the observed partnerships. For partners in the first quartile of the wealth distribution, however, financing accounts for 93% of the gain. The cost of moral hazard corresponds to 42% of the entire gain from partnerships. A loan policy specifically targeting partnerships is less effective in improving welfare than a conventional loan policy that provides loans to individual entrepreneurs.

Lessons From The American Federal-State Unemployment Insurance System For A European Unemployment Benefits System, Christopher J. O'Leary, Burt S. Barnow, Karolien Lenaerts

Upjohn Institute Working Papers

The federal-state system of unemployment insurance (UI) in the United States was established by the Social Security Act of 1935 during the Great Depression. Under the program, states provide temporary partial wage replacement to involuntarily unemployed workers with significant labor force attachment. The federal government induced states to establish UI programs through two means: 1) a uniform federal tax imposed on employer payrolls, with a 90 percent reduction granted in states operating approved UI programs, and 2) grants to states to administer their programs. The system has evolved into a collection of separate state programs adapted to different regional, economic, …

A Structural Model Of A Multitasking Salesforce: Multidimensional Incentives And Plan Design, Minkyung Kim, K. Sudhir, Kosuke Uetake

Cowles Foundation Discussion Papers

We develop the first structural model of a multitasking salesforce to address questions of job design and incentive compensation design. The model incorporates three novel features: (i) multitasking effort choice given a multidimensional incentive plan; (ii) salesperson’s private information about customers and (iii) dynamic intertemporal tradeoffs in effort choice across the tasks. The empirical application uses data from a micro nance bank where loan officers are jointly responsible and incentivized for both loan acquisition repayment but has broad relevance for salesforce management in CRM settings involving customer acquisition and retention. We extend two-step estimation methods used for unidimensional compensation plans …

The Potential For Moral Hazard Behavior In Irrigation Decisions Under Crop Insurance, Paloch Suchato

Paloch Suchato

Effects The 2014 Medicaid Expansion On Seat Belt Use: An Investigation Into Moral Hazard, Paul Pangburn

Economics

Under the Patient Protection and Affordable Care Act, signed into law by President Obama in 2010, health insurance coverage was expanded to 20 million previously uninsured people. Of these, 14.5 million were Medicaid eligible. Moral Hazard, a common research topic in insurance, is defined as when the private actions of an individual in a risk-sharing situation influence the probability of the outcome. There are two types of moral hazard, called ex-post moral hazard and ex-ante moral hazard. In the case of health insurance, ex-post moral hazard is when a health behavior changes after an individual becomes insured. Ex-ante moral hazard, …

Antecedents To The Crisis: Mandeville, Smith, And Keynes, Jonathan B. Wight

Economics Faculty Publications

The purpose of this paper is to present the methods of teaching about the global financial crisis (GFC) from a social economic perspective. Using primary texts from the history of economic thought, the moral underpinnings for collective social action are examined in times of economic depression. The deregulation of financial markets raises two questions: to what extent is deregulation the result of a misunderstanding about human nature and the behavioral lessons of social economics; and to what extend does deregulation ignore the moral lessons of Adam Smith’s invisible hand?

How Liability Insurers Protect Patients And Improve Safety, Tom Baker, Charles Silver

All Faculty Scholarship

Forty years after the publication of the first systematic study of adverse medical events, there is greater access to information about adverse medical events and increasingly widespread acceptance of the view that patient safety requires more than vigilance by well-intentioned medical professionals. In this essay, we describe some of the ways that medical liability insurance organizations contributed to this transformation, and we catalog the roles that those organizations play in promoting patient safety today. Whether liability insurance in fact discourages providers from improving safety or encourages them to protect patients from avoidable harms is an empirical question that a survey …

When Salespeople Manage Customer Relationships: Multidimensional Incentives And Private Information, Minkyung Kim, K. Sudhir, Kosuke Uetake, Rodrigo Canales

Cowles Foundation Discussion Papers

At many firms, incentivized salespeople with private information about customers are responsible for CRM. While incentives motivate sales performance, private information can induce moral hazard by salespeople to gain compensation at the expense of the firm. We investigate the sales performance–moral hazard tradeoff in response to multidimensional performance (acquisition and maintenance) incentives in the presence of private information. Using unique panel data on customer loan acquisition and repayments linked to salespeople from a microfinance bank, we detect evidence of salesperson private information. Acquisition incentives induce salesperson moral hazard leading to adverse customer selection, but maintenance incentives moderate it as salespeople …

Input Use Under Crop Insurance: The Role Of Actual Production History, Taro Mieno, Cory Walters, Lilyan E. Fulginiti

Department of Agricultural Economics: Faculty Publications

The impact of crop insurance on changes in input use has attracted much attention by economists. While there are a number of studies on this topic, they frame moral hazard in inputs use in a static model. However, when agricultural producers are forward-looking, they would make input allocation decisions realizing that their decisions would affect their future actual production history. This, in turn, affects the probability and size of future indemnity payments. Thus, moral hazard should be framed in a dynamic input use decision model. We first show theoretically that under certain feasible conditions, a static analysis always results in …

Disaster And Recovery: The Effects Of Post-Disaster Aid On Economic Development, Joshua M. Drouin

Steeplechase: An ORCA Student Journal

The effects of aid on economic development is topic typically studied from the perspective of corruption and allocative efficiency. We examine aid to less developed nations from a different viewpoint; assuming aid reaches the intended recipients, does it actually benefit them? We utilize Indonesia and the 2004 earthquake and tsunami as a natural experiment to observe the influx of aid, and compare the regions development before and after the disaster. By establishing a baseline before the disaster, and utilizing a new start point after the destruction, we can gauge the reconstruction efforts and observe whether aid is beneficial or harmful. …

Lessons From The American Federal-State Unemployment Insurance System For A European Unemployment Benefits System, Christopher J. O'Leary, Burt S. Barnow

Christopher J. O'Leary

The federal-state system of unemployment insurance (UI) in the United States was established by the Social Security Act of 1935 during the Great Depression. Under the program, states provide temporary partial wage replacement to involuntarily unemployed workers with significant labor force attachment. The federal government induced states to establish UI programs through two means: 1) a uniform federal tax imposed on employer payrolls, with a 90 percent reduction granted in states operating approved UI programs, and 2) grants to states to administer their programs. The system has evolved into a collection of separate state programs adapted to different regional, economic, …

Moral Hazard And Mispriced Systemic Risk In The Lead-Up To The 2007 Subprime Mortgage Crisis In The United States, Georgi Rusinov

Undergraduate Economic Review

The 2007 subprime crisis was caused by high demand for subprime mortgage products underpinned by the unrealistic assumption that property prices would keep rising indefinitely. The subprime mortgage market worked as expected as long as prices were rising and demand for property was high. When these two conditions were violated and the housing bubble collapsed, the system became dysfunctional, many subprime borrowers defaulted, and mortgage-backed securities lost much of their value. Prevention could have been achieved through regulatory measures to shift the risk back from taxpayers and investors to loan originators. Fair distribution of risk should be the main objective …

Three Essays On Us Agricultural Insurance, Taehoo Kim

All Graduate Theses and Dissertations, Spring 1920 to Summer 2023

Agricultural insurance programs such as crop insurance and Dairy Margin Protection program (MPP-Dairy) are managed by United State Department of Agriculture (USDA). The objective of these programs is to help farmers manage their financial risk. Agricultural insurance programs have played an important role for farmers in terms of maintaining farm profitability. There are several potential problems with insurance programs, such as moral hazard and adverse selection, which make them inefficient.

With respect to these problems, three research gaps are identified: i) moral hazard in prevented planting (PP), ii) choice of PP and planting a second crop, and iii) selecting margin …

Mortgage Refinancing In Nigeria: Prospects And Challenges, Kama Ukpai, Phebian N. Bewaji, Adigun Mustapha, Olufemi Adetunji Edun, Olubukola Adegbe, Josiah Dassah

Bullion

The paper examines the mortgage (re)finance market in Nigeria with a view to identifying its prospects and challenges. The method adopted included a review of jurisdictional experiences on mortgage refinance and thereafter draw on some lessons of experience as the Nigeria case is considered as a country in transition. Further discussions centered on the challenges of financialization of mortgages, mortgage affordability, low awareness of mortgage refinancing, macroprudential risks and moral hazard that confronts mortgage refinance in the country. The paper, further, provides considerations with regard to value-reorientation, institutional, regulatory and legal infrastructures as prerequisites for successful mortgage refinance system.

The Effect Of Health Insurance On Workers' Compensation Filing: Evidence From The Affordable Care Act's Age-Based Threshold For Dependent Coverage, Marcus O. Dillender

Upjohn Institute Working Papers

This paper identifies the effect of health insurance on workers' compensation (WC) filing for young adults by implementing a regression discontinuity design using WC medical claims data from Texas. The results suggest health insurance factors into the decision to have WC pay for discretionary care. The implied instrumental variables estimates suggest a 10 percentage point decrease in health insurance coverage increases WC bills by 15.3 percent. Despite the large impact of health insurance on the number of WC bills, the additional cost to WC at age 26 appears to be small as most of the increase comes from small bills.

International Debt Forgiveness: Who Getspicked And Its Effect On The Tax Effort Ofdeveloping Countries, Leanora Alecia Brown, Jorge Martinez-Vazquez

ICEPP Working Papers

We explore whether the expectation of debt forgiveness discourages developing countries from attaining sustainable fiscal independence through improving their tax effort. While the international financial community advises poor countries to improve revenue mobilization, the same international community routinely bail-out poor countries that fail to meet their loan repayment obligations. The act of bailing-out creates an expectation about receiving debt forgiveness time and again in the future. The key prediction of our theoretical framework is that in the presence of debt forgiveness, countries’ tax efforts will decline and more so the higher the intensity of the bailouts. We test this using …

Dynamic Moral Hazard Without Commitment, Johannes Hörner, Larry Samuelson

Cowles Foundation Discussion Papers

We study a discrete-time model of repeated moral hazard without commitment. In every period, a principal finances a project, choosing the scale of the project and a contingent payment plan for an agent, who has the opportunity to appropriate the returns of a successful project unbeknownst the principal. The absence of commitment is reflected both in the solution concept (perfect Bayesian equilibrium) and in the ability of the principal to freely revise the project’s scale from one period to the next. We show that removing commitment from the equilibrium concept is relatively innocuous — if the players are sufficiently patient, …

Macroeconomic Fluctuations As Sources Of Luck In Ceo Compensation, Hsin-Hui Chiu, Lars Oxelheim, Clas Wihlborg, Jianhua Zhang

Business Faculty Articles and Research

Macroeconomic fluctuations in interest rates, exchange rates, and inflation can be considered sources of good or bad “luck” for corporate performance if management is unable to adjust operations to these fluctuations. Based on a sample of 2,091 US firms, we decompose the impacts of macroeconomic fluctuations on three measures of CEO compensation. Our study provides empirical support for the importance of considering macroeconomic fluctuations in designing CEO incentive schemes. It adds to the managerial power literature on moral hazard and CEO compensation by pinpointing the obvious risk that the CEO in an asymmetric and non-linear reward system will be inclined …

A Critical Examination Of The Climate Engineering Moral Hazard And Risk Compensation Concern, Jesse Reynolds

Jesse Reynolds

The Unintended Consequences Of Safety Regulation, Sherzod Abdukadirov

Sherzod Abdukadirov

This study examines how risk trade-offs undermine safety regulations. Safety regulations often come with unintended consequences in that regulations attempting to reduce risk in one area may increase risks elsewhere. The increases in countervailing risks may even exceed the reduction in targeted risks, leading to a policy that does more harm than good. The unintended consequences could be avoided or their impacts minimized through more careful analysis, including formal risk trade-off analysis, consumer testing, and retrospective analysis. Yet agencies face strong incentives against producing better analysis; increased awareness of risk trade-offs would force agencies to make unpalatable and politically sensitive …

When Good Bankers Go Bad: Is Moral Hazard Evolutionarily Stable?, Atin Basuchoudhary, Troy Siemers, Sam Allen

Atin Basu Choudhary

We apply existing theory as a preliminary analysis of whether efficient contracts can evolve naturally. Any banker could belong to one of two cultures – patient and impatient. We suggest that the interaction of patient bankers with other patient bankers is a critical element in the success of efficient contracts while the interaction of impatient bankers with other impatient bankers leads to the spread of moral hazard in the banking system. We show that the success (or failure) of efficient contracts depends on the initial proportion of bankers who are part of the patient culture. We further show that regulatory …