We consider a closed economy where a risk neutral bank competes with a competitive bond market. Firms can finance a risky project either by a bank credit or by issuing a bond which is directly sold to risk averse investors who also hold safe deposits at the bank. We show that the bank tends to allocate more capital to lower quality projects but there are some interesting qualifications. If the asymmetric information concerns only the success probability, then we observe adverse selection while if it concerns only the expected return, bad types are driven out of the market.
Objectives - Preferences of both Alzheimer patients and their spouse caregivers are related to a willingness-to-pay (WTP) measure which is used to test for the presence of mutual (rather than the conventional one-way) altruism. Methods - Identical contingent valuation interviews were conducted in 2000 - 2002 for 126 Alzheimer patients and their caregiving spouses living in the Zurich metropolitan area (Switzerland). We elicit WTP three hypothetical treatments of the demented patient. The treatment Stabilization prevents the worsening of the disease, bringing dementia to a standstill. Cure restores patient health to its original level. In No burden, dementia takes its normal course while caregiver’s burden is reduced to its level before the disease. Results - Different characteristics of therapies are reflected in differences in WTP values. Accepting WTP values as expression of preferences, one finds that patients do not rank Cure higher than No burden; implying that their WTP is entirely altruistic. Caregiving spouses rank Cure before Burden, some 40 percent of their WTP reflecting an altruistic motive again. Discussion - The evidence suggests that WTP values are reliable measures of subjective preferences even in Alzheimer patients. Using this indicator, it is found that only caregivers have extra WTP for Cure, implying that curing dementia has value exclusively to them.
We analyze a Bayesian merger game under two-sided asymmetric information about firm types. We show that the standard prediction of the lemons market model–if any, only low-type firms are traded–is likely to be misleading: Merger returns, i.e. the difference between pre- and post-merger profits, are not necessarily higher for low-type firms. This has two implications. First, under very general conditions, equilibria exist where mergers take place, and there is no presumption that there is ineffciently low trade. Second, in these equilibria it is typically not the case that only low-type firms enter an agreement.
Empirical studies on the relationship between income and happiness commonly use standard ordered response models, the most well-known representatives being the ordered logit and the ordered probit. However, these models restrict the marginal probability effects by design, and therefore limit the analysis of distributional aspects of a change in income, that is, the study of whether the income effect depend on a person’s happiness. In this paper we pinpoint the shortcomings of standard models and propose two alternatives, namely generalized threshold and sequential models. With data of two waves of the German Socio-Economic Panel, 1984 and 1997, we show that the more general models yield different marginal probability effects than standard models.
In the literature on optimal indemnity schedules, indemnities are usually restricted to be non-negative. Gollier (1987) shows that this constraint might well bind: insured could get higher expected utility if insurance contracts would allow payments from the insured to the insurer at some losses. However, due to the insurers’ cost function Gollier supposes, the optimal insurance contract he derives underestimates the relevance of the non-negativity constraint on indemnities. This paper extends Gollier’s findings by allowing for negative indemnity payments for a broader class of insurers’ cost functions.
We examine how globalization affects firms incentives to train workers. In our model, firms invest in productivity-enhancing worker training before Cournot competition takes place. When two separated product markets become integrated and are thus replaced with a market with greater demand and greater firm number, training by each firm increases provided the two countries are suffciently small. When barriers between large markets are eliminated, training is reduced. Similar results hold when firms in countries with different training systems face globalization of product markets. In particular, apprenticeship systems are threatened by a large-scale integration of product markets. Contrary to product market integration, labor market integration has no effect on training incentives.
The standard solution to adverse selection is the separating equilibrium introduced by Rothschild and Stiglitz. Usually, the Rothschild-Stiglitz argument is developed in a model that allows for two states of the world only. In this paper adverse selection is dis-cussed for continuous loss distributions. This gives rise to the new problem of finding the proper form of an insurance contract to impose partial insurance of the low risks. This paper contributes to the discussion on optimal insurance. It analyzes two basic forms of insurance contracts: A contract with a deductible and a contract imposing a positive co-insurance rate. Since high risks can always self-reveal themselves as high risks and buy the optimal insurance contract at high risks’ premiums the Pareto-superior insurance contract is the one that leaves the low risks with higher expected utility while deterring high risks from joining the contract that is designed for low risks. The deductible contract turns out to be superior if premiums contain a sufficiently high loading.
We provide a framework for analyzing bilateral mergers when there is two-sided asymmetric information about firms’ types. We show that there is always a "no-merger" equilibrium where firms do not consent to a merger, irrespective of their type. There may also be a "cut-off" equilibrium if the expected merger returns satisfy a suitable single crossing condition, which will hold if a firm’s merger returns are "essentially monotone decreasing" in its type. Applying our analysis to the linear Cournot model, we show how the merger pattern depends on the cost effects of mergers, the extent of uncertainty, and the way profits are split. Specifically, we show how increasing uncertainty about competitor types may foster mergers as firms hope for strong rationalization effects.
This paper is concerned with a comparison of immigrants and Swiss citizens with respect to level of education, labor market outcomes and healthcare utilization. The evidence is based on data for 1999 from the first wave of the Swiss Household Panel. In order to control for confounding influences, linear and non-linear (negative binomial) regressio nmodels are used. The main result is that differences in economic position between immigrants and Swiss nationals tend to be smaller than those found in other countries. The observed differences (higher employment levels of immigrant women, lower earnings of immigrant men, higher healthcare utilization rates of all immigrants) tend to be no larger than those observed between Swiss citizens living in different parts of the country.
Die Studie untersucht die Eigenschaften der Unternehmen, die als Erste in einen sich neu oeffnenden Markt investieren. Fuer den ersten Investor bestehen gewisse Vorteile (first-mover-advantages), die einen moeglichst fruehen Eintritt in den Markt nahe legen. Andererseits fuehrt die politische und wirtschaftliche Unsicherheit in Osteuropa zu einem Anreiz, die Investitionsentscheidung hinauszuzoegern, um von den Erfahrungen der anderen zu profitieren. Die Einflussfaktoren fuer die Wahl des Zeitpunktes der ersten Direktinvestition in Osteuropa werden anhand der Daten von rund 1000 Industrieunternehmen aus der Schweiz geschaetzt. Die Ergebnisse zeigen, dass grosse und international erfahrene Unternehmen aus dem Konsumgueterbereich einen fruehen Markteintritt bevorzugen. Zudem werden Direktinvestitionen, die auf den lokalen Markt ausgerichtet sind, frueher getaetigt als Investitionen zur Ausnutzung der niedrigen Arbeitskosten.
