Investments and Risk Transfers

2017 ◽  
Vol 92 (6) ◽  
pp. 1-23 ◽  
Author(s):  
Tim Baldenius ◽  
Beatrice Michaeli
Keyword(s):  
Moral Hazard ◽  
Risk Premium ◽  
Bargaining Power ◽  
Risk Premia ◽  
The Other ◽  
Investment Risk ◽  
Incomplete Contracting ◽  
Risk Transfer ◽  
Specific Investments ◽  
Division Managers

ABSTRACT We demonstrate a novel link between relationship-specific investments and risk in a setting where division managers operate under moral hazard and collaborate on joint projects. Specific investments increase efficiency at the margin. This expands the scale of operations and thereby adds to the compensation risk borne by the managers. Accounting for this investment/risk link overturns key findings from prior incomplete contracting studies. We find that if the investing manager has full bargaining power vis-à-vis the other manager, he will underinvest relative to the benchmark of contractible investments; with equal bargaining power, however, he may overinvest. The reason is that the investing manager internalizes only his own share of the investment-induced risk premium (we label this a “risk transfer”), whereas the principal internalizes both managers' incremental risk premia. We show that high pay-performance sensitivity (PPS) reduces the managers' incentives to invest in relationship-specific assets. The optimal PPS, thus, trades off investment and effort incentives.

scholarly journals Reducing the Effects of Moral Hazard: Institutional Designs Within International Alliances

2020 ◽  
Author(s):  
Brian Lai ◽  
Jonathan Day
Keyword(s):  
Moral Hazard ◽  
Bargaining Power ◽  
Rational Design ◽  
International Institutions ◽  
The Other ◽  
Member States ◽  
Military Alliance ◽  
International Alliances ◽  
Conscious Effort ◽  
Military Support

What explains the level of commitment within an international military alliance? Specifically, when do alliances choose to adopt active military support for offensive uses of force versus lower levels of commitment? Drawing on the rational design of international institutions literature, this paper argues that the choice of commitment is a conscious effort to address two competing problems. The first is the potential for entrapment. Allies worry that commitments may lead other member states to act in a risky fashion, creating unnecessary conflict. The other problem is the need to demonstrate commitment in order to maximize the bargaining power of the member states. The former problem leads allies to choose lower levels of commitment like defense pacts in order to signal to alliance members what types of behaviors are acceptable. Conversely, the latter problem encourages states to make broader obligations about when they will use force. Empirically, concern for moral hazard should be more likely when there are power disparities amongst members within an alliance. Greater levels of threat facing alliance members should lead states to favor maximizing their commitments. These two arguments are tested empirically on all alliances from 1816-1992 with results supporting both conjectures.

The Value of Information in the Hold-Up Problem

2004 ◽  
Vol 5 (2) ◽  
pp. 177-203 ◽  
Author(s):  
Thomas Pfeiffer
Keyword(s):  
Information System ◽  
Information Structure ◽  
Value Of Information ◽  
The Other ◽  
Information Control ◽  
Ceteris Paribus ◽  
Head Office ◽  
Specific Investments ◽  
Negative Effect ◽  
Central Management

Abstract In the literature, the information structure of the hold-up problem is typically assumed to be exogenous. In this paper, we introduce an additional stage at which the head office may grant individual divisions access to an information system before they undertake their specific investments. Although more information ceteris paribus enhances each divisions’ profits, more information can reduce divisions’ investments and destroy synergies for the other division that would have been generated by the investments. If this negative effect dominates, then information can be harmful for the entire company. Hence, information control can be a subtle force to deal with the hold-up problem to a certain extent. In this paper we analyze those conditions under which information is either harmful or beneficial for central management.

Disclosure and Secrecy in Employee Monitoring

2010 ◽  
Vol 22 (1) ◽  
pp. 187-208
Author(s):  
Mitchell A. Farlee
Keyword(s):  
Risk Aversion ◽  
Moral Hazard ◽  
Monitoring System ◽  
Risk Premium ◽  
Risk Sharing ◽  
Limited Liability ◽  
Efficient Production ◽  
System A ◽  
Liability Risk ◽  
Employee Monitoring

ABSTRACT: Disclosure and monitoring policy are studied, where disclosure relates to information about the monitoring system. A moral hazard model is presented where employee monitoring occurs with some exogenous probability and the owner privately learns whether he will be monitoring before the employee chooses his productive action. Disclosure policy is an owner choice between revealing to the employee whether he will be monitoring before the action (Disclosure) or remaining silent (Secrecy). The results rely on the joint presence of risk aversion and limited liability. Risk aversion creates an efficiency/risk tradeoff where secrecy obtains risk-sharing benefits. Limited liability reduces these benefits, allowing preference for disclosure. Lower monitoring probabilities increase the risk premium required to obtain effort with secrecy. For small monitoring probabilities, disclosure is preferred even though less efficient production is achieved, because disclosure provides a greater risk-sharing benefit. For high monitoring probabilities, secrecy is preferred because it leads to greater efficiency despite a greater risk premium.

scholarly journals Axiomatic Results for Weighted Allocation Rules under Multiattribute Situations

Mathematics ◽  
2021 ◽  
Vol 9 (6) ◽  
pp. 617
Author(s):  
Yu-Hsien Liao
Keyword(s):  
Bargaining Power ◽  
The Other ◽  
Target Type ◽  
Allocation Rule ◽  
Interactive Environments ◽  
Allocation Rules ◽  
Other Hand

In many interactive environments, operators may have to deal with different work objectives at the same time. In a realistic context, such as differences in the target type to be addressed, or changes in the behavior of other operators, operators may therefore have to cope with by adopting different work levels (strategies) at any given time. On the other hand, the importance or influence brought by operators may vary depending on many subjective and objective factors, such as the size of the constituency represented by a congressman, and the bargaining power of a business personnel which may vary. Therefore, it is reasonable that weights are apportioned to operators and arbitrary usability should be distributed according to these weights under various working levels and multiattribute situations. In pre-existing results for allocation rules, weights might be always apportioned to the “operators” or the “levels” to modify the differences among the operators or its working levels respectively. By applying weights to the operators and its working levels (strategies) simultaneously, we adopt the maximal marginal variations among working level (strategy) vectors to propose an allocation rule under multiattribute situations. Furthermore, we introduce some axiomatic outcomes to display the rationality for this weighted allocation rule. By replacing weights to be maximal marginal variations, a generalized index is also introduced.

scholarly journals Partner Uncertainty and the Dynamic Boundary of the Firm

2017 ◽  
Vol 9 (4) ◽  
pp. 277-302 ◽  
Author(s):  
Thomas Hellmann ◽  
Veikko Thiele
Keyword(s):  
Asset Specificity ◽  
The Other ◽  
Trade Off ◽  
Specific Investments ◽  
Dynamic Boundary ◽  
Ex Post ◽  
Ex Ante

We develop a new theory of the dynamic boundary of the firm where asset owners may want to change partners ex post. We identify a fundamental trade-off between (i) a “displacement externality” under non-integration, where a partner leaves a relationship even though his benefit is worth less than the loss to the displaced partner, and (ii) a “retention externality” under integration, where a partner inefficiently retains the other. With more asset specificity, displacement externalities matter more and retention externalities less, so that integration becomes more attractive. Wealth can resolve ex post inefficient partner arrangements, but may weaken ex ante incentives for specific investments. (JEL D21, D23, D25, D62, D86, G31)

Guanxi orientation, value creation and value capture in buyer-supplier relationships: a dyadic perspective

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Lucy Sojung Lee ◽  
Weiguo Zhong
Keyword(s):  
Value Creation ◽  
Design Methodology ◽  
The Other ◽  
Matched Sample ◽  
Value Capture ◽  
Supplier Relationships ◽  
Content Type ◽  
Specific Investments ◽  
The Relationship ◽  
Positive Effect

Purpose This paper aims to investigate the importance and prevalence of Guanxi in business interactions in network-based societies such as China, few studies have the phenomenon from a dyadic view. In a business dyad, one partner may not value Guanxi and take it as a template for actions as the other does. Design/methodology/approach The authors propose that such collective and asymmetric Guanxi orientation influence both the creation and distribution of relational rent in a Guanxi dyad. Furthermore, relationship-specific investments (RSIs) moderate the relationship between dyadic Guanxi orientation and relational rent creation and distribution. Findings Based on a matched sample of supplier-buyer dyads in China, the authors find that joint Guanxi orientation is positively related to joint pie creation, whereas Guanxi orientation imbalance has a positive effect on the pie distribution imbalance. Originality/value These results contribute to the literature by revealing how dyadic Guanxi dynamics and practices affect dyadic performance and providing managers with meaningful implications for dyadic Guanxi management.

scholarly journals Variance risk premia for agricultural commodities

2019 ◽  
Vol 79 (3) ◽  
pp. 286-303
Author(s):  
Wenwen Xi ◽  
Dermot Hayes ◽  
Sergio Horacio Lence
Keyword(s):  
Risk Premium ◽  
Price Volatility ◽  
Risk Premia ◽  
Content Type ◽  
Risk Premiums ◽  
Variance Risk Premium ◽  
Revenue Insurance ◽  
Risk Neutral ◽  
Variance Risk ◽  
Practical Implications

Purpose The purpose of this paper is to study the variance risk premium in corn and soybean markets, where the variance risk premium is defined as the difference between the historical realized variance and the corresponding risk-neutral expected variance. Design/methodology/approach The authors compute variance risk premiums using historical derivatives data. The authors use regression analysis and time series econometrics methods, including EGARCH and the Kalman filter, to analyze variance risk premiums. Findings There are moderate commonalities in variance within the agricultural sector, but fairly weak commonalities between the agricultural and the equity sectors. Corn and soybean variance risk premia in dollar terms are time-varying and correlated with the risk-neutral expected variance. In contrast, agricultural commodity variance risk premia in log return terms are more likely to be constant and less correlated with the log risk-neutral expected variance. Variance and price (return) risk premia in agricultural markets are weakly correlated, and the correlation depends on the sign of the returns in the underlying commodity. Practical implications Commodity variance (i.e. volatility) risk cannot be hedged using futures markets. The results have practical implications for US crop insurance programs because the implied volatilities from the relevant options markets are used to estimate the price volatility factors used to generate premia for revenue insurance products such as “Revenue Protection” and “Revenue Protection with Harvest Price Exclusion.” The variance risk premia found implies that revenue insurance premia are overpriced. Originality/value The empirical results suggest that the implied volatilities in corn and soybean futures market overestimate true expected volatility by approximately 15 percent. This has implications for derivative products, such as revenue insurance, that use these implied volatilities to calculate fair premia.

scholarly journals Option-Based Estimation of the Price of Coskewness and Cokurtosis Risk

2020 ◽  
pp. 1-27
Author(s):  
Peter Christoffersen ◽  
Mathieu Fournier ◽  
Kris Jacobs ◽  
Mehdi Karoui
Keyword(s):  
Risk Premium ◽  
Risk Premia ◽  
Factor Models ◽  
Option Prices ◽  
Variance Risk Premium ◽  
Market Return ◽  
Price Of Risk ◽  
Variance Risk ◽  
Index Option

Abstract We show that the prices of risk for factors that are nonlinear in the market return can be obtained using index option prices. The price of coskewness risk corresponds to the market variance risk premium, and the price of cokurtosis risk corresponds to the market skewness risk premium. Option-based estimates of the prices of risk lead to reasonable values of the associated risk premia. An analysis of factor models with coskewness risk indicates that the new estimates of the price of risk improve the models’ performance compared with regression-based estimates.

Promoting condom-only brothels through solidarity and support for brothel managers

1997 ◽  
Vol 8 (1) ◽  
pp. 40-43 ◽  
Author(s):  
Chuanchom Sakondhavat ◽  
Yuthapong Werawatanakul ◽  
Anthony Bennett ◽  
Chusri Kuchaisit ◽  
Sugree Suntharapa
Keyword(s):  
High Risk ◽  
Hiv Infection ◽  
Condom Use ◽  
Bargaining Power ◽  
Aids Prevention ◽  
The Other ◽  
Prevention Programme ◽  
Policy Ideas ◽  
Khon Kaen

Brothel workers in Thailand are at high risk of HIV infection but they alone do not have adequate bargaining power to insist on condom use with all clients. Brothel managers, on the other hand, are a source of influence over both clients and their workers and can promote universal condom use in their establishments. To test whether brothel managers in Khon Kaen City would adopt and successfully implement a condom-only policy in their establishments, all 24 brothel managers in Khon Kaen City attended a meeting on the dangers of HIV and benefits of an all-condom policy. Ideas on how to implement the policy were discussed. Follow-up visits were made once a month to brothels to resupply condoms, provide reinforcement and to collect data. All brothel managers approved of the condom-only in principle and are now implementing the policy. Results of the evaluation of condom use and degree of solidarity in these 24 brothels are available for the AIDS prevention programme. However, a condom-only policy in brothels can only succeed if managers and brothel workers show solidarity in rejecting all noncondom using clients. Laws to promote condom use may not be needed if brothels are given the opportunity to implement a condom-only policy using their own resourcefulness and determination.

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