Voting and Trading in Symbiosis

The notion of political stability of Chapter 2 is applied to the general equilibrium analysis of Chapter 1, highlighting how trading and voting mechanisms help each other’s functioning. On an incomplete financial market, trading reduces the dimensionality of the collective decision-making problem; in the presence of externalities or imperfect competition, trading reduces the polarization of the electorate. In both cases, political stability obtains for lowered rates of super majority. Hence trading facilitates the emergence of a voting-stable decision. It is furthermore argued that stability with respect to the lowest possible rate of super majority is more likely to result in economic efficiency. Hence voting mitigates market failures. However, it takes different governance rules to ensure efficiency of stable decisions: shareholder governance on an incomplete financial market, stakeholder democracy when facing externalities or imperfect competition. And expectations about the outcome of the decision-making process can play a crucial, potentially destabilizing role.

The Role of Household Income on Child Labor: A Lesson From the Indonesian Crisis

Child labor is often considered a logical consequence in a household trying to meet the economic needs of poverty-stricken families. Reallocating a child's time as a buffer stock in household life is one of the last strategies or mechanisms carried out in developing countries when faced with various shocks. The purpose of this study is to determine the role of household income on child labor in Indonesia. The model used in this study was conducted in two stages through the fixed effects and conditional fixed-effects model. The results showed that permanent income affects child labor in Indonesia. This shows that child labor cannot be separated due to many factors, which include differences in economic conditions that underlie household choices and income among economic actors, incomplete financial market conditions, and constraints from resource and credit that may limit the investment decision that an individual makes. Therefore, the household would conduct consumption smoothing through children involved in the workforce. One thing that should be noted is that in households, females are more prone and susceptible than males when faced with shock. Therefore, to reduce the effects of shock, females tend to become involved in the workforce, primarily in the fields of agriculture and domestic work.

RECURSIVE BACKWARD SCHEME FOR THE SOLUTION OF A BSDE WITH A NON LIPSCHITZ GENERATOR

On an incomplete financial market, the stocks are modeled as pure jump processes subject to defaults. The exponential utility maximization problem is investigated characterizing the value function in term of Backward Stochastic Differential Equations (BSDEs), driven by pure jump processes. In general, in this setting, there is no unique solution. This is the reason why, the value function is proven to be the limit of a sequence of processes. Each of them is the solution of a Lipschitz BSDE and it corresponds to the value function associated with a subset of bounded admissible strategies. Given a representation of the jump processes driving the model, the aim of this note is to give a recursive backward scheme for the value function of the initial problem.

PARTIAL EQUILIBRIUM AND MARKET COMPLETION

We consider financial markets with agents exposed to an external source of risk which cannot be hedged through investments on the capital market alone. The sources of risk we think of may be weather and climate. Therefore we face a typical example of an incomplete financial market. We design a model of a market on which the external risk becomes tradable. In a first step we complete the market by introducing an extra security which valuates the external risk through a process parameter describing its market price. If this parameter is fixed, risk has a price and every agent can maximize the expected exponential utility with individual risk aversion obtained from his risk exposure on the one hand and his investment into the financial market consisting of an exogenous set of stocks and the insurance asset on the other hand. In the second step, the market price of risk parameter has to be determined by a partial equilibrium condition which just expresses the fact that in equilibrium the market is cleared of the second security. This choice of market price of risk is performed in the framework of nonlinear backwards stochastic differential equations.

Backward Stochastic PDE and Imperfect Hedging

We consider a problem of minimization of a hedging error, measured by a positive convex random function, in an incomplete financial market model, where the dynamics of asset prices is given by an Rd-valued continuous semimartingale. Under some regularity assumptions we derive a backward stochastic PDE for the value function of the problem and show that the strategy is optimal if and only if the corresponding wealth process satisfies a certain forward-SDE. As an example the case of mean-variance hedging is considered.