The insurance function of contracts

One of the central problems in contract law is to define the frontier between legal and illegal breaches of promises. The distinction between good and bad faith is perhaps the conceptual tool most commonly used to tell one from the other. Lawyers spend a lot of energy trying to frame better definitions of the concepts of good and bad faith based on principles of ethics or justice, but often pay much less attention to theories dealing with the incentives that can engender good faith behavior in contractual relationships. By describing the economics of what Stiglitz defined as “explicit” and “implicit” insurance, I highlight the “insurance function” hidden in any promise with basically no mathematical notation. My aim is to render the subject intelligible and useful to lawyers with little familiarity with economics.

On insurance markets with endogenous information acquisition: A robust mechanism design approach

Neste trabalho propomos a aplicação das noções de equilíbrio da recente literatura de desenho de mecanismo robusto com aquisição de informação endógena a um problema de divisão de risco entre dois agentes. Através deste exemplo somos capazes de motivar o uso desta noção de equilíbrio, assim como discutir os efeitos da introdu ção de uma restrição de participação que seja dependente da informação. A simplicidade do modelo nos permite caracterizar a possibilidade de implementar a alocação Pareto efiente em termos do custo de aquisição da informação. Além disso, mostramos que a precisão da informação pode ter um efeito negativo sobre a implementação da alocação efi ciente. Ao final, sao dados dois exemplos específicos de situações nas quais este modelo se aplica.

Unemployment insurance an analysis of optimal mechanisms under aggregate shocks

The purpose of this work is to provide a brief overview of the literature on the optimal design of unemployment insurance systems by analyzing some of the most influential articles published over the last three decades on the subject and extend the main results to a multiple aggregate shocks environment. The properties of optimal contracts are discussed in light of the key assumptions commonly made in theoretical publications on the area. Moreover, the implications of relaxing each of these hypothesis is reckoned as well. The analysis of models of only one unemployment spell starts from the seminal work of Shavell and Weiss (1979). In a simple and common setting, unemployment benefits policies, wage taxes and search effort assignments are covered. Further, the idea that the UI distortion of the relative price of leisure and consumption is the only explanation for the marginal incentives to search for a job is discussed, putting into question the reduction in labor supply caused by social insurance, usually interpreted as solely an evidence of a dynamic moral hazard caused by a substitution effect. In addition, the paper presents one characterization of optimal unemployment insurance contracts in environments in which workers experience multiple unemployment spells. Finally, an extension to multiple aggregate shocks environment is considered. The paper ends with a numerical analysis of the implications of i.i.d. shocks to the optimal unemployment insurance mechanism.

Determinants for political risk insurance of direct investments in emerging markets

Esta dissertação analisa os principais determinantes para investidores contratarem seguro de proteção de riscos políticos (PRI) para seus investimentos diretos, assim com o racional de sair de um PRI não renovando suas políticas. Esta dissertação contribui para a literatura existente sobre PRI, investigando os principais motivadores para PRI, tais como, riscos políticos, riscos econômicos, capacidade do patrocinador, instrumento utilizado para realizar o investimento (horizonte do investimento) determina combinações de PRI utilizando um modelo binário de resposta não linear. Um banco de dados único da Multilateral Investment Guarantee Agency (MIGA) no período de 1990 até 2010, contendo informações sobre 693 investimentos incluindo sua cobertura para: seguro de risco de conversibilidade, seguro para risco de expropriação, riscos de guerras e distúrbios civis e riscos de quebra de contrato. Entretanto, percebemos que 47% destes seguros não permanecem ativos até o prazo originalmente contratado. Adicionalmente, instituições financeiras como garantidoras utilizam proporcionalmente mais dívida do que capital como instrumento de investimento e são largamente seguradas dentro da União Européia (EU). Por outro lado, investidores nos BRICs tendem a cobrir primariamente seus investimentos em infraestrutura. Resultados empíricos incluem que um aumento nos riscos de quebra de contrato e guerra civil estão totalmente correlacionados com a renovação de contratos de seguro, assim como um aumento da percepção de risco do pais que está recebendo o investimento.

Commodity Taxation and Social Insurance

We investigate optimal commodity taxation in a social insurance framework based on Varian (1980). We show that the tax prescriptions in this moral hazard framework are notably similar to those derive

On the cost of sympathy : a alternative model of insurance markets

The paper provides an alternative model for insurance market with three types of agents: households, providers of a service and insurance companies. Households have uncertainty about future leveIs of income. Providers, if hired by a household, perform a diagnoses and privately learn a signal. For each signal there is a procedure that maximizes the likelihood of the household obtaining the good state of nature. The paper assumes that providers care about their income and also about the likelihood households will obtain the good state of nature (sympathy assumption). This assumption is satisfied if, for example, they care about their reputation or if there are possible litigation costs in case they do not use the appropriate procedure. Finally, insurance companies offer contracts to both providers and households. The paper provides sufficient conditions for the existence of equilibrium and shows that the sympathy assumption 1eads to a 10ss of welfare for the households due to the need to incentive providers to choose the least expensive treatment.

Do insurance defrauders want to be punished?

We analyze a Principal-Agent model of an insurer who faces an adverse selection problem. He is unable to observe if his client has a high risk or a low risk of having an accident. At the underwriting of the contract, the insurer requests the client to declare his risk. After that, the former can costly audit the truthfulness of this announcement. If the audit confirms a false declaration, the insurer is legally allowed to punish the defrauder. We characterize the efRcient contracts when this punishment is bounded from above by a legal restriction. Then, we do some comparative statics on the efRcient contracts and on the agent's utility. The most important result of this paper concerns the legal limit to a defrauder's punishment. We prove that there exists a uni que value of this legal limit that maximizes the expected utility of a high risk type. Facing this particular value of the legal limit to a defrauder's punishment, the insurer will effectively audit a low risk reporto We also show that this particular value increases with the probability of facing a high risk policyholder. Therefore, when this probability is sufRciently high, the nullity of the contract is not enough. From the point of view of a potential defrauder, the law should allow harder sanctions. This is an striking result because the nullity of the contract is a common sanction for this kind of fraud in the USA and in some European countries.

Project portfolio management: an analysis from the insurance industry IT area

This paper aims to bring more information related to the critical question "how IT areas of insurance companies are defining and delivering their strategic initiatives Portfolios?" and make conclusions based on the collected data. To reach these interpretations, it is composed of a theoretical investigation on the theme, a strategy delineation for the research methodology and a conclusion presentation based on the findings. In this last part, this study concluded that explored organization does not applied a sufficient number of best practices answering the critical question as "the company is not mature on this subject".

Optimal unemployment insurance for couples

This work analyzes the optimal design of an unemployment insurance program for couples, whose joint search problem in the labor market differ significantly from the problem faced by single agents. We use a version of the sequential search model of the labor market adapted to married agents to compare optimal constant policies for single and married agents, as well as characterize the optimal constant policy when the agency faces single and married agents simultaneously. Our main result is that an agency that gives equal weights to single and married agents will want to give equal utility promises to both types of agents and spend more on the single agent.

Financial guarantees in Brazilian life insurance and pension plans

Recently regulated Brazilian life and pension products offer a benefit structure composed of minimum guaranteed annual rate, in°ation adjustment according to a price index and participation on an investment fund performance. We present a valuation model for these products. We establish a fair condition relationship between minimum guarantees and participation rates, and explore its behavior over a space of maturities, interest rates, and also fund and price index volatilities and correlation. Besides consistency to reference models, we found that the effect of the fund volatility is conditioned to the price index volatility level and the correlation between them.

Log smoldering after an Amazonian deforestation fire

The characteristics of log smoldering after an Amazonian deforestation fire are described. The experiment was carried out in 2001 at the Caiabi farm, near the city of Alta Floresta, state of Mato Grosso, Brazil, as part of a set of tests that have been performed in the same area since 1997. A 200 x 200m(2) test area was slashed in the beginning of June and burned on 20 August. The area contained 507 logs with diameter at breast height (DBH) higher than 10 cm, per hectare. In the day following the main burn 59 logs were found to remain smoldering, a number that corresponds to 2.9% of the total in the area. We chose 11 of the 59 logs to have their smoldering process monitored. Their diameter, moisture content and CHN dry biomass composition after the plot burn and before smoldering were determined. Other parameters such as temperature distribution while smoldering, porosity, density and mass volatilized during thermogravimetric test were also determined. Average smoldering speeds were in the range from 0.8 to 1.5 cm h(-1) for logs that smoldered without transition to the flaming regime. The average speed increased to 2.1 cm h(-1) for those logs that oscillated between smoldering and flaming. The speeds were lower overnight as compared to values determined during daytime for the same log. Higher log moisture contents were found to produce decreased speeds. Micro-porous biomass was not observed in the set of the 11 selected logs. Smoldering was observed to occur at substantial intensity in crossing of logs, with no longitudinal propagation. (C) 2003 Elsevier Ltd. All rights reserved.

Biomass consumption and CO2, CO and main hydrocarbon gas emissions in an Amazonian forest clearing fire

Fundação de Amparo à Pesquisa do Estado de São Paulo (FAPESP)

Pustular dermatosis caused by fire ant (Solenopsis invicta) stings in a dog

This paper reports a case of spontaneous fire ant sting dermatitis in canine. The skin lesions consisted of nonfollicular, grouped pustules in the abdominal region. Several fire ants were found attached to the lesional skin. Histopathological findings included an intraepidermal neutrophilic pustule and predominantly neutrophilic interstitial dermatitis. An extensive area of collagen degeneration was also observed below the epidermal pustule. These clinical and histopathological findings are remarkable similar to those observed in fire ant stings in humans.

Stem protective tissue in Erythroxylum tortuosum (Erythroxylaceae), a fire tolerant species from cerrado

The origin and structure are described of the secondary protective tissue in the stem of Erythorxylum tortuosum Mart., a fire tolerant shrubby species common in Brazilian cerrado. The highly tortuous stems are covered with thick bark which is more developed at the base of the stem. After fire in the cerrado, rhytidome fragments of the burned stem flake off, revealing newly formed cork. The first periderm appears near of the terminal buds and is iniated by periclinal divisions in subepidermal cells giving rise to radial rows of cells. The first phellogen is discernible only after the differentiation of the several radial rows of cork cells. Other phellogens have their origin in successively deeper layers of the cortex. The sucessive periderms are discontinuous around the circumference. The collapsed cells with phenolic substances and the accumulated dead cells cause the formation of discontinuous blackish lines, which delimit the sucessive periderms in the rhytidome. The rhytidome contains large quantities of sclereids developed from cell wall thickening of cortex cells. The occurrence of periderm, in the young parts of the stem and of rhytidome in the older parts represents pyrophytic characteristics and may explain, in part, the fire tolerance of this species.