COSTLY EXTERNAL FINANCE AND INVESTMENT EFFICIENCY IN A MARKET EQUILIBRIUM MODEL

The corporate finance literature suggests that a financially constrained firm invests less than an identical unconstrained firm. This does not imply that financial frictions cause firms to invest less than in a frictionless economy. When firms compete for investment funds, an increase in financial frictions can lead individual firms to increase their investment levels. A greater than the frictionless level of investment is likely in low-productivity firms, in cash-rich firms, and in firms with cheap external capital. Government programs that make capital cheaper for small firms may lead to lower levels of investment for all firms and decrease efficiency (JEL O16, E22, E44, G20)     

DEPOSIT INSURANCE and BANK FAILURES: NEW EVIDENCE FROM THE 1920s

This paper examines the contribution of deposit insurance to bank failures during the 1920s. Using individual bank data from Kansas, where membership in the state insurance system was voluntary, I find that the balance sheets of insured banks reflected greater risk-taking, and probit model estimates indicate that insured banks were more likely to fail than non-insured banks. Insurance had an especially strong impact the closer a bank was to failure. Because regulation was comparatively strict in Kansas the findings suggest that deposit insurance had an even greater impact in other states and in the recent U.S. experience.     

EXTERNAL RECRUITMENT AND INTRAFIRM MOBILITY

In Chan (1996), I suggest that a contest between internal and external candidates for a position within a firm is generally biased in favor of the former to maintain work incentive for existing workers. This implies that a successful external candidate tends to be superior in ability relative to internally promoted colleagues and therefore enjoys a higher probability of subsequent promotion. Moreover, this effect tends to diminish up the hierarchy if external competition is more of a threat at lower job levels. Analyzing personnel data from a U.S. financial corporation, I find consistent support for this hypothesis. (JEL J00 , J41 )     

EXTERNAL THREAT AND COLLECTIVE ACTION

This article studies how players allocate their endowed resources between productive and conflictual activities in the context of rivalry between two groups. We show that the suboptimality and exploitation propositions established by Olson (1965) do not necessarily apply when external threat is endogenized. We also illustrate that it does not always pay to take an offensive stance. When competing with an offensive group, it might be better for members of a defensive group to remain defensive. Furthermore, in the context of rivalry between two groups, free riding can actually benefit everyone in the system. (JEL D70 , D74 )     

THE TRAVELS OF A BANK DEPOSIT IN TURBULENT TIMES: THE IMPORTANCE OF DEPOSIT INSURANCE DESIGN FOR CROSS-BORDER DEPOSITS

We examine the impact of the existence on an explicit deposit insurance (DI) scheme and its design features on bilateral cross-border deposits (CBD) in a gravity model setting. We find that both the absolute quality of a country's DI and its relative quality vis-à-vis other countries' DI generally affect depositor behavior. However, during systemic banking crises, cross-border depositors primarily seek countries with the best DI schemes. Similarly, during the 2008–2009 great financial crisis, the emergency actions taken by the governments, which supply and maintain these safe havens, have led to substantial relocations of CBD. (JEL F34, G18)     

ALTRUISM, MATCHING, AND NONMARKET INSURANCE

Incomplete market insurance gives rise to nonmarket arrangements for coinsurance. We find that the effort altruistically linked individuals take to avoid an accident increases with the degree of altruism. If the degree of altruism is sufficiently high, an economy with nonmarket insurance yields higher social welfare than an economy without nonmarket insurance. As altruism increases, the equilibrium level of effort approaches the second-best solution without the need for costly monitoring. Coinsurance is above (below) the socially optimal level if individuals place greater weight (less weight) on their own utility than on that of their partners.     

ENTITLEMENT EFFECTS, UNEMPLOYMENT INSURANCE AND EMPLOYMENT DECISIONS

Many studies have identified the work disincentive effects of unemployment insurance. This paper points out the entitlement effect of this and other social insurance programs on employment, as the risks of labor-market participation are reduced by the existence of unemployment benefits. This employment-increasing effect can offset the disincentive effect, with the net impact on employment becoming an empirical issue. Using data on a sample of married women for 1971, we find that on net there is a slight negative effect on employment of higher unemployment insurance benefits. The entitlement effect on employment is, though, generally positive and significant, suggesting that the provisions of social insurance induce increased labor-force participation among women who otherwise would remain out of the labor force.     

SOLVENCY REGULATION AND THE PROPERTY-LIABILITY "INSURANCE CYCLE"

Fluctuations in the supply of property-liability insurance may be exacerbated by regulation. To limit insolvencies, regulators constrain insurers against writing an excessive quantity of insurance relative to net worth. Revenue is used as a measure of aggregate quantity. In a competitive market with inelastic demand, a constraint on the ratio of revenue to net worth yields a catastrophe process for price dynamics. Indirect evidence supports the argument that the current form of solvency regulation is destabilizing.     

OVEREXPANSION IN THE SOCIAL INSURANCE BUDGET AND THE CONSTITUTIONAL PERSPECTIVE

Browning (1975) has recently reasoned that the social insurance budget is inevitably too large in a democracy. The purpose of this paper is to argue that there are different conceptual contexts within which the correct size of the social insurance budget can be analyzed. Within at least one relevant context it is not at all obvious that the social insurance budget must inevitably be too large in a democracy, The first part of this paper reviews Browning's argument. The second presents an alternative analysis which leads to the conclusion that the social insurance system may well have certain characteristics that work toward the maintenance of an efficient budget level.     

HEALTH CARE, INSURANCE, AND THE CONTRACT CHOICE EFFECT

This article explores the interdependence between the individual consumer's demand for medical care and choice of health insurance coverage, with emphasis on its implications for demand behavior and empirical analysis. We show that an increase in the price of medical care has two effects on demand, the usual response of reduced quantity demanded and a health insurance contract choice effect resulting from the consumer's incentive to change insurance plan. The contract choice effect, widely neglected in studies of medical care demand, alters both the quantitative and qualitative predictive properties of the consumer's demand for medical services. (JEL D11, D81, I11 )     

RACIAL SEGREGATION AND INSURANCE ENTERPRISE AMONG BLACK AMERICANS IN NORTHERN CITIES

At the turn of the century, many white-owned insurance firms discriminated against blacks by denying them coverage or by charging them extraordinarily high premiums. This discrimination created a void that was successfully filled by black insurance entrepreneurs who built upon an old tradition of self-help. My study adds to this account by showing that, in northern cities during the Great Migration, there was a significant, positive association between the representation of blacks in insurance occupations and the spatial isolation of black populations. This finding suggests that, during the study period, many blacks were drawn into the insurance business by the prospect of serving a geographically based market of co-ethnic consumers. I conclude that residential segregation by race, an ecological factor, played an important role in the development of insurance enterprise among black Americans in the urban North.     

ECONOMICS COURSEWORK AND LONG‐TERM BEHAVIOR AND EXPERIENCES OF COLLEGE GRADUATES IN LABOR MARKETS AND PERSONAL FINANCE

Using survey data from over 2,000 students who attended one of four large public universities in 1976, 1986, or 1996, we investigate the relationship between taking more coursework in economics, or choosing economics as an undergraduate major, and a wide range of later decisions and outcomes in labor markets and personal finance, many of which have not been analyzed in earlier research. Generally, economics coursework and majoring in economics are significantly related to higher levels of earnings, home equity, and savings. They are also associated with working more hours and negatively related to completing graduate degrees (except the MBA). Among graduates with positive savings, those with more economics coursework invest more in individual stocks and money market accounts, and are more likely to have employer‐provided life insurance. They have fewer credit cards, which are more often paid in full each month. Most of these findings also hold for graduates who majored in business, but on average economics majors worked more hours and earned more than business majors, were more likely to have been self‐employed, and expected to retire at an older age. Business majors were more likely to have experienced a layoff, and were even less likely than economics majors to complete graduate degrees (except the MBA). Economics majors expected to save even more than business majors by retirement, and viewed short‐term and precautionary motives for saving as more important. Finally, our results suggest that exposure to economics through course‐taking is more important for later outcomes than actual performance in those courses. (JEL A22, J3, D12)     

PROFIT AND EXPENDITURE FUNCTIONS IN BASIC PUBLIC FINANCE: AN EXPOSITORY NOTE

This paper demonstrates how profit and expenditure functions may be used to prove fundamental results about deadweight losses suffered by consumers, producers, and resource owners. Losses arising from excise taxes and subsidies are examined and, in the case of a tax, the individual level analysis is extended to the market level in a partial equilibrium setting. In addition, profit and expenditure functions are applied to quantity constraints, two-part tariffs, all-or-nothing choices, and reservation prices. Although no new results are derived, the paper provides motivation for the study of indirect objective functions and duality.     

CONFLICTING VIEWS ON THE EFFECT OF OLD-AGE AND SURVIVORS INSURANCE ON RETIREMENT

The literature explaining the sharp drop in labor force participation of the elderly in recent decades is examined. Several recent studies made by economists outside the Social Security Administration have found the impact of OASI to be much more important than was found by surveys made within the social security system. An examination of census and manpower data lends support to the view that OASI has had an important role in encouraging retirement at earlier ages. The drop in labor force participation among the elderly has impeded government efforts to improve the economic condition of elderly persons.     

PRICE ELASTICITY AND ADVERSE SELECTION IN THE DEMAND FOR SUPPLEMENTARY HEALTH INSURANCE

Probit regression estimates show the effects of the price of insurance, anticipated medical expenditures, and other factors on reported decisions about purchasing hypothetically offered supplementary insurance policies. The demand estimates can characterize how much supplemental insurance would be purchased under different tax policies affecting health insurance purchases. Although eliminating the current tax subsidy to insurance is shown to decrease demand, the results indicate a substantial demand for supplementary insurance even in the absence of present tax incentives. However, our results on adverse selection raise concerns about the potential stability of supplemental insurance markets.