An asset-based approach to social risk management : a conceptual framework

There is increasing concern about the vulnerability of poor and near-poor rural households, who have limited capabilities to manage risk and often resort to strategies that can lead to a vicious cycle of poverty. Household-related risk is ususally considered individual or private, but measures to manage risk are actually social or public in nature. Furthermore, various externality issues are associated with household-related risk, such as its links to economic development, poverty reduction, social cohesion, and environmental quality. Hence the need for a holistic approach to risk management, or"social risk management,"which encompasses a broad spectrum of private and public actions. An asset-based approach to social risk management is presented, which provides an integrated approach to considering household, community, and extra-community assets and risk-management strategies. The conceptual framework for social risk management focuses on rural Sub-Saharan Africa. The report concludes with several suggestions on moving from concepts to actions.Health Economics&Finance,Insurance&Risk Mitigation,Banking Law,Environmental Economics&Policies,Banks&Banking Reform

Web Note No. 18

In a recent analysis comparing the current oil production tax, More Alaska Production Act (MAPA, also known as SB 21) to the tax it replaced, Alaska’s Clear and Equitable Share (ACES), Scott Goldsmith, professor emeritus of economics at ISER, found that MAPA would produce higher revenues in the future, if changing to MAPA causes producers to make investments that lead to more production than would have occurred under ACES.2 Professor Goldsmith did not advocate for either tax, but projected effects of each under a range of different future oil prices, production rates, and costs. He noted that comparative revenues are highly sensitive to future costs and oil prices. Oil prices are notoriously difficult to forecast. Future North Slope oil production, as well as lease costs that can be deducted from producers’ tax liabilities under both ACES and MAPA, are also highly uncertain. Proponents of either MAPA or ACES appear to make assumptions about prices, production, and costs that support their arguments. Given the inherent uncertainty about oil prices, new production, and expenditures for capital and operating costs, what assumptions would be most reasonable to make for assessing outcomes of the tax regimes? This note critically examines the relevant assumptions for projecting tax outcomes, and explores how the different taxes compare under a set of assumptions that seem most reasonable, given our best current information. The comparisons address not only the amount of revenue the state would collect, but also how the taxes differently share risk between the industry and the state, and administrative issues affecting the nature of the relationship between the oil industry and state government. The analysis also places the debate about MAPA vs. ACES in the longer term context of Alaska oil production taxes, comparing MAPA and ACES to the original petroleum profits tax (PPT) that preceded ACES, and to the old severance tax PPT replaced.Northrim Bank

STRATEGIC CHOICE ALONG THE VERTICAL COORDINATION CONTINUUM

Fundamental changes are underway in the U.S. agri-food system, changes that are altering traditional marketing relationships. Parts of the food system are becoming tightly integrated, such as the poultry subsector and, increasingly, the pork subsector. The tightening of vertical linkages has been characterized by movement from open markets to various forms of managed coordination, e.g. contracting, strategic alliances, and single ownership of multiple market stages. 1998 AAEA SymposiumIndustrial Organization,

Moral Hazard in Partnerships

In this paper, we investigate incentive structures within partnerships. Partnerships provide a classic example of the tradeoff between risk spreading and moral hazard. The degree to which firms choose to spread risk and sacrifice efficiency incentives depends upon risk preferences, for which data are typically unavailable. We are able to overcome this difficulty due to the existence of a unique data set on a prominent form of professional partnership; medical group practice. We consider a two-stage model in which agents choose effort in response to incentives and in which the firm can choose two different instruments to affect incentives and to spread risk: the compensation method and the number of members. There are two new theoretical results. First, relative to the compensation method or group size which would be chosen in the absence of risk or risk aversion, the best compensation method will be one which sacrifices efficiency incentives in order to spread risk, and the best membership size will exceed the first best size for the same reasons. Second, a further increase in risk or risk aversion leads the firm to sacrifice more efficiency incentives in order to spread more risk. Hence, firms who are more risk averse or face greater uncertainty pay larger risk premiums in terms of sacrificed output due to shirking. The empirical results are striking and consistent with the theory. Firms which report more risk aversion have greater departures from first-best organizational incentive structures. Specifically, increased risk aversion leads to compensation arrangements which spread more risk through greater sharing of output and to decreased group size in order to counteract diminished incentives. We also find that compensation arrangements that have greater degrees of sharing of output across physicians significantly reduce each physician's productivity, whereas reductions in group size significantly increase productivity. The estimated premium associated with risk aversion accounts for almost eleven percent of gross income, comparing the most risk averse to the least risk averse physicians in the sample.

Risk and Incentives: A Not-So-Tenuous Trade-off

Risk and Uncertainty,

Risk sharing versus financial contagion in Asia: An asset price perspective

AbstractThis paper assesses financial integration in Asia in terms of risk-sharing benefit versus financial contagion cost. We construct a new measure of risk sharing based on a term structure model, which allows identification of realized stochastic discount factors. Risk sharing is low in Asia, and varies across time and countries, whereas contagion risks are more significant intra-regionally, and relatively stable over the past decade. An overall tradeoff exists between risk sharing and contagion, but the terms of tradeoffs vary across countries, depending on relative economic fluctuations and inflation differentials. Asia therefore can potentially enhance risk sharing without raising contagion risk

How China's government and state enterprises partitioned property and control rights

In 1980, China's government owned and controlled its state enterprises, which were managed (inefficiently) by bureaucrats. During the 1980s, the government experimented with decentralizing state enterprises to boost productivity. By decade's end, China's state enterprises had become more market-oriented, and the structure of enterprise property rights had changed dramatically. The author examines how China's government and state enterprises partitioned property rights -how the government and enterprises decided about incentives, financial arrangements, and control rights. The author assumes that the government is risk-neutral and the enterprise manager is risk-averse; that the government's goal is to increase revenue (or profitability), to retain control of the firms (by bailing outfirms in financial trouble and collective heavier taxes on high-performing firms). The enterprise manager and employees, on the other hand, have an informational advantage over the government that allows them to earn a rent; that advantage leads to suboptimal efforts. Among the author's findings: (1) The ways the government and enterprises partitioned property rights were consistent with the prediction of the principal-agent model based on the above assumption. (2) Many of the changes in property rights reflected the government's attempt to cope with managerial informational advantage. (3) The government, in striving for equality, rewards inefficient firms while penalizing efficient ones (the so-called ratchet effect). Efficient firms are unwilling to reveal their true efficiency. They pretend to be inefficient by slacking, so they can get more transfers. So, there are inherent conflicts between two of the government's goals: profitability and equality. And the government's desire to control state enterprises prevents many of them from becoming decentralized and improving their productivity.Labor Policies,Economic Theory&Research,Environmental Economics&Policies,Banks&Banking Reform,International Terrorism&Counterterrorism,Banks&Banking Reform,Economic Theory&Research,Environmental Economics&Policies,National Governance,Municipal Financial Management

Alternative frameworks for providing financial services

Drawing on country experience, the authors analyze alternative frameworks for providing financial services. Scope of permissible activities: The integrated banking model (commercial banking fully integrated with other financial services, including investment banking) benefits both financial institutions and consumers. Potential costs, such as extending the safety net to non-deposit financial services, can be mitigated with safeguards and firewalls, which require regulatory enforcement and monitoring. Internationally, countries are moving toward the integrated model. The wider scope of services appears to improve financial stability and mitigate the risk of a banking crisis. Degree of competitiveness and contestability (openness to competition): Competitiveness need not only require many financial institutions; a concentrated system can be competitive if contestable. Allowing the liberal entry of foreign banks lowers the franchise value of (domestic) institutions, but the evidence suggests that on balance foreign entry provides important benefits. Systems should not be over-competitive, however. They should allow enough franchise value that future profits give institutions an incentive to behave prudently. Design of safety net: the design of the safety net is important in the tradeoff between ensuring the safety and soundness of financial institutions and allocating resources efficiently. A well-functioning safety net minimizes regulatory forbearance and gives banks incentives to act prudently. Owners of financial institutions behave more prudently if they have much at risk, in the form of capital, future expected profits, or their own jobs. The wrong safety net, especially the wrong deposit insurance, entails great moral hazard. Large deposit holders are more likely to provide market discipline if they are not covered by deposit insurance (explicit or implicit), if disclosure is extensive, and if the accounting framework is adequate. Supervision: Best international practice suggests that supervision of the financial conglomerate should probably be consolidated in one agency. Supervisors should have incentives both to monitor and to take appropriate action. Supervisory salaries should be sufficient, relative to those in the private sector, to attract and retain competent and motivated staff.Payment Systems&Infrastructure,Banks&Banking Reform,Environmental Economics&Policies,Financial Intermediation,Labor Policies,Banks&Banking Reform,Financial Intermediation,Environmental Economics&Policies,Knowledge Economy,Education for the Knowledge Economy

Dealing with Major Technological Risks

This article is concerned with the management of major hazards stemming from technology and entailing potentially dreadful consequences. It proposes a brief survey of the0501n difficulties and policy issues arising both in public and private decision making when dealing with major technological risks. Three themes are considered: risk assessment, risk sharing and risk control. Issues related to evaluation methods, to risk perception and to the acceptable level of risk are first examined. The article then goes on to explore the problem of optimal risk sharing between the different stakeholders. The firm's liability and extended liability to the firm's partners are considered. Insurance issues are also discussed. Lastly, the survey addresses the control of risks both from a prevention and from a damage mitigation point of view. The various instruments available to the State to reduce risks are reviewed and several issues are also raised with respect to the measures firms can take to reduce risks. Investment in safety, human error, organisational design and information disclosure are addressed in this section. The topics of siting and urban planning are analysed as mitigation strategies, and the important aspect of emergency planning ends the survey. Cet article d'intérêt général porte sur la gestion des risques d'origine technologique aux conséquences potentiellement catastrophiques. Il s'agit d'un document de synthèse destiné à cerner les problèmes fondamentaux en matière de gestion publique et privée des risques technologiques majeurs. Trois thèmes y sont traités: l'évaluation, la distribution et le contrôle des risques. Les questions se rapportant aux méthodes d'évaluation, à la perception des risques et aux difficultés liées à l'établissement d'un seuil de tolérance sont d'abord passées en revue. La seconde partie du document met en lumière les difficultés que présente le partage optimal du risque entre les différents agents. La responsabilité civile de la firme et de ses partenaires est alors examinée. Les problèmes liés à l'assurance contre ce type de risque sont aussi brièvement décrits. Cet article traite enfin du contrôle des risques en couvrant à la fois les approches préventives et les stratégies d'atténuation des dommages. On y aborde premièrement les instruments de contrôle dont dispose l'État pour réduire les risques. Du côté des firmes, les sujets tels que l'investissement en sécurité, l'erreur humaine, le design organisationnel et la divulgation de l'information sont passés en revue. L'aménagement du territoire et la gestion des urgences sont ensuite abordés de façon succincte dans la dernière partie de l'article.Safety, major risks, risk assessment, risk sharing, risk control, prevention, mitigation, Sécurité, risques majeurs, évaluation des risques, distribution des risques, contrôle des risques, prévention, atténuation

Big Data, Small Credit: The Digital Revolution and Its Impact on Emerging Market Consumers

This research report sheds light on a new cadre of technology companies who are disrupting the credit scoring business in emerging markets. Using non-financial data -- such as social media activity and mobile phone usage patterns -- complex algorithms and big data analytics are forever changing the economics of how we identify, score, and underwrite credit to consumers who have been invisible to lenders until now