Optimal investment policy and dividend payment strategy in an insurance company

We consider in this paper the optimal dividend problem for an insurance company whose uncontrolled reserve process evolves as a classical Cram\'{e}r--Lundberg process. The firm has the option of investing part of the surplus in a Black--Scholes financial market. The objective is to find a strategy consisting of both investment and dividend payment policies which maximizes the cumulative expected discounted dividend pay-outs until the time of bankruptcy. We show that the optimal value function is the smallest viscosity solution of the associated second-order integro-differential Hamilton--Jacobi--Bellman equation. We study the regularity of the optimal value function. We show that the optimal dividend payment strategy has a band structure. We find a method to construct a candidate solution and obtain a verification result to check optimality. Finally, we give an example where the optimal dividend strategy is not barrier and the optimal value function is not twice continuously differentiable.Comment: Published in at http://dx.doi.org/10.1214/09-AAP643 the Annals of Applied Probability (http://www.imstat.org/aap/) by the Institute of Mathematical Statistics (http://www.imstat.org

Culture, beliefs and economic performance

Beliefs are one component of culture. Data from the World Values Survey is available on a subset of beliefs concerning (broadly) meritocracy and poverty that appear relevant for economics. We document how they vary as well as their distribution across countries. We then correlate these measures of beliefs with economic growth and compare them with institutional and geographical determinants of income. A strong negative relationship is found between leftist economic beliefs and growth but little evidence is found of a relationship with respect to non-economic beliefs. Finally, we briefly discuss some causal effects on beliefs. The evidence suggests that higher country risk and more dependence on natural resources shifts nations to a more leftist set of economic beliefs. Overall the evidence supports the view that cultural specificities may explain why certain institutions cannot be transplanted between nations with different cultural histories and underlines the limit to policy activism

Anger and Regulation

We propose a model where voters experience an emotional cost when they observe a firm that has displayed insufficient concern for other people's welfare (altruism) in the process of making high profits. Even when there exist few truly altruistic firms, an equilibrium may emerge where all firms pretend to be kind, refraining from charging "abusive" prices to their customers (or "exploiting" workers). Our main result is that as competition decreases, the set of parameters for which such pooling equilibria exist is smaller and firms are more liekly to anger voters by displaying low levels of altruism. As a consequence, when firms have been shown to be unkind, the welfare of consumers will go up when these firms are punished (for example through fines), even when this does not imply a change in prices. Indeed, regulation affects welfare through three channels: First, there is the standard channel whereby a reduction in monopoly price lads to the production of units that cost less than their value to consumers. Second, regulation calms down existing consumers: a reduction in the profits of a firm viewed as excessively selfish increases total welfare by reducing consumer anger. Finally, there is a third (mixed) channel arising because individuals who were out of the market when they were excessively angry in the unregulated market, decide to purchase once the firm is regulated, reducing the standard distortions described in the first channel.Anger, regulation, public relations, commercial legitimacy, altruism, populism

Are Politicians Really Paid Like Bureaucrats?

We provide the first empirical analysis of gubernatorial pay. Using US data for 1950-90 we document, contrary to widespread assumptions, substantial variation in the wages of politicians, both across states and over time. Gubernatorial wages respond to changes in state income per capita and taxes, after controlling for state and time fixed effects. The economic effects seem large: governors receive a 1 percent pay cut for each ten percent increase in per capita tax payments and a 4.5 percent increase in pay for each ten percent increase in income per capita in their states. There is strong evidence that the tax elasticity reflects a form of reward-for-performanc.' The evidence on the income elasticity of pay is less conclusive, but is suggestive of rent extraction' motives. Lastly, we find that democratic institutions seem to play an important role in shaping pay. For example, voter-initiatives and the presence of significant political opposition lead to large reductions in the income elasticity of pay, and to large increases (at least double) in the tax elasticities of pay, relative to the elasticities that are observed when these democratic institutions are weaker.

A note on Fairness and Redistribution

We note some problems in Alesina and Angeletos (2005) and suggest a way to maintain the key insight of that paper, which is that a demand for fairness could lead to different economic systems such as those observed in France versus the US (multiple equilibria).Inequality, taxation, redistribution, political economy.

Why Doesn't Capitalism Flow to Poor Countries?

macroeconomics, international, capitalism, regulation, poor countries

Why Doesn't Capitalism Flow to Poor Countries?

We find anecdotal evidence suggesting that governments in poor countries have a more left wing rhetoric than those in OECD countries. Thus, it appears that capitalist rhetoric doesn't flow to poor countries. A possible explanation is that corruption, which is more widespread in poor countries, reduces more the electoral appeal of capitalism than that of socialism. The empirical pattern of beliefs within countries is consistent with this explanation: people who perceive corruption to be high in their country are also more likely to lean left ideologically (and to declare support for a more intrusive government in economic matters). Finally, we present a model explaining the corruption-left connection. It exploits the fact that an act of corruption is more revealing about the fairness type of a rich capitalist than of a poor bureaucrat. After observing corruption, voters who care about fairness react by increasing taxes and moving left. There is a negative ideological externality since the existence of corrupt entrepreneurs hurts good entrepreneurs by reducing the electoral appeal of capitalism.