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12-40 Bresson, Florent; Duclos, Jean-Yves - Intertemporal Poverty Comparisons

The paper deals with poverty orderings when multidimensional attributes exhibit some degree of comparability. The paper focuses on an important special case of this, that is, comparisons of poverty that make use of incomes at different time periods. The ordering criteria extend the power of earlier multidimensional dominance tests by making (reasonable) assumptions on the relative marginal contributions of each temporal dimension to poverty. Inter alia, this involves drawing on natural symmetry and asymmetry assumptions as well as on the mean/variability framework commonly used in the risk literature. The resulting procedures make it possible to check for the robustness of poverty comparisons to choices of temporal aggregation procedures and to areas of intertemporal poverty frontiers. The results are illustrated using a rich sample of 23 European countries over 2006-09.

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12-39 Agbo, Maxime; Santugini, Marc; Williams, Jonathan W. - Screening with Congestion

We study the effect of congestion on monopoly second-degree price discrimination. We provide three results. First, with congestion, the firm does not always provide distinct contracts (i.e., it is not always optimal to price discriminate) and it is more likely for the low-valuation buyer to be excluded. Second, the presence of congestion implies that no buyer receives an efficient allocation. In particular, the high-valuation buyer might be offered a higher or a lower quality (relative to the first-degree price discrimination offer). Finally, congestion might be beneficial to buyers. Specifically, for values of the parameters for which all types are serviced, consumer surplus under second-degree price discrimination may be greater than consumer surplus under no price discrimination.

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12-38 Cosset, Jean-Claude; Somé, Hyacinthe Y.; Valéry, Pascale - Does Competition Matter for Corporate Governance ? The Role of Country Characteristics

We investigate the empirical relation between competition and corporate governance and the effect of country characteristics on this relation. We find that competition is associated with strong corporate governance, but only in less developed countries. We next examine the impact of corporate governance on firm value given the level of competition. We find that competition and corporate governance appear to be complements in explaining firm value in developing countries, while in developed countries they are substitutes.

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12-37 Lalime, Thomas; Michaud, Pierre-Carl - Littératie financière et préparation à la retraite au Québec et dans le reste du Canada

Dans cet article, nous démontrons, en utilisant des données de l’Enquête canadienne sur les capacités financières, que le Québec tire de l’arrière par rapport au reste du Canada non seulement en termes de niveau de littératie financière et d’éducation financière, mais aussi en termes d’épargne et de préparation à la retraite. Nous analysons la possibilité que ces différences soient expliquées par des différences socioéconomiques et explorons la possibilité que des spécificités institutionnelles telles que la prépondérance des régimes de retraite d’employeur à prestations déterminées au Québec puisse expliquer ces différences.

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12-36 Fesselmeyer, Eric; Mirman, Leonard J.; Santugini, Marc - Risk Sharing in an Asymmetric Environment

We study the effect of an asymmetric environment on risk sharing. In our model, entrepreneurs consider undertaking risky projects in the real sector as well as selling part of their projects to investors. To capture the idea of an asymmetric environment, the returns on the alternative risk-free investment are allowed to differ between the entrepreneurs and the investors, i.e., agents have different opportunity costs of participating in the risky projects. We first show that the presence of asymmetric options establishes links between the risk-free and risky sectors as well as between the real and financial sectors. In particular, an asymmetric environment implies that the amount of risk sharing depends on the risk-free rates and the expected return of the risky project. Moreover, the level of real investment also depends on the risk-free rates. Second, we show how different risk-free rates may encourage or discourage risk sharing, and even prevent risk sharing altogether.

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12-35 Blouin, Max - Peacekeeping: a Strategic Approach

This paper presents a theoretical model of conflict between two players, with intervention by a peacekeeping force. Peacekeepers are treated as a military contingent, capable of taking sides, acting as a third (independent) side in the war, or remaining inactive, depending on circumstances. This departs from previous models, in which peacekeeping was no more than a parameter affecting players' fighting costs. The main result is an optimal deployment strategy by peacekeepers, detailing the nature and level of intervention required under different circumstances; a strategy which results in the lowest possible level of warfare between the two antagonists. The credible threat of force (rather than mere intervention) is the strategy's key component.

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12-34 François, Pascal; Gauthier, Geneviève; Godin, Frédéric - Optimal Hedging when the Underlying Asset Follows a Regime-switching Markov Process

We develop a flexible discrete-time hedging methodology that minimizes the expected value of any desired penalty function of the hedging error within a general regime-switching framework. A numerical algorithm based on backward recursion allows for the sequential construction of an optimal hedging strategy. Numerical experiments comparing this and other methodologies show a relative expected penalty reduction ranging between 0.9% and 12.6% with respect to the best benchmark.

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12-33 Dionne, Georges - The Empirical Measure of Information Problems with Emphasis on Insurance Fraud and Dynamic Data

We discuss the difficult question of measuring the effects of asymmetric information problems on resource allocation. Three problems are examined: moral hazard, adverse selection, and asymmetric learning. One theoretical conclusion, drawn by many authors, is that information problems may introduce significant distortions into the economy. However, we verify, in different markets, that efficient mechanisms have been introduced in order to reduce these distortions and even eliminate, at the margin, some residual information problems. This conclusion is stronger for pure adverse selection. One explanation is that adverse selection is related to exogenous characteristics, while asymmetric learning and moral hazard are due to endogenous actions that may change at any point in time. Dynamic data help to identify the three information problems by permitting causality tests.
 

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12-32 Dionne, Georges; Rothschild, Casey G. - Risk Classification and Health Insurance

Risk classification refers to the use of observable characteristics by insurers to group individuals with similar expected claims, compute the corresponding premiums, and thereby reduce asymmetric information. With perfect risk classification, premiums fully reflect the expected cost associated with each class of risk characteristics and yield efficient outcomes. In the health sector, risk classification is also subject to concerns about social equity and potential discrimination. We present an analytical framework that illustrates the potential trade-off between efficient insurance provision and social equity. We also review empirical studies on risk classification and residual asymmetric information that inform this trade-off.
 

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12-31 Dionne, Georges; Fombaron, Nathalie; Doherty, Neil - Adverse Selection in Insurance Contracting

In this survey we present some of the more significant results in the literature on adverse selection in insurance markets. Sections 1 and 2 introduce the subject and Section 3 discusses the monopoly model developed by Stiglitz (1977) for the case of single-period contracts extended by many authors to the multi-period case. The introduction of multi-period contracts raises many issues that are discussed in detail; time horizon, discounting, commitment of the parties, contract renegotiation and accidents underreporting. Section 4 covers the literature on competitive contracts. The analysis is more complicated because insurance companies must take into account competitive pressures when they set incentive contracts. As pointed out by Rothschild and Stiglitz (1976), there is not necessarily a Cournot-Nash equilibrium in the presence of adverse selection. However, market equilibrium can be sustained when principals anticipate competitive reactions to their behavior or when they adopt strategies that differ from the pure Nash strategy. Multi-period contracting is discussed. We show that different predictions on the evolution of insurer profits over time can be obtained from different assumptions concerning the sharing of information between insurers about individual's choice of contracts and accident experience. The roles of commitment and renegotiation between the parties to the contract are important. Section 5 introduces models that consider moral hazard and adverse selection simultaneously and Section 6 covers adverse selection when people can choose their risk status. Section 7 discusses many extensions to the basic models such as risk categorization, multidimensional adverse selection, symmetric imperfect information, reversed or double-sided adverse selection, principals more informed than agents, uberrima fides and participating contracts.

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12-30 Vincent, Nicolas - Price Stickiness in Customer Markets with Reference Prices

Price rigidity is often modeled by assuming that firms face a fixed cost of price change. However, in surveys, firms report that the main reason they wish to keep prices stable is for fear of antagonizing customers. Moreover, marketing studies show that most consumers engage in very little product comparison on a typical shopping trip. In this paper, we explore the implications of these observations for price rigidity. In our model, comparing prices and characteristics of alternative brands is time-consuming. While some consumers behave as bargain hunters with zero opportunity cost form shopping, most are loyal to firms as long as posted prices are not raised. A price increase is interpreted as a signal that a better alternative may be available and triggers consumer search. Firms do not face menu costs and are free to change nominal prices, but understand that their pricing decisions will affect their customer base and hence future profits. We show that this micro-founded mechanism is akin to a nominal rigidity and naturally generates price stickiness. It is also compatible with the observation of frequent sales at the retail level and can rationalize the decreasing or flat hazard functions observed empirically.

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12-29 Tiberti, Luca; Tiberti, Marco - Rural Policies and Poverty in Tanzania: an Agricultural Household Model-Based Assessment

The main objective of this study is to develop a robust and comprehensive tool to evaluate the effect on households’ welfare of different agricultural policies in Tanzania. This is done through a non-separable agricultural household model where production and consumption decisions are considered. In particular, we look at labour market failure, since this is among the major constraints in a context like rural Tanzania. Non-separability implies that production and consumption decisions are interlinked and that labour allocation is likely to be determined by shadow wages rather than market wages. A two-stage estimation strategy is adopted: the shadow price of family labour is first estimated and then included into the production and demand systems. The impact of a number of agricultural policies on poverty is then estimated. In particular, we evaluate the impact of policies established by the Agricultural Sector Development Programme, as well as changes in food prices.

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12-28 Amano, Robert; Carter, Tom; Moran, Kevin - Inflation and Growth: a New Keynesian Perspective

The long-run relation between growth and inflation has not yet been studied in the context of nominal price and wage rigidities, despite the fact that these rigidities now figure prominently in workhorse macroeconomic models. We therefore integrate staggered price- and wage-setting into an endogenous growth framework. In this setting, growth and inflation are linked via the incentive to innovate. For standard calibrations, the linkage is strong: as trend inflation shifts from -5 to 5 percent, the range over which the economy’s steady-state growth rate varies spans 50 basis points, implying up to a 15 percent output differential after thirty years. Nominal wage rigidity plays a critical role in generating these results, and compounding of inflation’s growth effects implies large welfare losses. Endogenous growth thus proves a key channel via which inflation impacts New Keynesian economies.

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12-27 Bruneau, Gabriel; Moran, Kevin - Exchange Rate Fluctuations and Labour Market Adjustments in Canadian Manufacturing Industries

We estimate the impact of exchange rate fluctuations and other external factors on hours worked and employment in Canada’s manufacturing industries. The analysis is based on a dynamic model of labour demand and the econometric strategy employs a dynamic OLS approach for cointegrating regressions. Our data is drawn from a panel of 20 manufacturing industries, from Statistics Canada’s KLEMS database, and covers a long sample that includes two full cycles of appreciation and depreciation in the value of the Canadian dollar. We find that exchange rate fluctuations have economically and statistically significant effects on the labour choices of Canada’s manufacturing employers, and that these effects are stronger for industries more exposed to trade. In addition, we find that the enactment of NAFTA in 1994 has had a negative impact on labour in manufacturing industries. Finally, we report that employment reacts faster than total hours worked, suggesting that hours worked per employee react in a countercyclical fashion to exchange rate fluctuations.

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12-26 Dionne, Georges; Li, Jingyuan - Comparative Ross Risk Aversion in the Presence of Quadrant Dependent Risks

This paper studies comparative risk aversion between risk averse agents in the presence of a background risk. Although the literature covers this question extensively, our contribution differs from most of the literature in two respects. First, background risk does not need to be additive or multiplicative. Second, the two risks are not necessary mean independent, and may be quadrant dependent. We show that our order of cross Ross risk aversion is equivalent to that of partial risk premium, while our index of decreasing cross Ross risk aversion is equivalent to that of a decreasing partial risk premium. These results generalize the comparative risk aversion model developed by Ross (1981) for mean independent risks. Finally, we show that decreasing cross Ross risk aversion gives rise to the utility function family belonging to the class of n-switch utility functions.

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12-25 Araar, Abdelkrim - Pro-Poor Growth in Andean Countries

This paper studies the pro-poor growth in the Latino American Andean countries. We first present different definitions of pro-poorness and the related methods in order to generate the statistically robust results for classes of pro-poor measures. Also, we present the non anonymous pro-poor approach and we propose also a new method to study the inter-temporal pro-poor growth with the aim to capture the change of wellbeing of the poor over time. We apply these procedures to five L.A. countries, which are Ecuador, Colombia, Peru, Bolivia and Venezuela for the period between 2005 and 2010. In general, we find strong statistical evidence that the Andean L.A. countries growths have been absolutely and relatively pro-poor for the period between 2005 and 2010. However, the 2008 world economic crisis has affected temporarily growth and the latter was not absolutely pro-poor during this economic crisis. Starting from 2009, the L.A. countries have registered a remarkable economic recovery. This recovery has helped to growth to absolutely pro-poor and thus, to continue to reduce poverty in this region of world.

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12-24 Chaigneau, Pierre; Sahuguet, Nicolas - Pay-for-Luck in CEO Compensation: Matching and Efficient Contracting

We develop a stylized model of efficient contracting with matching between firms and managers with state-contingent reservation utility. We show that the optimal contract is designed to retain and insure the manager. The retention motive explains pay-for-luck in executive compensation, while the insurance feature explains asymmetric pay-for-luck. This contract can be implemented with call options based on a single performance measure which generally does not filter out luck. When costs of involuntary managerial turnover differ across firms, and the abilities of different managers are more or less precisely estimated ex-ante, the model can also explain the observed association between pay-for-luck and bad corporate governance.
 

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12-23 Brodeur, Abel; Connolly, Marie - Do Higher Childcare Subsidies Improve Parental Well-being? Evidence from Québec's Family Policies

In this paper, we investigate the effect of a change in childcare subsidies on parental subjective well-being. Starting in 1997, the Canadian province of Québec implemented a generous program providing $5-a-day childcare to children under the age of 5. By 2007, the percentage of children attending subsidized day care had tripled and mothers’ labor force participation had increased substantially. Objectively, more labor force participation is seen as a positive improvement, bringing with it higher income, independence and bargaining power. Yet a decrease in women’s subjective well-being over previous decades has been documented, perhaps due to a effect where women work more but still bear the brunt of housework and childrearing (Hochschild and Machung, 1989). Using data from the Canadian General Social Survey, we estimate a triple-differences model using differences - and - reforms between Québec and the rest of Canada and between parents with young children and those with older children. Our estimates suggest that Québec’s family policies led to a small decrease in parents’ subjective well-being. Of note, though, we find large and positive effects for poor household families and high school graduates and negative effects for middle household income families. We find similar negative effects on life satisfaction for both men and women, but different effects on satisfaction with work-life balance. This suggests that fathers’ life satisfaction could be influenced by their wives’ labor supply while their work-life balance is not.

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12-22 Araar, Abdelkrim - Expected Poverty Changes with Economic Growth and Redistribution

This paper focusses on the theoretical and computational framework in order to estimate the impact of economic growth or that of the change in inequality on poverty. During the last few years, there was a growing interest to perform such estimations and to anticipate the implication of some strategic policies, that can be adopted to meet the Millennium Development Goal (MDG, henceforth), that is to cut poverty by half. As is illustrated in this paper, estimated poverty changes may be less precise or even wrong. Precisely, this bad estimation occurs when the distributive changes are non-marginal, whereas the used approach is based on the assumption of marginal changes. In an other case, and where the estimation is implicitly based on a parameterized model of the income distribution, results may be less precise when the predicted distribution cannot reproduce perfectly that derived with the sample. In this study, by using some popular methods, we have used some household surveys of the African countries, as well as, fictive data to show the error size that can occur. Further, we propose a new numerical method to allow to estimate accurately the impact of distributive changes on poverty.

 

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12-21 Malekan, Sara; Dionne, Georges - Securitization and Optimal Retention under Moral Hazard

Securitization is one of the most important innovations in financial markets. It is a process of converting illiquid loans that cannot be sold readily to third-party investors into liquid securities and selling them to dispersed investors. As a result, securitization improves liquidity in capital markets by allowing originators to remove the issued loans from its balance sheet and use the proceeds for other purposes or even to originate new loans. In spite of all its advantages, securitization is often suspected of being one of the main reasons for the recent financial crisis. One concern that is frequently raised in the literature is that securitization leads to moral hazard in lender screening and monitoring. By selling loans to investors and removing them from their books, banks have a lesser incentive to carefully evaluate and monitor borrowers’ credit quality to ensure that they can repay the loans, because the risk of delinquencies falls on investors rather than lenders. One problem in the literature is that the analysis of securitization is very general and suffers from a lack a specific security design analysis under asymmetric information. We address the moral hazard problem using a principal-agent model where the investor is the principal and the lender is the agent. We show that the optimal contract must contain a retention clause in the presence of moral hazard.

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12-20 Fagart, Marie-Cécile; Fluet, Claude - The First-Order Approach when the Cost of Effort is Money

We provide sufficient conditions for the first-order approach in the principal-agent problem when the agent’s utility has the non-separable form u(y - c(a)) where y is the contractual payoff and c(a) is the money cost of effort. We first consider a decision-maker facing prospects which cost c(a) with distributions of returns y that depends on a. The decision problem is shown to be concave if the primitive of the cumulative distribution of returns is a convex function, a condition we call Concavity of the Cumulative Quantile (CCQ). Next we apply CCQ to the distribution of outcomes (or their likelihood-ratio transforms) in the principal-agent problem and derive restrictions on the utility function that validate the first-order approach. We also discuss a stronger condition, log-convexity of the distribution, and show that it allows binding limited liability constraints, which CCQ does not.
 

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12-19 Grass, Gunnar - Model Implied Credit Spreads

I propose a new measure of credit risk, model implied credit spreads (MICS), which can be extracted from any structural credit risk model in which debt values are a function of asset risk and the payout ratio. I implement MICS assuming a barrier option framework nesting the Merton (1974) model of capital structure. MICS are the increase in the payout to creditors necessary to offset the impact of an increase in asset variance on the option value of debt. Endogenizing asset payouts, my measure (i) predicts higher credit risk for safe firms and lower credit risk for firms with high volatility and leverage than a standard distance to default (DD) measure and (ii) clearly outperforms the DD measure when used to predict corporate default or to explain variations in credit spreads.

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12-18 Behrens, Kristian; Murata, Yasusada - Globalization and Individual Gains from Trade

We analyze the impact of globalization on individual gains from trade in a general equilibrium model of monopolistic competition featuring product diversity, pro-competitive effects and income heterogeneity between and within countries. We show that, although trade reduces markups in both countries, its impact on variety depends on their relative position in the world income distribution: product diversity in the lower income country always expands, while that in the higher income country may shrink. When the latter occurs, the richer consumers in the higher income country may lose from trade because the relative importance of variety versus quantity increases with income. Using data on GDP per capita and population, as well as on the U.S. income distribution, we illustrate our theoretical results in two different contexts: the hypothetical bilateral trade liberalization between the U.S. and 188 countries; and the historical sequence of U.S. free trade agreements since 1985.

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12-17 Mirman, Leonard J.; Santugini, Marc - Learning and Technological Progress in Dynamic Games

We study investment and consumption decisions in a dynamic game under learning. To that end, we present a model in which agents not only extract a resource for consumption, but also invest in technology to improve the future stock. At the same time, the agents learn about the stochastic process governing the evolution of public capital, including the effect of investment in technology on future stock. Although the characterization of a dynamic game with Bayesian dynamics (and without the assumption of adaptive learning) is generally intractable, we characterize the unique symmetric Bayesian-learning recursive Cournot-Nash equilibrium for any finite horizon and for general distributions of the random variables. We also show that the limits of the equilibrium outcomes for a finite horizon exist. The addition of learning to a stochastic environment is shown to have a profound effect on the equilibrium.

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12-16 Clavet, Nicholas-James; Duclos, Jean-Yves - Le financement des services de garde des enfants: effets sur le travail, le revenu des familles, et les finances publiques

Le financement public des services de garde (SDG) est au cœur d’objectifs multiples au Québec et ailleurs au Canada. Cet article rapporte l’impact des trois mesures principales de financement public (le crédit d’impôt provincial, la déduction d’impôt fédérale, et les subventions directes aux Centres de la petite enfance — les CPE) sur le revenu des familles, la participation des femmes au marché du travail, et sur les finances publiques québécoises et canadiennes. Contrairement à la littérature canadienne existante, cet impact est estimé à l’aide d’un modèle structurel d’offre de travail qui incorpore explicitement les préférences travail/loisir des familles. Ce modèle tient aussi compte du système fiscal et de transfert du Québec et du Canada, de l’effet des coûts fixes à travailler, de la variabilité des SDG et de leurs coûts, ainsi que la distribution des caractéristiques socio-démographiques des familles québécoises. Les mesures de financement des SDG accroissent globalement et considérablement le revenu des familles après impôts, transferts et frais de garde; elles ont aussi un impact plus marqué sur le revenu et sur le travail des femmes monoparentales que sur celui des femmes en couple. Leur abolition entraînerait des économies substantielles sur le plan des finances publiques provinciales, mais affecterait toutefois peu celles du gouvernement fédéral.

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12-15 Dionne, Georges; Santugini, Marc - Entry, Imperfect Competition, and Futures Market for the Input (revised version)

We analyze firms’ entry, production and hedging decisions under imperfect competition. We consider an oligopoly industry producing a homogeneous output in which risk-averse firms face an entry cost upon entering the industry, and then compete in Cournot with one another. Each firm faces uncertainty in the input cost when making production decision, and has access to the futures market to hedge the random cost. We provide two sets of results. First, under general assumptions about risk preferences, demand, and uncertainty, we characterize the unique equilibrium. In contrast to previous results in the literature (without entry), both production and output price depend on uncertainty and risk aversion. Specifically, when entry is endogenized and the futures price is not actuarially fair, access to the futures market does not lead to separation. Second, to study the effect of access to the futures market on entry and production, we restrict attention to constant absolute risk aversion (CARA) preferences, a linear demand, and a normal distribution for the spot price. In general, the effect of access to the futures market on the number of firms and production is ambiguous.

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12-14 Dionne, Georges; Li, Jingyuan; Okou, Cedric - An Extension of the Consumption-based CAPM Model

We extend the Consumption-based CAPM (C-CAPM) model to representative agents with different risk attitudes. We first use the concept of expectation dependence and show that for a risk averse representative agent, it is the first-degree expectation dependence (FED) rather than the covariance that determines C-CAPM’s riskiness. We extend the assumption of risk aversion to prudence and propose the measure of second-degree expectation dependence (SED) to obtain the values of asset price and equity premium. These theoretical results are linked to the equity premium puzzle. Using the same dataset as in Campbell (2003), the estimated measures of relative risk aversion from FED and SED approximations are much lower than those obtained in the original study and correspond to the theoretical values often discussed in the literature. The theoretical model is then generalized to higher-degree risk changes and higher-order risk averse representative agents.

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12-13 Dessy, Sylvain; Orset, Caroline; Yémélé Kana, Legrand - The Global Fight against Child Trafficking: How Can It Be Won ?

We study how countries can coordinate their national action plans so as to fight global child trafficking. As both the demand and supply of trafficked children are transboundary in scope, international cooperation may be necessary to mitigate cross-country externalities. We show that specialization is the main feature of international cooperation. We also show that the pattern of specialization depends only on the level of economic development of state-parties. In particular, specialization leads to asymmetric national action plans when state-parties have different levels of economic development: the governments of poorer countries specialize on fighting the supply of trafficked children from their territories, while the governments of richer countries specialize on fighting the demand arising within their territories.

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12-12 Bouakez, Hafedh; Eyquem, Aurélien - Government Spending, Monetary Policy, and the Real Exchange Rate

A robust prediction across a wide range of open-economy macroeconomic models is that an unanticipated increase in public spending in a given country appreciates it currency in real terms. This result, however, contradicts the findings of a number of recent empirical studies, which instead document a significant and persistent depreciation of the real exchange rate following an expansionary government spending shock. In this paper, we rationalize the findings of the empirical literature by proposing a small-open-economy model that features three key ingredients: incomplete and imperfect international financial markets, sticky prices, and a not-too-aggressive monetary policy. The model predicts that in response to an unexpected increase in public expenditures, the effective long-term real interest rate falls, causing the real exchange rate to depreciate. We establish this result both analytically, within a special version of the model, and numerically for the more general case.

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12-11 Dionne, Geoges; Li, Jingyuan - Comparative Ross Risk Aversion in the Presence of Mean Dependent Risks

This paper studies comparative risk aversion between risk averse agents in the presence of a background risk. Although the literature covers this question extensively, our contribution differs from most of the literature in two respects. First, background risk does not need to be additive or multiplicative. Second, the two risks are not necessary mean independent, and may be conditional expectation increasing or decreasing. We show that our order of cross Ross risk aversion is equivalent to the order of partial risk premium, while our index of decreasing cross Ross risk aversion is equivalent to decreasing partial risk premium.  These results generalize the comparative risk aversion model developed by Ross (1981) for mean independent risks. Finally, we show that decreasing cross Ross risk aversion gives rise to the utility function family belonging to the class of n-switch utility functions.

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12-10 Cosset, Jean-Claude; Martineau, Charles; Samet, Anis - Do Political Institutions Affect the Choice of the U.S. Cross-Listing Venue?

We study the impact of political institutions on foreign firms’ choice of their U.S. cross-listing venue. Using two measures of political institutions (an index of political rights and a political constraint index) and controlling for various firm-level and country-level characteristics, we show that foreign firms from countries with weak political institutions are more likely to cross-list in the U.S. via the over-the-counter market and less likely to opt for an exchange-listed program (i.e., New York, Nasdaq, and AMEX).

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12-09 Chaigneau, Pierre - The Effect of Risk Preferences on the Valuation and Incentives of Compensation Contracts

We use a comparative approach to study the incentives provided by different types of compensation contracts, and their valuation by risk averse managers, in a fairly general setting. We show that concave contracts tend to provide more incentives to risk averse managers, while convex contracts tend to be more valued by prudent managers. This is because concave contracts concentrate incentives where the marginal utility of risk averse managers is highest, while convex contracts protect against downside risk. Thus, prudence can contribute to explain the prevalence of stock-options in executive compensation. We also present a condition on the utility function which enables to compare the structure of optimal contracts associated with different risk preferences.

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12-08 Chaigneau, Pierre - Explaining the Structure of CEO Incentive Pay with Decreasing Relative Risk Aversion

It is established that the standard principal-agent model cannot explain the structure of commonly used CEO compensation contracts if CRRA preferences are postulated. However, we demonstrate that this model has potentially a high explanatory power with preferences with decreasing relative risk aversion, in the sense that a typical CEO contract is approximately optimal for plausible preference parameters.

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12-07 Chaigneau, Pierre - The Optimal Timing of CEO Compensation

This paper extends a standard principal-agent model of CEO compensation by modeling the progressive attenuation of information asymmetries between firm insiders and shareholders in continuous time. In this setting, we show that the optimal timing of compensation results from a tradeoff between the progressive accumulation of noise in the stock price process and the progressive resolution of information asymmetries. Since all points in the stock price process are incrementally informative about the CEO action, we also show that the whole stock price process should a priori be used for compensation purposes. This may however lead CEOs to inefficiently divert resources to repeatedly manipulate the stock price, which is why it might be optimal to use only a few points in the stock price process instead.

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12-06 Bouvard, Matthieu; Chaigneau, Pierre; de Motta, Adolfo - Transparency in the Financial System: Rollover Risk and Crises

The paper presents a theory of optimal transparency in the financial system when financial institutions have short-term liabilities and are exposed to rollover risk. Our analysis indicates that transparency enhances the stability of the financial system during crises but may have a destabilizing effect during normal economic times. Thus, the optimal level of transparency is contingent on the state of the economy, with the regulator increasing disclosure in times of crises. Under this policy, however, an increase in disclosure signals a deterioration of the economy’s fundamentals, so the regulator has incentives to withhold information ex-post. In that case, the regulator may have to commit ex-ante to a degree of transparency which trades off the frequency and magnitude of financial crises. The analysis also considers the possibility that financial institutions, in an attempt to deal with rollover risk, either diversify their risks or increase the liquidity of their balance sheets.

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12-05 Chaigneau, Pierre - On the Value of Improved Informativeness

One of the main predictions of principal-agent theory, the “informativeness principle”, is often violated in practice. We propose an explanation that emphasizes the role played by the change in the form of the optimal contract that follows an improvement in informativeness. We show that the overall gains from a less noisy performance measure emanate from two sources: the direct effect of a change in the volatility of the performance measure, and the effect of the induced change on the form of the optimal compensation contract. We emphasize that the direct effect can either largely under-estimate or largely overtimate the overall gains from improved informativeness, and we show that these gains can even be nil in some instances.

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12-04 Dionne, Georges; Michaud, Pierre-Carl; Pinquet, Jean - A Review of Recent Theoretical and Empirical Analyses of Asymmetric Information in Road Safety and Automobile Insurance

Road safety policies and automobile insurance contracts often use incentive mechanisms based on traffic violations and accidents to promote safe driving. Can these mechanisms improve road safety efficiently? Do they reduce asymmetric information between drivers and insurers and regulators? In other words, is there residual asymmetric information in observed distributions of accidents and infractions? We answer these questions in this chapter by reviewing recent theoretical and empirical results based on various data and methodologies. We present recent tests related to the identification of residual asymmetric information in road safety management and in automobile insurance contracting. We also propose a theoretical analysis of the foundations of point-record driver’s licenses observed around the world.

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12-03 Dessy, Sylvain; Gohou, Gaston; Vencatachellum, Désiré - Foreign Direct Investments in Africa's Farmlands: Threat or Opportunity for Local Populations ?

We study the welfare effects of government-backed FDIs in Africa’s farmlands. We build an occupational choice model featuring four mechanisms driving these effects. First, local farming is subject to social arrangements prescribing that farmers share their crop surplus with kin. Second, proceeds from land investment deals are invested to make modern inputs affordable to local farmers. Third, these deals cause some farmers to shift to wage employment. Fourth, they also entrench export-oriented agriculture, at the expense of local markets. We show that three conditions are sufficient for such deals to make local people better off: (i) the state has a high capacity and willingness to negotiate deals that benefit local people; (ii) these deals create enough jobs; (iii) wage employment make displaced farmers better off. Fulfilling these three conditions, however, may conflict with the interests of profit-maximizing foreign investors.

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12-02 Dessy, Sylvain; Pallage, Stéphane; Vencatachellum, Désiré - The Political Economy of Social Inclusion

We build a political economy model of state policy choice highlighting the challenges to breaking barriers to the adoption of inclusive policies in Africa. We highlight necessary and sufficient conditions for a political leader to gain from implementing exclusive policies: (i) Implementing inclusive policies must be risky; (ii) the political leader must have adequate access to an overseas’ financial safe haven as a technology for protecting the spoils from implementing exclusive policies, or investing the looted funds in the domestic economy must sufficiently contribute to mitigate the risk of a revolution. Our results suggest that breaking barriers to inclusive policies in Africa is not an easy task. Bans on international money-laundering schemes may not be sufficient if domestic money laundering is easy and sufficiently discrete.

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12-01 Fesselmeyer, Eric; Mirman, Leonard J.; Santugini, Marc - A Reconsideration of Arrow-Lind: Risk Aversion, Risk Sharing, and Agent Choice

We consider the original Arrow-Lind framework in which a government undertakes a risky project to be shared among many taxpayers. In our model, the taxpayers decide the level of participation in the risky project. Moreover, the amount of taxes collected by the government fully finances the public project. In this case, we show that projects cannot be evaluated only on the basis of expected benefits since the resulting tax determined by the model is incompatible with any risk sharing.

Centre interuniversitaire sur le risque, les politiques économiques et l'emploi
ESG UQAM, Université du Québec à Montréal, C.P. 8888, Succ. Centre-Ville, Montréal (Québec) CANADA H3C 3P8
Madame Hélène Diatta  | Téléphone : 514 987-6181 | Télécopieur : 514 987-4707 | Courriel : diatta.helene@uqam.ca
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