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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.

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).

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.

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.

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.

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.

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.

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.

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.

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.

12-01 Fesselmeyer, Eric; Mirman, Leonard J.; Santugini, Marc - Spreading Risk: Limiting Cases

We show that a large number of agents sharing risk does not remove concern for risk (through risk spreading) when entrepreneurial activity is not insignificant in the economy.