Disability insurance and optimal income taxation

This paper studies the design of disability insurance scheme when agents differ in their privately known productivity. We extend the Diamond and Mirrlees (1978) two period model to allow for agents differing ex-ante in their productivity and characterize the optimal nonlinear tax transfer that maximizes a utilitarian welfare function when per-period earnings and age are observable while individuals’ productivity and health status are not observable. We show that the induced tax/benefit scheme should exhibit a marginal income tax that decreases with age for some agents. A marginal subsidy on the young high productive income may be desirable. While the disability scheme always involves the old low productive agents to be indifferent between working and claiming disability benefits, this result is not always true for the old high productive agents. JEL Classification H55 · H23 · E62     

Good cop,bad cop: Complementarities between debt and equity in disciplining management

We demonstrate an inherent conflict between ex ante efficient monitoring and liquidation decisions by outside claimholders. We show it can be useful to commit to inefficient liquidation when monitors fail to produce information: this provides stronger incentives to monitor. The implication for firm capital structure is that more information is generated about firm prospects – and hence firm value increases – when a firm’s cash flow is split into a ‘safe’ claim (debt) and a ‘risky’ claim (equity) compared to when a single claim is sold. We also derive the optimal allocation of control rights between safe and risky claims. This partially resolves the Tirole (2001) puzzle as to why firms issue multiple securities that generate ex post conflicts of interest.     

Mediating Interests: The Accountancy Bodies' Responses to the McFarlane Report

There is now a considerable literature on the significance for accountants of their being accepted as a profession. The claim that they have regard to ‘the public interest’ in their activities is a central feature of the accountancy bodies’ claims to being accepted as a ‘profession’. This, they argue, distinguishes them from trade associations and trade unions. The claim is significant for both their economic and symbolic value. This paper examines the accountancy bodies’ claims by examining their responses to the 1992 publication of a discussion document The Future of Auditing by the Auditing Practices Board. Responses by four major professional bodies are analysed in detail. It is concluded that most of them do not attempt to redeem the claim to have regard to the public interest. Instead, they are mainly concerned to promote their members' private interests, frequently by advocating policy measures that will advance their own members' interests at the expense of those of other accountancy bodies. The significance of the contradiction between the transparency of this advocacy and the considerable effort expended in claiming to act in the public interest is discussed.     

Diverging Mortality Inequality Trends among Young and Old in the Netherlands*

We analyse the trends in inequality in mortality across poverty groups at different ages over the period 1996–2016 in the Netherlands. In addition, we examine whether these trends are related to unequal changes in avoidable mortality, separated by preventable and treatable causes of death. We find that while inequalities in mortality have decreased at ages up to 65, inequalities increased for the oldest age groups. The decline in inequality at the younger ages can, to a large extent, be explained by a strong decrease of mortality from preventable and cardiovascular causes among the poor. The link between inequality and avoidable mortality at the oldest ages is less straightforward. The increasing inequality at old age might be the result of the inequalities shifting from the young to the older age groups, or of the rich benefiting more from the recent health (care) improvements than the poor.     

Optimal social security claiming behavior under lump sum incentives: Theory and evidence

Many Americans claim Social Security benefits early, though this leaves them with lower monthly payments throughout retirement. We build a lifecycle model that closely tracks claiming patterns under current rules, and we use it to predict claiming delays if, by delaying benefits, people were to receive a lump sum instead of an annuity. We predict that current early claimers would defer claiming by a year given actuarially fair lump sums, and the predictions conform with respondents' answers to a strategic survey about the lump sum. In other words, such a reform could provide an avenue for encouraging delayed retirement without benefit cuts or tax increases. Moreover, many people would still defer claiming even for smaller lump sums.     

Coherent hedging in incomplete markets

In incomplete financial markets, not every contingent claim can be perfectly replicated by a self-financing strategy. In this paper, we minimize the risk that the value of the hedging portfolio falls below the payoff of the claim at time T. We use a coherent risk measure, introduced by Artzner et al., to measure the risk of the shortfall. The dynamic optimization problem of finding a self-financing strategy that minimizes the coherent risk of the shortfall can be split into a static optimization problem and a representation problem. We will deduce necessary and sufficient optimality conditions for the static problem using convex duality methods. The solution of the static optimization problem turns out to be a randomized test with a typical 0–1 structure. Our results improve those obtained by Nakano. The optimal hedging strategy consists of superhedging a modified claim that is the product of the original payoff and the solution to the static problem.     

Dividend Barrier Strategies in A Renewal Risk Model with Generalized Erlang Interarrival Times

Abstract

We consider a renewal risk model with generalized Erlang distributed interarrival times. We assume that the phases of the interarrival time can be observed. In order to solve de Finetti's dividend problem, we first consider phasewise barrier strategies and look for the optimal barriers when the initial capital is 0. For exponentially distributed claim sizes, we show that the barrier strategy is optimal among all admissible strategies. For the special case of Erlang(2) interarrival times, we calculate the value function and the optimal barriers.     

How Did the Elimination of the US Earnings Test above the Normal Retirement Age Affect Labour Supply Expectations?*

We look at the effect of the 2000 repeal of the earnings test above the normal retirement age on retirement expectations of workers in the Health and Retirement Study, aged 51 to 61 in 1992. For men, we find that those whose marginal wage rate increased when the earnings test was repealed, had the largest increase in the probability to work full-time past normal retirement age. We do not find significant evidence of effects of the repeal of the earnings test on the probability to work past age 62 or the expected claiming age. On the other hand, for those reaching the normal retirement age, deviations between the age at which Social Security benefits are actually claimed and the previously reported expected age are more negative in 2000 than in 1998. Since our calculations show that the tax introduced by the earnings test was small when accounting for actuarial benefit adjustments and differential mortality, our results suggest that although male workers form expectations in a way consistent with forward-looking behavior, they misperceive the complicated rules of the earnings test. Results for females suggest similar patterns but estimates are imprecise.     

Payback criterion,hurdle rates and the gain of waiting

In the standard literature on investment decisions, commonly observed instruments, namely the payback criterion and the use of hurdle rates, are criticised as they do not lead to a maximization of expected profits.By using the real option approach to investment under uncertainty, we show that it can be rational for the investor to use the payback criterion as a rule of thumb, because a shorter payback period indicates lower gains of waiting.In addition, we claim that the use of hurdle rates can serve a similar purpose: It allows to distinguish between projects with different values of waiting.An explicit expression for the optimal payback period and the optimal hurdle rate is given.     

Time-inconsistent investment,financial constraints,and cash flow hedging

This paper studies the interplay between firm investment and cash flow hedging decisions when the decision-maker has time-inconsistent preferences. We show that cash flow hedging acts as a double-edged sword. In some cases, cash flow hedging enhances firm value because the firm can thus invest at the firm-value-maximizing timing. In other cases, however, cash flow hedging may adversely affect firm value because it loosens the financial constraint that works as a commitment device to mitigate premature investment. Our results thus highlight one unexplored potential dark side of hedging and suggest that the optimal hedging decision is the result of a trade-off between flexibility and commitment.     

Stochastic orders in dynamic reinsurance markets

We consider a dynamic reinsurance market, where the traded risk process is driven by a compound Poisson process and where claim amounts are unbounded. These markets are known to be incomplete, and there are typically infinitely many martingale measures. In this case, no-arbitrage pricing theory can typically only provide wide bounds on prices of reinsurance claims. Optimal martingale measures such as the minimal martingale measure and the minimal entropy martingale measure are determined, and some comparison results for prices under different martingale measures are provided. This leads to a simple stochastic ordering result for the optimal martingale measures. Moreover, these optimal martingale measures are compared with other martingale measures that have been suggested in the literature on dynamic reinsurance markets.Received: March 2004, Mathematics Subject Classification (2000): 62P05, 60J75, 60G44JEL Classification: G10     

Payout policy, capital structure, and compensation contracts when managers value control

The optimal contract between managers and investors is endogenouslyderived when managers have preferences for both monetary compensationand corporate resources under their control. When the optimalpayout is privately known to managers, they can be induced tomake payouts by linking their compensation to the payout. Publicequity is a claim on this discretionary payout. If investorscan obtain new information about the firm's optimal payout level,it can be utilized by transferring the control from managementto investors. The new information allows the firm to achievea more efficient allocation through recontracting. We show thatthe new information will be obtained if and only if the payoutfalls below a promised level     

Pricing a contingent claim liability with transaction costs using asymptotic analysis for optimal investment

We price a contingent claim liability (claim for short) using a utility indifference argument. We consider an agent with exponential utility, who invests in a stock and a money market account with the goal of maximizing the utility of his investment at the final time T in the presence of a proportional transaction cost ε>0 in two cases: with and without a claim. Using the heuristic computations of Whalley and Wilmott (Math. Finance 7:307–324, 1997), under suitable technical conditions, we provide a rigorous derivation of the asymptotic expansion of the value function in powers of \(\varepsilon^{\frac{1}{3}}\) in both cases with and without a claim. Additionally, using the utility indifference method, we derive the price of the claim at the leading order of \(\varepsilon^{\frac{2}{3}}\) . In both cases, we also obtain a “nearly optimal” strategy, whose expected utility asymptotically matches the leading terms of the value function. We also present an example of how this methodology can be used to price more exotic barrier-type contingent claims.     

Extreme Value Analysis of Mortality at the Oldest Ages: A Case Study Based on Individual Ages at Death

In this article, the force of mortality at the oldest ages is studied using the statistical tools from extreme value theory. A unique data basis recording all individual ages at death above 95 for extinct cohorts born in Belgium between 1886 and 1904 is used to illustrate the relevance of the proposed approach. No leveling off in the force of mortality at the oldest ages is found, and the analysis supports the existence of an upper limit to human lifetime for these cohorts. Therefore, assuming that the force of mortality becomes ultimately constant, that is, that the remaining lifetime tends to the Negative Exponential distribution as the attained age grows is a conservative strategy for managing life annuities.     

Tractable hedging with additional hedge instruments

In an uncertain volatility model where only the stock and the money market account are traded, the upper price bound of a European claim is given by the solution of a Black-Scholes-Barenblatt equation. If an additional hedge instrument is available, the price bound can be tightened. This is also true if the set of admissible strategies is restricted to tractable strategies, which are defined as sums of Black-Scholes strategies. We study the structure of both strategies, the general strategies and the tractable strategies, when an additional convex instrument is available. For a call and a bullish vertical spread, we give closed-form solutions for the optimal tractable hedge when the additional instrument is a call option. We show that the position in the additional convex claim as well as the reduction in the price bounds allow to capture the amount of convexity risk a claim is exposed to.     

对新《保险法》理赔程序与时限法律规制的研究

新《保险法》关于理赔程序和时限的法律规制，体现了公平理赔、尽速理赔的价值目标，对解决理赔难问题发挥了重要作用，但仍存在与保险理赔实践不够契合、法律责任设置不完善等问题。本文从分析新《保险法》理赔程序与时限的相关规定人手，将其与保险理赔实践进行对比，并研究违反程序与时限的法律后果，最后对如何进一步完善相关规定、增强法律的执行效果提出了建议。     

Moments of Discounted Dividends for a Threshold Strategy in the Compound Poisson Risk Model

Abstract

We consider a compound Poisson risk model in which part of the premium is paid to the shareholders as dividends when the surplus exceeds a specified threshold level. In this model we are interested in computing the moments of the total discounted dividends paid until ruin occurs. However, instead of employing the traditional argument, which involves conditioning on the time and amount of the first claim, we provide an alternative probabilistic approach that makes use of the (defective) joint probability density function of the time of ruin and the deficit at ruin in a classical model without a threshold. We arrive at a general formula that allows us to evaluate the moments of the total discounted dividends recursively in terms of the lower-order moments. Assuming the claim size distribution is exponential or, more generally, a finite shape and scale mixture of Erlangs, we are able to solve for all necessary components in the general recursive formula. In addition to determining the optimal threshold level to maximize the expected value of discounted dividends, we also consider finding the optimal threshold level that minimizes the coefficient of variation of discounted dividends. We present several numerical examples that illustrate the effects of the choice of optimality criterion on quantities such as the ruin probability.     

Liquidity as a choice variable: a lesson from the Japanese government bond market

In Japan, almost identical government bonds can trade at largeprice differentials. Motivated by this phenomenon, we examinethe issue of the value of liquidity in markets for risklesssecurities. We develop a model of an issuer of bonds, a marketmaker, and heterogeneous investors trading in an incompletemarket. We show not only that divergent prices for similar securitiescan be sustained in a rational expectations equilibrium butalso that this divergence may be optimal from the perspectiveof the issuer. Price segmentation is possible because agentshave a desire to trade, but short-sale restrictions limit theirtrading strategies and prevent them from forcing bond pricesto be equal. Restricting the form of market making to excludeprice competition and unregulated profit maximization is alsonecessary to sustain price segmentation. The optimality of segmentationfrom the issuer's standpoint arises because of the issuer'sability to charge for the liquidity services provided to theinvestors.     

Optimal proportional reinsurance to minimize the probability of drawdown under thinning-dependence structure

Abstract

In this paper, we consider the optimal proportional reinsurance problem in a risk model with the thinning-dependence structure, and the criterion is to minimize the probability that the value of the surplus process drops below some fixed proportion of its maximum value to date which is known as the probability of drawdown. The thinning dependence assumes that stochastic sources related to claim occurrence are classified into different groups, and that each group may cause a claim in each insurance class with a certain probability. By the technique of stochastic control theory and the corresponding Hamilton–Jacobi–Bellman equation, the optimal reinsurance strategy and the corresponding minimum probability of drawdown are derived not only for the expected value principle but also for the variance premium principle. Finally, some numerical examples are presented to show the impact of model parameters on the optimal results.