Price Regulation in Property-Liability Insurance: A Contingent-Claims Approach

A discrete-time option-pricing model is used to derive the “fair” rate of return for the property-liability insurance firm. The rationale for the use of this model is that the financial claims of shareholders, policyholders, and tax authorities can be modeled as European options written on the income generated by the insurer's asset portfolio. This portfolio consists mostly of traded financial assets and is therefore relatively easy to value. By setting the value of the shareholders' option equal to the initial surplus, an implicit solution for the fair insurance price may be derived. Unlike previous insurance regulatory models, this approach addresses the ruin probability of the insurer, as well as nonlinear tax effects.     

NETWORK SECURITY: VULNERABILITIES AND DISCLOSURE POLICY*

Software security is a major concern for vendors, consumers and regulators. When vulnerabilities are discovered after the software has been sold to consumers, the firms face a dilemma. A policy of disclosing vulnerabilities and issuing updates protects only consumers who install updates, while the disclosure itself facilitates reverse engineering of the vulnerability by hackers. The paper considers a firm that sells software which is subject to potential security breaches and derives the conditions under which a firm would disclose vulnerabilities. It examines the effect of a regulatory policy that requires mandatory disclosure of vulnerabilities and a ‘bug bounty’ program.     

The Scottish Path to Capitalist Agriculture 3: The Enlightenment as the Theory and Practice of Improvement

The second in this series of articles traced the transformation of Scottish agriculture during the period between 1747 and 1815. The Scottish Enlightenment is usually seen either as a passive expression of these and related economic changes, or as a local variant on European-wide intellectual trends with little direct connection to economy or society. In fact, it was directly involved in the transformation in three ways: as a theory of socio-economic development ('political economy'), a programme for agrarian change and the movement for its implementation ('Improvement'). The Scottish Enlightenment theorists were always conscious of the oppressive aspects of the division of labour which were inevitable under their own model of 'commercial society'. Towards the end of the eighteenth century, however, they became increasingly aware of how 'actually existing capitalism' concentrated power in ways that the model had not predicted. Faced with the counter-revolutionary onslaught on British radicalism which occurred in response to the French Revolution, the Scottish Enlightenment shattered under the weight of these contradictions into its component academic disciplines. The economic aspects of the Scottish Revolution accomplished, political economy increasingly shed all elements of critique and became reduced to an intellectually rigorous justification for the now capitalist landowning classes and the emergent industrial bourgeoisie.     

Consumer Ruthlessness and Mortgage Default during the 2007 to 2009 Housing Bust

From 2007 to 2009 U.S. house prices plunged and mortgage defaults surged. While ostensibly consistent with widespread “ruthless default,” analysis of detailed mortgage and house price data indicates that borrowers do not walk away until they are deeply underwater—far deeper than traditional models predict. The evidence suggests that lender recourse is not the major driver of this result. We argue that emotional and behavioral factors play an important role in decisions to continue paying. Borrower reluctance to walk away implies that the moral hazard cost of default as a form of social insurance may be lower than suspected.     

WHAT PRICE‐LEVEL DATA CAN TELL US ABOUT PRICING CONDUCT IN SOUTH AFRICA

This article reports the findings of a study of two unique microdata sets, which are the unit level basis of South Africa's measured Consumer Price Index and Producer Price Index, over the period December 2001‐December 2007. In particular, based on techniques that have been used in comparable international studies, findings are reported on the frequency and magnitude of price changes, the duration of prices, and heterogeneity in pricing. The results for South Africa are compared with the stylised facts for pricing conduct, which have been presented in recent international studies. The article offers an illustration of how microdata‐based findings on pricing conduct may impact on the modelling of monetary policy by introducing micro‐founded results into an open economy dynamic stochastic general equilibrium model for the South African economy. The article concludes by identifying areas for further research, where it has not as yet been determined how South African pricing conduct compares with certain stylised pricing facts identified in the international literature.