Private Information in Life Insurance,Annuity, and Health Insurance Markets

Economic theory predicts that private information on risks in insurance markets leads to adverse selection. To counterbalance private information, insurers collect and use information on applicants to assess their risk and to calculate premiums in an underwriting process. Using data from the English Longitudinal Study of Ageing (ELSA), this paper documents that differences in the information used in underwriting across life insurance, annuity, and health insurance markets attenuate private information to different extents. The results are in line with – and might help to reconcile – the mixed empirical evidence on adverse selection across these markets.     

The “Euro Illusion”: Illusion or Fact?

The changeover to the euro elicited an upsurge of research on the effects of the new currency on consumers’ conversion strategies, price estimates, price evaluations, choices, and purchases. This research includes longitudinal surveys, interviews, and controlled experiments, both natural and in the laboratory. The present article starts with an overview of this research after which it more specifically focuses on research showing an influence of the nominal value, as expressed in different currencies, on price evaluations and consumer choice. For most countries, the transition to the euro led to a lower nominal value currency. A bias known as the “euro illusion” has been documented such that the subjective value of money is influenced in the direction of the nominal value (i.e., in most countries prices and salaries seem smaller when expressed in euros than in the old domestic currency). Although the term was coined in connection with the euro changeover, the nominal representation of a currency has been shown to influence the subjective value of money in unfamiliar currencies other than the euro. Thus, tourists travelling abroad may frequently be subject to such an illusion. Different mechanisms have been proposed to account for the euro illusion. One is the numerosity heuristic and another the anchoring-and-adjustment heuristic in conjunction with biased conversion strategies. The size of the euro illusion is influenced by trade-offs between accuracy and effort. Consistent with this hypothesis, task importance, time constraints, familiarity with the conversion strategy, complexity of the conversion strategy, mood, and attitude towards the country or the currency all influence the size of the euro illusion.     

The Russian–Ukrainian earnings divide1

Ethnic differences are often considered to be powerful sources of diverse economic behaviour. In this article, we investigate to what extent ethnicity affects Ukrainian labour market outcomes. Using microdata from the Ukrainian Longitudinal Monitoring Survey and the Oaxaca–Blinder decomposition of earnings, we find a persistent and increasing labour market divide between ethnic Russians and Ukrainians throughout Ukraine’s transition era. We establish that language, rather than nationality, is the key factor behind this ethnic premium favouring Russians. Our findings further document that this premium is larger amongst males than females.     

Estimating the impact of social isolation on subjective health in Europe

Quality & Quantity - We investigate the relationship between social isolation and subjective health, considering that this relationship is potentially affected by endogeneity due to the...     

Accounting for preference dependency in target costing – a note

Review of Quantitative Finance and Accounting - Target costing is a well-established strategic cost management tool in theory and practice. The original target costing model implies independence of...     

Reservation wages of first- and second-generation migrants

We analyse the reservation wages of first- and second-generation migrants, based on rich survey data of the unemployed in Germany. Our results confirm the hypothesis that reservation wages increase over migrant generations and over time, suggesting that the mobility benefit of immigration may be limited in time.     

Consumers' switching inertia in a fictitious electricity market

Consumers in the deregulated Swedish electricity market do not switch from their incumbent supplier to the extent that would be economically beneficial. To examine potential causes for this switching inertia, a mail survey was administered to 540 Swedish electricity consumers who were randomly assigned to four experimental conditions and a control condition. Survey participants in the experimental conditions first made a choice of a supplier; then, they made choices between this alternative (their ‘incumbent supplier’) and other alternatives that differed from the incumbent supplier on price, quality of information, market share and availability of ‘green’ electricity. The results showed that lower price, higher quality of information, medium–large market share, and availability of green electricity increased switching to the alternatives to the incumbent supplier. A remaining general preference for choosing the incumbent supplier was reduced by instructions that removed feelings of loyalty and informed about the economic benefits of switching for all consumers.     

Choices of savings options related to trust in banks’ competence,benevolence and stability

The study investigates whether beliefs in professional investor skill in conjunction with trust in banks and other fund managers explain choices of options for long-term savings. From questionnaire data obtained for a population-based sample (n=178) and a sample of undergraduates (n=186), two index measures were constructed, one of beliefs in the skill of professional investors and another of trust in fund managers. The trust index was aggregated for the three interrelated components: competence, benevolence and stability. Regression analyses of the likelihood of savings in an actively managed fund showed an expected effect of investor-skill beliefs that was mediated by trust in the fund manager. In addition, self-reported knowledge played a larger role than trust for choices of passively managed index funds and in particular for own investment in stocks.     

Analysing the Agricultural Costs and Non‐market Benefits of Implementing the Water Framework Directive

Implementation of the Water Framework Directive (WFD) represents a fundamental change in the management of water in Europe with a requirement that member states ensure ‘good ecological status’ for all water bodies by 2015. Agriculture is expected to bear a major share of WFD implementation costs as it is compelled to reduce the emission of diffuse water pollutants. The research outlined here comprises interdisciplinary modelling of agricultural land use, hydrology and consequent water quality effects to consider both agricultural costs and the non‐market recreational use (and potentially non‐use) values that implementation of the Directive may generate. A theme throughout the research is the spatial distribution of the costs and benefits of WFD implementation, which is addressed through the use of GIS techniques in the modelling of agricultural land use, the integration of land use and hydrological models, and the estimation, aggregation and transfer of the economic value of the benefits.     

Interaction effects of mood induction and nominal representation of price on consumer choice

The transition to the euro in several European countries causes consumers to make mistakes in economic transactions. One mistake referred to as the “euro illusion” is the tendency to evaluate prices on the basis of their nominal representation, thus overestimating or underestimating how expensive products are. Investigating effects of the euro illusion on consumer choice as well as moderating effects of mood, three laboratory experiments were conducted employing convenience samples of students. In Experiment 1 a bias toward the nominal representation was demonstrated when participants chose an unfamiliar (fictitious) large-unit currency (small numbers) for paying the price of a consumer product but chose an unfamiliar small-unit currency (large numbers) for obtaining a salary. The bias was larger for participants who were induced to feel positive and deactivated (calm and relaxed) than for participants who were induced to feel negative and activated (anxious and jittery). The difference in frequencies of choice of currency were replicated in Experiment 2. No effects were, however, found of natural mood assessed by self-report ratings. In Experiment 3 choices of more expensive consumer products with additional features were more frequent when the prices were expressed in the large-unit currency than when expressed in the small-unit currency. Neither in this case did self-reported natural mood affect the choices.