The Insurance Is the Lemon: Failing to Index Contracts

We model the widespread failure of contracts to share risk using available indices. A borrower and lender can share risk by conditioning repayments on an index. The lender has private information about the ability of this index to measure the true state that the borrower would like to hedge. The lender is risk-averse and thus requires a premium to insure the borrower. The borrower, however, might be paying something for nothing if the index is a poor measure of the true state. We provide sufficient conditions for this effect to cause the borrower to choose a nonindexed contract instead.     

Capital Share Dynamics When Firms Insure Workers

Although the aggregate capital share of U.S. firms has increased, capital share at the firm‐level has decreased. This divergence is due to mega‐firms that produce a larger output share without a proportionate increase in labor compensation. We develop a model in which firms insure workers against firm‐specific shocks, with more productive firms allocating more rents to shareholders, while less productive firms endogenously exit. Increasing firm‐level risk delays exit and increases the measure of mega‐firms, raising (lowering) the aggregate (average) capital share. An increase in the level of rents magnifies this effect. We present evidence that supports this mechanism.     

NORTH PACIFIC FISHERIES ENVIRONMENT: INTERNATIONAL ISSUES

The extension of economic jurisdiction to 200 nautical mile Exclusive Economic Zones or Fishing Limits enabled coastal and island nations to add vast wealth to their exclusively owned natural resource portfolios. Simultaneously, the rights of nations to distant water fisheries were, at best, reduced to privileges. The motives for enclosure were economic, political, and strategic. However, simple economic theory suggests certain potential outcomes. First, if fishery stocks remained constant, restrictions and charges would make fishing in foreign zones relatively more costly, fishing in the remaining high seas less costly, and fishing in the domestic zone possibly less costly. Relative costs also may favor exploitation of coastal and fresh water regions for aquaculture. Second, because stocks do not remain constant, depletion in some areas will alter relative costs. Investments in conservation will be limited to claimed areas, where investors capture the benefits. Third, wherever maritime claims overlap or otherwise are unsettled, international tension will mount. The analysis here demonstrates that these expectations have become reality in the North Pacific.