How are Scope and Adding up Relevant for Benefits Transfer?

In this paper, we explore ways in which the theoretical constructs of scope and adding up can inform and improve the practice of benefit transfer. Specifically, we examine how the stated preference literature on scope and adding up can inform three critical steps in benefits transfer: study site selection, including studies to select for use in a meta-regression; calibrating benefit functions; and assessing transfer validity.     

Scale and scope economies for drug abuse treatment costs: evidence for Washington State

Drug abuse treatment has been pervasive in the US in the recent years, and the associated direct treatment costs approached $18 billion in 2001. However, there have been few published studies on scale economies, and none on scope economies, for drug abuse treatment costs. We estimate a restricted cost function for 17 hospitals in Washington State that provided inpatient and/or outpatient drug abuse treatment during the years 1997–2004. We find significant evidence of scale economies for hospitals that provide only outpatient drug abuse treatment services. The marginal costs of outpatient services are even smaller for hospitals that produce both outpatient and inpatient drug abuse treatment services. Further, these joint-production hospitals exhibit diseconomies of scope, or specialization economies. These results all imply that recent trends towards additional outpatient treatment services will enhance cost efficiency.     

Approximate maximum likelihood estimation for stochastic differential equations with random effects in the drift and the diffusion

Consider N independent stochastic processes \((X_i(t), t\in [0,T])\), \(i=1,\ldots , N\), defined by a stochastic differential equation with random effects where the drift term depends linearly on a random vector \(\Phi _i\) and the diffusion coefficient depends on another linear random effect \(\Psi _i\). For these effects, we consider a joint parametric distribution. We propose and study two approximate likelihoods for estimating the parameters of this joint distribution based on discrete observations of the processes on a fixed time interval. Consistent and \(\sqrt{N}\)-asymptotically Gaussian estimators are obtained when both the number of individuals and the number of observations per individual tend to infinity. The estimation methods are investigated on simulated data and show good performances.     

Statement of the Financial Economists Roundtable: Bank Capital as a Substitute for Prudential Regulation

The Financial CHOICE Act recently passed by the House proposes to create an “off‐ramp” that would allow banks to escape burdensome prudential regulation if the ratio of their equity capital to their total assets is 10% or more. The Financial Economists Roundtable supports this idea as a means of reducing regulatory costs, but believes some additional safeguards are needed. A capital ratio of 10% may not be high enough to discourage banks from excessive risk taking. A solution is to have two capital requirements for banks choosing the off‐ramp: one absolute (as proposed in the act) and one risk‐based. The FER believes that many banks will prefer this regime to the current burdensome prudential regulation, especially if regulators simplify the setting of risk weights and make them more rule‐based. Regulators setting minimum capital requirements should consider not only a bank’s stand‐alone risk, but also the systemic risk posed by banks, as well as the tendency of accounting measures of income and assets to overstate the economic value of banks’ equity capital. The Financial Choice Act would also eliminate useful elements of ongoing supervision and regulation, not all of which can be addressed by higher capital alone. Furthermore, to facilitate regulatory learning about risks, off‐ramped banks should continue to report the data that regulators use for stress tests, even if they are no longer subjected to the discipline of stress tests. Finally, the act is viewed as too permissive in its treatment of off‐ramped banks that get into trouble. To prevent gaming of regulation, FERC recommends that off‐ramped banks that subsequently fall below the minimum requirements should be required to raise new capital immediately.     

Analysis of Systemic Risk in the Insurance Industry

In this paper, we discuss the systemic relevance of the insurance sector. Systemic risk is defined as the propensity of a financial institution to be undercapitalised when the financial system as a whole is undercapitalised. By the law of large numbers, traditional lines of insurance with idiosyncratic non-catastrophic risks cannot be systemic. On the contrary, undiversified insurers specialised in activities whose insured risks are highly correlated with GDP are systemic. In the life insurance sector, some contractual clauses such as unhedged minimum guarantees and free options to surrender raise the chance of systemic relevance. On the contrary, life insurers satisfying the classic solvency capital requirements contribute to the liquidity of financial markets thanks to the long-termist approach of their portfolio management. Finally, using historical data in the U.S. on the contribution of different sectors to the aggregate volatility of the economy, we show that investment banking is almost twice as volatile as aggregate GDP, while insurance is one fifth as volatile as aggregate GDP. The insurance sector thus appears to be a stabilising force of the economy.     

Historical resources, uncertainty and preservation values: An application of option and optimal stopping models

State agencies and private historical organizations frequently acquire historical sites with unknown characteristics. In this paper, we provide two approaches to evaluating the preservation decision. In the first approach, we show that a historical site which is not permanently preserved provides citizens with a certain flexibility whose value can be measured as an option on the maximum between the current real estate value and the preservation value. In the second approach, we assume that the organization has an infinite planning horizon and chooses the optimal sale date. Using a contingent valuation estimate of the public's willingness to pay for preservation of a specific historical site and the real estate price, we provide simulation values of the preservation option value and the optimal stopping rule.