Medical insurance with rank-dependent utility

Summary. A well-known result in the medical insurance literature is that zero co-insurance is never second-best for insurance contracts subject to moral hazard. We replace the usual expected utility assumption with a version of the rank-dependent utility (RDU) model that has greater experimental support. When consumers exhibit such preferences, we show that zero co-insurance may in fact be optimal, especially for low-risk consumers. Indeed, it is even possible that the first-best and second-best contracts are identical. In this case, there is no “market failure”, despite the informational asymmetry. We argue that these RDU results are in better accord with the empirical evidence from US health insurance markets. Received: February 26, 2001; revised version: October 4, 2002 RID="*" ID="*"The authors would particularly like to thank Simon Grant, John Quiggin, Peter Wakker and an anonymous referee for valuable comments and suggestions on earlier drafts. The paper has also benefitted from the input of seminar audiences at The Australian National University, University of Auckland, University of Melbourne and University of Sydney. Ryan also gratefully acknowledges the financial support of the ARC, through Grant number A000000055. Correspondence to:R. Vaithianathan     

Network externalities and long-run market shares

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The outsourcing of R&D through acquisitions in the pharmaceutical industry

We examine the performance of 160 pharmaceutical acquisitions from 1994 to 2001 and find evidence that on average acquirers realize significant positive returns. These returns are positively correlated with prior acquirer access to information about the research and development activities at target firms and a superior negotiating position. A unique Desperation Index is employed to determine the current status of a firm's internal productivity. We find that firms experiencing declines in internal productivity or which are more desperate are more likely to engage in an outsourcing-type acquisition in an effort to replenish their research pipelines.     

Anxiety of dependency in international joint ventures? An empirical study of drivers and consequences of relationship insecurity

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Interest rate rules and price determinacy: The role of transactions services of bonds

Interest rate rules have been associated with price indeterminacy when they do not respond aggressively enough to inflation. Price indeterminacy is typically associated with indeterminacy of real bond balances, suggesting that the missing element is a meaningful role for government bonds. We assume that government bonds provide arbitrarily small transactions services and show that this can dramatically change the local and global determinacy conditions. In particular, the specification of fiscal policy affects the aggressiveness with which monetary policy must respond to inflation to deliver local determinacy—a range of passive monetary policies, even an interest rate peg, may yield determinacy.     

The consequences to analyst involvement in the IPO process: Evidence surrounding the JOBS Act

The JOBS Act allows certain analysts to be more involved in the IPO process, but does not relax restrictions on analyst compensation structure. We find that these analysts initiate coverage that is more optimistically biased, less accurate, and generates smaller stock market reactions. Investors purchasing shares following these initiations lose over 3% of their investment by the firm's subsequent earnings release. By contrast, issuers, analysts, and investment banks appear to benefit from this increased bias, as optimism is more positively associated with proxies for firm visibility and investment banking revenues when analysts are involved in the IPO process.     

THE EFFECTS OF MUTUAL FUNDS ON M&A COMPENSATION

Motivated by shareholders’ interest in combating executive wealth expropriation through the merger and acqusition (M&A) process, we study how mutual funds influence firm behavior around an acquisition through votes against management proposals. We find that mutual funds reduce the chief executive officer's ability to extract rents during the M&A process by voting against management‐sponsored compensation proposals after the acquisition, thus lowering both excess compensation and increasing pay‐for‐performance sensitivity. Furthermore, mutual fund voting magnifies the impact on negatively performing firms and firms with a larger amount of the mutual fund's holdings in the firm.