Health care and philanthropy: where are we headed?

Peering into health-care's future means examining social, economic and political issues. Knowing what's coming will help development professionals deal with this new world.     

Optimal compensation for potential fatality

Cordes and Weisbrod have recently demonstrated that the requirement that the government actually compensate individuals adversely affected by public projects is likely to have serious resource allocation implications. We examine a rudimentary model of government discretionary behaviour subject to a compensation requirement in the presence of physical risks. Risk assessments are endogenous and asymmetrically held — features enabling analysis of the trade- offs between compensation and protection or information available to the government, and of the structure of compensation which motivates it to do what is objectively best for the individual. We show that, paradoxically, greater government discretion seems more likely to ensure the latter.     

Political and Regulatory Risk: Beta Sensitivity in U.K. Electricity Distribution*

To establish price caps, regulators must determine appropriate returns for utilities capital employed. This paper uses the techniques of the Kalman Filter to estimate daily betas for the U.K.s regional electricity companies in the period from privatization to end-1998. The paper demonstrates that utilities risk is time-variant, and establishes significant political and regulatory influences in the systematic risk faced by shareholders. It finds beta to be mean reverting, with little evidence of cyclical variation across the regulatory review cycle. The paper confirms the prevalence of significant excess returns in U.K. privatized electricity distribution and suggests that over-estimation of the systematic risk faced by investors may imply further excess returns in the next regulatory review period.     

Integrated models of capital adequacy – Why banks are undercapitalised

With the majority of large UK and many US banks collapsing or being forced to raise capital over the 2007–9 period, blaming bankers may be satisfying but is patently insufficient; Basel II and Federal oversight frameworks also deserve criticism. We propose that the current methodological void at the heart of Basel II, Pillar 2 is filled with the recommendation that banks develop fully-integrated models for economic capital that relate asset values to fundamental drivers of risk in the economy to capture systematic effects and inter-asset dependencies in a way that crude correlation assumptions do not. We implement a fully-integrated risk analysis based on the balance sheet of a composite European bank using an economic-scenario generation model calibrated to conditions at the end of 2007. Our results suggest that the more modular, correlation-based approaches to economic capital that currently dominate practice could have led to an undercapitalisation of banks, a result that is clearly of interest given subsequent events. The introduction of integrated economic-scenario-based models in future can improve capital adequacy, enhance Pillar 2’s application and rejuvenate the relevance of the Basel regulatory framework.     

Modifying the RPI-X Regulatory System to Include Profit-sharing

This paper aims to contribute to the economic theory of RPI-X (price-cap) regulatory systems which include profit-sharing between a company and its customers. The particular focus is on whether profit-sharing can be introduced in an investment-neutral manner, and on whether there is scope to choose a profit-sharing system which maximises the expected customer rebate. Using a model of a company choosing optimal capacity in the face of uncertain demand and subject to price-cap regulation, it is shown that the potential exists for profit-sharing to be investment-neutral, and it is suggested that the expected customer rebate is maximised for an investment-neutral system which is effectively a cap on profits at a specified level.     

An Assessment of the Impact of Implementing the European Commission's Agenda 2000 Cereal Proposals for Specialist Wheatgrowers in Denmark

This paper undertakes an assessment of the impact of implementing the European Commission's Agenda 2000 cereal proposals for specialist wheatgrowers in Denmark. The economic model of a representative farm developed in Rygnestad and Fraser (1996) is extended to include a model of nitrate leaching and then used to simulate the impact of implementing the proposals. The results of this simulation are compared and contrasted with those of the sectoral and regional impact studies reported in European Commission (1998b). In particular, the proposals are shown to have an environmentally-beneficial effect in terms of reduced nitrate leaching, with the magnitude of this effect dependent both on the quality of land and on the ex ante set-aside rate.     

Common risk factors in bank stocks

This paper provides evidence on the risk factors that are priced in bank equities. Alternative empirical models with precedent in the nonfinancial asset pricing literature are tested, including the single-factor CAPM, three-factor Fama–French model, and ICAPM. Our empirical results indicate that an unconditional two-factor ICAPM model that includes the stock market excess return and shocks to the slope of the yield curve is useful in explaining the cross-section of bank stock returns. However, we find no evidence that firm specific factors such as size and book-to-market ratios are priced in bank stock returns. These results have a number of important implications for the estimation of the banks’ cost of capital as well as regulatory initiatives to utilize market discipline to evaluate bank risk under Basel II.     

UNCERTAINTY AND THE POSITIVE THEORY OF THE PUBLIC ENTERPRISE*

This paper extends the analysis of Rees (1984a) of a public enterprise pursuing a size-related objective in the face of uncertain demand to a situation where its managers may be risk neutral or risk averse and where the public enterprise may produce more than one output. The optimal pricing policy of the public enterprise is analysed and the importance of not only the expected profit constraint but also the attitude to risk of the public enterprise in determining its relative prices is demonstrated.     

SET-ASIDE PREMIUMS AND THE MAY 1992 CAP REFORMS

This paper considers the linking of participation in the set-aside programme to the receipt of a compensatory payment for proposed reductions in European Community price support announced in May 1992. It is shown that in this situation set-aside premiums should lie between a lower bound sufficient to deter opting-out in favour of full cropping, and an upper bound approximately equal to a level sufficient to induce voluntary participation in the programme. The initial level of Community price support and the extent of reductions from this level are shown to be the main factors determining the gap between the upper- and lower-bound premiums. The impact of removing the compensatory payment system is also examined.