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on Contract Theory and Applications |
| By: | Subramanian, Krishnamurthy V. (Asian Development Bank Institute) |
| Abstract: | We show theoretically and empirically that dismissal laws—laws that impose hurdles on firing of employees—spur innovation and thereby economic growth. Theoretically, dismissal laws make it costly for firms to arbitrarily discharge employees. This enables firms to commit to not punish short-run failures of employees. Because innovation is inherently risky and employment contracts are incomplete, dismissal laws enable such commitment. Specifically, absent such laws, firms cannot contractually commit so ex ante. The commitment provided by dismissal laws encourages employees to exert greater effort in risky, but path-breaking, projects thereby fostering firm-level innovation. We provide empirical evidence supporting this thesis using the discontinuity provided by the passage of the federal Worker Adjustment and Retraining Notification Act. Using the fact that this Act only applied to firms with 100 or more employees, I undertake difference-in-difference and regression discontinuity tests to provide this evidence. Building on endogenous growth theory, which posits that economic growth stems from innovation, I also show that dismissal laws correlate positively with economic growth. However, other forms of labor laws correlate negatively with economic growth and swamp the positive effect of dismissal laws. |
| Keywords: | labor laws; R&D; technological change; law and finance; entrepreneurship; growth |
| JEL: | F30 G31 J08 J50 K31 |
| Date: | 2018–05–25 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0846&r=cta |
| By: | Michael Hoy; Afrasiab Mirza; Asha Sadanand |
| Abstract: | Guaranteed renewability is a prominent feature in many health and life insurance markets. It is well established in the literature that, when there is (only) risk type uncertainty, the optimal GR contract with renewal price set at the actuarially fair price for low risk types provides full insurance against reclassification risk. We develop a model that includes unpredictable (and unobservable) fluctuations in demand for life insurance as well as changes in risk type (observable) over individuals' lifetimes. The presence of demand type heterogeneity leads to the possibility that optimal GR contracts may have a renewal price that is either above or below the actuarially fair price of the lowest risk type in the population. Individuals whose type turns out to be high risk but low demand renew more of their GR insurance than is efficient due to the attractive renewal price. This results in incomplete insurance against re-classification risk. Although a first best efficient contract is not possible in the presence of demand type heterogeneity, the presence of GR contracts nonetheless improves welfare relative to an environment with only spot markets. Our results also apply to a comparison of environments with short versus long term (front loaded) insurance contracts. |
| Keywords: | insurance, guaranteed renewability, re-classification risk, demand uncertainty |
| JEL: | D80 D86 G22 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7103&r=cta |
| By: | Thai Nguyen; Mitja Stadje |
| Abstract: | This paper studies a VaR-regulated optimal portfolio problem of the equity holder of a participating life insurance contract. In a complete market setting the optimal solution is given explicitly for contracts with mortality risk using a martingale approach for constrained non-concave optimizations. We show that regulatory VaR constraints for participating insurance contracts lead to more prudent investment than the unconstrained solution in loss states. This result is contrary to the situation where the insurer maximizes the utility of the total wealth of the company (without distinguishing between equity and policy holders), in which case a VaR constraint may induce the insurer to take excessive risk leading to higher losses than in the case of no regulation, see Basak and Shapiro (2001). Furthermore, importantly for regulator we observe that for participating insurance contracts both relatively small or relatively large policyholder contributions yield rather risky and volatile strategies. Finally, we also discuss the regulatory effect of a portfolio insurance (PI), and analyze different choices for the parameters of the participating contract numerically. |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1805.09068&r=cta |
| By: | Canta, Chiara; Cremer, Helmuth |
| Abstract: | We study the design of public long-term care (LTC) insurance when the altruism of informal caregivers is uncertain. We consider non-linear policies where the LTC benefit depends on the level of informal care, which is assumed to be observable while children's altruism is not. The traditional topping up and opting out policies are special cases of ours. Both total and informal care should increase with the children's level of altruism. This obtains under full and asymmetric information. Social LTC, on the other hand, may be non-monotonic. Under asymmetric information, social LTC is lower than its full information level for the lowest level of altruism, while it is distorted upward for the higher level of altruism. This is explained by the need to provide incentives to highaltruism children. The implementing contract is always such that social care increases with formal care. |
| Keywords: | Long term care; uncertain altruism; private insurance; public insurance; topping up; opting out |
| JEL: | H2 H5 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:32682&r=cta |
| By: | Douglas Hay |
| Abstract: | Abstract Many economic historians agree that increased labour inputs contributed to Britain’s primary industrialisation. Voluntary self-exploitation by workers to purchase new consumer goods is one common explanation, but it sits uneasily with evidence of poverty, child labour, popular protest, and criminal punishments explored by social historians. A critical and neglected legal dimension may be the evolution of contracts of employment. The law of master and servant, to use the technical term, shifted markedly between 1750 and 1850 to advantage capital and disadvantage labour. Medieval in origin, it had always been adjudicated in summary hearings before lay magistrates, and provided penal sanctions to employers (imprisonment, wage abatement, and later fines), while giving workers a summary remedy for unpaid wages. The law always enforced obedience to employers’ commands, suppressed strikes, and tried to keep wages low. Between 1750 and 1850 it became more hostile to workers through legislation and judicial redefinition; its enforcement became harsher through expansion of imprisonment, capture of the local bench by industrial employers, and employer abuse of written contracts. More work in manuscript sources is needed to test the argument, but it seems likely that intensification of labour inputs during industrialisation was closely tied to these legal changes. |
| Keywords: | coercion, contract of employment, labour law, industriousness, punishment, work time |
| Date: | 2018–05–30 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:esohwp:_164&r=cta |