New Economics Papers
on Law and Economics
Issue of 2010‒10‒23
two papers chosen by
Jeong-Joon Lee, Towson University

  1. Safety and the Allocation of Costs in Large Accidents By Langlais, Eric
  2. Redefining a role for central banks: The increased importance of central banks’ roles in the management of liquidity risks and macro prudential supervision in the aftermath of the Financial Crisis By Ojo, Marianne

  1. By: Langlais, Eric
    Abstract: We study the characteristics of optimal levels of care and distribution of risk in a extended unilateral accident model, where 1/ parties are Rank Dependant Expected Utility maximizers, which allows us to capture two important behavioral characteristics in risk, both pessimism (probability transformation) and risk aversion; 2/ there exists an aggregate/uninsurable risk in case of accident ; 3/ tortfeasors have the opportunity to invest in damages reduction activities having a monetary cost of effort. Important results show that the optimal care is larger than under the risk neutral/small risks case, it depends on the aggregate wealth of society but does not depend on wealth distribution. We then examine whether ordinary liability rules, with or without insurance, can be used to implement the first-best outcome.
    Keywords: K13
    JEL: K13 D02
    Date: 2010–09–30
  2. By: Ojo, Marianne
    Abstract: Over the recent years, it has increasingly been acknowledged that macro prudential policies are not only considered to be “a missing ingredient from the current policy framework”, but that there has also been “too huge a gap between macro economic policy and the regulation of individual financial institutions.” The link between monetary policy and macro prudential policies, the knowledge of central banks in matters relating to information on market conditions and their oversight of payment systems, as well as the need to bridge the existing gap between supervisory authorities and central banks whilst executing their supervisory roles and functions, have necessitated an extension of central banks role in the management of liquidity risks and macro prudential supervision. A fundamental aim of this paper is to address how an extension of central banks’ roles in macro prudential supervision can assist regulators and supervisors in bridging the afore mentioned gap between macro economic policy and the regulation of individual financial institutions. In so doing, the need for greater focus on macro prudential factors, namely, the system as a whole, as opposed to mere focus on the supervision of individual institutions will be highlighted. The expertise and knowledge with which a central bank is endowed in its role as overseer of the entire payments system – as well as the quality of information which it has access to, are some of those factors which add weight to its ability to bridge “the gap”.
    Keywords: macroprudential; Financial Crisis; central banks; Basel III; systemic risk; supervision; liquidity; information; Banking Reform Act; Financial Services Act; regulators
    JEL: K2 E58 G21 E3
    Date: 2010–10–14

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