Governing criminal markets: The role of private insurers in kidnap for ransom

The intersection between the formal and criminal economies presents a range of intractable coordination and enforcement problems. Who orders and facilitates the interactions between private, legal entities, and criminals (potentially) engaged in kidnap for ransom? I analyze the contracts, protocols, norms, and agencies created by insurers to govern this unusual market. Stringent insurance contracts, effective security measures, and orderly resolutions create a profitable market for kidnap insurance. Underwriters manage moral hazard and adverse selection. Business risk consultancies minimize the kidnapping of insured workers, high‐net‐worth individuals, and travellers. Crisis responders ensure that hostages are treated well, keep ransoms moderate and stable, and discourage kidnappers from reneging on agreed ransoms. The state, private sector, and mafias incentivize cooperation and enforce contracts. Understanding this complex polycentric governance architecture is crucial for remedying current trends in “terrorist” kidnap for ransom.     

Governing kidnap for ransom: Lloyd's as a “private regime”

Kidnap for ransom raises significant governance challenges. In the absence of formal regulation and enforcement, insurers have created an effective private governance regime to facilitate smooth commercial resolutions. Controlling ransoms is paramount: “supernormal” profits for kidnappers create kidnapping booms and undermine the market for insurance. Ransom control requires cooperation, but there are high transactions costs in enforcing a collusive agreement. The Coasean prediction is that a single firm will form to internalize the externalities arising from lax insurance and mismanaged ransom negotiations—or a government must order the market. There is indeed a single source of kidnap insurance: Lloyd's of London. Yet, within the Lloyd's market several insurers compete for business. Lloyd's is a club providing private governance: Its members issue standard contracts, follow the same regime for kidnap resolution, and exchange information to stabilize ransoms. Lloyd's, therefore, combines aspects of Coase's “single firm” and “government” solution to the externalities problem.     

The government behind insurance governance: Lessons for ransomware

The insurance as governance literature focuses on the ability of private enterprises to collectively regulate, pool, and distribute risks. This paper analyzes how governments support insurance markets to maintain insurability and limit risks to society. We propose a new conceptual framework grouping government interventions into three dimensions: regulation of risky activity, public investment in risk reduction, and co-insurance. We apply this framework to six case studies, describing insurance markets' reliance on public support in more analytically precise terms. We analyze how mature insurance markets overcame insurability challenges akin to those currently presented by extortive cybercrime. Private governance struggled when markets grew too big for informal coordination or when (tail) risks escalated. Government interventions vary widely. Some governments prioritize supporting economic activity while others concentrate on containing risks. Governments also choose between risk reduction and ex post socialization of losses. We apply these insights to the market for ransomware insurance, discussing the merits and potential hazards of current proposals for government intervention.     

Redlining or risk? A spatial analysis of auto insurance rates in Los Angeles

Auto insurance rates can vary dramatically, with much higher premiums in poor and minority areas than elsewhere, even after accounting for individual characteristics, driving history, and coverage. This paper uses a unique data set to examine the relative influence of place‐based socioeconomic characteristics (or redlining) and place‐based risk factors on the place‐based component of automobile insurance premiums. We use a novel approach of combining tract‐level census data and car insurance rate quotes from multiple companies for sub‐areas within the city of Los Angeles. The quotes are for a hypothetical individual with identical demographic and auto characteristics, driving records, and insurance coverage. This method allows the individual demographic and driving record to be fixed. Multivariate models are then used to estimate the independent contributions of these risk and redlining factors to the place‐based component of the car insurance premium. We find that both risk and redlining factors are associated with variations in insurance costs in the place‐based component, with black and poor neighborhoods being adversely affected, although risk factors are stronger predictors. However, even after risk factors are taken into account in the model specification, SES factors remain statistically significant. Moreover, simulations show that redlining factors explain more of the gap in auto insurance premiums between black (and Latino) and white neighborhoods and between poor and nonpoor neighborhoods. The findings do not appear sensitive to the individual characteristics of the hypothetical driver. © 2007 by the Association for Public Policy Analysis and Management     

Labour mobility and decision making on social insurance in an integrated market

In a two-country model the consequences of labour mobility on social insurance levels are studied. There are two groups of workers, one with a high risk and the other one with a low risk of being nonemployed. In both countries the decision-making function on social insurance is some weighted average of the expected utilities of both groups. In case low-risk workers are much more mobile than high-risk workers, it can be concluded that labour mobility does not necessarily have a downward effect on social insurance. In that case coordination of decision making would not improve the levels of social insurance.     

Polanyi in Brussels or Luxembourg? Social rights and market regulation in European insurance

The decision of the Court of Justice of the European Union to ban sex discrimination in insurance has shown the potential reach of the principle of non‐discrimination. This paper discusses the different positions taken by participants in the policy process leading up to the decision, in order to reveal the potential and limitations of non‐discrimination as the basis for market‐regulatory social policy. It is shown that the European Commission's initial support for prohibiting insurance discrimination faltered with the realization that the measure would have little efficacy as a distributive social policy. It was left to the Court to assert that non‐discrimination rights are constitutive for European markets, regardless of their functional and instrumental limitations. The Court's focus was on the market‐integrative potential of rights as sources of norms for the conduct of insurance relationships. It is argued that this form of constitutive regulation is distinct from distributive social policy as it does not require that outcomes are egalitarian, but, rather, that the processes governing market relations should respect fundamental rights.     

Share the Wealth: Redistribution Can Increase Economic Efficiency

People frequently face uncertain income and the threat of loss can inhibit economic investments. Government redistribution can insure citizens against economic losses, but its effect on people’s investment decisions depends on how they react to redistributive rules. We apply methods from experimental economics to study how a redistributive institution affects people’s investment decisions. Experiment 1 tests whether redistribution can increase economic efficiency when people face risk problems—investment opportunities that are profitable on average but could result in a loss. In a between-subject design, participants decide whether to make a risky investment either individually or under an institution that redistributes earnings equally among four group members. We find greater investment and profits when participants are required to share their earnings. In Experiment 2, we examine free-riding by comparing an institution that allows non-investors to exploit investors to an assortment institution that matches investors with investors. We find that vulnerability to free-riding suppresses investment, whereas an assortment mechanism increases investment by preventing free-riding and thereby facilitating risk pooling.     

Early Impacts of the Affordable Care Act on Health Insurance Coverage in Medicaid Expansion and Non‐Expansion States

The Affordable Care Act (ACA) aimed to achieve nearly universal health insurance coverage in the United States through a combination of insurance market reforms, mandates, subsidies, health insurance exchanges, and Medicaid expansions, most of which took effect in 2014. This paper estimates the causal effects of the ACA on health insurance coverage in 2014 using data from the American Community Survey. We utilize difference‐in‐difference‐in‐differences models that exploit cross‐sectional variation in the intensity of treatment arising from state participation in the Medicaid expansion and local area pre‐ACA uninsured rates. This strategy allows us to identify the effects of the ACA in both Medicaid expansion and non‐expansion states. Our preferred specification suggests that, at the average pre‐treatment uninsured rate, the full ACA increased the proportion of residents with insurance by 5.9 percentage points compared to 2.8 percentage points in states that did not expand Medicaid. Private insurance expansions from the ACA were due to increases in both employer‐provided and non‐group coverage. The coverage gains from the full ACA were largest for those without a college degree, non‐whites, young adults, unmarried individuals, and those without children in the home. We find no evidence that the Medicaid expansion crowded out private coverage.     

Never lost a penny: An assessment of federal deposit insurance

Current problems of the Federal deposit insurance system threaten not only to increase future Federal costs but also to destabilize the U.S. banking system as it faces new competitors. The system's problems can be traced to weakness in both the political and market feedback mechanisms. Current policies governing Federal deposit insurance are flawed in numerous respects. Recent extension of capital forbearance to troubled institutions appears to be another step in the wrong direction. Reforms are suggested that would improve political accountablity and market discipline. However, given resistance to such reforms, only a banking crisis seems likely to break the impasse.     

Can behavioral economists improve economic rationality?

Behavioral economists recognize that we are all subject to the cognitive biases they have observed and studied in laboratory experiments. Yet the leading behavioral economists exhibit far more interest in applying those biases to market decisions than to political decision-, and see irrational decisions making as another example of market failure which justifies correction by some form of government action. We treat this as a justification for comparing the distortions of cognitive biases on market decisions with the distortions of those biases on political decisions. We also make a distinction between the rationality of individual decisions and the collective rationality of those decisions, and question Thaler’s argument that people fail to learn much from the mistakes they make in markets. We conclude that behavioral economists would do more to increase economic rationality by making the case for eliminating government policies that are clearly economically irrational and destructive. Eliminating such policies would not necessarily increase the individual rationality of political or market decisions, but it would increase the collective rationality of both.     

An Empirical Examination of the Determinants of Insured Municipal Bond Issues

Research demonstrates that there are interest cost savings associated with municipal bond insurance, and yet only half of the bonds are issued with insurance. The theoretical determinants of bond insurance are discussed and evaluated empirically through logistic regression. Statistically significant bond attributes are the underlying credit risk, maturity, par value, and a call option. In addition, regional market characteristics at the time of issue and market segmentations are determinants of bond insurance. These findings strengthen the hypotheses that insurance mitigates market segmentation and that insurers function as delegated monitors of bond quality.     

China’s Global Energy Diplomacy: Behavior Normalization Through Economic Interdependence or Resource Neo-mercantilism and Power Politics?

The magnitude of China’s energy needs and global energy acquisitions, and their recent emergence as key features of the international system, raise many sensitive questions: will China adapt to or reshape the international system as historically defined by the hegemonic West, and what is the role of its energy policy, politics, and resource nationalism in a possible new Great Game? While much of the current literature posits an either/or approach (China adapts to energy market or tries to redefine them as a part of a wider political plan), our hypothesis is that China is essentially a pragmatic actor who reacts to the forces in presence, rather than a revisionist power with a grand plan to realign the world order to suit its needs and satisfy some kind of pre-established grand vision. We posit that China goes beyond conformity with or resistance to the established energy market and the power relations they underpin: While local circumstances may be considered variables, its fixed objective is a stable international order and the pragmatic satisfaction of its energy needs in order to insure continued economic growth and general stability at home.     

Do vehicle recalls reduce the number of accidents? The case of the U.S. car market

The number of automobile recalls in the U.S. has increased sharply in the last two decades, and the numbers of units involved are often counted in the millions. In 2010 alone, over 20 million vehicles were recalled in the United States, and the massive recalls of full model lines by Toyota have brought this issue to the front pages around the country and the world. However, there is no quantitative evidence of the effect of recalls on safety. Without that evidence, the government and insurance companies have been reluctant to request and use more detailed recall information to increase correction rates, and regulators have not studied the possible link between the growing number of recalls and the risk of life for consumers. In this paper we empirically quantify the effect of vehicle recalls on safety using repeated cross‐sections on accidents of individual drivers and aggregate vehicle recall data to construct synthetic panel data on individual drivers of a particular vehicle model. We estimate the effect of recalls on the number of accidents and find that a 10 percent increase in the recall rate of a particular model reduces the accidents of that model by between 0.78 percent and 1.6 percent when using the full sample of accidents in our data. We also find that recalls classified as “hazardous” are more effective in reducing accidents, and the recall effect is especially strong when we restrict attention to accidents that lead to personal injuries and only include vehicles more likely to be at fault for the accident, but much less so for accidents that only lead to property damage. We also find that vehicle models with recalls with higher correction rates have on average fewer accidents in the years following a recall, which indicates the importance of the role of drivers' behavior regarding recalls on safety. Our findings suggest that policymakers should consider, for example, policies to allow insurance companies to take into account recall correction behavior when pricing auto insurance, which could be made possible through regulatory changes by the U.S. government, and should revisit the complex trade‐offs between pre‐ and post‐market regulation in this important industry. © 2011 by the Association for Public Policy Analysis and Management.     

FHA restructuring proposals: Alternatives and implications

Abstract

This article evaluates problems of the Federal Housing Administration (FHA) under its current structure, develops criteria for judging alternative structures, and suggests one alternative—an assigned risk pool—that encourages efficiency in the insurance function while still promoting low‐ and moderate‐income housing. A historical introduction explains how the current institutional relationships came about and created FHA's problems.

FHA's decline resulted from the mixing of a heavy social agenda with the basic insurance objective, a destructive reorganization of the Department of Housing and Urban Development that caused FHA to lose control and focus, and government's inherent inability to respond to market signals. Yet the economic rationale for government involvement in FHA functions is strong. An FHA organized as an independent government agency, a government‐sponsored enterprise, or even a privatized entity structured as an assigned risk pool could improve efficiency of underwriting, pricing, and administration while achieving the redistributional objectives.     

Environmental Stressors and Food Security in China

This article considers the immediate forces influencing China’s food system and food security. By immediate is meant events of the reform period, from the late 1970s to 2008. It begins by asking the question that has preoccupied specialists since the publication of Lester Brown’s Who Will Feed China? in 1995: How much arable land does China have? Is that land area sufficient to insure grain sufficiency? To insure food security? The article focuses on the human pressures on the food production environment, and then treats the effects of socioeconomic change: land, air, and water degradation. The core of the article examines six responses of the state to both perceived and actual environmental stressors: policy restricting arable land conversion, China’s one-child policy, investment in irrigation systems, the South–North Water Diversion Project, large-scale afforestation and reforestation campaigns, and the program to convert marginal agricultural lands to forests and grasslands.     

论我国汇率制度及人民币国际化的抉择

近些年来先后有许多新兴市场国家爆发了金融危机，包括东南亚国家、韩国、俄罗斯、巴西和阿根廷等。这些国家爆发金融危机有一个根本性的标志，就是放弃了固定的或有限浮动的汇率制度。这说明实行固定的或有限浮动的汇率制度是导致新兴市场国家发生金融危机的根本原因之一。我国也属于新兴市场国家，也实行钉住美元的有管理的浮动汇率制度，是否也存在严重的汇率风险，这是值得关注的问题。不仅如此，新兴市场国家究竟应实行何种汇率制度才能确保金融秩序的长期稳定?相应地我国今后应选择何种汇率制度才能有效防范和化解金融风险?人民币是否要国际化?东亚国家是否应建立货币联盟，催生亚元?这些也是需要深入研究的重大现实问题。本就这类问题作出了系统分析和探讨，以求抛砖引玉。     

Industries, Occupations, and Trade Policy Preferences

The nature of one’s work, not just who one works for, is central to political and economic life. Yet models of trade policy preferences mostly ignore occupation, focusing exclusively on industries (perhaps because industries are the usual organizing dimension of economic policymaking). This article proposes new measures of how much risk trade imposes on different workers based on how diversified their occupation is across industries, thus considering both industry and occupation. Having a job specific to any sector appears to encourage protectionism, regardless of that sector’s comparative advantage, supporting the idea that public opinion may treat trade policy as insurance.     

中国公共政策制定中的政府俘获及其解决对策

中国公共政策制定中的政府俘获主要有国有垄断企业有力影响政府的决策、地方支柱企业绑架地方政府的决策、向政府官员提供非法的个人所得三种表现形式。政府俘获产生的原因包括企业与政府形成利益共同体、以GDP增长为核心的政绩考核体系、政府反腐败不力及廉政建设滞后、各社会群体参与不均衡、政府权力缺乏制约,法治不健全等方面。解决这一问题应从以下几方面采取措施:减少政府对市场经济的干预、保障民众的结社权利,培育公民社会、实现政策制定的公开透明和广泛参与,严惩政府官员腐败行为、加强廉政制度建设,建立以科学发展观为指导的政绩考核体系。     

Self-interest,public interest,and public health

Although the activities of physicians, as represented by the AMA, have long been viewed from a self-interest perspective by economists, public-health processes have not been subjected to such an examination. But just as the conduct of ostensibly charitable hospitals cannot be examined independently of the interests of the physicians who staff them, so too, we think, the conduct of public-health bureaus should not be examined in isolation from the interests of the medical community that they represent. An interest-group interpretation of public health would look to the ways in which public-health processes increase the aggregate demand for medical services, thereby generating quasirents for specialized input suppliers. We have explored in preliminary fashion some ways in which public-health agencies may advance the collective interests of physicians, though we would be the first to acknowledge that much work remains to be done on this topic.We are grateful to the Lynde and Harry Bradley Foundation for financial support.