Frank Milne

A Microeconometric Model of the Demand for Health Care and Health Insurance in Australia

This paper develops a model for interdependent demand for health insurance and health care under uncertainty to throw light on the issue of insurance-induced distortions in the demand for health care services. The model is used to empirically analyse the determinants of the choice of health insurance type and seven types of health care services using micro-level data from the 1977–78 Australian Health Survey. Econometric implementation of the model involves, simultaneously, issues of discreteness of choice, selectivity and stochastic dependence between health insurance and utilization. Health status appears to be more important in determining health care service use than health insurance choice, while income appears to be more important in determining health insurance choice than in determining health care service use. For a broad range of health care services both moral hazard and self selection are found to be important determinants of utilization of health care services.

Option Pricing With V. G. Martingale Components

European call options are priced when the uncertainty driving the stock price follows the V. G. stochastic process (Madan and Seneta 1990). the incomplete markets equilibrium change of measure is approximated and identified using the log return mean, variance, and kurtosis. an exact equilibrium interpretation is also provided, allowing inference about relative risk aversion coefficients from option prices. Relative to Black-Scholes, V. G. option values are higher, particularly so for out of the money options with long maturity on stocks with high means, low variances, and high kurtosis.

The existence of equilibrium in incomplete markets and the objective function of the firm

Abstract We consider an economy in which firms′ decisions are made by a collective decision of the shareholders. The main result shows the simultaneous existence of an exchange equilibrium in the market for shares and a voting equilibrium in the internal decisions of firms. We present our results in a general framework, with a measure space of agents. Our model covers the cases of incomplete markets and externalities between firms and shareholders. We show that a voting rule due to Kramer is a special case.

ARBITRAGE AND DIVERSIFICATION IN A GENERAL EQUILIBRIUM ASSET ECONOMY

This paper presents a theory of equilibrium asset pricing that generalizes the recent work of G. Connor (1984). Th e model extends Connors results to more general sets of asset return s and consumer preferences; introduces production; and provides a fra mework for analyzing exact and approximate equilibrium asset pricing. The other major contribution of the paper is the introduction of geo metric arguments that exploit the properties of induced preferences o ver assets. This method of analyzing asset pricing provides an intuit ively appealing way of analyzing equilibrium asset pricing theories. Copyright 1988 by The Econometric Society.

Capital Asset Pricing with Proportional Transaction Costs

The implications for portfolio behavior and asset prices of transaction costs are central to the analysis of numerous issues in economics. For example, questions involving the demand for the financial contracts issued by financial intermediaries are intimately tied to the existence of transaction costs. Thus the analysis of questions involving the nature of the demand for mutual fund shares, insurance contracts, mortgage loans, etc., and the form those contracts take require the explicit inclusion of transaction costs.

Information and securities: A note on pareto dominance and the second best

A unified analysis is provided of two related problems: the first concerns the welfare impact of changing the set of tradeable securities in an incomplete market economy. The second concerns the welfare implications of changing the common information structure faced by all agents. Both problems arise from a common second-best framework in which expanding the set of trading opportunities can lead to a Pareto worsening. Journal of Economic Literature Classification Number: 026. ,rl 1987 Academic Press. Inc. In this note we provide a unified analysis of two related problems: The first concerns the welfare impact of changing the set of tradeable securities in an incomplete market economy. The second concerns the welfare implifications of changing the common information structure faced by all agents. We will discuss apparent paradoxial results that arise in both problems, using a single geometric example. The example provides a clear illustration of the source of the apparent paradoxes; both problems arise from a common second-best framework. (By second-best we mean the Lipsey-Lancaster [20] idea of additional constraints on allocations, over and above resource availability constraints.) Our discussion brings together two related but distinct literatures. The * We are greatly indebted to James Ohlson for many constructive comments; and to David Kreps and N. V. Long for comments on a previous draft.

Default Risk in a General Equilibrium Asset Economy with Incomplete Markets

IN THE ARROW [1], Debreu [2] economy with contingent commodities, or derivable primitive securities (i. e., a security that pays one unit of account if a certain state of the world occurs), the analytical apparatus of certainty general equilibrium theory can be applied directly with suitable reinterpretation. Nevertheless, many writers (e. g., Arrow [1], Radner [11]) have criticized the complete market model as unrealistic, in requiring an embarrassingly rich set of forward insurance markets. Arrow has argued that transaction costs and moral hazard problems would be sufficient to destroy the existence of complete markets and introduce an incomplete market theory.2 There are some simplified incomplete market models in existence. One of the first formulations was based upon the mean-variance formulation of portfolio theory. This model was developed by Sharpe [12], Lintner [7] and other writers, and is the basis for much subsequent work in finance theory. 3 Another model was introduced by Diamond [4], who used the contingent commodity framework, but restricted trades to linear combinations or contingent commodities. Diamonds model is more general for analytical purposes than the mean-variance formulation, because it does not restrict preferences of subjective probability distributions. In these types of models there has been some confusion over the role of default risk, when agents borrow or short-sell. Diamond assumes no-bankruptcy, but does not include this assumption explicitly in his analysis, nor does he explore its implications. A similar situation applies for the mean-variance formulation.4 In this paper we will attempt to clarify the default risk issue, and at the same time generalize the Diamond model in a number of directions. Because the model has the same properties as the Debreu model (except for the possibility of unboundedness below for consumption sets when there are short sales) it is easy to show the existence of an equilibrium for a suitably restricted asset economy. The paper is divided into two sections: Section 1 provides the formal model and proofs; Section 2 is concerned with interpretations, extensions and limita-

Choice over asset economies: Default risk and corporate leverage

Abstract This paper attempts to clarify the apparent conflict between the recent contribution of Stiglitz and Smith (S-S) and the established Modigliani-Miller (M-M) leverage theorem. The two approaches differ in their treatment of asset creation. Whereas M-M restrict their discussion to a given set of competitive asset markets, S-S consider the addition of an extra asset to the original systems.

The firm's objective function as a collective choice problem*

Concluding commentsIn this paper I have tried to make the simple point that the shareholders problem is a collective choice problem. Because of Arrows Possibility Theorem we must draw the pessimistic conclusion that under very general institutional arrangements there is no Arrow constitution for the firm. Of course, constitutions do exist for theoretical special cases, which have been widely used in the past literature. Although these cases have obvious important roles to play for many positive theoretical problems, they may be too simplistic to explain more complicated phenomenon relating to the financial and organizational structure of firms.

Externalities, Monopoly and the Objective Function of the Firm

This paper provides a theory of general equilibrium with externalities and/or monopoly. We assume that the firms decisions are based on the preferences of shareholders and/or other stakeholders. Under these assumptions a firm will produce fewer negative externalities than the comparable profit maximising firm. In the absence of externalities, equilibrium with a monopoly will be Pareto efficient if the firm can price discriminate. The equilibrium can be implemented by a 2-part tariff.