Patrick L. Leoni

Designing the Financial Tools to Promote Universal Access to AIDS Care

We argue that reluctance to invest in drug treatments to fight the AIDS epidemics in developing countries is largely motivated by severe losses occurring from the future albeit uncertain appearance of a curative vaccine. We design a set of securities generating full insurance coverage against such losses, while achieving full risk-sharing with vaccine development agencies. In a General Equilibrium framework, we show that those securities are demanded to improve social welfare in developing countries, to increase current investment in treatments and the provision of public goods. Even though designed for AIDS, those securities can also be applied to other epidemics such as malaria and tuberculosis, as well as any innovative treatment to fight orphan diseases.

NONLINEARITY, CYCLICITY, AND PERSISTENCE IN CONSUMPTION AND INCOME RELATIONSHIPS: RESEARCH IN HONOR OF MELVIN J. HINICH

This paper is dedicated to the memory of the great statistician Melvin J. Hinich, with whom we were in contact about this research prior to his untimely death from a tragic fall. We develop a neoclassical growth model with habit formation to exhibit an equilibrium nonlinear relationship between aggregate consumption growth and income growth. We first provide empirical evidence consistent with this relationship both for the United States and France, and we reject the hypothesis of a random walk for consumption. We then estimate this nonlinear relationship. We find for both countries robust evidence of persistence, nonlinearity, and cyclicity in the relationship between consumption and income.

Can Patent Duration Hinder Medical Innovation

We argue that, in the pharmaceutical industry, excessive patent duration can deter investments in innovative treatments in favor of me-too drugs. The point is that too-long durations foster incentives to collude to delay investments in R&D for innovative treatments. We give a set of sufficient conditions for which collusion is a subgame-perfect equilibrium; that is, the threat of punishing any deviator is credible. We then show that reducing current duration always breaks down market discipline, and so does an increase in duration for innovative treatments. Optimal patent duration must then be a trade-off between breaking down market discipline and rewarding innovation.

Pandemics of the Poor and Banking Stability

We first develop a theoretical model that shows that the likelihood of a collapse of the banking industry of a developing country increases, as the joint prevalence of large pandemics such as AIDS and malaria increases. We also show that the optimal bank reserves increase as the prevalence increases. In the empirical part of the paper, we consider a large dataset of developing countries, and we exhibit a causality effect from combined prevalence to deposit turnover, as well as causality effect from an increase of combined prevalence to an increase in bank reserves. Those empirical facts therefore support our theoretical findings.

HIV/AIDS and Banking Stability in Developing Countries

We argue that the recent large increase in deposits’ turnover in many developing countries with high HIV/AIDS prevalence is associated with the spread of the disease. The point is that the need to pay for individual treatments force large�?scale withdrawals of households’ deposits, and that those large withdrawals put the banking industry at risk. In a standard demand�?deposit model where the HIV/AIDS prevalence among depositors is random, we show that (1) the probability of a large�?scale banking failure without a bank run increases as the odds of any prevalence level increases, and (2) it is always optimal to deposit, and thus to accept the risk of banking failure, to maintain long�?term investments in place.

Psychological Determinants of Occurrence and Magnitude of Market Crashes

We simulate the Dynamic Stochastic General Equilibrium model of Mehra-Prescott [9] to establish the link between the anticipation of endowment drops (for instance a recession) and sudden market crashes. Contrary to the commonly accepted view that those crashes are solely driven by large drops in endowments at the time they occur, the simulation shows that: 1- a large and subjective anticipation of an endowment drop amplifies the magnitude of the crash next period without permanent effects, and 2- there always exists an upper-bound on the maximal anticipation of the drop so that the crash magnitude next period remains constant regardless of the drop level. Those findings are independent of the risk aversion of agents, and of the formation process of the anticipation.

Stop-loss strategies and derivatives portfolios

We carry out a Monte-Carlo simulation of the long-term behaviour of a standard derivatives portfolio to analyse the performance of stop-loss strategies in terms of loss reductions. We observe that the more correlated the underlyings, the earlier the stop-loss activation for every acceptable level of losses. Switching from 0-correlation across underlyings to a very mild form of correlation significantly decreases the expected time of activation, and it significantly increases the probability of activating the stop-loss. Adding more correlation does not significantly change those features. We introduce the notion of laissez-faire strategies, and we show that those strategies always lead to lower average losses than stop-losses.

Extreme punishments characterize weak Pareto optimality

In normal form games, we model the largely observed psychological phenomenon of systematic and extreme punishment after a deviation, regardless of the cost. After establishing basic properties, we show that this notion characterizes a weak form of Pareto optimality. Every Pareto optimal outcome can also be sustained by the threat of extreme punishment, which cannot be achieved in general through Nash equilibria strategies, nor with tit-for-tat strategies.

Optimal R&D Outsourcing

We study optimal contracts when R\&D is outsourced to another company. We find that, when a realistic assumption holds, the optimal contract always leads in equilibrium to the lowest acceptable chance of having a successful technical innovation, given announced compensations. This assumption is significantly different from those used in the literature, and it is necessary for the result to hold.

The Economics of an HIV/AIDS Vaccine

We survey the main economic aspects of the creation of an AIDS vaccine. We first describe the market conditions for this vaccine, and we show the critical importance of patents to start the costly R&D process. We then describe the main economic impediments to this venture, and the main financial mechanisms in place to alleviate them. We pinpoint their pitfalls, and we finally present novel mechanisms capable of restoring economic efficiency, and of providing greater incentives for investors toundertake R&D in this vaccine.