Timothy Worrall

Informal Insurance Arrangements with Limited Commitment: Theory and Evidence from Village Economies

Recent work on consumption allocations in village economies finds that idiosyncratic variation in consumption is systematically related to idiosyncratic variation in income, thus rejecting the hypothesis of full risk-pooling. We attempt to explain these observations by adding limited commitment as an impediment to risk-pooling. We provide a general dynamic model and completely characterise efficient informal insurance arrangements constrained by limited commitment, and test the model using data from from three Indian villages. We find that the model can fully explain the dynamic response of consumption to income, but that it fails to explain the distribution of consumption across households.

Foreign direct investment and the risk of expropriation

Foreign direct investment accounts for a considerable proportion of international capital flows. In 1986 the flow of foreign direct investment from developed market economies to developing countries was

Limited Commitment Models of the Labour Market

12.5 billion or roughly one-half of all private capital flows from the developed to the developing nations (and roughly one-quarter of the flow of all foreign direct investments). Its significance for developing countries may even grow in the future as debt is swapped for equity (see Pollio and Riemschneider, 1988). The most important sector in volume term is the manufacturing sector, the concern of this paper. In 1978 total stocks of manufacturing foreign direct investment accounted for roughly two-thirds of the total in less developed countries, with just one-eighth devoted to the extractive industries (see Stopford and Dunning, 1983, p.22).(This abstract was borrowed from another version of this item.)

Unemployment Insurance under Moral Hazard and Limited Commitment:Public versus Private Provision

We present an overview of models of long-term self-enforcing labor contracts in which risk sharing is the dominant motive for contractual solutions. A base model is developed which is sufficiently general to encompass the two-agent problem central to most of the literature, including variable hours. We consider two-sided limited commitment and look at its implications for aggregate labor market variables. We consider the implications for empirical testing and the available empirical evidence. We also consider the one-sided limited commitment problem for which there exists a considerable amount of empirical support.

The Welfare Implications of Costly Monitoring in Credit Market

This paper analyzes a model of private unemployment insurance under limited commitment and a model of public unemployment insurance subject to moral hazard in an economy with a continuum of agents and an infinite time horizon. The dynamic and steady-state properties of the optimum private unemployment insurance scheme are established. The interaction between public and private unemployment insurance schemes is examined. Examples are constructed to show that for some parameter values increased public insurance can reduce welfare by crowding out private insurance more than one-to-one and that for other parameter values a mix of both public and private insurance can be welfare maximizing.

The new macroeconomics: Asymmetric information, investment finance and real business cycles

Rationing is a pervasive feature of credit markets. It has been suggested that credit rationing represents a suboptimal allocation of resources. In a general equilibrium model of credit rationing with hidden information and costly monitoring we show that if credit is rationed it is suboptimal but that credit should be rationed more tightly. In equilibrium, loan applicants bear average monitoring costs, whereas for efficiency they should bear marginal monitoring costs which are larger because average monitoring costs increase with quantity as extra loans are accompanied by a rise in the interest rate which increases the number of defaults. Copyright 1994 by Royal Economic Society.

Currency areas and international assistance

This paper surveys the literature on the role of financial factors in explaining economic fluctuations. We begin by discussing the views of some prominent early macroeconomists and then examine the recent literature on the role of asymmetric information in the market for investment finance. This literature shows that in the presence of informational asymmetries, financial factors may affect real variables like investment and output. In dynamic models real variables may also affect financial factors and may generate persistent effects of shocks even in models which would not display persistence in the absence of the informational asymmetry. Preliminary: Comments welcome.

Mutual Insurance, Individual Savings, and Limited Commitment

This paper considers a simple stochastic model of international trade with three countries. Two of the tree countries are in an economic union. Comparisons are made between equilibrium welfare for these two countries under fixed and flexible exchange rate regimes. Within the model it is shown that flexible exchange rate regimes generate greater welfare. However, we then consider comparisons of welfare when the two countries also engage in some international assistance in order to share risk. Such risk-sharing is limited by enforcement constraints of cross border assistance. It is shown that taking into account limited commitment risk-sharing fixed exchange rates or currency areas can dominate flexible exchange rate regimes reversing the previous result.