Tuesday, September 23, 2008

CAPITALISM AND MORAL HAZARD

I am beginning to feel fear because of this "crisis". We have just seen the biggest state intervention in the economy made by the USA. After the Lehman Brothers storm or Merril Lynchl adverse winds, it was believed that such actions would bring calm to the financial sector, whose starting point could not be better with this "catch up" that it was lived on the stock markets last Friday. But I think we also have come to an evil precedent, which translates into a potential threat to the "laisse-afaire": moral hazard.


To understand it easily, think for a moment like a manager: it is time for lean cows; your company, one of the most important of the country seems to be addressing difficulties. The Government, to avoid bankruptcy, acts to save it. Once that the situation returns to its natural channel: are you going to take more precautions to avoid situations like above? Surely not. You know you can run more risk and earn a bigger sum of money, because if the business goes wrong there is a government intervention to save your company.


This is not something new. oral hazard problems had brought more serious difficulties to some countries (for example, the crisis in South Korea in 1992). I think that a more cautious option would have been a "back door" action plan of financial assets, cleaning "junk" mortgages. In this way the financial markets were not only able to recover confidence, but also would have avoided much of the previous effect. In fact, something similar has been raised by the Bank of England for the Northern Rock case. It is a pity that the U.S. economy is thirty times more influential to the world that the English one.

Wednesday, September 3, 2008

Incentives to Speed vs. Sanctions: A Theoretical Analysis (summary)

Road accidents are one of the biggest problems faced by contemporary society; this is prooved by the wide regulation that is emerging in our days around this issue in order to prevent them. However, in many occasions, the legislature does not give right incentives which should be taken into account if politicians really want to achieve a more cautious behavior by drivers. Through theoretical modeling, under the assumptions that pose a few doctrines, to seek the appropriate stimuli for this purpose becomes a complex task, more typical for the interdisciplinary field of economic analysis of Law.


This time it proposes a model of the driver through the classical theory (micro-) economic, under the assumptions of full rationality and perfect information, which will be later modified by deviations from these assumptions, in order to approach a little more to a real driver.

The results confirm what had been claimed for much of the doctrine (especially criminalists) against the excess of regulation in the field of road safety; alternatives are also proposed to this whole mess by implementing new theories like the agency behavior theory, so regulators could benefit remove the deviations proposed by these theories: Assimetric information and the existence of moral incentives.



Download here the working paper: Incentives to Speed vs. Sanctions: A Theoretical Analysis