Vol. 12, No. 1
Adverse selection, competition, and linear self-insurance (pp. 3–15)
A two-class insurance model is analysed. In addition to a competitive insurance market, the households can use a simple linear self-insurance technology. Using the recently proposed Coalition Proof Equilibrium with Private Information due to Kahn and Mookherjee (1995) the insurance market equilibrium is found to be either separating or pooling. There may be profits in equilibrium. The self-insurance option can, but does not necessarily, promote more efficient allocation of consumption; self-insurance may be dysfunctional, lowering welfare. The model is applied to a competitive private pension market where the households in addition can save in a bequeathable asset.
(JEL: D41, D82, D89)
Uncertainty aversion in a simple insurance model (pp. 16–27)
A simple insurance model is considered where the distribution of accident probabilities in the population is known, but where the actual probability of each policyholder is unknown to both insurers and the policyholder himself. It is shown that if policyholders are uncertainty averse, deductibles are distorted downwards. A complete view of insurance in such circumstances need thus consider trade in uncertainty as well as risk.
(JEL: D81, G22)
Regional convergence across the Finnish provinces and subregions 1960–94 (pp. 28–40)
This paper analyses the convergence of regional products in Finland using two different data sets. Firstly, β- and σ-convergence was estimated for the 12 Finnish provinces during 1960–94. Convergence was found to be strong in 1960–80, but after 1980 regional disparities started growing again. Secondly, a similar study was conducted for the 88 small-scale subregions in 1988–94. As with the provinces, the subregions’ relative growth performance and cross-sectional convergence dynamics were evaluated using Markov chain transition matrices. No clear evidence for σ- or β-convergence was found here, but the dynamic analysis revealed a rapidly evolving distribution of gross regional products. Thus the type of regional classification and method used can markedly affect the results obtained in a convergence study.
(JEL: O4, R1)
Hans Dillen and Bo Stoltz:
The distribution of stock market returns and the market model (pp. 41–56)
In this paper the Market Model, estimated for 20 stocks on the Stockholm Stock Exchange, is examined under different assumptions regarding the distribution of the residuals. We find strong evidence that the residuals have a leptokurtic distribution and our results suggest that much of the leptokurticness can be attributed to a jump component in the distribution. Moreover, changes in the assumed distribution of the residuals can sometimes change the beta estimate by 20 percent or more. Our alternative estimators are more robust to extreme observations.