Honesty in a regulatory context -- good thing or bad?

Article Abstract:

It is often taken for granted that if more firms were innately honest or ethical this would be a good thing. We use the example of pollution policy to dispute such a claim. If regulation is by pollution tax social welfare is non-monotonic in population honesty. The choice of policy instrument may itself be characterised by `reversals', with command-and-control methods being preferred for intermediate values of population honesty, a tax system being preferred at the extremes. This means that if -- because of the spread of `ethical shareholding' or for whatever reason -- the honesty of the corporate population increases through time, we should not be surprised to see at first a switch away from market-based instruments, and then a switch back. Though environmental regulation is chosen as a context, the implications are more general. [C] 2001 Elsevier Science B.V. All rights reserved. JEL classification: K4; K2; H8 Keywords: Pollution control; Honesty; Incentives

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Competitive insurance markets under adverse selection and capacity constraints

Article Abstract:

Ever since the seminal work by Rothschild and Stiglitz (Q. J. Econom. 90 (1976) 629) on competitive insurance markets under adverse selection, the problem of non-existence of equilibrium in pure strategies has received much attention in the literature. We extend the original analysis by considering firms which face capacity constraints, which might be due to limited capital. We show that under mild assumptions an equilibrium exists, where every consumer obtains his appropriate Rothschild-Stiglitz contract. JEL classification: C72; C78; D82; G22 Keywords: Insurance markets; Asymmetric information; Competitive equilibrium; Capacity constraints

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