D82 - Asymmetric and Private Information; Mechanism DesignReturn

In the globalised world of the past decade, the characteristic movement of the real economy in Europe has been in the lower amplitudes of the economic cycle and has been complicated by the low effectiveness of fiscal and monetary policy tools and instability on the financial markets, which, in relation to the real economy, display features of autonomy and virtuality. The exchange rates of the euro, rouble and Czech crown display exceptional volatility, while the yields from financial instruments are at a historic minimum. These phenomena are the result of the stagnation of the European economy, a high level of indebtedness and an inability to effectively solve escalating political problems, such as military conflicts, terrorism, mass migration, economic sanctions, etc.

The text refers to a specific field of the insurance market, which concerns export insurance by the state-owned insurance corporation (EGAP). In this company, we can find some moral hazard and adverse selection due to almost 100% guarantees to insured entities. The paper concerns the relationship between the insurance corporation and banks that grant loan to Czech exporters or foreign importers in high-risk countries. On the part of the bank, there exists adverse selection while submitting applications for insurance and moral hazard during the insurance relationship. These are the problems on the part of the EGAP, which has a conflict between supporting regional export affordability and realizing an optimal portfolio. With such high guarantees, banks can offer their clients high risk while receiving irrelevantly low insurance premiums. This text tries to identify some differences between the existing process of evaluation and the ideal set that decreases the impact of those two effects.

Our rapidly changing world has been challenging insurers to keep the pace. Given the qualitative changes in risk trends, the insurance industry has encountered a problem of insurability limits and shifting boundaries of the private insurance sector. The possibilities of covering enormous uncertainties, particular risks and new or modified risks are discussed in this paper. The basic problem of how the nature of risks has evolved over time and obstacles to insuring against certain risks are explained in this paper, and some innovative ways to overcome the mentioned obstacles are listed. One of the most recently discussed issues is the impact of catastrophic losses and man-made disasters since their frequency and extent have been continuously growing recently. In order to handle the rapid changes in our world and to maintain its stable position, the insurance industry has found some ways to heighten the limits of insurability, i.e., adjustments of terms and conditions, careful risk selection and pricing, reinsurance, innovations, public private partnerships, or multi-source financing of incurred losses have been used recently. However, given the more stringent regulatory requirements which are going to be implemented by 2013, capital requirements may increase and thus the capacity of the insurance industry might be reduced and the industry might have to find other solutions for heightening its capacity.

The paper provides an overview of several selected topics dealing with application of agency theory to the credit contracts. The costly state verification and costly punishment models of optimal debt contracts are introduced and compared with respect to their performance in the situation characterized by risk aversion. Adverse selection in credit markets and its solution with a menu of screening contracts is described and the use of collateral as a screening instrument is discussed. The dynamic relationship between the lender and borrower is introduced in a soft budget constraint model of default and bankruptcy decisions. Alternative assumptions about informational asymmetries in credit markets are presented as well. For all these topics a number of references from Czech and international economic literature is provided.

This paper analyses problems within the asymmetric information models (principal agent models) where we replace standard assumption of maximisation of expected income by maximisation of probability of economic survival. This paper concentrates on two basic models - adverse selection model and moral hazard model. In both cases the effect of asymmetry of information gets weaker or even disappears. Contrary to standard approach the competitive Pareto effective equilibrium could exists in both models with pooled contract with full coverage of possible accident by the principal.