I have posted the lecture notes that we will be using for the next few meetings: Also, a problem set based upon Chapter 11 will be due on November 16. See http://129.62.162.249/4366problem_sets/ for more details.
Dr. Martin F. Grace makes some very insightful comments concerning Rand's just released study entitled "Compensating the Victims of 9/11". Dr. Grace links to Figure 2 of the Rand study, which shows how compensation is distributed according to who (e.g., charity, government, private insurers) paid what to whom (e.g., civilians and emergency responders killed or seriously injured during the attacks on the twin towers), and he notes that charity picked up 7% of the tab, private insurers paid 51% of total losses, and the government picked up the remainder.
An obvious public policy implication is whether ex post victim compensation by charity and government may "crowd out" private insurance. As Dr. Grace notes, "public policy should be designed to encourage people to have more insurance rather than rely upon prospective government payments." I made similar points two months ago concerning the effect of public disaster relief on the risk management incentives of firms and individuals. The prospect of public disaster relief creates a serious moral hazard problem by reducing consumers' demand for private insurance, which in turn incentivizes them to underinvest in loss prevention and mitigation.
The 2nd midterm exam (blank exam booklet and key) is now available from the class website!
On Thursday, we will continue our study of option pricing. The chapters coming up will be chapters 11 and 12. I will also post the lecture notes as well as information concerning problem sets fairly soon. Besides reading chapters 11-12, my paper entitled "Derivation and Comparative Statics of the Black-Scholes Call and Put Option Pricing Equations" will also be required reading.
For a highly literate, non-emotional, fact/science-based perspective on the outsourcing debate, go no further than today's Econoblog entry entitled "The Rise of Outsourcing"!
Following up on Dr. Seward's RMI@Baylor posting entitled "Social Security Reform: When will it come?", there are a couple of Social Security-related articles appearing in the blogosphere which are definitely worth a read. For starters, check out Alex Tabarrok's posting on marginalrevolution.com entitled "The Social Security Inversion". The basic premise of this article is that current (and past) retirees have gotten the best deal from Social Security; indeed, many of them did far better than they could have done in any other investment (Tabarrok cites the (spectacular) example of the first known Social Security recipent, Ida May Fuller, who received a nominal payoff equal to 925 times her total contribution into the system). Unfortunately (as both Seward and Tabarrok point out), for today's workers and their children, Social Security (as it is currently configured) is a raw deal; even if the Social Security system does not become insolvent, current workers will receive a very poor return on their "investment".
The second article appears in yesterday's online version of the Wall Street Journal. Entitled "Social Security: What's Next", this article provides both liberal and conservative views concerning reforming the Social Security system.