• Selected
• Entire List

Abstract:
This paper develops and tests a theory of insurers' choice of the mix of equity and liabilities. We first develop the simplest model of an insurance market with costly equity, in a two-period setting. For equity to have any role in an insurance market there must be aggregate uncertainty, or dependence among insured risks; the absence of a law of large numbers means that equity is necessary to back up promises to pay claims in the event of adverse realizations of aggregate shocks. Accordingly, the key comparative static issue that we focus on is the impact of increasing aggregate uncertainty. We consider separately the cases of aggregate uncertainty in the loss incurred conditional upon an accident and uncertainty in the probability of an accident (i.e. dependence among the events of individual accidents). If the former case, the total equity issued by a competitive insurance market is increasing in the degree of uncertainty (and linear in a parameterized example). In the latter case, equity may be increasing then decreasing as a function of uncertainty. In both cases, the ratio of equity to revenue is increasing in uncertainty. We test the model, as well as implications of recent models of insurance market dynamics, on a cross-section of U.S. property-liability insurers. While the theory is developed for competitive markets, by assuming that each insurer is operating in one or more competitive markets, we can use firm-level data in the tests. This paper uses for the first time, to our knowledge, a sample of 1155 U.S. property- liability stock insurance companies in a study of capital structure. The focus is on tests of two hypotheses. The first is the implication of the static model, that leverage is decreasing in aggregate uncertainty. The second is an implication of previous dynamic models of competitive insurance markets (Gron (1994) and Winter (1994)) that external equity is more costly than internal equity -- specifically that there is a positive cost to the ``round- trip'' of distributing an amount of cash then raising the same amount in external equity. Previous tests of this implication focus on insurance pricing, that the error in premiums as predictors of subsequent claims rather than being white noise should be correlated with the current stock of equity. These tests thus center on the dynamic behavior of insurance premiums. The empirical analysis here is complementary, based not on prices but directly on capital structure decisions. The paper also offers a link between the recent insurance market literature and corresponding empirical results in tests of capital structure for non-financial corporations: Titman and Wessels (1988) and Rajan and Zingales (1994) find negative relationships between leverage and past profitability; an explicit dynamic theory and tests are offered by Fischer, Heinkel and Zechner (1989).

Abstract:
This paper assesses the current state of deregulation in Canadian markets for telephony, electricity and airlines. It is an opportune time to review the Canadian experience. Enough time has passed since the inception of deregulation, and sufficient problems have arisen in the transition towards competition, that lessons are available. The problems are evident: shortages and consumer intolerance to high prices in electricity markets; a slow (relative to prior expectations) rate of entry of competitors into local telephone service; and bankruptcies in the airline industry. Yet enough distance remains in the transition towards greater reliance on markets, and uncertainty in even how far the transition will take us, that these lessons will prove valuable in the future.

Abstract:
Are price-matching guarantees anticompetitive? This paper examines the incentives for price-matching guarantees in markets where information about prices is costly. Under some conditions the conventional explanation of price-matching announcements as facilitating collusion finds support, and is even strengthened. But our model provides an additional explanation for the practice. A price-matching guarantee may be a credible and easily understood means of communicating to uninformed consumers that a firm is low-priced. The credibility of the signal to uninformed consumers is assured by the behaviour of informed consumers. We contrast the testable implications of our model with those of the anticompetitive theories and discuss supportive evidence from an illustrative sample of retailers.

Abstract:
Commentators have often Claimed that Canada's competition legislation is among the most economically sophisticated in the world. In large part, this claim is based on the explicit recognition given to efficiency as an overall criterion in the Competition Act (the "Act") (section 1.1) and as a specific criterion in the treatment of mergers. Section 96 of the Act prohibits the Competition Tribunal from making an order against a merger if the proposed merger would bring about gains in efficiency that are greater than, and would offset, any prevention or lessening of competition, provided that these gains would not likely be attained without the merger. A merger involving a substantial lessening of competition that would otherwise indicate a remedy or prohibition under section 92 of the Act may be permitted under section 96.

Unfortunately, application of section 96 and the entire role of efficiencies in merger review has become disturbingly uncertain. The uncertainty lies in the interpretation of the tradeoff implied in the section between the anticompetitive effects of a merger and the efficiencies, such as cost savings, arising from the merger.

A practicing lawyer would reasonably turn to the Competition Bureau for guidance on efficiency-balancing criteria. Merger review by the Bureau is the most important hurdle in practice; only three mergers have been challenged before the Tribunal under the 1986 Act. Bureau statements, however, reveal a bewildering range of positions. This article provides a critical evaluation of the various positions taken by the Competition Bureau.

Abstract:
According to convention theory, insurance premiums should be informationally efficient predictors of the present value of policy claims and expenses. This paper develops an alternative theory of insurance market dynamics based on two assumptions. First, insured risks are dependent. Under this assumption, insurers' net worth determines the market capacity since it is necessary to back the contractual promises to pay claims. Second, in raising net worth, external equity is more costly than internal equity. The theory explains the variation in premiums and insurance contracts over the "insurance cycle" and is supported by tests on postwar data.

Abstract:
This article examines requirements tying of a competitively supplied good to a monopolized good. It expands the set of market conditions in which this instrument is known to be profitable. With heterogeneous, privately informed buyers, a firm can profit by tying two goods even when demands for the goods are price independent - providing the demands are stochastically dependent. We investigate the profitability of tying as a response to stochastic demand, as well as the effects of tying on prices and the extent of the market served.

Abstract:
Firms sometimes agree to limit the discounts they offer a class of customers, i.e., they collude on the price differences across consumer classes. Why? Courts have struck down agreements to limit discounts as violations of the laws against price-fixing. Are these collusive agreements in fact efficient? This article addresses these questions in a multi- product duopoly model. Under one interpretation, the incentive to collude on relative prices can be traced to heterogeneity in consumers' time costs. Under fairly general conditions, total surplus increases with the collusion. This efficiency effect is most striking in the case where collusion raises the prices faced by all consumers over which firms compete.