Risk Sharing, Risk Spreading and Efficient Regulation
The book provides an integrated approach to risk sharing, risk spreading and efficient regulation through principal agent models. It emphasizes the role of information asymmetry and risk sharing in contracts as an alternative to transaction cost considera
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Risk Sharing, Risk Spreading and Efficient Regulation
Risk Sharing, Risk Spreading and Efficient Regulation
T.V.S. Ramamohan Rao
Risk Sharing, Risk Spreading and Efficient Regulation
T.V.S. Ramamohan Rao Indian Institute of Technology Kanpur Kanpur, Uttar Pradesh, India
ISBN 978-81-322-2561-4 ISBN 978-81-322-2562-1 DOI 10.1007/978-81-322-2562-1
(eBook)
Library of Congress Control Number: 2015944074 Springer New Delhi Heidelberg New York Dordrecht London © Springer India 2016 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. Printed on acid-free paper Springer (India) Pvt. Ltd. is part of Springer Science+Business Media (www.springer.com)
Dedicated to the generous presence of the Goddess Saraswati
Preface
A large proportion of economic exchange, even in predominantly market-oriented economies, utilizes contracts as the major institutional mechanism. Contracts are, in most cases, with independent agents outside the firm. There will be information issues, transaction cost considerations, risk sharing in several directions, issues related to control, and fixed cost considerations that define the nature of contracts. Almost invariably some fixed assets, such as technology and know-how, physical or financial capital, brand name and reputation, and/or the characteristics of information, underlie the specific contract under consideration. Coase initially identified transaction cost advantages. Spot contracts, or onetime exchanges, probably correspond to this closely. Given the cost advantage of contracts over the market mode, there is always a possibility that contract execution will increase costs so long as the market does not supplant such contracts. Different agents may have different propensities to create inefficiency. But, given the market for the product of the contract, they tend to create significant variations in profits of the principal. Hence, diversification of production through contracts increases the variability of profits for the principal. Some effici
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