...Health Care Moral Hazard “Moral hazard is a term describing how behavior changes when people are insured against losses.” Moral hazard can be entered into all characteristics of life throughout a business in internal and external affairs. Before researching about Moral Hazard we had no idea what it pertained to besides the definition. It is a widespread problem that has been growing over the past decade. We chose a Moral Hazard in health care because we feel that it is a rising dangerous conflict in the United States. In this essay we will be presenting an argument about Moral Hazard in the Health Care profession. Although there are many to discuss we will only examine one. The argument we would like to make is people are using too much medical insurance, and that’s why our costs are becoming too high. What this means is we are accepting insurance that is worth more to us than we spend to obtain it. When we know if we can’t pay the amount of money back that someone else will be paying the bill, we will use more medical insurance because the amount of money to obtain it is far below the amount of the service itself. For example, if we go to the doctors the medical insurance will pay an amount to the doctor and we pay a co-payment way less than the actual amount. In the “moral hazard” case, we’re using care that costs more than it’s worth. It can be argued that the insurer is getting ripped off. The reason this is a concern for financial market observers is, the process used...
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...JP MORGAN & CHASE CO. TURNS BLIND EYE TO PONZI SCHEME: MORAL HAZARD PROBLEM Banks have been at the forefront of the financial system for as long as they have existed and have captured the attention of stakeholders on both controversial grounds as well as being undisputed with regards to the many helpful services they provide. JP Morgan & Chase is one such bank, surrounded by hostile news articles and excessive scrutiny but rightfully so as it has of recent been the topic of much controversy as turning a blind eye to the moral codes established by the Securities and Exchange Commission (SEC) and assisting Ponzi Scheme masterminds in swindling unsuspecting investors. On January 7th, 2014, JP Morgan was accused of assisting its high profile client of two decades, Bernard Madoff, a mastermind ponzi schemer in executing his goal of duping investors into parting with their savings worth a whopping $17.3billion of which included pension funds that belonged to JPM shareholders. The bank was fined a penalty of close to $2billion stemming from two felony violations of the Bank Secrecy Act, which is a federal law that requires banks to alert authorities to suspicious activity. The bank was further required to pay $543million in resolving private claims over losses tied to the scheme. A reported $9.5billion has been recovered whilst almost $4.9billion has been returned to investors. It can be agreed that this by far does not compensate for the losses the investors incurred. The...
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...their importance and jeopardized the entire economy That's what Simon Johnson then explained by saying that 鄭nything that is too big to fail is too big to existｻ, The main lesson of this crisis is that it's no longer possible to leave as much power in those institutions, indeed it's essential to reduce their size and their influence on the economy so that no futher institution can be ｫtoo big to failｻ B. How is this concept related to Moral Hazard? Moral Hazard occurs ｫwhen a party insulated from risk behaves differently than it would behave if it were fully exposed to the riskｻ. In that definition of moral hazard the idea of risk is very present, so we can easily see how this concept is related to the financial system and the banks. Indeed Moral hazard is the idea that banks could take unnecessary risks because they believe they池e too big to fail and would be bailed out in future crises. So moral hazard shows us how dangerous it is to have such important banks. Thus the solution is to reduce the Moral hazard and the only way to achieve that goal is to allow banks to fail but governments...
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...Moral Hazard Critical Thinking Essay Everyday people are faced with challenges, obstacles and important decisions. When forced to address these encounters, a system of options are present. When choosing which option to chose or path to follow, people ultimately have two absolute alternatives. First, people can chose to be moral and just in their tactic, or unfortunately, people may choose a more unethical approach. Regrettably, in today’s world the latter has and is occurring. This seemingly unfair, yet also unavoidable interaction is referred to as moral hazard. Moral hazard occurs when two parties are forming some sort of agreement, contract, etc. and there is a possible risk at hand. Although people normally would be cautious of these risks they are protected. Bluntly, moral hazard is when a party is protected in some way from risk and therefore chooses to act in a way that they normally would not if they were not protected from that risk. While moral hazard may seem to only affect the party who is ignorant of the other party’s protection, it can become a much larger issue with regard to financial markets. Therefore, many financial market observers are aware and cautious of this for a few reasons. When dealing with the financial markets, the issue of moral hazard specifically relates to the Federal Reserve. The Federal Reserve creates a “safety net” for companies in large financial markets. There are two opposing stances regarding this. While some argue that...
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... Chapter 7 Why Do Financial Institutions Exist? Chapter Preview A vibrant economy requires a financial system that moves funds from savers to borrowers. But how does it ensure that your hard-earned dollars are used by those with the best productive investment opportunities? Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-3 Chapter Preview In this chapter, we take a closer look at why financial institutions exist and how they promote economic efficiency. Topics include: •Basic Facts About Financial Structure Throughout the World •Transaction Costs •Asymmetric Information: Adverse Selection and Moral Hazard Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-4 Chapter Preview (cont.) • The Lemons Problem: How Adverse Selection Influences Financial Structure • How Moral Hazard Affects the Choice Between Debt and Equity Contracts • How Moral Hazard Influences Financial Structure in Debt Markets • Conflicts of Interest Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-5 Basic Facts About Financial Structure Throughout the World • The financial system is a complex structure including many different financial institutions: banks, insurance companies, mutual funds, stock and bonds markets, etc. Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-6 Basic Facts About Financial Structure Throughout the World • The chart on the next slide shows how nonfinancial business attain external funding in the U.S., Germany, Japan, and Canada...
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...But it is difficult to get from youth up a right training for virtue if one has not been brought up under right laws; for to live temperately and hardily is not pleasant to most people, especially when they are young. For this reason their nurture and occupations should be fixed by law; for they will not be painful when they have become customary. But it is surely not enough that when they are young they should get the right nurture and attention: since they must, even when they are grown up, practise and be habituated to them, we shall need laws for this as well, and generally speaking to cover the whole of life; for most people obey necessity rather than argument, and punishments rather than the sense of what is noble. (Aristotle, Nicomachean Ethics, Book X, chapter 10) This is a very important quote coming from Nicomachean Ethics, Book X, chapter 10, where Aristotle tries to explain that most young people don’t tend out of their own nature to act virtuous. But not because they don’t want to, but because they don’t know to act in this way. We need to train, drill, and educate the youth of this generation to act in a virtuous way. Aristotle believes children should be taught at all times whether at school or at home to act in the correct ways. When these children are young they need education and habituation, Aristotle preaches throughout Book X, chapter 10. Virtue naturally brings pleasure at virtuous acts, but its active exercise, as needed for happiness, depends to...
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...Nash equilibrium = a pair of strategies (strategy is a best response against the other) When players act rationally, optimally, and in their own self-interest, it’s possible to compute the likely outcomes (equilibria) of G. By studying G, we learn: Strategies are likely to take us and how to modify the rules of the game to our own advantage. SEQUENTIAL G (players take turns moving) are influenced by who moves first (a potential first-mover advantage, or disadvantage), and who can commit to a future course of action. Credible commitments (threats) are difficult to make because they require players to commit to a course of action against their self-interest. Thus, the best threat is one you never have to use. SIMULTANEOUS-move G, players move at the same time. In the prisoners’ dilemma, convict and cooperation are in tension—self-interest leads to outcomes that reduce both players’ payoffs. Cooperation can improve both players’ payoffs. Rules of thumb: • Be nice: No rest strikes. • Be easily provoked: Respond immediately to rivals. • Be forgiving: Don’t try to punish competitors too much. • Don’t be envious: Focus on your own slice of the port pie, not on your competitor’s. • Be clear: Make sure your competitors can easily interpret your actions. Strategic: model as either a simultaneous-move or sequential-move game. Focusing on how the outcome of bargaining games depends on who moves first and who can commit to a bargaining position, as well as whether...
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...Assignment: Discuss the idea that banks will continue to fail even in the presence of supervision clearly articulating what constitutes supervision and regulation for the financial system as well as the rationale for regulating the financial system. __________________________________________________________________________ What constitutes supervision and regulation for the financial system? Banking supervision and regulation provides a forum for regular cooperation on banking supervisory matters; its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision The core principle for effective banking supervision addresses supervisory requirements relating to banking licensing. The licensing authority must have the power to set criteria and reject applications establishment that do not meet the standards set. The licensing process should consist of an assessment of the ownership structure, governance of the bank and that includes: fitness and propriet of board members and senior management, its strategic and operating plan, its internal controls, risk management, projected financial condition and its capital base The purpose of obtaining this information is to review: major shareholders' past banking and non-banking business ventures, their integrity and standing in the business community, their financial strength, their ability to provide further financial support should it be needed, their other interests and the...
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...En The Economics of Money, Banking, and Financial Markets, 9e (Mishkin) – Global Edition Chapter 8 An Economic Analysis of Financial Structure 8.1 Basic Facts About Financial Structure Throughout the World 1) American businesses get their external funds primarily from A) bank loans. B) bonds and commercial paper issues. C) stock issues. D) loans from nonbank financial intermediaries. Answer: D Ques Status: Revised 2) Of the sources of external funds for nonfinancial businesses in the United States, loans from banks and other financial intermediaries account for approximately ________ of the total. A) 6% B) 40% C) 56% D) 60% Answer: C Ques Status: Previous Edition 3) Of the sources of external funds for nonfinancial businesses in the United States, corporate bonds and commercial paper account for approximately ________ of the total. A) 5% B) 10% C) 32% D) 50% Answer: C Ques Status: Previous Edition 4) Of the following sources of external finance for American nonfinancial businesses, the least important is A) loans from banks. B) stocks. C) bonds and commercial paper. D) loans from other financial intermediaries. Answer: B Ques Status: Previous Edition 5) Of the sources of external funds for nonfinancial businesses in the United States, stocks account for approximately ________ of the total. A) 2% B) 11% C) 20% D) 40% Answer: B Ques Status: Previous Edition 6) Which of the following statements concerning external...
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...differences between moral hazard,morale hazard and physical hazard In short, Moral hazard is a hazard dealing with the difference between right and wrong while a moral hazards is a hazard dealing with people's attitudes. It also refer to the characters of individuals related to the property ( eg: the owners) that can increase the chance of loss. example : conditions resulting from a weakness of human character (when someone should know the difference between right and wrong), such as embezzlement. Morale hazard is a closely related to moral hazards it refer to the indifferent attitudes of individuals related to the property because of the pre sence of insurance policy. examples : conditions resulting from a person's indifferent attitude toward a loss when a property of exposure is insured, such as failing to lock the doors or roll up the windows of your car or leaving valuables in plain sight in your car . . .especially during the holiday season. Physical hazards refer to the physical features that can lead to an increase in the chance of loss from certain perils. examples : According to poor brakes and engine problem in heavy rains can nause road accidents. Explain briefly the law of large number In probability theory, the law of large numbers (LLN) is a theorem that describes the result of performing the same experiment a large number of times. According to the law, the average of the results obtained from a large number of trials should...
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...Upjohn Institute Press Book Chapters Upjohn Research home page 2005 Human Resource Management and Safety: Technical Efficiency and Economic Incentives Richard J. Butler Brigham Young University Yong-Seung Park Kyung Hee University Citation Butler, Richard J., and Yong-Seung Park. 2005. "Human Resource Management and Safety: Technical Efficiency and Economic Incentives." In Safety Practices, Firm Culture, and Workplace Injuries. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research, pp. 1-12. http://research.upjohn.org/up_bookchapters/33 This title is brought to you by the Upjohn Institute. For more information, please contact ir@upjohn.org. 1 Human Resource Management and Safety Technical Efficiency and Economic Incentives More U.S. workers die each year on the job than were killed in the U.S. military cumulatively from 1998 through November 2004, even after including self-inflicted and accidental military deaths (DIOR 2005). In 2001, there were 8,786 job-related fatal injuries (5,900 not counting the fatalities caused by the terrorist attacks of September 11), or about 3.7 fatal injuries per 100,000 workers. Workers made 2.1 million trips to the emergency room for injuries sustained from accidents at work (Centers for Disease Control and Prevention 2004). Workers’ compensation insurance, which covers all medical expenses and part of lost wages associated with injuries, cost employers $63.9 billion in 2001 (Williams, Reno, and Burton 2003). The...
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...* Question 1 0 out of 10 points | | | A Ponzi scheme is characterized by: I. an investment whose growth is financed by high returns on its investment. II. an investment whose growth is financed by new clients who give money. III. an investment that relies on receiving funds from nonprofit institutions. | | | | | Selected Answer: | [None Given] | Answers: | A. I only | | B. II only | | C. III only | | D. I, II, and III | | | | | * Question 2 0 out of 10 points | | | Reasons why indirect finance is so important include: | | | | | Selected Answer: | [None Given] | Answers: | A. the persistent increase in the cost of stocks. | | B. the fact that banks provide liquidity to depositors. | | C. the fact that banks increase transaction costs for savers. | | D. the fact that banks increase transaction costs for investors. | | | | | * Question 3 0 out of 10 points | | | The free-rider problem arises: | | | | | Selected Answer: | [None Given] | Answers: | A. when people benefit from a good without paying for it. | | B. only when markets are perfectly competitive. | | C. if labor unions are strong. | | D. when a country is expanding. | | | | | * Question 4 0 out of 10 points | | | A project pays $125 with a probability of 0.75 or pays $90. What is the expected value of this project? | | | | | Selected Answer: | [None Given] | Answers: | A. $116.25 | | B. $93.75...
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...11-8-2011 Financial Markets & Inst Dodd-Frank Assignment The Dodd Frank Act has been created as a regulatory reaction from the recent financial crisis. The magnitude of its implications and provisions has not been seen since the great depression and will be conducted as a major overhaul to the financial systems rules. Financial regulation within a system that clearly had ulterior motives and lacked market discipline is inevitable. Without clear transparency of what and how borrowers are investing individuals savings will surely lead to moral hazard and conflicting interests. With Dodd Frank hopefully some of this asymmetric information will be largely more apparent to an inspecting investor. This Act aims to promote the financial stability of the United States financial system by implementing rules and regulations to improve accountability and transparency. Dodd Frank mainly addresses issues dealing with ending the "too big to fail" banks, protecting the American taxpayer by ending bailouts, ensuring consumers safety from abusive financial services practices, and for other related purposes. The legislation gives the government more power to step in and "unwind" financial firms that are failing, enables more oversight of the derivatives market, and to protect the individual investor (Bentley). Thanks to Dodd-Frank, we will see whistleblowers offered incentives for reporting compliance violations to a larger and more powerful SEC. The SEC will also have the power to impose...
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...Mishkin Chapter 8 An Economic Analysis of Financial Structure (pp. 168-192) Modified & Extended Mishkin Notes Professor Leigh Tesfatsion Department of Economics Iowa State University Ames, IA 50011-1070 Last Revised: 6 April 2011 © 2004 Pearson Addison-Wesley. All rights reserved 8-1 Key In-Class Discussion Questions • What basic “stylized facts” characterize the current U.S. financial system? • Do transactions costs and asymmetric information help to explain these stylized facts? • Enron Case Study (Mishkin p. 177, and asymmetric information problems in securities markets exemplified by the Enron bankruptcy scandal? online html notes “Enron Scandal & Moral Hazard”): In what ways (if any) are © 2004 Pearson Addison-Wesley. All rights reserved 8-2 Financial Structure Manner in which firms finance their activities using external funds. MIX SOURCE Equity Debt Securities Markets FIs 8-3 © 2004 Pearson Addison-Wesley. All rights reserved External Finance Sources 1970-2000 © 2004 Pearson Addison-Wesley. All rights reserved 8-4 The Decline of Banks as a Source of External Finance (Mishkin 12, Fig 2, p. 287) Source: Federal Reserve Flow of Funds Accounts; Federal Reserve Bulletin. © 2004 Pearson Addison-Wesley. All rights reserved 8-5 One reason for the decline…the U.S. savings & loan crisis in the 1980s Mishkin Chapter 11, Figure 1 © 2004 Pearson Addison-Wesley. All rights reserved 8-6 Recent Trends • Decreasing...
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...The Managerial Compensation Responding to Earnings Manipulation Ruoyu Zhang** August 10, 2012 Abstract When the true earning in each period is private information to the agent, then the performance based pay provides the agent with incentive to misallocate the earnings to get more compensation. To address the concern of earnings manipulation problem, SEC imposed a strict disclosure regulation in 1993. An optimal managerial contract should be designed not only to provide the agent with an incentive to take actions that enhance the actual profitability of the firm, but also to minimize the agent’s incentive to falsify earnings reports. This paper uses a two-period model to demonstrate that the compensation scheme contingent on reported earnings cannot provide the agent with the incentive both to maximize earnings and to report earnings honestly. In the optimal contract, the principal must still tolerate some degree of earnings management. In addition, with the increase of the misrepresentation penalty, the principal would rather lower the incentive to make the agent work less but report earnings truthfully. I thank Professor Jean-Etienne De Bettignies and Professor Olena Ivus for valuable comments and suggestions. All errors are my own. ** MSc Candidate in Business Economics, Queen’s School of Business. Email: 11rz3@queensu.ca Table of Contents Abstract ..........................................................................................................
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