Moral Hazard Risk Research Articles

Monitoring and Home Bias in Global Hiring: Evidence from an Online Labor Platform

Online labor platforms increasingly use monitoring systems to manage remote workers. This study assesses whether and how these systems mitigate employer bias in hiring foreign versus domestic workers. Leveraging the exogenous introduction of a monitoring system for time-based projects on a leading online labor platform, we employ a difference-in-differences model to estimate the impact of monitoring systems on mitigating employers’ tendency to bias against hiring foreign workers (home bias). Results indicate a significant reduction in home bias, along with a 15% increase in the hiring of foreign workers following the introduction of the monitoring system. The mitigation effect is notably stronger in high-routine projects or when employers lack prior positive experiences with foreign workers, two scenarios characterized by low external uncertainty and high internal uncertainty, respectively. Moreover, employers no longer exhibit a stronger home bias in scenarios of lower moral hazard risk or coordination costs. These findings lend support to the effectiveness of monitoring systems in mitigating employers’ home bias through facilitating contractual control and coordination. Our study offers important implications for the design of online labor platforms and policymaking.

Moral hazard in online peer-to-peer lending

ABSTRACT Does the shift towards reintermediation in the peer-to-peer (P2P) lending industry increase the market’s vulnerability to moral hazard by the platform? To address this question, we develop a model where the crowdfunding platform screens loan applications and assigns interest rates to listed loans for investors to fund. We find that when the platform’s only source of income is origination fees, the platform has the incentive to relax its screening effort. Relaxing the screening effort allows low-quality borrowers to list their loans on the platform, which is detrimental to lenders and sub-optimal from an aggregate welfare perspective. Our results imply that current regulations governing P2P lending platforms may not be sufficient to protect lenders from this moral hazard risk. We show that the platform’s moral hazard problem can be overcome when it has sufficient skin in the game.

인공지능(AI)과 한국 부동산의 부패방지에 관한 연구

This study attempted to present discussions and directions regarding artificial intelligence(AI) and the prevention of corruption in Korean real estate. This Paper dealt with moral hazard, corruption prevention, and trust using real estate, the 4th industrial revolution(4IR), AI, and intelligent information technology as keywords. Prior research is focusing on economic utility and technical benefits related to AI and real estate. In contrast, this study pointed out the risk of moral hazard and corruption arising from the combination of AI and real estate, and conducted a paper to prevent moral hazard and corruption. In this respect, there is a difference between this study and existing previous studies. This is where the originality of this study appears. The results of this study on anti-corruption of AI and Korean real estate are as follows. As a result of the study, the problems of AI and Korean real estate, and anti-corruption were presented in three major categories: 1. AI and the problem of changing times, 2. Korean real estate and corruption problem, and 3. AI and real estate problem. In relation to this, this study largely derived three measures as implications of the research. The contents include, first, responses to the issues of AI and changing times, second, responses to Korean real estate and corruption issues, and third, measures to respond to AI and real estate issues. This study hopes to restore market trust through Artificial Intelligence(AI) and the prevention of corruption in Korean real estate, and to build a future where the benefits and utility provided by real estate, AI, and intelligent information technology are desirable.

Implementation of Islamic Bank Mudharabah Financing in Makassar

This study aims to determine the implementation of mudharabah contracts in Islamic banks. The type of research used is qualitative. This research was conducted with in-depth interviews. The informants who will be the source of data in this research are people who are directly involved in mudharabah financing practices. Informants were determined by purposive sampling and snowball techniques. Informants were determined by certain criteria: (1) Islamic banking leaders in Makassar (2) Islamic banking account officers in Makassar (3) Customers who are or have received mudharabah financing. The total number of informants is 5 people. The results showed that there is a high risk of moral hazard so that this financing is transferred to the Mudharabah contract, so the conclusion of this study is that the implementation of the mudharabah contract is not fully implemented.

Reinterpreting Modern Monetary Theory Through an Islamic Lens: Insights from Indonesia's Economic Thought

Modern Monetary Theory (MMT) has gained attention, particularly following the crisis caused by COVID-19, which led every country to experience a significant decline in economic growth. This concept proposes the idea that a central bank can create money to finance real sector activities without having to borrow from specific parties, which is then believed to solve various economic problems. This theory has sparked various disagreements within conventional economics. Therefore, in countries that adopt dual economic systems, they certainly have their own perspectives when considering this monetary theory. This research utilizes library documentation or collected reading sources as data sources. The research findings suggest that the concept of MMT is not in conflict with Islamic Sharia, as the MMT concept aligns with the functions of money described by Al Ghazali and Ibn Khaldun. Hence, the MMT concept is not expected to lead to excessive inflation, as it conforms to the Islamic theory of the function of money, where money serves as a medium of exchange rather than a tradable commodity. With this concept, the quantity of goods in a country will be accompanied by the Money Supply. However, the application of economic theories like MMT must be adapted to the conditions and economic concepts of a given country. Despite MMT's compatibility with Islamic monetary concepts, Indonesia is not yet ready to fully implement MMT, which is why the predicted level of moral hazard risk is higher.

Voluntary Disclosure, Moral Hazard, and Default Risk

We study a dynamic moral hazard setting where the manager has private evidence that predicts the firm’s cash flows. Bad-news disclosure is rewarded by a lower borrowing cost relative to the no-evidence case, whereas no disclosure leads to higher borrowing costs. For a given capital structure, disclosure reduces the firm’s default risk by lowering its pay-for-performance sensitivity. However, for a set of low-profitability firms, the anticipation of future disclosure of information by managers lowers both firm value and managerial rents at the financing stage because of a reduction in the firm’s initial liquidity. The model can reconcile the empirical evidence on the effects of providing earnings guidance, especially for loss firms. This paper was accepted by Bruno Biais, finance. Funding: S. Fu is supported by the Shanghai Pujiang Program and the Program for Professor of Special Appointment (Eastern Scholar) at Shanghai Institutions of Higher Learning [Grant 0900000182]. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2023.4860 .

Stabilising market expectations through a market tool: a proposal for an enhanced TPI

This paper puts forward a proposal to complete the ECB Transmission Protection Instrument (TPI) with the aim of making it more effective in anchoring the yields of European sovereign debts to Member States’ fundamentals. We use a model in which yields fluctuate within bands, which we specify following two alternative approaches: stochastic and deterministic. The resulting fluctuation's interval represents the range of yields that can be seen as justified by Member States’ fundamentals; yields outside the band would instead trigger the ECB intervention as foreseen by the TPI. The proposal minimizes the risk of moral hazard, as the fluctuation bands vary as each country's creditworthiness changes. Moreover, the proposal is directly implementable with existing Treaties.

Assessment moral hazard of crop insurance in Indonesia

Moral hazard is crucial issue in insurance not only in developing countries but also in developed countries. This research is to find out the cause of moral hazard on the implementation of crop insurance in Indonesia. To support farmers in risk management and prevent financial losses the Indonesian government subsidizes crop insurance by paying 80% of the premiums. This study asked to farmer as primary data in Karanganyar Regency, Central Java. The result indicates that landholding size, farming experience, age, study experience, income, and farmers’ participation in crop insurance influence the farmers’ production cost. While farming and study experience has no significant influence on production cost. This study found that there is a risk of moral hazard when farmers are covered by crop insurance. This means that farmers will not take the necessary precautions to protect their crops, leading to greater losses.

Analisis Risiko Pembiayaan Mudharabah di Bank Syari’ah

Risks and obstacles to the implementation of mudharabah financing are one of the factors behind the low development of mudharabah financing in Islamic banks compared to other financing products. To anticipate risks and to enhance the development of mudharabah financing in Islamic banks, it is necessary to identify and in-depth study the risks of implementing mudharabah financing in Islamic banks so that strategies and solutions for these risks can be found. This research was conducted for this purpose by using quantitative research methods. The results of this study indicate that there are risks inherent in this financing, namely agency problems, adverse selection, moral hazard, and other risks that have not been studied in this study. These risks are a particular challenge for Islamic banks to implement mudharabah financing. The results of this study offer several strategies that can be carried out by Islamic banks in anticipating some of these risks, namely conducting analysis of prospective customers who are really good, conducting post-contract visits, providing managerial assistance as well as in preparing good and correct financial reports, conducting inspections and periodic monitoring, as well as immediately making decisions and following up when data is found that are not suitable for the implementation of the business carried out by the mudhorib. The solutions presented in this study can be further developed to support the implementation of mudharabah financing in Islamic banks.

DESIGN OF SMALLHOLDER FARMERS PARTNERSHIP MODEL AND FINANCIAL ANALYSIS WITH THE CONCEPT OF CREATING SHARED VALUE

Approximately 90% of Indonesias local beef supply is supplied by smallholder farmers who practice traditional and inefficient management. PT X is one of the companies that has assisted smallholder farmers through a partnership system that includes banks and insurance companies. However, smallholder farmers continue to require assistance due to complex requirements, such as interest charges. This study aims to measure and analyze the performance of partnerships at PT X, design an interest-free Creating Shared Value (CSV) partnership model, and run financial analysis simulations, namely Net Present Value and Benefit-Cost Ratio. Meanwhile, the importance-performance analysis is used in the design of the partnership model. The studys findings indicate that the PT X partnership performs quite well. However, eight performance variables must be improved and used to create CSV partnerships. All partnership patterns applied using the interest-free CSV concept produce the largest NPV and BCR values. Even in the breeding partnership pattern, the highest NPV value was IDR 3,430,000, and the largest Net BCR was 1.26%. Thus the partnership with the CSV concept can be implemented and provide mutual benefits to partner smallholder farmers and PT X by creating shared value. Further research is recommended to avoid the risk of moral hazard and partnership failure.

Risk of Claims and Moral Hazard for House Insurance in Canada

We investigate the risk of claims using hazard models for house insurance for the three periods: prior to, during and after the financial crisis. The present study is based on the data provided by Property & Casualty Carrier for the Canadian Market. The semiparametric Cox proportional hazard model results suggest that Canada’s house insurance options (Bronze, Silver, Gold, and Platinum) influence the risk of claims. The smaller coverage option, Bronze, has much fewer claims than the complete coverage option, Gold. This may suggest the presence of a moral hazard problem. The financial crisis however impacted the role of the type of coverage had on the risks of claims reducing the moral hazard problem, after controlling for the characteristics of the houses.

Assurance and Deterrence in the UK’s East Asia Policies

East Asia is essential to the UK’s post-Brexit international strategy. Within a complex web of bilateral and multilateral arrangements, the UK needs to manage historical ties, new strategic objectives and ongoing partnerships. Underpinning these interactions is trust and some of the dynamics more commonly associated with formal security alliances. Post-Brexit, there is a need to assure these states of the UK’s place in the world and particularly its commitment to, and strategic objectives in, the region, but also recognise that there is an increasing risk of moral hazard for the UK in seeking to achieve some of its objectives. Catherine Jones offers a framework for understanding the challenges and opportunities for the UK’s current planning in the region.◼

How private equity-backed buyout contracts shape corporate governance

ABSTRACT This paper explores how contracts in private equity-backed buyouts shape corporate governance in portfolio companies. Drawing upon agency theory and incomplete contracting theory, 50 actual contracts are analyzed in detail. Contracts focus on reducing adverse selection risks through limiting pre-investment information asymmetries and aligning the goals of investors and sellers. Moral hazard risks vis-à-vis management are limited through limiting post-investment information asymmetries and limiting shirking behavior through limiting free cash flows. Goal alignment is achieved through high-powered incentive structures combined with shifting risk of underperformance to management. Managerial hold-up problems are addressed through restricting share transactions and limiting managerial actions. Residual powers and contingencies are mainly used to deal with incomplete contract designs due to uncertainties. Few clauses are used to address the reverse agency problem in which management is protected against moral hazard problems created by the private equity investor. PE contracts have transparent and very strong outcome-based cash flow rights, both limiting downside risk and rewarding upside potential. This contrasts with VC contracts which are especially contingency-based given the high levels of uncertainty of the portfolio companies.

China and Zambia: creating a sovereign debt crisis

Abstract Does Zambia's exceptionally high level of Chinese loan commitments provide insights into China's financial statecraft? Some have argued that Chinese lending to Zambia reflects China's purposeful use of loans to build leverage and perhaps acquire strategic assets. This article uses new data on Chinese loans, lenders and contractors and process-tracing to argue instead that Zambia is an extreme case of coordination problems in Chinese lending. Among all African countries with Chinese loans, Zambia has had the largest number of distinct Chinese lenders since 2000 (18) and the second largest number of different Chinese contractors winning Chinese loan-financed projects (29). This multiplication of stakeholders has created fierce and unregulated competition for infrastructure contracts in Zambia. In Beijing, ‘fragmented authoritarianism’ has meant an absence of top-down coordination of firms' and lenders' activities and thus few restraints. At the same time, Zambia's political leaders disregarded their own restraints on over-borrowing. Distinctive Chinese ideas about debt sustainability likely created additional disincentives for close Chinese monitoring. Finally, Zambia's history of frequent debt cancellations from China and other lenders likely exacerbated moral hazard risks.

The Analysis of Fintech Risks in China: Based on Fuzzy Models

Fintech has not changed the nature and risk attributes of financial business. Its openness, interoperability, and other characteristics trigger the concealment, infectivity, universality and sudden characteristics of financial risk more obviously, and the potential systemic risk more complexly. This paper adopts fuzzy set analysis to conduct a comprehensive review of Fintech risk. It is found that the technology risk, moral hazard and legal risk, with a weight of up to 80%, are the dominant factors affecting the Fintech risk, while other prominent credit risk, market risk and operational risk in the traditional financial field account for a small proportion, but they still cannot be ignored. The research of this paper enriches the relevant research on the quantification of Fintech risk, and helps to strengthen risk prevention from the aspect of enhancing the safety of Fintech infrastructure, improving the legal system, sound the regulatory framework and strengthening industry self-discipline.

Mixture modeling segmentation and singular spectrum analysis to model and forecast an asymmetric condor-like option index insurance for Colombian coffee crops

Weather-related hazards generate unfortunate risks, especially for low-income economies, such as populations dependent on agriculture. Index insurance offers structural advantages compared with conventional insurance, including moral hazard, adverse selection, and systemic risk. It also represents a promising financial tool because of its potential to provide timely economic relief after an unusual weather event by indemnifying policyholders based on the observed value of a particular index directly related to weather parameters. Because of these advantages, this type of insurance can potentially be extended to more crop-productive regions. This study examines the possible spread of weather index insurance programs for Arabica Coffee in Colombia in the short and medium terms in aggregated regions, according to the wet and dry crop seasons. Using a short historical precipitation data from 2010 to 2019 for 163 productive zones in 11 departments located at altitudes of 990–1,890 m, we use an unsupervised technique to first cluster the observations through mixture modeling. Then, we extract through singular spectrum analysis, the signal components of precipitation of each cluster and seasons to propose a simple index insurance model which determines the immediate payoff disbursals. We particularly identify the behavior of the tendency and seasonal payoffs. Finally, we forecast the tendency components in each cluster and season to derive a ratio of future payoffs in exceedance. This ratio serves as a measure of financial risk as it represents future additional payments that are expected to be disbursed due to the tendency component. The results have important implications for designing agricultural hedging instruments for coffee producers at an individual scale or as reinsurance instruments.

Informal institution and corporate innovation: From the perspective of social trust

Purpose: This study examines how social trust, as an informal institution, creates a cooperative and honest atmosphere to improve managers’ willingness for firm innovation. This study also addresses that the informal system may substitute for the formal institutions in promoting corporate innovation. Design/methodology/approach: This study opts a sample of Chinese listed firms over the period of 2007–2014. We obtain the detailed patent application information from the official website of China Patent and Intellectual Property Office. The social trust information is based on the results of Chinese Enterprise Survey System. Findings: The results indicate that firms located in regions of high social trust tend to have more innovation output, and is robust to a battery of sensitivity tests. The authors further document that this effect is more pronounced for firms with poor short-term financial performance, which are located in regions with weak legal environments and firms having lower information transparency. In addition, the authors also demonstrate that social trust can help firms to get adequate funds to reduce financial pressure and encourage firms to pay more attention to long-term benefits, alleviating investors as well as management myopia. Research limitations/implications: Limited by the data sources, when measuring innovation activity, the authors only use patent numbers represent for innovation output. Then, this study measures the patent quality through classifying patent categories (invention patent or others), since in China, the citation data are imperfect and inadequate. Practical implications: The results suggest that social trust means a good culture of honesty and cooperation can promote firm’s innovation engagement. Especially, in emerging markets, where formal mechanisms are relatively less effective, informal institutions can serve as an alternative system for alleviating information asymmetry. Originality/value: This study contributes to the literature in two ways. First, this study finds the positive effect of social trust on corporate innovation, which provides a new perspective for deepening the understanding of the influence factors of innovation. Second, this study further clarifies the mechanism of social trust promoting firm innovation, indicating that social trust can effectively alleviate outsiders’ concern about moral hazard risk. Then the stakeholders are more willing to provide financial support and pay more attention to the firm’s long-term performance.

Pooling mortality risk in Eurozone state pension liabilities: An application of a Bayesian coherent multi-population cohort-based mortality model

We design a coherent cohort-based multi-population mortality model, calibrate it to national mortality rates in the Eurozone using Human Mortality Database data, and use it to project developments in national mortality across the Eurozone. Combining this model with a stylized model of social security pensions in each country allows us to calculate the pension mortality risk in these systems and estimate the benefits of pooling it across the Eurozone. We examine three risk pools, which are all actuarially fair, but differ in how undiversifiable risk is allocated across countries. The first naïve approach allocates undiversifiable risk in proportion to GDP, a second according to a CAPM-based measure of the undiversifiable risk each country contributes to the pool and a third ensures that the aggregate benefits of diversification are shared equitably across countries using a measure we adopt. In all cases, the benefits of risk pooling increase over time as mortality uncertainty accumulates, but fall over time as cross-country correlation increases due to the long-term dominance of the mortality trend, which by assumption is shared between countries. The peak benefit occurs around 2050, with an aggregate reduction in the standard deviation of pension expenditures of around 0.11% of GDP, or 3% of pension expenditure at the 99th percentile. We find that allocating undiversifiable risk proportional to GDP does not ensure an efficient allocation of undiversifiable risk across countries, given that different countries have markedly different pension mortality risk due to different pension system generosities as well as different mortality correlation with the Eurozone. Based on our results we propose a contract design that surmounts most of the moral hazard risks created by the pool, and suggest directions for future research.

Deposit Insurance, Moral Hazard and Bank Risk

Using evidence from Russia, we explore the effect of the introduction of deposit insurance on bank risk. Drawing on variation in the ratio of firm deposits to total household and firm deposits before the announcement of deposit insurance, so as to capture the magnitude of the decrease in market discipline after the introduction of deposit insurance, we demonstrate that larger declines in market discipline generate larger increases in traditional measures of risk. These results hold in a difference-in-difference setting in which private domestic banks serve as the treatment group and state and foreign-owned banks, whose deposit insurance regime does not change, serve as a control group.

Тенденции и риски развития рынка Финтех в странах Азиатско-Тихоокеанского региона на примере альтернативного кредитования

The article attempts to identify and systematize trends and risks in the development of the alternative lending market in the countries of the Asia-Pacific region. Alternative lending as a segment of financial technology market (Fintech) in Asia has significantly increased its share in the global market over the past 5 years. During the period from 2017 to 2018, the share of Asia-Pacific countries increased in all 4 key Fintech segments. The research methodology is based on the methods of statistical data analysis, comparative analysis and correlation analysis. As a result of the analysis, the author identifies three main trends: an increase in the level of internationalization of alternative lending, an increase in the role of large technology companies (BigTech) in providing financial services to the population, and outsourcing of storage and client data processing to third parties. Along with these trends, new emerging risks may have an impact on financial stability in Asian countries: the risk of spillover onto other participants in the financial sector, procyclicality and the risk of moral hazard for systemically important organizations, etc. The author comes to the conclusion that in order to minimize the effects of fraud risk as well as other key risks, it is worth introducing a special regime regulating alternative lending in the country.