This paper explains why CEOs are unable to curtail risky investments before a crisis. CEOs rely on the advice of their employees to understand the riskiness of their investments. When employees observe noisy signals, they may be reluctant to disclose their information for the fear of getting fired. So, the CEO needs to offer contracts which provide incentive to disclose their information. The p...

High correlations between risks can increase required insurer capital and/or reduce the availability of insurance. For such insurance lines, securitization is rapidly emerging as an alternative form of risk transfer. The ultimate success of securitization in replacing or complementing traditional insurance and reinsurance products depends on the ability of securitization to facilitate and/or be...

Risk management is activity undertaken in an organization to identify and manage threats to achieving organizational objectives. In 2004, the Committee of Sponsoring Organizations published its Enterprise Risk Management – Integrated Framework as a structured approach to risk management. Using three pillars of procurement risk management -procurement planning, solicitation and award, and contra...

Risk-shifting incentive problem in financial contracting, which typically arises in the context of a lenderborrower relationship, stands for the borrower’s incentive to influence the risk of his project. Thus, the borrower can increase the value of his payoff at the expense of the lender. However, the lender also may have a risk incentive under some circumstances so that he may render it diffic...

Anthony Downward Department of Engineering Science, University of Auckland, New Zealand, [email protected] David Young Electric Power Research Institute, Palo Alto. This work completed whilst a Postdoctoral Fellow at the University of Auckland Energy Centre, [email protected] Golbon Zakeri Department of Engineering Science, University of Auckland, New Zealand, [email protected], htt...

In this paper we show that fixed-term contracts, which are commonly used to franchise highways, do not allocate demand risk optimally. We characterize the optimal risk-sharing contract and show that it can be implemented with a fairly straightforward mechanism—a least-present-value-of-revenue auction. Instead of bidding on tolls (or franchise lengths), as in the case of fixed-term franchises, i...

A major problem for insuring catastrophic risk is that, as a disaster causes damages to many insureds at the same time, such insurance and in particular reinsurance contracts are often subject to considerable default risk. On the other hand, the securitization of insurance risk, for example via a catastrophe bond, can be designed to completely avoid default risk. In many cases, however, the pay...

We examine how uncertainty about the stochastic effects of partner actions affect the efficacy of action versus deliverables requirements in formal contracts. We proceed by examining three scenarios designed to represent different levels of experience: Full Knowledge – consistent with strong experience in the joint production technology and the current partner; Risk – experience in the technolo...