Extra Credit Opportunity: Free Enterprise Forum with Glenn Loury, “Capitalism and Race”

I am pleased to announce the Baugh Center’s upcoming Free Enterprise Forum with Glenn Loury, Merton P. Stoltz Professor of the Social Sciences at Brown University. The lecture, “Capitalism and Race,” is Thursday, April 22, at 5:30pm CST via Zoom. The event is co-sponsored by Baylor’s Department of Economics.

Professor Loury is one of the world’s leading experts on the economic and social aspects of race. He will discuss recent developments in race relations including the concept of antiracism, the shift of emphasis within organizations and institutions from diversity to equity and inclusion, and the role of markets in addressing racial bias.

Professor Loury has been on the faculty of Brown University since 2005. He was previously at Boston University where he served as University Professor and Founder and Director of the Institute on Race and Social Division. He has also taught at Harvard, Northwestern, and Michigan. He received his PhD in Economics from MIT. He has published widely in the areas of applied microeconomic theory, game theory, industrial organization, natural resource economics, and the economics of race and inequality. He is a Fellow of the American Academy of Arts and Sciences and the Econometric Society and also served as Vice President of the American Economic Association, and is a recipient of the Guggenheim Fellowship.

As a prominent social critic and public intellectual, writing mainly on the themes of racial inequality and social policy, Professor Loury has published over 200 essays and reviews in journals of public affairs in the U.S. and abroad. He is a member of the Council on Foreign Relations, is a contributing editor at The Boston Review, and was for many years a contributing editor at The New Republic. Professor Loury’s books include One by One, From the Inside Out: Essays and Reviews on Race and Responsibility in America (The Free Press, 1995 – winner of the American Book Award and the Christianity Today Book Award); The Anatomy of Racial Inequality (Harvard University Press, 2002); Ethnicity, Social Mobility and Public Policy: Comparing the US and the UK (ed., Cambridge University Press, 2005); and, Race, Incarceration and American Values (MIT Press, 2008).

Since this panel discussion has the makings of an extra-credit opportunity for Finance 4335, let’s have it! You can earn extra credit by attending this Zoom webinar and reporting on what you learn. If you decide to take advantage of this extra-credit opportunity, I will use the grade you earn on your report to replace your lowest quiz grade in Finance 4335 (assuming that your grade on the extra credit is higher than your lowest quiz grade). Submit your report as a (PDF formatted) 1-2 page executive summary. In order to receive credit, the report must be uploaded to the Assignments section of the Course Canvas page by no later than 5 pm CST on Monday, April 26 (Click on the Assignment entitled “Free Enterprise Forum with Glenn Loury, ‘Capitalism and Race’, April 22, 2021“).

Registration is required at https://bit.ly/FEF_Loury. After registering, you will receive a link to the Zoom webinar.

You Can Bet on the Vaccine, Literally

This WSJ  article tells a compelling story about how prediction markets offer important tools for managing risk.  For example, consider the following quote from this article:

…investors can bet on a contract “Will 100 million people have received a dose of an approved COVID-19 vaccine in the US by April 1, 2021?” (At this writing, the betting suggests a likelihood slightly above 1 in 3.)

Case studies of how (poorly designed) insurance creates moral hazard

In my moral hazard lecture, I discuss how contract designs and pricing strategies can “fix” the moral hazard that insurance might otherwise create. Insurance is socially valuable if it enables firms and individuals to manage properly the risks that they face. However, insurance can also have a potential “dark side.” The dark side is that too much insurance and/or incorrectly priced insurance can create moral hazard by insulating firms and individuals from the financial consequences of their decision-making. Thus, in real-world insurance markets, we commonly observe partial rather than full insurance coverage. Partial insurance ensures that policyholders have incentives to mitigate risk. Real-world insurance markets are characterized by pricing strategies such as loss-sensitive premiums (commonly referred to as “experience-rated” premiums), and premiums that are contingent upon the extent to which policyholders invest in safety.

In competitively structured private insurance markets, we expect that the market price for insurance will (on average) be greater than or equal to its actuarially fair value. Under normal circumstances, one does not expect to observe negative premium loadings in the real world. Negative premium loadings are incompatible with the survival of a private insurance market since this would imply that insurers cannot cover capital costs and would, therefore, have incentives not to supply such a market.

This brings us to the National Flood Insurance Program (NFIP). The NFIP is a federal government insurance program managed by the Federal Emergency Management Agency (also known as “FEMA”). According to Cato senior fellow Doug Bandow’s (admittedly dated, but still quite accurate) blog posting entitled “Congress against Budget Reform: Voting to Hike Subsidies for People Who Build in Flood Plains”,

“… the federal government keeps insurance premiums low for people who choose to build where they otherwise wouldn’t. The Congressional Research Service figured that the government charges about one-third of the market rate for flood insurance. The second cost is environmental: Washington essentially pays participants to build on environmentally fragile lands that tend to flood.”

Thus, the NFIP provides a fascinating case study concerning how subsidized flood insurance exacerbates rather than mitigates moral hazard. It does this by encouraging property owners to take risks (in this case, building on environmentally fragile lands with high flood risk) which they otherwise would not be inclined to take if they had to pay the full expected cost of such risks.

There are many other examples of moral hazard created by insurance subsidies. Consider the case of crop insurance provided to farmers by the U.S. Department of Agriculture. The effective premium loading on federally provided crop insurance is typically quite negative (often -60% or more), thus putting crop insurance on a similar footing to flood insurance in terms of cost compared with actuarially fair value. Just as mis-priced flood insurance effectively encourages property owners to build in floodplains, mis-priced crop insurance motivates farmers to cultivate acreage which may not even be all that fertile.

I could go on (probably for several hundred more pages–there are many other egregious examples which I could cite), but I think I will stop for now…

Psychological aspects of decision-making under risk and uncertainty…

As I noted in my blog posting from earlier today entitled “Reading and Quiz assignments due Tuesday, February 2 in Finance 4335“, starting this Tuesday, February 2, we begin a series of five class meetings devoted to the topic of decision-making under risk and uncertainty. While we will address this topic primarily from an economics perspective,  there is also much to be gained from a psychological perspective.  Indeed, University of Chicago professor Richard Thaler was awarded the 2017 Nobel Memorial Prize in Economics for his scholarly contributions which apply psychological principles to economic analysis. Keeping this in mind, I highly recommend that Finance 4335 students listen to the latest (50-minute) “Hidden Brain” podcast entitled “Afraid of the Wrong Things“. Here’s the description of this podcast:

“Around the world, people are grappling with the risks posed by the COVID-19 pandemic. How do our minds process that risk, and why do some of us process it so differently? This week, we talk with psychologist Paul Slovic about the disconnect between our own assessments of risk and the dangers we face in our everyday lives.”

Barron’s in Education 30-minute live event: How Student Loan Policy May Change Under A Biden Administration

This Wednesday, 1/27/21, at 11 AM CT: How Student Loan Policy May Change Under A Biden Administration. Join MarketWatch reporter Jillian Berman and Seth Frotman, Founder and Executive Director of the Student Borrower Protection Center for a discussion on the student loan market, the challenges borrowers are facing, and the policy changes we could see under the Biden administration. 

Click here to register for Barron’s Live.