Family Business Research Paper Example | Topics and Well Written Essays - 11000 words

Family Business - Research Paper Example This condition, in turn, has transformed contemporary organisations. Organisations pursue competencies that make firms globally competitive. Companies’ pursuit of competencies is no longer just limited to financial and physical capital, but it also includes human capital. This move is necessary to create added value to their services or products, attract new customers, and retain loyal clients (Nordhaug, 1993; Westhead & Matlay, 2006). However, despite the fast phase changes in the modern period, the significant and integral role of the family in the economic activities of the society remains undeterred (Aldrich & Cliff, 2003). Of the several facets manifesting the integral role of the family in the society, the influence of family on business, in terms of firm creation and management, is no longer limited to small businesses, but it also consists of large corporations with families holding majority shares (Steier, Chrisman & Chua, 2004). This scenario is observed not only in the United States and in Europe, but it is also an event that has become perceptible in China, Japan and other Asian countries (Steier et al., 2004). As such, it can be claimed that there is a pervasive participation of families in the establishment and management of economic institutions that redefines the role of families in economic organisations and activities as well as in organisational life (Aldrich & Cliff, 2003; Morck & Nakamura, 2003; Steier et al., 2004). In this context, family owned business (FOB), just like non-family owned business, requires effective governance for the firm to achieve continued growth and success. Implementation of policies, strategies and management by family founders/owners are geared towards attaining efficient and effective governance that will sustain and maintain the family corporation (Angus, 2005). Effective FOB governance is essential not only in handling organisational issues and in wealth management of the FOB, but it is also necessary in handling conflicts arising from family relations involve in the business (Moore& Juenemann, 2008). In this condition, understanding governance in family owned business becomes one of the essential factors in determining FOB’s sustainability, growth and success in the era of globalisation. Background of the Study Family owned businesses play a crucial role in economic activities across the globe (Steier et al, 2004). Families creating and managing their own businesses have become pervasive and it is clearly manifest in many developing countries (Ramachandra & Merisetty, 2009). However, as economic institutions, FOBs require effective governance that will ensure not only their continued existence in the market, but can also guarantee the firm’

The Iranian Revolution and the Beginning of the Islamic Republic Research Paper

The Iranian Revolution and the Beginning of the Islamic Republic - Research Paper Example The paper also explores Khomeini as the leader of the revolution, especially his leadership skills and character. The discussion also spotlights some of his decisions that led the country into becoming an Islamic Republic. The paper will utilize, as a background, a number of academic terms studied throughout the semester such as authoritarianism, theocracy, leaders’ personality traits and characteristics and the various forms of repression engaged by governments. The discussion concentrates on both the events that caused the revolution and the revolution itself. It is widely clear about the aftermath of the revolution and what Iran has evolved into, but not too many people are aware of Khomeini’s reasoning and tactics that brought this change. This discussion utilizes political finding theory grounded in the tenet that if those agitating for a revolutionary movement failed to utilize or provide the appropriate opportunities when conditions were ripe, the revolution will fail. It thus follows that a revolution is shaped by essential political opportunities or effective actions made by the leaders. The Iranian revolution in 1979 managed to topple Shah’s absolute dynasty and replace it with a theocracy led by Ayatollah Khomeini. For the first time, the world saw the conception of a new structure of government; one modelled around the concept of wilayat I faqih, which revolves around the thought that everybody requires guardianship in the form of the rule or supervision by the leading Islamic Jurists. Revolutions, Islamic or otherwise, rarely live up on all their promises, and an external enemy can avail a practical diversion for the pressing internal problems. The Iranian revolution did not live up to the people’s expectations. The revolution may have produced a popular and widely accepted form of governance structure; nevertheless, it did not entirely overturn the old order. Although the Iranian revolution managed to topple Pahlavi dyn asty, traces of dictatorship were not entirely eliminated. Khomeini and the Mullahs ended up replacing one dictatorial regime with another. It was a shocking to millions of Iranians who had participated in the revolution in the anticipating that it would surrender more freedom. The ally revolutionaries such as secularists and leftists were equally suppressed by the new Islamic Republic government just as when under Shah’s Regime. The triumph or failure of social movements is principally affected by political opportunities. The political suppression of the Shah Regime led to the creation of a collective determination by inflating opposition against the Regime. Shah introduced changes too soon and radical opposition was inevitable to those who felt that their status quo was threatened. The fall of Shah Regime The root of the revolution can be traced back in part to preceding revolutions such as Persian Constitutional Revolution by liberalists and the White Revolution. It was a protest against what they regarded as efforts to modernise and westernize Iran (January 4). Despite the witnessed economic growth under Shah’s leadership, there was a lot of opposition to Mohammad Reza Shah absolutist monarchy. This antagonism particularly fuelled by the Regime’s military dictatorship and use of the secret police (America trained SAVAK police) to manage the country. Dissatisfaction was alive among the masses, especially arising from the violent crackdowns conducted by the regime (January 6). This in turn, had led to an

Horatio Alger’s Ragged Dick Essay Example for Free

Horatio Alger’s Ragged Dick Essay In the story of â€Å"Ragged Dick†, Horatio Alger tells an inspirational story portraying a hero, Dick, to be the embodiment of individual opportunity in American culture. Dick gains mobility up the socio ­economic ladder through his good virtue and dedication to higher education. Dick is an honest young â€Å"black ­boot† with a second ­rate shared apartment and low vernacular. However, Dick is generous and industrious, while keeping a frugal stance as to know the value of a dollar. while en route of finding new work, a young boy falls into the east river, and the father swears great rewards to the rescuer. Dick, an excellent swimmer, dives off a ferry and saves the boy, without hearing of any reward. The father, a wealthy industrialist himself, rewards Dick by giving him a well ­paying job as a clerk at his office. Dick, now realizing his potential, has allowed himself a new name with his new career, signifying his upward climb on the ladder claiming that he is finally, â€Å"cut off from the old vagabond life which he hoped never to resume† and sealing his grip upon the American Dream. Alger’s â€Å"rags to riches† story contains valuable tools that can be used to motivate a person’s social psychology, it’s myths can be unrealistic which can lead a person to believe a dream that could be impossible to obtain. The example of valor, hard work, and initiative are concrete tools for one’s toolbox, whereas relying only on gallantry can only go so far in our socio ­economic world. First, you could just take a look into the professions throughout our economy. Art, literature, and education are thrown on the back burner as business degrees are the #1 funded, and sought after, sectors.

Roles Of Investment Banks In Mergers And Acquisitions Finance Essay

Roles Of Investment Banks In Mergers And Acquisitions Finance Essay BACKGROUND: Â  Mergers and Acquisitions which can also be abbreviated as MA, relates to the corporate strategy, company finance and management of buying, selling and combining of different firms which can assist, finance or help a developing company in a particular sector develop more without generating a need to create different business entity. The history of MA has evolved in five stages. The process of MA is triggered by the economic factors such as growth in GDP, interest rates and monetary policies which brings the companies and organizations to emerge in the transactions of MAs. The first stage is known as the first mergers wave which was commenced from 1897 to 1904. During this phase merger occurred between the companies who are in the line of productions of heavy manufacturing products like railroads, electricity, etc. All the mergers that happened during these phase are of horizontal type. The companies and organizations that are merged had enjoyed monopoly in the market because of their same kind of manufacturing business of heavy machineries and industrial goods. At the end of the first merger wave those companies that are involved in mergers and acquisitions have tasted bitter failures because of non achievement of desired efficiency. These failures were highly fuelled by the economic slowdown and stock market crash in 1903 and 1904 respectively. Those companies were further more retaliated by the legal frameworks, which are even not in their favour. The Supreme Court had passed a mandate stating the possibility of halting of the anticompetitive companies using the Sherman Act an act which was passed in 1890 by the US government against the combination of companies who creates the potential harm to the competitive markets by their cartels and monopolies. (William L. Letwin, Congress and the Sherman Antitrust Law: 1887-1890, 23 U.Chi.L.Rev 221 (1956)) The second wave merger took place from 1916 to1929. During this period the mergers between oligopolies had taken place rather than monopolies. The economic boom after the World War I had given rise to these mergers. The technological advancement in railroads and transportations by motor vehicles had given a proper infrastructure to these mergers and acquisitions. The government encouraged the companies to work united and the policy was implemented in 1920s. The second mergers wave was mainly a horizontal or conglomerate type. Mergers happened during this phase were mainly between the companies producing petroleum, food products, metals, transportation equipments and chemicals. Investment banks had a vital role in facilitating mergers and acquisitions during this phase. The end of second wave mergers happened due to sudden crash in stock market in 1929. The tax relief provided by the government helped mergers to start again in 1940s. The third wave merger took place between 1965 and 1969 which was of conglomerate in nature. These mergers were inspired by the high interest rates, rise in stock markets and strict antitrust policies. The interesting fact about these mergers is, the bidder firms were smaller in size than the target firms. These mergers were financed from equities and investment banks have no more vital roles in those mergers. The third wave mergers ended by the plan of the Attorney General to split the conglomerates in 1968 and also due to a poor performance by the conglomerates. The fourth wave mergers took place between 1981 and 1989 which was a kind of acquisitions. These mergers were not big in size as compared to those in third wave mergers. Mergers were happened between the oil and gas companies, airline and banking companies and pharmaceuticals. This wave ended due to anti takeover laws, financial reforms and Gulf war. The fifth wave mergers took place between 1992 and 2000. During this period mergers were inspired by globalization and rise in stock market. Mergers were financed by the equity and not by the debt. The motives of mergers have changed from short term to long term profits. This merger wave ended with the burst of stock market bubble. To sum up, the process of mergers and acquisitions is coming from all the way long and has passed through lots of economic and geographic barriers. It is being developed by the various economic factors. Many other factors have contributed in its growth and as long as these economic units of production exist, MA will continue to spread and develop. As this paper is all about the financing of MAs, firstly, we must know about the ways in which the transactions of MAs are financed. You can finance an acquisition by borrowing money based on assets you own yourself or you can borrow money based on the business value and assets of the company you wish to purchase. Mergers are also frequently financed by stock swaps or by issuing new stock in your company to use as payment to the target companys shareholders.( http://www.ehow.com/how_2119515_finance-buyout-merger.html) If a company takes on debt to make an acquisition and the deal goes sour, it runs into financial trouble and the executives are replaced. But if an equity-backed deal goes wrong, the stock price simply underperforms and nobody can be sure why. One thing is certain unwise acquisitions abound in this market. Michael H. Lubaktin and Peter J. Lane Acquisitions can be financed by cash purchase, an exchange of stocks of shares or a combination of both cash and shares. However, from all these stated mediums, cash is considered as a most preferred mode of financing. It has started taking pace during 1970s, when the percentage of takeovers grew from 20% in 1960s to over 50% during 1970s. (D. A. Blackmon, 1997. WorldComs massive bid shakes up little town. Wall Street Journal, October 13: Bl, B9; P. Elstrom, C. Yang, and S. Jackson, 1997. WorldCom + MCI: How it all adds up. Business Week, November 4: 44.) Whenever a company decides it wants to merge or acquire another firm, they use the services provided by the professionals outside the company. It may include the Investment banks, accountants and valuation experts. There is variety of services provided by the Investment banks like helping to select the target, target valuation, advising on strategy and raising the required finance to complete the transaction. We have seen the origin of Mergers and Acquisitions and even various ways of financing it. But in this paper we are going to talk more about the role of Investment banks in the entire procedure of MA. So, before we move on further, lets just see how these Investment banks came into existence. We will see their origin, a bit of services they offer and finally their extreme importance in the transaction of mergers and acquisitions. In the true sense, Investment Banking is investing in the securities of the issuing companies, i.e. buying their shares and then to resale them to the general public. (Fleuriet, Michel, 2008, p.1). Investment banking is originated in 1792 outside the Wall Street and under a Buttonwood tree. This is the only known origin of investment bank by number of investment bankers. However, there is no exact report of truth of its origin. Anyways as nobody knows where Investment banking came from; let alone what it actually is. There are various other services apart from reselling the securities that investment banks provide. But it is believed that most of them are much older than the Investment banks themselves. Lets begin with the financial products the Investment banks offer. Investment banks deal with the underwriting and trading government bonds. They trade in international bond syndications. They develop new instruments of structured finance; one of them is mortgage-based securities. The major functions of Investment banks are: Raising Capital Trading Securities Advising on Corporate Mergers and Acquisitions. In general terms Investment banks act as intermediaries between the sellers and the buyers of securities. Moreover, they do more than just that. The scope of investment banking include all major capital market activities such as underwriting, private placement, MA, venture capital, market making, proprietary trading, financial engineering, clearing and settlement, and financing and money management. K.T. Liaw, The Business of Investment Banking (New York: Wiley, 1999). Apart from the rest of the duties of Investment banks, we are going to see more about its duties towards advisory on deals of Mergers and Acquisitions. Investment banks are nowadays having become more focused on taking the deals of MAs which are of logically planned to think deeply and apply thoughtful logic in the whole merger transaction. If an Investment bank is on the buy side of the transaction, it will spend lot of time to analyze the situation, strategic setting of the acquirer and of the target. It will help them to identify potential strategic aims for the transaction. AIMS and OBJECTIVES: The main aim of this paper is getting a legitimate understanding of the entire process of MA as well as an extreme vital role of Investment banks in the entire process of MAs. Moreover, by doing this research work, I would try to find out various strategies and methods that the Investment banks use according to the companys situations. Furthermore, I would also try to find out the ways the Investment banks use their arbitragers in taking higher risks to get the maximum amount of profit out of the entire merger transactions. There are several other objectives and questions that are needed to be answered that I would try to find and present my best possible outcome of the research in this paper. In recent trend, the transaction of mergers and acquisition requires a strategic plan to create a successful merger. There are several ways that the companies involved are applying nowadays. Firstly, the acquirer company makes a tender offer which means, it makes a takeover bid in public like an open offer or an invitation to all the shareholders of the target company. It offers the stock for sale at a specific price during a stipulated time period. That offer may be for a minimum or maximum number of shares. And in this case the acquirer firm directly contact the shareholders through the medium of newspaper advertisements and the directors of the target firm may not have endorsed the proposal of the tender offer. The price which the acquirer firm offers to the target firms shareholders usually have included premium over the current market price of the target companys shares. Acquirer firm does so to induce the shareholders to sell their maximum number of shares to them. There is an extreme importance to study both the perspectives of the entire process of MA. It means the process consists of both the buyers perspective and the sellers perspective. Here, we are going to study these perspectives and try to conclude the outcomes of the entire research. First of all we will see the transaction from the buyers point of view. How a buyer of the firm gathers all required materials, assemble the team, recruit the internal team to go on for further details, getting things done by the outside teams, etc. Secondly, we will go for the sellers perspective of the deal. What made the seller to sell his business, preparations made to close the bid, keeping in mind the needs of prospective buyer, gathering the decisions of the sellers entire team, preparing financial terms, taking help from the outsiders, etc. Moreover, we will also focus on the importance of the advisory teams which plays a vital role in closing the deals. They may be accountants, attorneys, investment banks or other financial institutions. As this paper is made to get insight on workings of the Investment banks as an advisor to both the parties in the deal, we will see more on the entire work done in the past by various Investment banks from all over the world. We will also take some examples of the Investment banks and their financial advisory terms and structures to get exact and insight knowledge of the Investment banks as an advisor. Finally, we will conclude on the basis of ethics, the working of both sides of the merger deals and the ethics used by the Investment banks in its advisory role to the process of mergers and acquisitions. Methodology and Data: Research methods are the techniques for gathering data (Aldridge and Levine, 2001). It is a systematic and orderly approach for collecting and analyzing data and obtaining particular information from collected data (Jankowicz, 2000). The research I am doing on is a topic that can be discussed a lot. Because of its increasing importance, the data regarding my research can be available in ample quantity from number of sources like journals, articles, magazines and some research papers, electronic search engines from college, World Wide Web, documentary data, Survey based data etc which helps to develop a good literature and synthesize and analyze primary data. Secondary data analysis provides higher quality data than could be obtained by collecting on your own (Stewart and Kamins, 1993). Re-analyzing secondary data can lead to unforeseen or unexpected new discoveries (Saunders et al, 2003). These available secondary data can give me that information that is at least a basic idea giving and can be my first approach to initiate my research work. Because of the day to day financial news is available in Financial News Papers, lot of information regarding investment banks are available from it. Along with that the inter net is considered as the best source of getting information on almost every topic we wish to work on. So, my first move to start research would be secondary data available from above mentioned sources. Data collection through interviews has been the prime source of this research. An interview is a purposeful discussion between two or more people (Kahn and Cannell, 1957). It is a type of social interaction between a researcher and an interviewee, who serves as the potential source of information relevant to the research. The use of interviews helps the researcher to collect valid and reliable data that are significant so as to the research questions and objectives (Saunders et al, 2003). Bryman and Bell (2007) says that the research interview is an important data collection strategy in any type of research whether it is quantitative or qualitative. The major merit of interview to be used as a data collection tool is that it focuses predominantly on the researchers topic along with being more insightful. The objective behind conducting interview is to collect relevant information required to the respondents knowledge in particular field (Merriam, 1994, pp. 86 87). Structure of the Study: This study has been divided into five chapters: Chapter two describes empirical literature based on past studies conducted on single and panel countries and an overview of Investment banks working towards the finalizations of merger deals with description of recent trend and progress of MA deals. Chapter three explains the methodology and data used in this study together with the description of variables. Chapter four states the analysis of the collected data and findings. Finally, chapter five provides the results and conclusion derived from the given study. CHAPTER TWO: LITERATURE REVIEW Introduction: An acquisition is a transaction where one company buys shares of another company, by issuing its own new shares, cash, debt or a mixture of these forms of consideration. A merger transaction is where both parties agree to combine their business, and for this purpose form a new company that issues shares which replace the shares of both businesses (Reuvid, Jonathan, 2007). Mergers and Acquisition activities have been circled from long time, which is based on various macro economic factors. The overall economic state of the nation and abroad. Stock prices of public listed companies. Liquidity levels in the financial markets. The level of pressure by antitrust on Mergers and Acquisitions. The level of regulation in accurate checking of certain industries, such as airlines, telecommunication, banking and other financial services. If the conglomerates or pure play companies are in favour of market experts and analysts. There are so many differences in aspects of the number of companies bought and sold, as well as prices paid for these deals, as time has passed. Firstly, we will see the examples of the merger transactions that had failed due to lack of proper preparations and over spending of money in transaction. Here is the case of Conseco Finance, which was trading near its highest level at $50 per share in June 1998. The CEO of the company, Stephen Hilbert, and the public market were very confident about the companys prospects. However, Hilbert announced the acquisition of Green Tree Financial, a subprime mortgage and consumer lending company, for a whopping $7.6 billion, that same month. The offered price was more than seven times the net worth of Green Tree, or a $6.6 billion premium to the tangible book value. Then the disaster had started to happen over the next two years. The stock price of the company dropped to $below $10 per share from $50 per share. The company was declared bankrupt in the spring 2003. Moreover, the analysts attributed the companys long and painful downfall to its overpayment for the Green Tree assets and the subsequent adverse impact of that purchase on Consecos operations. This disaster not only resulted in loss of job to Hilbert, but also drove a very successfu l company out of business. The popular

Problems in the United States Educational System Essay -- essays resea

Problems in the United States Educational System Today, the way the educational system works in the U.S. concerns a large number of people in this country. "Only 25% of adults have a great deal of confidence in the people running education, according to the General Social Survey, down from 49% in 1974" (Russel 4). A lot of discussions have been held to find the best ways to improve teaching methods. At the same time, people recognize that a very valuable solution to increase the level of education in the United States is to look at some problems that cause difficulties and hamper the enhancement of the quality of education. The first step is to define these problems. As in every country, the U.S. wants to develop its national standards in education and wants them to be high. This has always been a government function. Being democratic, the government is trying to fit the qualities of democracy into the way to set these standards. Of course, this is not an easy task since this country has a very diverse population. To plea se everybody has always been an almost impossible task. Despite this impossibility, national standards have already been set. "If a visitor from another nation was dropped into an American public school classroom without knowing the state or the region, he or she would be likely to see the same lesson taught in the same way to children of the same age" (Ravitch 9). Everything seems right except the fact that the abilities of children are different. Not everybody is able to study at a college; not everybody wants to continue being educated. It is obvious that every country wants to produce as many educated people as possible. But, at the same time, every country needs workers because, regardless of the fast development of technology, there is still a great necessity for human labor. To satisfy all the necessities of the country, the government should provide different kinds of education. This does not mean that we need to eliminate all of the standards; they could be set in each field of education. Although standards are set, there is still a very big difference in teaching methods in different schools. Perhaps, the most serious problem starts in high schools: some schools provide a higher level of education than others. Students from most city schools graduate with the confidence in their knowledge; their level of educati... ... 1998: 45-47. Gray, Kenneth. "The baccalaureate game: Is it right for all teens?" Phi Delta Kappa Apr. 1996: 528+. McEachern, William A. "The Max for the Minimum." The teaching economist. Issue 15. Spring 1998. Nelson, F. Howard. "How and How Much the U.S. Spends On K-12 Education: An International Comparison." Mar. 1996: n. pag. Online. Internet. 9 Mar.1998. Available http://www.aft.org/research/reports/interntl/sba.htm. Ravitch, Diane. "50 states, 50 standards?: The continuing need for national voluntary standards in education." The Brookings Review Summer 1996: 6+. Rehder, Robert R. "Education and Training: Have the Japanese Beaten Us Again?" Personnel Journal Jan. 1983: 42. Russel, Cheryl. "What's wrong with schools?" American Demographics Sep. 1996: 4+. Sinitsyn, Maxim I. "The Results of a Test." msinits@siue.edu (30 Mar. 1998). Smith, Greg. "How to beat the SAT/ACT blues" Career World Nov. 1995: 13+. Sternberg, Robert J. "Extra Credit for Doing Poorly." New York Times 25 Aug. 1997, late ed.: sec.A: 23. "Strengths and weaknesses of American education." Phi Delta Kappa Apr. 19

The Assassination Of John F. Kennedy Essay examples -- essays research

In January of 1960, a young man by the name of John F. Kennedy was sworn in to uphold the office of President of the United States of America. He was assassinated on November 22, 1963, when he was only 46 years old. There is lots of speculation about the way he died. Here are just a few questions concerning his death. Who or how many people were involved in President John F. Kennedy’s assassination? This is a question that has baffled many people for 33 years. Some of the main questions are: Was Lee Harvey Oswald the lone assassin? This question may never be answered. Is there a possibility that there could have been another rifleman? What is the minimum time to get three shots off with the Mannlicher Carcano bolt action rifle? Why did Jack Ruby shoot Oswald? Was he trying to protect himself or show loyalty to his President? Did Fidel Castro have President Kennedy assassinated? Were the CIA and FBI involved? What about the â€Å"mob†; did they have any logical reason to kill the President? What is the story on the â€Å"superbullet†? How can one assassin shoot three shots at a man in a limousine going 11.2 mph under five seconds? Among the most crucial questions to be considered in determining the identity of the President’s assassin are the number of shots fired in the course of the assassination, the time elapsed between shots, and the location of the site or sites where the shots were fired. A great deal of evidence rides on these questions: the number of wounds, the path of the bullets causing each wound, the position of the rifle believed to have fired the recovered bullet and its fragments, the position and number of empty cartridge cases believed to have been fired, and visual observations by bystanders. In addition, a mass of evidence has been collected from the people that witnessed the shooting. I will try to explain or figure out what went on during the 22 of November in 1963.   Ã‚  Ã‚  Ã‚  Ã‚  There are many theories on the assassination of JFK. The first theory is that Robert Kennedy, the brother of John and also the attorney general at this time dated a known mobsters’ girlfriend, and Robert also tried to get one of the biggest court cases in the history of the U.S. put upon the mob. In order to get back at him, they killed his brother. Later, they killed him when he was going to run for President. There is some more evidence that the mob ... ...mes. I think that the CIA was mad at President Kennedy for not helping them out at the Bay of Pigs, so they managed to convince Oswald that they would give him lots of money to kill the President. When they hired Oswald, they had one of their own men on the grassy knoll to shoot Oswald after he shot President Kennedy, then the CIA’s man would kill Kennedy. This supports the theory of why the people heard a shot over the fence at the grassy knoll. Another things that supports my theory is that they never found the third bullet. When the man behind the fence did not do his job, they sent Jack Ruby to finish what they started. They had to quiet Oswald or he was going to talk and tell who was really behind it. Who was really behind it? This is a question that the world will never know the real answer to. This concludes my theory on how President John F. Kennedy was assassinated. Works Cited Accessories After the Fact. U.S. Government Printing Office, 1964. North, Mark. Act of Treason. New York: Carroll & Graf Publishers, 1991. Posner, Gary. Case Closed. New York: Random House, 1993. Scott, Peter Dale. Deep Politics and the Death of JFK. University of California Press, 1993.

Advanced Microeconomics Essay

Question 1: Consumer Theory 1.1: In both the Marshallian and Hicksian consumer optimisation problems, it is assumed that consumers are supposed to be rational. The main focus of these problems are cost minimisation and utility maximisation, which play a huge part in consumer demand, but in real life, these are not the only problems that are considered. Also, it is assumed that every consumer’s indifference curve for two goods would be the same – they are very generalised models, and do not take into account other factors. For example, not many consumers would spend their entire budget on said goods – one thing to consider would be a consumer’s marginal propensity to consume and save. Though both of the problems provide a framework and model of consumer decisions, they are not plausible when applying them to real-life terms, because we have imperfect knowledge. 1.2: The expression given in the question, is the rearranged derivative of the Hicksian demand being equal to the Marshallian demand, when income from the budget constraint is equal to minimised expenditure, whereby m=ep, ÃŽ ¼. This is given by: dDdp= dHdp- dDdm . dedp using m = e. Shephard’s Lemma provides us an alternative way of deriving Hicksian demand functions, using e. It is given by: dedp= x* It is important to note that e is strictly increasing in p, due to Shephard’s Lemma, and x* >0,by assumption. Substituting this into the above expression gives: dDdp= dHdp- dDdm x*  This expression now represents a complete law of demand, as it has combined both Marshallian and Hicksian demand, whereby income from the budget constraint of Marshallian demand, is equal to minimised expenditure of Hicksian demand. Therefore, it has maximised utility and minimised cost simultaneously, to create an optimal quantity of demand in x*. The first term, dDdp, means that Marshallian demand (maximising utility) increases, relative to the price of the good. dHdp represents the Hicksian part of the expression, whereby expenditure is minimised, relative to the price of the good. Question 3: Adverse Selection, Moral Hazard and Insurance 3.1: Insurance markets are needed when risk is present. Risk occurs when there is uncertainty about the state of the world. For example, car drivers do not know if they will crash their car in future, and suffer a loss of wealth – so they would purchase insurance to eliminate this risk of loss, and protect them if they were to ever crash their car. Agents (buyers of insurance) will use insurance markets to transfer their income between different states of the world. This allows insurance markets to trade risk between high-risk and low-risk agents/states. These can be described as Pareto movements. A Pareto improvement is the allocation, or reallocation of resources to make one individual better off, without making another individual worse off. Another term for this is multi-criteria optimisation, where variables and parameters are manipulated to result in an optimal situation, where no further improvements can be made. When the situation occurs that no more improvements can be made , it is Pareto efficient. A condition for efficiency is the least risk-averse agent bears all the risk in an insurance market. If a risk-averse agent bears risk, they would be willing to pay to remove it. A risk-averse agent has a diminishing marginal utility of income; whereby his marginal utility is different across states, if his income is different across states. The agent would give up income in high-income states, in which his marginal utility is low, to have more income in low-income states (e.g. bad state of the world causing a loss of wealth), where his marginal utility would be high. If the insurance market is risk neutral, they will sell insurance to the customer, as long as the payment received is higher than the expected value of pay-outs that the insurer is contracted to give to the customer in different states of the world. Whenever the agent bears some risk, unexploited gains from trade exist. Absence of unexploited gains from trade is a requirement in an efficient insurance market, therefore the situation must arise, whereby the agent’s income is equalised across the states of the world. A risk neutral insurance company can charge a premium to equalise the agent’s income across states of the world, in the best interests of the risk-averse agent. Also, for an insurance market to be  efficient, a tangency condition is implied. The tangency of the indifference curves of a risk-averse agent, and a risk-neutral agent, is where efficiency occurs. At this point, one cannot be made better off, without the other being made worse off (Pareto efficiency). However, an insurance company will never be completely efficient in real life, as information asymmetry exists. The first type of information asymmetry to arise in an insurance market is moral hazard, whereby the actions that an agent may take after signing the contract cannot be observed. This gives the company a trade-off decision between giving full insurance or offering incentives for the agent. Full insurance is first-best in the absence of asymmetric information, when the insurance company is risk-neutral and the agent is risk-averse. However, if the agent is fully insured by the company, they have no reason to prevent a bad state of the world from happening. To solve this problem, the insurance company will not offer full insurance, in order to provide the agent with an incentive to avoid losses. The second type of information asymmetry to occur in an insurance market, is adverse selection. This is when the agent has private information about his risk type and characteristics, and agents in the market are heterogenous. As the insurer doesn’t know which agents are high-risk or low risk, the company will not offer different types of full insurance to match risk-types, as high-risk agents will prefer contracts that are designed for low-risk agents. To solve this, the insurer will offer low-risk agents less insurance – this ensures that high-risk types do not have the incentive to choose a contract for low-risk customers, as they will want more insurance, because they know they will need to claim more. This ensures that the insurance company maintains non-negative profit, as high-risk individuals cost more to insure. However, these solutions carry agency costs, because the result is less efficient than if symmetric information was present. I believe that risk neutrality of an insurance company is a sufficient condition for insurance to take place. Insurance companies are risk-neutral to maximise expected profits, therefore as the principal, will design contracts to achieve this, as well as making certain that the agent picks the desired effort (i.e to prevent a bad state of the world) for that contract, and to make sure that the agent even picks the  contract in the first place. Making sure incentives are compatible, and ensuring participation by the correct risk types, are constraints on maximising expected profits. If an insurance company was risk-averse, without the availability of symmetric information, they cannot differentiate between different risk-types, and therefore would not want to take on the risk of possible high-risk agents buying low-risk contracts. They would charge a higher premium to offset this, which would discourage low-risk customers to sign a contract with the company, as it would not be maximising their own utility. This would lead to a missing market, where trade would be prevented, because other risk-neutral companies would offer better contracts, and they would be able to steal all the low-risk customers. The magnitude of this would depend on the number of low- and high-risk people in the population. This leads me to believe that risk neutrality is also a necessary condition for insurance to take place. 3.2: An insurance company will sell a policy, c, r, if it makes non-negative profits, then:  Ã¢â€ â€™ r-pic ≠¥0,  where c = payout, pi = probability of the loss state, r = premium. Competition in the market drives profit down to zero, therefore r-pic = 0 in equilibrium. For the contract to be at equilibrium, it must satisfy two conditions: the break-even condition, whereby no contract makes negative profits; and absence of unexploited opportunities for profit, because if there was a contract outside of the offered set, with non-negative profit, would mean the offered set is not in equilibrium. If all agents are homogenous, if all agents face the same probability of loss, pi=p, insurance companies would know each buyer’s pi. The firm must maximise each agent’s utility subject to the firm breaking even. This would be at the point of tangency of the agent’s indifference curve and zero-profit constraint. This would be in equilibrium as another profit-making polic y could not be offered. Therefore, as they can observe agent’s risk types, they can offer different policies, to different types: ÃŽ ¸i= ri, ci. It follows that each is offered full and fair insurance. In real life, heterogeneity is usually the case. This is when pi varies with all individuals. Assuming that there are two types: high-risk types, H, and low-risk types, L, where the probability  of loss for H is higher than for L. Individuals know their own probability of loss i=H, L, but insurance companies are unable to observe this. In this case, there are two different kinds of equilibria that insurance companies could opt with: the candidate pooling equilibrium and the candidate separating equilibrium. The pooling equilibrium is where all risk types buy the same policy. In contrary, the separating equilibrium is based on each risk type buying a different policy. In the pooling equilibrium, if both H and L risk-types choose the same policy, the probability of loss is p and the probability of no l oss is 1- p. Therefore, the slope of the ‘aggregate fair-odds line is -1-pp. The pooling contract must lie on this line to be in equilibrium, to ensure the firm breaks even exactly. The contract must also ensure both types want to buy it – it must take both L and H to higher indifference curve than the indifference curve they would be on if they stayed uninsured. Agent L ends up below his fair odds line, and H above his, which means L pays more than expected costs, and H pays less – both pay the fair pooled premium, but H claims on the policy more. So if L prefers to buy the contract, so will H. This leads me to believe both L and H will be able to get full insurance, though it’s not completely fair, as the firm does not need H to choose a different policy to remain breaking even. However, this brings to mind the notion that if full insurance is offered, the agent will not have the incentive to prevent a loss state. Therefore, less insurance will probably be offered, and as both risk types are paying the same premium of the same policy, neither will receive full insurance, as it impossible to differentiate between the two – they will both choose the same policy offered. In the separating equilibrium, one contract would be offered to L, and another to H. Each risk type must prefer the contract designed for that type (i.e. the incentives must be compatible). The contracts offered should give each type the highest possible utility, subject to the firm breaking even. If full insurance contracts were offered to both L and H, where their respective indifference curves are tangent with their respective zero-profit constraints/fair-odds lines, low risk customers would prefer the policy designed for them, but high-risk customers would also prefer the same policy, not the policy designed for them. So they would not both be offered full insurance, as this gives rise to the problem of preventing H from imitating L – low-risk agents are cheaper to insure for the firm (claim less  often) so they get a better rate. Therefore, instead of offering L full insurance, they are offered C, which is still on their fair odds line, but on a lower indifference curve, still ensuring the zero-profit constraint. Now, if the high-risk agents were to choose between the policy designed for them, and C, they will choose the policy designed for them, because they prefer to have more insurance for less money. So, in conclusion, in the separating equilibrium, high-risk (H) customers receive full insurance, and low-risk (L) customers only receive partial insurance – they pay the price to prevent H from imitating them. L is worse off than if there was symmetric information in the market, but no difference to H.