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Managing Disruption Risk: The Interplay Between Operations and Insurance
Disruptive events that halt production can have severe business consequences if not appropriately managed. Business interruption (BI) insurance offers firms a financial mechanism for managing their exposure to disruption risk. Firms can also avail of operational measures to manage the risk. In this paper, we explore the relationship between BI insurance and operational measures. We model a manufacturing firm that can purchase BI insurance, invest in inventory, and avail of emergency sourcing. Allowing the insurance premium to depend on the firm's insurance and operational decisions, we characterize the optimal insurance deductible and coverage limit as well as the optimal inventory level. We prove that insurance and operational measures are not always substitutes, and we establish conditions under which they can be complements; that is, insurance can increase the marginal value of inventory and can increase the overall value of emergency sourcing. We also find that the value of insurance is higher for those firms less able to absorb financially significant disruptions. As disruptions become longer but rarer, the value of emergency sourcing increases, and the value of inventory and the value of insurance increase before eventually decreasing.
This paper was accepted by Martin Lariviere, operations management.
Journal Article
Barriers to Household Risk Management: Evidence from India
Why do many households remain exposed to large exogenous sources of nonsystematic income risk? We use a series of randomized field experiments in rural India to test the importance of price and nonprice factors in the adoption of an innovative rainfall insurance product. Demand is significantly price sensitive, but widespread take-up would not be achieved even if the product offered a payout ratio comparable to US insurance contracts. We present evidence suggesting that lack of trust, liquidity constraints, and limited salience are significant nonprice frictions that constrain demand.We suggest possible contract design improvements to mitigate these frictions.
Journal Article
Washing Away Your Sins? Corporate Social Responsibility, Corporate Social Irresponsibility, and Firm Performance
The authors address the questions of whether and how corporate social responsibility (CSR) relates to firm performance and, in so doing, identify four mechanisms pertaining to this relationship: (1 ) slack resources lead to CSR (i. e., slack resources mechanism) (2) CSR improves performance (i. e., good management mechanism), (3) CSR makes amends for past corporate social irresponsibility (CSI) (i.e., penance mechanism), and (4) CSR insures against subsequent CSI (i.e., insurance mechanism). Using an integrative approach, the authors incorporate the four mechanisms in their empirical model specification. Specifically, to model the interplay among CSR, CSI, and firm performance and to test the four mechanisms simultaneously, they propose a structural panel vector autoregression specification. In support of the good management mechanism, results from an unbalanced panel data set of more than 4,500 firms and up to 19 years suggest that firms that engage in CSR are likely to benefit financially from their CSR investments. Moreover, the authors do not find support for the slack resources or the insurance mechanism. In contrast, and in support of the penance mechanism, often firms' CSR seems to trail their CSI. However, the results also suggest that the penance mechanism is ineffective in offsetting negative performance effects due to CSI.
Journal Article
Seeking Legitimacy Through CSR: Institutional Pressures and Corporate Responses of Multinationals in Sri Lanka
Arguably, the corporate social responsibility (CSR) practices of multinational enterprises (MNEs) are influenced by a wide range of both internal and external factors. Perhaps, most critical among the exogenous forces operating on MNEs are those exerted by state and other key institutional actors in host countries. Crucially, academic research conducted to date offers little data about how MNEs use their CSR activities to strategically manage their relationship with those actors in order to gain legitimisation advantages in host countries. This paper addresses that gap by exploring interactions between external institutional pressures and firm-level CSR activities, which take the form of community initiatives, to examine how MNEs develop their legitimacy-seeking policies and practices. In focusing on a developing country, Sri Lanka, this paper provides valuable insights into how MNEs instrumentally utilise community initiatives in a country where relationship-building with governmental and other powerful non-governmental actors can be vitally important for the long-term viability of the business. Drawing on neo-institutional theory and CSR literature, this paper examines and contributes to the embryonic but emerging debate about the instrumental and political implications of CSR. The evidence presented and discussed here reveals the extent to which, and the reasons why, MNEs engage in complex legitimacy-seeking relationships with Sri Lankan host institutions.
Journal Article
Pricing and Hedging Insurance Products in Hybrid Markets
Diese Dissertation stellt innovative Pricing- und Hedging-Modelle für eine breite Klasse von Versicherungsprodukten vor. Eine wichtige Neuerung im Hinblick auf die existierende Literatur ist dabei das Anwenden F-doppelt stochastischer Markovketten, was die Ausarbeitung der Formeln anhand stochastischer Intensitätsprozesse ermöglicht. Für die Prämienbestimmung für Arbeitslosigkeitsversicherungsprodukte werden die Intensitätsprozesse durch mikro- und makroökonomische stochastische Kovariablenprozesse generiert, um Einflüsse und Abhängigkeitsstrukturen innerhalb von Arbeitsmärkten zu untersuchen. Als Preisregel wird die \"Real-World\"-Preisformel des Benchmark-Ansatzes gewählt.Für die Bestimmung optimaler Hedgingstrategien werden quadratische Hedging-Methoden auf eine breite Klasse von Versicherungsprodukten, u.a. Lebensversicherungsprodukten, angewandt. Die Lösungen werden dabei anhand der Galtchouk-Kunita-Watanabe-Zerlegung jeweiligen der Schadenprozesse bestimmt.
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