In Chapter 6, we confront the reality that many dog owners must eventually face decisions about their dogs’ end-of-life, potentially including hard decisions about euthanasia or costly medical interventions. We frame these decisions about ending life in terms of the owners’ fiduciary responsibilities and what they imply across different property rights regimes. We show how framing the relationship between dogs and humans in terms of principal-agent theory may offer some novel insights about responsibilities. We explore the appropriateness of euthanasia and how individual preferences and societal perspectives on its appropriateness have changed over time. We then examine the growth in pet health insurance and pre-paid veterinary plans and how this growth affects the economics of the choice between various treatments and euthanasia. We conclude by considering how individual and societal attitudes toward the use of dogs in medical research have changed over time. Nonetheless, although the number of dogs used in research has declined in recent years, many dogs still suffer and experience premature death.

In 1997, a domestic financial crisis broke out with mass chaebol bankruptcy, and then a currency crisis broke out as Japanese banks suddenly pulled short-term loans out with a liquidity crisis at home. Japan was willing to provide the liquidity to cope with the situation; however, the United States brought the case to the IMF to open up South Korea’s capital market and realize its broader national interests in East Asia after the Cold War. South Koreans yet accepted the IMF conditionality willingly to utilize it as a momentum for the reforms they thought desirable. The country carried out thoroughgoing reforms while failing to consider the complementarities between the new and existing institutions. The reforms improved corporate governance and purged the system producing non-performing loans, but they undermined the mechanism of the high economic growth. They also led to the massive layoff of workers and the sale of assets to foreigners.

Fears do not simply reflect the reality of the underlying dangers. Fear is itself created by society’s debates about what count as risks and how these should be managed. Beck has argued that modernity’s uncertainties have arisen from technological developments themselves, in that these have generated self-destructive threats that they are incapable of controlling. This chapter argues that Rome’s social structure generated its own specific set of anxieties. Just as technology has today created anxieties about the downside of that innovation, in Rome, empire generated a set of fears concerning its perceived negative side-effects. These were focused on moral issues, and their anxieties were expressed in areas where they had their own expertise, in particular the law and rhetoric. Their fears were also often constructed in a backward-looking way, seeking to reduce future risk by returning to the traditions of the past.

This chapter introduces the concept of insurance as a product and explores why people want to purchase insurance in general (and health insurance in particular). The main discussion centers around explaining that health insurance (and all insurance) is primarily financial protection: health insurance does not protect your health but instead protects your wealth from health-related risk. The chapter then moves on to discuss the operations of an insurance company: how premiums are set, the difference between correlated and uncorrelated risk, group insurance, and experience rating. The chapter ends by discussion moral hazard in the context of an individual with insurance coverage. The end of chapter supplement provides a mathematical example of why someone who is risk averse would want to purchase insurance.

Summary: Policies targeted at disciplining moneylenders was one approach to dealing with the problem of limited supply and high prices; the other was establishing alternative sources of affordable credit. Following rounds of discussion among colonial officials in the late nineteenth century on the type of credit supplier most suited to cater to demand in rural India, the government embarked on an ambitious project to transplant credit cooperatives as designed in Europe to Indian villages in 1904. The chapter explores the phase of transplant and how the cooperative enterprise in India differed from the European model. It examines how cooperatives performed, evaluates profit and loss statements and analyses whether expansion in the number of cooperatives led to inclusive development. The chapter finds negative outcomes in each measure. Prevailing political objectives prioritizing equity over efficiency led to a cooperative structure operating with low savings and weak regulation. The regulatory problem ultimately led to the exclusion of poorer peasants from accessing credit and overleveraged cooperative banks. Injections of public money into rural cooperatives embedded moral hazard in the sector. These problems became more severe in the 1940s and 1950s.

This chapter addresses insuring natural catastrophes in America. It provides an overview of the existing lines of insurance for natural catastrophe losses, such as homeowners insurance, commercial property insurance (including business interruption insurance), the National Flood Insurance Program, and earthquake insurance (including the California Earthquake Authority). Currently, most natural catastrophe losses are uninsured in America as a result of consumer ignorance regarding risk and private insurers’ general treatment of natural catastrophes as uninsurable correlated risks. Consequently, this chapter also includes a discussion of ways more natural catastrophe losses could be insured in America by considering the ways other developed countries throughout the world insure natural catastrophe losses.

Chapter 3 offers a historical account of the emergence of the welfare state. In the absence of private or public insurance and faced with new, poorly understood, and existential risks, workers set up mutual aid societies (MASs) to cope with industrialization and urbanization. At their peak, MASs covered up to half of the (male) population but only protected against a small fraction of the risks of unemployment, disability, disease, old age, and death. While MASs tried to mitigate adverse selection and moral hazard through monitoring, they faced a double bind: they attracted bad risks while losing good risks to commercial insurance. Nor could they cope with correlated risks or support PAYG arrangements (the time-inconsistency problem). Ultimately, they were replaced by compulsory public social policy programs that mandated all citizens to join a common risk pool. The state had the power of compulsion, the ability to overcome the time-inconsistency problem, and majority support for social insurance in the absence of effective private alternatives. The result was a massively redistributive welfare state.

The ethics of climate change are deeply problematical – a “perfect moral storm.” This ethical terrain is characterized by a dispersal of cause and effect, a fragmentation of agency, and an institutional inadequacy. However, the greatest moral pitfall derives from the severely lagged nature of climate change, leading to dire issues of intergenerational equity. Common notions of justice in the climate arena include distributive, reparative, and procedural elements. The precautionary principle is also perceived to be a salient consideration. Ethical challenges particular to climate interventions start with the "moral hazard" or mitigation deterrence reservation as well as the risk of hubris in seeking to engineer the earth system. Some argue that geoengineering shirks responsibility for our emissions and saddles the future with a burdensome climate debt. An alternative though not universally accepted view is that since climate change is likely to have asymmetrical adverse impact on the poor, geoengineering would convey to them asymmetrical benefits. Though ethics would seem to demand not merely societal climate sacrifices but personal ones as well, few among my Yale students or Harvard colleagues have yet to undertake them. I can’t claim to be any holier than they, which is itself a dilemma.

In practice, the regulator generally has access to less information than the regulated firm on costs. In Baron– Myerson (1982) the regulated firm has private information on cost characteristics it cannot modify. In Laffont– Tirole (1986) the firm has private information on its endogenous effort to decrease cost. Regulators must pay information rent to access the information required for designing the contracts and must credibly commit to pay it to avoid a ratchet effect. The issue is politically sensitive because the ‘fee’ for information increases the operator’s profit whereas it is paid either by the consumers or the taxpayers, that is, by voters. Under adverse selection, to reduce the cost of the information rent, which is highest for the most efficient firm that is induced to produce the first-best level, less efficient firm production is distorted downward. The optimal regulation mechanism to address moral hazard risks impacting costs offers a menu of contracts where efficient firms choose a high fixed payment and produce the optimal effort while inefficient firms are constrained to choose cost-plus contracts, which again implies no rent and no effort for them.

Chapter 6 argues that businesses, especially large companies receiving government funding, should expect there to be conditionality attached to this. Other European countries have, unlike the UK, built in to their COVID-19 support packages requirements for environmental targets, protections for jobs and put caps on the interest rates banks can charge on government-backed loans. It will discuss the missed opportunity to secure a payback after the 2008 banking crisis and the moral hazard that the large-scale bailouts engendered. It will suggest that the loosening of monetary policy, both then and now, will, if not managed properly, continue to funnel money to the rich.

It will look at proposals to learn from past mistakes to secure a ‘pandemic payback’, for instance if the government were to take advantage of historically low interest rates to purchase equity stakes in businesses that face challenges but are fundamentally sound. It will look at international voices calling for a fundamental change in how companies are governed so that they serve a broad group of stakeholders, and proposals for changes to the law to make it the duty of directors to promote the long-term success of a company in place of short-term shareholder interest.

If the logic of markets is that price equals value, sometimes there are forms of value that fall outside of what markets are able to recognize. We call this phenomenon market failure. It is not a personal or institutional failure or even a failure of economic theory, just a limitation of markets as a medium. Our core case study is of the opening of Tate Modern. The museum revitalized the Southwark area of London and increased property values sometimes 500%. The museum relied on philanthropy and government support and was not able to capture all of the value it created. We consider two very different methods economists use to evaluate these situations: contingent valuation method and economic development study. We compare and contrast the approaches taken by the Guggenheim and the Tate. We explore concepts of market failure including public goods, externalities, tragedy of the commons, free-rider problems, adverse selection, and moral hazard.

As the Global Financial Crisis has demonstrated, any complex system is vulnerable to fragility without purpose and vigilance. The tentacles of the finance industry traverse state boundaries. They create moral and economic hazards as well as opportunities. Each poses legitimacy and authority implications. Failure to address those threats have contributed to a populist turn, which poses the risk of further policy uncertainty and instability. Responding to this crisis through resilience as either metaphor or organising framework is, however, problematic. This chapter argues that notwithstanding its increasing usage by international bodies such as the G20, resilience is not a neutral concept. Privileging resilience as an end in itself may prove counterproductive unless underpinned by a normative reset of the purpose of the corporation and the market, and the duties and responsibilities each owe to society. It concludes that without clear definition of purpose, and accountability, regulatory structural form is irrelevant, as demonstrated by the failure and ineffectiveness of the Twin Peaks model in Australia.

Financial crises are widely perceived to be the reason monetary rules cannot work. The extraordinary challenges posed by crises require policymakers to act discretionarily. We show that this argument is not only wrong but backward: It is more important than ever to have true rules for monetary policy, which actually bind, to cope with financial crises. We show how the Fed failed to respond appropriately to the 2007–2008 crisis. Contrary to the then chairman Bernanke’s public statements, the Fed did not behave as an orthodox lender of last resort. Instead, it experimented with dubious policies that further entrenched moral hazard in the financial system. We criticize these policies, as well as an approach to economics, which we call “triage economics,” that mistakenly supposes the basic rules of price theory provided no guidance in crafting policy responses to crises. A rules-based approach to monetary policy is thus consistent with extreme market turbulence. In fact, rules are how such turbulence is pacified.