Category Archives: incentives

GNP linked securities? Link to inflation as well.

In an article in the Financial Times this week, Patrick Honohan, Governor of the Central Bank of Ireland, proposes that Irish debt repayments be linked to the country’s growth:

“One dimension which, in my personal view, has not yet received the attention it deserves is the potential for mutually beneficial risk-sharing mechanisms. A variety of financial engineering options could be considered going beyond the plain vanilla bonds currently employed.

A simple version, which could indeed be useful beyond the specific case of Ireland, would, over time, shape the arrangements with European partners in such a way that Ireland pays more if its GNP growth is strong; less and slower if growth remains weak. The aim of such GNP-linked bonds or similar risk-sharing innovations must be to restore, through growth, a favourable dynamic to the sovereign debt ratio, putting its sustainability too, like that of the banks, beyond doubt.”

After a sharp decline in GNP per capita that put Ireland back a decade, Patrick Honohan is worried that the downward cycle of debt overhang and austerity measures will further erode growth and make debt even more burdensome. Continue reading

GE’s CFO, on Forecasting, Financial Planning and Earnings Guidance

The Fall 2010 Journal of Applied Corporate Finance printed an edited version of a presentation by GE’s CFO, Keith Sherin, on “Financial Planning and Investor Communications at GE (With a Look at Why We Ended Earnings Guidance). The original talk happened at the University of Notre Dame’s Center for Accounting Research and Education (CARE) conference on “Financial Statement Analysis and Valuation: Forecasting Firm and Industry Fundamentals” held at Coral Gables, Florida on April 9, 2010. The video is available here. Sherin gives a clear exposition of the financial planning process at GE and its role in management, how they compare ex post performance to projections, etc.

Catastrophe risks: the US National Flood Insurance Program

An interesting analysis of the US National Flood Insurance Program by Erwann Michel-Kerjan appeared in this Fall’s issue of the Journal of Economic Perspectives. One key issue in evaluating the program and its payouts versus premiums is assessing the probability of extreme events–always an issue in catastrophe insurance. Another key issue is incentives to game the program rules, something that also arises persistently in legislatively mandated insurance. In this case it is the use of outdated maps. And, the well known issue of reduced incentives to take actions to minimize the risk of loss. In the conclusion, the author points out that several other countries use private insurance markets for the same risks.

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