Browsing by study line "Research track"

This thesis focuses on the investigation of adverse selection and moral hazard in the Finnish entrepreneurial insurance system. The thesis builds upon previous research on moral hazard and adverse selection in insurance markets, but focuses specifically on the social insurance market for entrepreneurs within sickness and parental allowances. This topic is of interest as mandating social insurance for entrepreneurs is vital, but often lacking due to the flexible nature of entrepreneurial activity. As a result, the social insurance systems may be subject to adverse selection and moral hazard. Rich panel data on insurance contributions of entrepreneurs in Finland allows me to measure the extent of asymmetric information both overall and dynamically. To test the former, I use a positive correlation test. In particular, the test looks at the probability of sickness or having a child in relation to insurance contributions. The results indicate a slight positive correlation between sickness risk and insurance contributions as well as the probability of having a child and insurance contributions. A more significant result is found for the risk of having children in a dynamic sense, showing a strong indication of a rise in insurance contributions around the time of receiving parental allowance. However, the results are more ambiguous in the case of sick pay. These results are robust to several controls as well as two separate identification strategies. Due to the endogeneity of illness or choosing to have children, causal conclusions cannot be drawn from the results.

The opportunity costs of defence and the impact of defence spending on economic growth aroused the interest of researchers during the Cold War. The question is topical again, as the war in Ukraine has accelerated international armaments and increased investments in defence. For Finland and Sweden, the issue is also important in terms of future NATO membership, because NATO recommends that its member countries spend at least 2% of GDP on defence. Achieving the limit requires an increase in defence spending from both countries. No case studies on the impact of defence spending on economic growth have been published about Finland and Sweden, but the countries have been discussed as part of broader panel materials. This thesis fills the gap. The thesis applies structural vector autoregressive methods to analyse the period from 1960 to 2021. Granger causality is included in the analysis, because–despite its problematic nature–the concept has a central position in the history of the research topic. Previous literature has considered the identification of a structural model challenging because the determination of bidirectional causality would require a suitable exogenous variable, which is almost impossible to find in this context. The view is challenged by suggesting that a partial identification can be accepted when the interest is focused only on the defence spending shock. The alternative analysis concerning a shorter time period tests the sensitivity of results to a time period. The impulse response analysis suggests that the impact of defence spending on GDP is slightly positive for both countries, but statistically significant only for Sweden. Granger causality is not observed in either direction for either country. Finland's neutral result is in line with expectations and previous literature, but Sweden's positive result is contrary to expectations. The alternative analysis concerning the post-Cold War era confirms that the Finnish result is robust regardless of the time period. The inconsistency with previous literature and the challenges caused by conditional heteroskedasticity raise doubts about the reliability of the Swedish result. The thesis indicates that increases in defence spending will not harm economic growth in Finland and Sweden. The result is surprising, as it has been suggested that previous studies have underestimated the negative impact of defence spending and most of the recent literature supports a negative or neutral impact. Further research is needed, especially on the impact mechanisms and the causes of heterogeneity. Decomposing defence spending could provide answers to unresolved questions.

The phrase 'central limit theorem' has commonly come to stand for a result where partial sums of random variables converge to a gaussian random variable in the sense of distribution. Theorems of this nature readily yield applications to statistics and econometrics since they form the theoretical basis of approximating the sampling distribution of a given test statistic when the exact distribution may be intractable or otherwise infeasible to be retrieved. Faced with such a situation, a researcher can instead ask whether the test statistic, or a certain transformation of it, converges in distribution as the sample size grows without bound. If the answer is in the affirmative, then one may in a principled manner approximate the distribution of the finite-sample statistics with that of the limit distribution such that the approximation can be made in some sense arbitrarily good by sufficient increases in the sample size. Naturally, similar procedures apply in the case of estimators. These asymptotic normality results for econometric estimators, as they are called, require differing conditions to be satisfied depending on the nature of the data-generating process where the observations are thought to originate from. This thesis examines a selection of foundational central limit theorems in the cases of I.I.D., independent, D.I.D., and dependent data-generating processes and presents examples of their econometric applications, primarily to deduce asymptotic normality for a selection of key econometric estimators.

Failures in bargaining, such as strikes or stalled climate change negotiations, are costly for all parties. So why does bargaining fail when mutually beneficial agreements exist? In the thesis, the classical problem of bilateral bargaining is studied by the means of a new laboratory experiment and a literature review of related theoretical and experimental work. The main focus is on the role of commitment tactics as a source of conflict. In the literature, complete information bargaining is often deemed to be efficient whereas incomplete information is considered to be the main driver of delay. However, by simply allowing the negotiators to attempt strategic commitments that are costly to make and uncertain to succeed, unique predictions of inefficient equilibria are obtained even when bargaining under complete information. The main theoretical framework of the thesis is a dynamic bilateral bargaining model of tough negotiations and delayed agreement. In the unique stationary Markov perfect equilibrium of the model, the bargaining takes the form of a war of attrition. Negotiators initially commit themselves to incompatible demands but an agreement is reached once a commitment decays. The rates at which the commitments decay determine the expected duration of the conflict. Moreover, if the negotiators do not differ in patience the one with the stronger commitment receives in expectation a larger share of the contested surplus. The predictions of the model are tested in a new laboratory bargaining experiment. The analysis of the pilot round shows mixed results. We find some conflict and inefficiency in bargaining due to initial incompatible commitments. Furthermore, in line with the theory, more than half of the agreed offers have a different outcome than the prevalent equal sharing of much of the experimental bargaining literature. However, it cannot be concluded that the data would be completely in line with the hypotheses. The different rates at which the commitments decay do not always determine the bargaining outcome and length of the delay. Slight modifications to the experimental design, which may solve the issues detected, are discussed. The different delay patterns observed in various real-life bargaining contexts suggest that there is not a single approach which could explain all the inefficiencies. The approach emphasizing the role of strategic commitments provides an alternative to the incomplete information explanation. However, despite the rich theoretical literature, only a few experimental studies testing the commitment models exist. The pilot round of our experiment is an important contribution to this branch of bargaining literature. Certainly, further empirical research is required in order to better understand the exact role that strategic commitments have in different conflicts.

In this thesis, a conditional BVARX forecasting model for short and medium term economic forecasting is developed. The model is especially designed for small-open economies and its performance on forecasting several Finnish economic variables is assessed. Particular attention is directed to the hyperparameter choice of the model. A novel algorithm for hyperparameter choice is proposed and it is shown to outperform the marginal likelihood based approach often encountered in the literature. Other prominent features of the model include conditioning on predictive densities and exogeneity of the global economic variables. The model is shown to outperform univariate benchmark models in terms of forecasting accuracy for forecasting horizons up to eight quarters ahead.

I study whether modest copayment increases affect the general practitioner (GP) use in Finland, a country with relatively low copayments, low inequality, and an extensive welfare state. I also examine whether the estimates are driven by certain low–income groups considered to be economically vulnerable. The Finnish Government allowed municipalities to increase copayments in 2015 and 2016 by 9.5% and 27.5% respectively. At maximum, this meant that the copayment for a GP visit was 20.90 euros at the beginning of 2016, approximately 40% higher than at the end of 2014. Almost all municipalities made the 9.5% increase at the start of 2015, but some of them decided not to make the 27.5% increase at all or made smaller increases. I exploit this variation by estimating two–way fixed effects regression models, and I use population–wide administrative data containing all primary healthcare visits in 2013–2018 and socioeconomic information on patients. In the models, copayment increases are negatively associated with both GP use and median waiting times. Based on the means of estimates from several specifications, the 27.5% increase alone is associated with a 2% decrease in visits per resident in the first four quarters after the change and a 6% decrease thereafter. The estimates are not statistically significant. The median waiting times decrease by two days in the first year after the change and five days thereafter, and these results are significant. When I estimate the effects of both increases, the means of estimates are now a 5% decrease in visits per resident in the first four quarters after the last increase and an 8% decrease thereafter. Some of the estimates are statistically significant. I find no evidence to support the hypothesis that the low–income groups were more sensitive to the increases. However, the confidence intervals are wide across the study, suggesting that the design may be underpowered to detect small effects from zero. Moreover, the point estimates are surprisingly far from zero, which is especially surprising when upper income quintiles are concerned. Therefore, more evidence is needed to be able to make firm conclusions about the causal effects of policy changes.

We consider a so-called principal-agent problem, where our aim is to construct an optimal contract that maximises utilities for the contractor, the principal, and for the effort-exerting party, the agent. In our setting, the time-horizon of the contract is infinite, and the agent receives a continuously paid compensation for exerting effort. Our main goal is to establish a problem introduced in Sannikov (2008) and characterise an optimal contract by restricting the menu of feasible contracts, an approach inspired by Cvitanic et. al. (2018) We begin with an extensive literature review, where we review the continuous-time principal-agent problems and further motivate the scope of this thesis. We start from the notable article Holmström et. al. (1987), and we progress towards the works Williams (2008), Sannikov (2008) and Cvitanic et. al. (2018) Following the review, we construct the problem and lay the mathematical foundations for it. We focus on a new benchmark setting, adapted from Sannikov (2008) and Cvitanic et. al. (2018). We first define the so-called controlled state equation, and construct the canonical probability space. Then, we introduce then impose few assumptions regarding the core concepts, and identify the problems of the agent and the principal and characterise their objective functions. After characterising the problem, we characterise the optimal contract and show that the optimal contract maximises the principal's profit. We characterise the difference function of Sannikov (2008) to the agent's optimisation problem, and then follow Cvitanic et. al. (2018) on the reduction of the problem. The reduction is done by restricting the possible menu of contracts and thus reduce the non-standard problem to a dynamic programming problem. We introduce the corresponding Hamiltonian functionals, together with the value functions to the both principal and the agent. Furthermore, we introduce a family restricted processes, which we show to characterise the optimal contract. We finish with showing that the optimal contract exists even with the notion of retirement. Having completed the main technical contribution, that is, having solved for the optimal contract, we briefly discuss the results and their implications against previous literature. Additionally, we discuss the possible extensions to our research.

Kuolevuus on viime vuosikymmeninä alentunut merkittävästi. Eläkejärjestelmän näkökulmasta elinajan piteneminen asettaa maksunnousupaineita, sillä eläkettä maksetaan pidemmäksi ajaksi kuin mihin oli varauduttu. Tästä syystä vuoden 2005 eläkeuudistuksessa otettiin käyttöön uusi sopeutumismekanismi, elinaikakerroin. Sen tarkoitus on sopeuttaa alkavien eläkkeiden määrä elinajanodotteen muutokseen. Lisäksi vuoden 2017 eläkeuudistuksessa on päätetty nostaa alinta eläkeikää asteittain 63 vuodesta 65 vuoteen kolmen kuukauden vuosivauhtia vuoteen 2027 asti. Sen jälkeen alimman eläkeiän nousu sidotaan elinajan odotteeseen. Edellä kuvattu kokonaisuus on edunsaajalle haastava ja elinaikakerrointa on julkisuudessa usein kuvattu ’eläkeleikkurina’. Tässä työssä elinaikakertoimen ja eliniän noston yhteisvaikutukset on kuvattu selkeästi. Muutosten tarpeellisuus on osoitettu skenaariolaskelmilla asteittain niin, että kunkin toimenpiteen vaikutus on eritelty sekä eläkejärjestelmän että vakuutetun näkökulmasta. Toimenpiteiden vaikutusten arviointiin on käytetty kahta kirjallisuudessa vakiintunutta mikrotalouden käsitettä: aktuaarinen reiluus ja aktuaarinen neutraalisuus. Tässä työssä ei arvioida edellä mainittujen käsitteiden arvoja absoluuttisina, vaan pikemminkin tarkastellaan niiden muutoksia eri sopeutusmekanismien tullessa voimaan. Laskelmissa arvioidaan myös vuoden 2005 eläkeuudistuksessa voimaan tulleen lykkäyskertoimen kannustavuutta. Arvio on toteutettu kahdella skenaariolla: ensinnä, kun työskentely jatkuu työeläkeotteella ilmoitettuun tavoite-eläkeikään asti ja toiseksi tilanteessa, jossa työskentely jatkuu yhden vuoden ajan alimman eläkeiän täyttymisen jälkeen. Laskelmista nähdään, että molempien sopeutumismekanismien voimaantulo on ollut välttämätöntä, jotta vakuutusmaksun korotuksen tarve ei olisi noussut kohtuuttomasti. Lisäksi vakuutetun näkökulmasta sekä elinaikakertoimen että alimman eläkeiän nosto kohdistuvat edunsaajille eikä tuleville vakuutetuille, kuten olisi käynyt mikäli vakuutusmaksua olisi nostettu. Kannustavuuden näkökulmasta tulokset ovat mielenkiintoisia. Työskentely tavoite-eläkeikään asti on toimeentulon näkökulmasta kannattavaa. Eläkejärjestelmän näkökulmasta se pidentää työuria ja lyhentää eläkeuria, näin ollen maksutulo kasvaa ja eläkevarallisuudet pienenevät. Vakuutetun näkökulmasta taas elinaikakertoimen pienentävä vaikutus eläkemäärässä kumoutuu lykkäyskorotuksen ansiosta täysin, ja lisäksi eläke kasvaa lisävuosien osalta myös tavallisella karttumalla. Mekanismi on siis näiltä osin toimiva. Yhden vuoden lisätyöskentelyn kannustavuus riippuu monista tekijöistä: odotetusta elinajasta, jo karttuneesta eläkkeestä ja jopa lykkäysvuoden eläkeindeksistä. Tämän tarkastelun perusteella on vaikea osoittaa, että mekanismi olisi kaikille ikä- tai tuloluokille täysin toimiva. Laskelmien tulosten perusteella nähdään, että vuoden 2005 ja 2017 eläkeuudistuksissa luoduilla sopeutumis-mekanismeilla on merkittävä rooli maksutason hillitsemisessä elinajan pidentyessä. Lisäksi tuloksista huomataan, että sopeutusmekanismeja on tutkittava eri mittareilla, jotta havaitaan niiden kokonaisuusvaikutukset eri tilanteissa. Aktuaarinen reiluus ja erityisesti aktuaarinen neutraalisuus ovat tämän tutkimuksen perusteella osoittautuneet varteenotettaviksi käsitteiksi tähän tarkoitukseen.

Flash crashes are one of the most prominent market inefficiencies which are recognized in stock and index prices. They violate the hypothesis of efficient markets and affect the real economy as well. Their proper forecasting has not been possible with conventional methods due to their seeming rarity and extremity. Furthermore, they are difficult to detect from the noise of price processes. By augmenting the HAR model with company-specific news data aim is to improve volatility estimates on days when these extreme events occur. These days are first identified from the price processes by a novel statistical method called V-statistic, which detects statistically significant flash crashes. Data is every fulfilled trade for six stocks from New York Stock Exchange, and company-specific news flow data which is obtained from RavenPack News Analytics service. Both data sets cover the years 2014 to 2016. HAR model is estimated for all six stocks with and without the news data and the in-sample-model estimates are compared both on the full data and on the days when flash crashes occur. Results are ambiguous but they give slight signs that news data could be useful for improving volatility estimates on the days when flash crashes occur. Model volatility estimates are better on average when augmented with news data. Mean absolute percentage error is 0.1% smaller on average across all entities when augmenting the model with news data. However, there are differences across companies on how much and if at all news data improves models' performance. In conclusion, further work is needed to verify the usefulness of news data in forecasting flash crashes.

This thesis explores the implications of Heterogeneous Agent New Keynesian (HANK) models for monetary policy by analyzing the existing literature and proposing a structural modification to a Two-Agent New Keynesian (TANK) model. The literature review offers an overview of the results of HANK models, starting from early contributions that first combined heterogeneity with nominal rigidities, revealing transmission channels of monetary policy that cannot be assessed with a representative agent framework. Subsequent studies build and use the HANK framework to examine these transmission channels more deeply, identifying the significant role of distributional effects in how monetary policy is transmitted to aggregate macroeconomic variables. The review also discusses the optimal monetary policy in HANK models, which focuses on minimizing idiosyncratic risk at the cost of inflation stability, and the role of HANK models in addressing the forward guidance puzzle. The thesis further examines TANK models as a simpler alternative to HANK models still being sufficient for capturing the effects of heterogeneity in New Keynesian models. By modifying a TANK model, this thesis aims to better align heterogeneity assumptions with empirical evidence on household types, particularly with the so-called wealthy hand-to-mouth households. This modification leads to the identification of a new feedback loop channel where investments in physical capital amplify the responses of aggregate variables. However, a structural dilemma arises where calibrations cannot guarantee the desired non-Ricardian response of consumption with a negative investment response. The thesis contributes to the understanding of the results and implications of different variations of HANK models for monetary policy, complementing existing theoretical discussions, and demonstrates the importance of heterogeneity assumptions in New Keynesian models.