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Myron Suvorov
Myron Suvorov

Equilibrium Subtitles English



This course attempts to explain the role and the importance of the financial system in the global economy. Rather than separating off the financial world from the rest of the economy, financial equilibrium is studied as an extension of economic equilibrium. The course also gives a picture of the kind of thinking and analysis done by hedge funds.




Equilibrium subtitles English


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Market equilibrium is a market state where the supply in the market is equal to the demand in the market. The equilibrium price is the price of a good or service when the supply of it is equal to the demand for it in the market. If a market is at equilibrium, the price will not change unless an external factor changes the supply or demand, which results in a disruption of the equilibrium.


Market equilibrium occurs when market supply equals market demand. The equilibrium price of a good or service, therefore, is its price when the supply of it equals the demand for it. If the market reaches equilibrium, the supply, demand, and price will generally be stable unless an external factor applies downward or upward pressure on demand or supply.


Given this new information, the demand for peaches will likely increase since people will see more value in consuming peaches. This, in turn, will drive the equilibrium price upwards since demand will have increased (i.e., shift to the right).


You can visualize the equilibrium price as a ball in bowl. The bowl can can be tipped and the ball will move, but it will find its way back to a stable place. The equilibrium price works that same way. At any other price, forces are put into play that will push the price back towards equilibrium.


Written & Directed: Maurice AmaraggiProduced by: Nemo FilmsCo-Produced with: WIP Wallonie Image ProductionWith the help of: The French Center of Cinema & Audiovisual in Belgium; the Foundation of the Memory of the Holocaust; The European Institute of Sephardic Jews; The Jewish Channel, The NetherlandsLanguage: Greek narration with English subtitles; English narration with English subtitles; English narration with Dutch subtitles; English narration with French subtitles


Thank you. Heterogeneity and consumer taste and needs and the cost and quality of goodsand services are ubiquitous features of resource allocation.But as long as these are publicly observable, markets can price, sort and match the variations efficiently.For example for insurance which is what I'm going to concentrate on today, you can have an efficient insurance marketwhere there is no private information that allows people on one side of the market to improve on the predictionof expected benefits based on public information.If you have those circumstances then you can have competitive underwriting in which the prices of insurance contractsare set at their actuarial value plus a competitively determined load and that market will operate efficiently.And incidentally an essential aspect of a well-working insurance market of that form,is that issues like the ability of insurers to re-price contracts or to cancel coverage if a buyer has a bad experience,are causes that will themselves be negotiated in the competitive market as contract terms and they will be appropriately priced.Now an example of an insurance market which does not satisfy these conditions is the market for health insurance.And there are a number of reasons, it's really a perfect storm of problems of failure, of market failure.There are various sources for this, one which I'll talk about subsequently is that there may be social sentiment for exposed equity or fairness and those can conflict with what would originally be a perfectly legitimate and efficient market outcome.That is to say you can have an efficient market outcome which is socially unacceptable and the response to thatmay be a factor to upset the market. Perhaps appropriately but nevertheless it's a problem to deal with.Other issues in this market arise from asymmetric information. And they are the classic problems of adverse selection.Where people are denied coverage or offered actuarially very unfair contracts because of the possibilitythat they are bad risk, moral hazard where coverages becomes very expensive because providers lack incentivesto minimise treatment cost or withhold unproductive treatments. It's part of a principal-agent problem.Performance risk in which insurers evade paying benefits by making contract enforcement costly.A general problem in contract theory where you have asynchronous operations of the transaction.And finally signalling and screening as a device used by market participants to avoid either being lumped intogether with high-risk peers or having to pay benefits to high-risk people.Let me say first something about the problem of social unacceptability of market outcomes,that's particularly an issue for health insurance.So consumers and society have difficulty refusing or withholding treatment after bad health outcomes are realised.There's a social sentiment for exposed equity and this can conflict with competitive underwriting.A good example is if someone had kidney failure, they are very expensive to treat,but social sentiment is that as a human right they are entitled to treatment at some affordable cost.Now the problem of conflicts between socially acceptable, what's socially acceptableand market outcomes could probably be taken care ofif consumers could acquire unconditional lifetime health insurance ex ante, before their health status is ever determined.And if they chose not to buy health insurance they commit irrevocably to the consequences of having limited ability to pay.But neither of those conditions are met in reality.A consequence of that is that it's often the practice in health insurance and in other areasto forbid competitive underwriting on the basis of some criteria with the objective of trying to mitigate market outcomesthat are deemed unfair. For example it's often in health insurance, a rule which prohibits discrimination on the basis of genderor on the basis of pre-existing conditions.Now from an economic point of view if the regulation requires these kinds of non-discrimination rulesand that results in coverage for high-risk consumers at less than their actuarial valuethen the unintended consequence is that unless the market is subsidised, the premiums for the low-risk consumersare going to have to rise above their actuarial value, they will be penalised.And there is effectively an income transfer from the low-risk to the high-risk consumers.And this in turn can induce a form of adverse selection, it's now not coming from asymmetric informationbut simply from social regulation to try to ensure fair outcomes.Very difficult to have the inter-personal transfers required to achieve this level of fairness in a systemthat does not in itself introduce a substantial market distortion. So the type just mentioned.So very careful regulation is needed to try to deal with these issues of social fairness.Asymmetric information is the most common reason cited for failures in insurance marketsand particularly health insurance markets and they are these classic triumvirate adverse selection, moral hazardand performance risk or counter-party risk.There's a long history in economics and pre-economics of attention to these sources, this is not,this is a very, very old subject and to partisans of market solutions who think carefully about it.You need to think seriously about whether you're in a market situation where these problems can be overcomeor whether something of substance has to be done to overcome.There's a lot of other literature on markets under incomplete or asymmetric information.And I'm not going to spend time going through this but if you flash some names there you might recognise some of them.One comment, I'm talking about health insurance here today specifically but many insurance markets and marketsin which, basically which depend on contracts, share many of the same problems.Labour markets and markets for financial derivatives which are insurance contracts have problemsthat are quite similar to those that arise in the health insurance market.I'm going to remind you of some price theory that I believe everyone has seen in their first graduate class in economicsand these are some diagrams from Rothschild-Stiglitz, I would be cautious about putting up diagramsbut in this case you've all seen these before so I just want to remind you quickly of what happens in an insurance marketwith asymmetric information. So here's a diagram with contingent commodities, the consumption of healthy or consumption of sick,and there's an endowment point in which the person will have less resources to consume and will incur a loss,if they're sick the loss is in red here, loss L, a 45 degree line that corresponds to equal consumption in either state.The budget line in this case is the locust of actuarially fair trades, that is to say insurance contractswhich will break even for the insurer.And when individuals are risk adverse, expect a utility maximisers, the slope of their indifference curveat the 45 degree line gives the odds of being sick.And if you have actuarially fair insurance there is an optimal contract, in this case located at a little arrowfrom full insurance, you'll have full insurance, so that would be the point in which this particular consumer would locate.Very standard analysis.This works perfectly well if there's more than one class of consumers, you could have robust consumers, frail consumers,frail consumers have a higher probability of getting sick and if they were, if their risk class were observablethen the market would simply offer 2 insurance contracts, F and R, each would get full insurance and at premiumswhich reflect the actuarially fair cost of insuring against their losses.Now suppose that the risk classes of the consumers is not observable, so that when an insurer offers a contract,he does not know ex ante whether the buyer is robust or frail.In this circumstance one possibility is that all consumers, both frail and robust would buy a contractand in this case you may get an actuarially, a locus of actuarially fair contracts.Which in this diagram is labelled the all-in break even contracts.And that's simply an average of the break even budget lines for the 2 classes, the location of the averagewill depend on how commonly people are robust or frail. In this diagram I've labelled what I call a candidate pooling contract.This would be a contract which is break even for a competitive insurer, if it was in fact purchased by all people.Detail on that, this is just a blow up so you can see a little better what's going on.And that particular contract, pooling contract, P, is located at a point of tangencybetween the robust consumer's indifference curve and the actuarially fair line or the break even line for pooled contracts.And that contract P then has the property that robust consumers would choose not to move.The higher risk consumers, the frail consumers would like to buy more of at that price but that's not,in this case not being offered.In the market there would be no incentive for an insurer to offer a broader coverage because only the frail would buy itand it would not break even.But this candidate cannot survive as a Nash equilibrium, the reason is that they are blocking contracts.In this case it's noted in this diagram by a little blue dot.And it's a contract located in the area which is better for the robust but worse for the frail.So what would happen is in the existence of the contract P, if an insurance company now offered the blocking contract,it could entice away all of the robust consumers from which it could then break even or betterand leave behind all of the frail consumers at P in which case P would no longer break even.And equilibrium would break down. So this is the original Rothschild Stiglitz argument that a pooling equilibrium cannot exist.Another possibility that they considered and that occurs in this markets is a so-called separating equilibriumwhere each risk class will have its own policy and the policies now are positioned in commodity space in such a waythat the high-risk consumers will not be tempted to try to misrepresent themselves as robust consumersand move to the contract being purchased by the robust group.And in detail you get a diagram which looks like this, the frail consumers are getting full insuranceat a high premium, actuarially fair premium, the robust consumers are getting partial insuranceand with the location of that being such that R is not a utility improvement for the frail consumerso they have no pause in it to move away from F to R.Now in the diagram as drawn here note that the indifference curve of the robust consumersdoes not intersect the all-in break even contract.And if you do a little analysis as Rothschild and Stiglitz does do, this, the result is that F and R in this caseis a stable Nash equilibrium. However, and this is just a question of the proportions of consumers, frail and robust consumersand the nature of the difference curves of the robust consumers, you could also have a situationin which the indifference curve of the robust consumers through the separating contract R cuts the break even contract line.In which case there's now a blocking pooling contract.Now the pooling contact cannot itself be an equilibrium, we already know that.But it's enough to block the separating equilibrium and in this case no Nash equilibrium in this market will necessarily exist.So the conclusions of that classic study are that when consumers know their risk classand insurers cannot distinguish risk classes and in a competitive market any contractwhich is defined by its premium and its coverage that can be offered, then either there's a separating Nash equilibriumin which robust consumers are only partially insured or there's no Nash equilibrium at all.It's also known from literature about the same time that if the risk classes are very closely spacedor in the worst case a continuum of risk classes, then there is no Nash equilibrium, it will always break down.It is possible that there are Non-Nash or high-order of conjecture equilibria in these markets,that is a result of Wilson but I'm not going to concentrate on that.So what I do in the paper that I'm discussing today is ask the following question, if you have an insurance marketlike the health insurance market with asymmetric information where the market either unravels or achievesa very inefficient separating equilibrium what kinds of market organisations or regulationscan be used to mitigate the effects of asymmetric information and achieve stability and relative or some second order efficiency.As a general problem, this is a problem of applied mechanism design and you can consider 3 kinds of elements,consumer, insurer and/or market interventions to control either a selection.Other problems that don't show up in Rothschild Stiglitz but are present in this market,incentive designs to control moral hazard from consumers and from providers of health services.And finally capital and conduct requirements to control performance or counter-party risk.I'm going to, because I have limited time, I'm going to give you one extremely simple regulatory schemewhich solves the adverse selection problem.Suppose that you regulate this market by restricting the kinds of coverage that contracts offered in the market can provide.Specifically a considered fixed coverage regulation.It says that if there's a loss capital L associated with sickness then the only contractsthat will be allowed by the regulators in the market will be ones that cover a specified share Theta of that loss.Once a coverage level is specified, the contract terms are specified, then the premiums can then be determined competitivelyin the market.So consider a market like that, suppose you have competitive insurers, suppose you have free entry and exit of insurersand initially, I'm going to go to the best case first.Suppose you have fixed coverage at a level that would obtain the same pooled contract that previouslywe said could not be a Nash equilibrium because it was blocked.And now if we just go back to the case of the pooled equilibrium we'll see that this simple regulationis enough to restore Nash equilibrium within this regulated market.The contracts that are now allowed effectively, the contract that's allowed is a contract which corresponds to P,competition would allow other contracts which are identical to that in terms of the loss covered but would vary in premium.And those correspond to a 45 degree line which is just a fine translation of the 45 degree line.So along that line labelled fixed coverage, various premiums, those are the contracts that could exist in this market.It's very easy to see, elementary to see that P is in this case, has to be a Nash equilibrium, it has to exist,effectively the intersection of the all-in-breakeven contract line, actuarially fair contractsand the fixed coverage line determine the Nash equilibrium.And with a little, just a little geometric argument you can easily convince yourselfthat there are no longer any possible blocking contracts.So in this case there is no adverse selection by restricting the kinds of contracts that can be offered.You manage to corral all consumers to purchase this, blocking contract that was shown here, I'm sure the contractthat was shown here that cannot be blocked was not one with full coverage but it could have been.One could actually have full coverage and in that case the robust consumer would actually prefer a little less,the frail consumer would prefer a little more.But with no ability of the insurers to modify contract terms or offer alterative contract forms.There is no possibility that they could block.Now one has to be, if one were to use this device, one has to be rather careful about where one locates the fixedor minimum coverage level. If you have a lower level of minimum coverage than at P you get back into situationwhere you can have non-existence of equilibrium or you can have a separating equilibrium.In that case the robust consumers are either at the coverage limit or you're actually back into the caseof a classic Rothschild-Stiglitz separating equilibrium.But the main point here is essentially in this case by regulating the kinds of products that are offered in the marketone is able to bring adverse selection under control.And in fact it's very difficult although there are many, many ways to regulate an insurance market,it's very difficult to avoid the problem of adverse selection, at least with a continuum of risk classes of consumers,without some kind of regulation of product form.Essentially of the kinds of contracts that are, on which competition is permitted.I'm going to, I have about 3 minutes left, I'm going to just give you a quick list of some of the kindsof regulatory techniques that are used, I'm not even going to describe how they work, some work well, some work less well.My research program is to try to determine exactly which ones work best and it's kind of the insurance market equivalentof determining the optimal voting rule, the question is among all the forms of regulation,are there regulatory devices which are in some sense second best.On the consumer side you can have coverage mandates, you can require people to buy insurance,you can subsidise their premiums perhaps through using vouchers. If they have low income you can subsidies their premiums.And for the control of moral hazard you can have co-payments, you can have what are called reference price benefitswhich say that the, for any given condition the insurance pays the least cost effect available therapy and anything above thatthe consumer is on their own, that has some very nice automality properties from the standpoint of gettingthe in


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