In this paper, we explore how an extremely large and persistent catastrophic shock is shared between two countries under the assumption that markets are complete, but each country is subject to endogenous solvency constraints. Catastrophic shocks we consider here constitute of exogenous country-specific events, and have serious repercussions on national outputs; examples include natural disasters and disastrous epidemics.
We introduce solvency constraints into a complete markets setup following the theoretical framework proposed by Lustig (2007). On the one hand, a reason for adopting a complete markets setup is that catastrophic shocks are publicly observable, and markets are therefore likely to exist for such states. On the other hand, a reason for assuming solvency constraints is that it is not easy to force agents to fully recognize outstanding liabilities in a cross-border financial arrangement. In Lustig’s (2007) framework, Lucas trees and all contingent claims are traded among agents, however agents’ solvency is limited in that human capital cannot be used as collateral. An essential aspect of this characterization of solvency constraints is that the current size of short positions in a financial instrument is endogenously determined by the future value of collateral assets (long positions in other financial instruments).
Performance related pay and individualised wage setting appears to be on the rise, even in economies with strong unions. Following the publication of the seminal article of Holmström and Milgrom (1987), performance-based pay became a predominant method of rewarding executive managers. But individualised pay and performance related pay appear to be spreading to lower ranks of employees within organisations, and throughout the labour market as well.
Particularly in Europe, where negotiated, fixed union wages has been the principle point of departure, this development represents an important break with traditional forms of remuneration. This paper analyses the effect of introducing performance related pay on the within-firm wage dispersion. In particular, our focus is on interaction effects between performance pay and collective bargaining.
Adaptation has become a strategic negotiation issue only recently, although UNFCCC (1992) already referred to it in Art. 2 and Art. 4. Among other things, the difficulty of implementing national and international mitigation policies and the increasing awareness of climate inertia eventually put adaptation under the spotlight of science and policy. The EU has recently released the “Green Paper on Adaptation” (see EU, 2007) and many EU countries have prepared and started to implement national adaptation plans. The Bali action plan (2008) has identified the need for enhanced adaptation action by Parties of the Convention, and adaptation is among the five key building blocks for a strengthened response to climate change. COP 13 has established the Adaptation Fund Board with the role of managing the Adaptation Fund, established at COP7. COP14 at Poznan (2009) also made some progress on a number of important issues concerning adaptation.
