Just Insurance Through Global Macro-Hedging: Information, Distributive Equity, Efficiency, and New Markets for Systemic-Income-Risk-Pricing and Systemic-Income-Risk-Trading in a New Economy
Published in: University of Pennsylvania Journal of International Economic Law, Vol. 25, 2004
This article considers the prospects for exploiting (a) several deep conceptual linkages between justice and insurance, (b) the rapid development of new hedging methods and technologies, and (c) an increasingly integrated global finance economy, in a manner that can render the global economy both more just and more prosperous.
It first derives an account of economic justice from the best known theories currently in the field – an account likely to enjoy broad appeal. The article then elaborates on a number of striking parallels between what it takes for the best account of justice on the one hand, the theory of insurance on the other. The upshot is that insurance markets bearing certain attributes would afford opportunity to spread risk occasioned by economic change much more justly than is currently managed. The problem is that markets bearing those attributes face well known obstacles, the best known among them those rooted in asymmetrically spread information.
The article next argues that insurance markets bearing the requisite attributes can be simulated by markets in derivative securities the values of which are tied to underlying macroeconomic aggregates not subject to manipulation by traders. That's to say that we can develop analogues to insurance markets not plagued by the best known asymmetric information problem, that popularly known as "moral hazard." What is more, however, derivatives markets of the sort here envisaged offer means of escaping the other principal asymmetric information problem – so-called "adverse selection" – as well. For these markets are classic Hayekian aggregators and publicizers of value-pertinent information.
The article finally turns to careful consideration of what currently stands in the way of development of the markets that it envisages, and to what might be done to surmount those obstacles. It happens that the latter obstacles are readily surmounted through collective action. The article accordingly concludes with a number of proposals for concerted action, not only by governments but by non-governmental organizations as well.
Date of Authorship for this Version
Hockett, Robert C., "Just Insurance Through Global Macro-Hedging: Information, Distributive Equity, Efficiency, and New Markets for Systemic-Income-Risk-Pricing and Systemic-Income-Risk-Trading in a New Economy" (2006). Cornell Law Faculty Publications. 63.