The one thing that jumps out at me here is that if local prices go up you could switch to imports (for tradeable goods) and thus you would still simply want to maximise the return on your portfolio. Obviously non tradeable goods changes the story, and I think that is the area where your theory would hold the msot sway.

If the goods you are wanting to purchase with your future cashflows are local, then wouldnt you want exposure to local markets? So if prices go up, the value of your investment goes up to match.

The corollary of this is that investment in international goods is based upon the expected level of future consumption of imported goods. In which case international investing would be more of a glorified currency and inflation hedging strategy.

Agreed – however, that is merely telling us that as the cost of sharing information falls, the information asymmetry declines. It is an important point, to be sure, but it is also completely consistent with the idea that there IS some type of home bias – it just explicitly states it is the result of transaction costs.

Ultimately, even if we got to the point where other firms information is exactly the same – we still have a gap between private sector and public sector information. As long as this gap persists we could make an argument for publicly provided insurance. If this gap disappears, then we still know that the public sector could help (as asymmetric information will still lead to “to little” insurance) – however, the case would be FAR less compelling 🙂

“Another hypothesis is that investors have superior access to information about local firms or economic conditions. But as van Nieuwerburgh and Veldkamp (2007) points out, this seems to replace the assumption of capital immobility with the equally implausible assumption of information immobility.”

There is also empirical evidnace that home bias has been decreasing over time which could suggest it is more of a transaction cost problem and thus as the transaciton costs of shraing information and trading oversaeas have fallen, the home bias has diminshed.

Agreed – but I am assuming that the private sector has worse information, hence why the government should provide. If information is equal than I agree – it is the key assumption.

“Similar to why I don’t buy the home bias arguments about portfolio allocation, I don’t see it being any different for insurance.”

Fair enough. However, empirically there is a home bias in portfolio allocation – why would that be if it wasn’t the result of information asymmetries.

Plus on the mulitnational front comapnies like AIG (bad example since they’ve jsut gone bust!) and IAG ahve big operations in NZ so I’m not sure about the local informaiton bias. Similar to why I don’t buy the home bias arguments about portfolio allocation, I don’t see it being any different for insurance.

Because the government can FORCE disclosure of information that private agents can’t get ahold of.

“If the industry is better able to price insuarance in line with the acual risk being taken, surely this would lead to a mroe “optimal” allocation.”

But in the case of asymmetric information we have a market failure, which leads to “under-insurance”.

“On the thiness, it would probably have to be from big multinationals anyways so I don’t see this as a porblem”

Agreed – but this also involves even more asymmetric information, as multinationals have less nation specific information 😛

“I’m interested in your theory on long-tail shocks:)”

Don’t have one – just thought I’d throw it in there 🙂 . Something to do with asymmetric payoffs between private and public industry types because of there capacity to absorb shocks.

If the industry is better able to price insuarance in line with the acual risk being taken, surely this would lead to a mroe “optimal” allocation.

On the thiness, it would probably have to be from big multinationals anyways so I don’t see this as a porblem, although I recognise in the current financial climate this might not be feasible!

On that note it probably is best the RBNZ does it so I guess we’ve come full circle, the RBNZ just needs to hire some specialist risk analysts to price the insurance in line with market rates, there must be a few people with these skills floating round looking for jobs with all the bank failures:)

I’m interested in your theory on long-tail shocks:)