Publication details, including instructions for authors and subscription information: http://www.tandfonline.com/loi/vjeb20 in which integration has taken place within the business curriculum.

This research examines the decision to purchase earthquake insurance by analyzing data on earthquake insurance price and penetration in the New Madrid fault zone in Missouri. Earthquake risk is of concern to consumers, the insurance industry, industry regulators, and government agencies because of the potentially catastrophic nature of losses resulting from a major earthquake. Despite the significance of the earthquake peril, the recent literature does not contain estimates of the price and income elasticity of the demand for earthquake insurance. Our analysis indicates that homeowners acquire earthquake insurance because of risk considerations, at higher levels of risk the demand for earthquake insurance is higher, and the price of earthquake coverage does not provide incremental information in explaining the demand for earthquake coverage.

While monitoring borrowers, a bank obtains private information about its customers, giving the bank an informational advantage in the production of subsequent services. Competing theories exist on the way banks use this advantage in the pricing of subsequent services to the customer. If moral hazard limits the transfer of private information, the borrowing relationship transforms into an informational monopoly and can be characterized as a "wasting asset." Alternately, if the banks' competitive environment necessitates that cost economies are shared, the relationship has "value." Ordering pairs of successive loans made to a particular borrower as prior loans and subsequent loans, and controlling for environmental, borrower, and loan characteristics, we show that the subsequent loan is priced significantly lower than the prior loan.

The theory of financial intermediation assigns banks a unique role in the resolution of information asymmetry. Banks, in general, obtain private information about the borrower and the project during the screening of loan applicants and during the monitoring of loan recipients. Incumbent banks, in particular, utilize information obtained while monitoring previous loan extensions to resolve information asymmetry when granting subsequent loans. We examine the rate on a sequence of loans to a borrower and find that the incumbent bank information advantage has finite magnitude and is quickly reflected in the pricing of the second loan. We also find that the lending relationship does not deteriorate to the detriment of the borrower. This study also provides further evidence supporting the hypothesis that an incumbent bank resolves information asymmetry during the monitoring of loan extensions.

No abstract