A Worn Path Essay Example | Topics and Well Written Essays - 500 words - 1

A Worn Path - Essay Example The setting of the story as written by the author is based on the Natchez Trace as well as the town of Natchez. Phoenix who is the protagonist in the video is an elderly Black American woman who subsequently goes on a heroic quest to rightly procure medicine for her beloved ill grandson. Throughout the story, the author uses different literary devices in order to make the story interesting. The Video also delivers the unforgettable character in the Black American woman, who does not even know when she was born. From the video, critics are well evident throughout the storyline. The various literary devices that are highly used in the video include allusion, metaphor, imagery, Simile and alteration. Allusion is a literary device that is used in the main character of the story, Phoenix. The name of phoenix is the similar to the mythical bird that subsequently raises the air and eventually bursts into flames. This bird is consumed by fire and when it gets burnt, a new phoenix spring emerges from the ashes. The old black woman is also old to walk in the difficult on her way to Natchez to get the medicine for her grandson. However, her age does not matter as the only thing that she believes in is that she has to have his medicine or die while trying. Metaphor is another literary device that is used in the video. From the video, it is quoted that the black woman walked slowly, a little side to side with a well-balanced heaviness, and with the lightness of the pendulum in the grandfather clock. Through such use of literary device, the author makes the character as well as the story to come into life. The Black old woman ambles in the cold, while she walks on the path multiple times for the sake of her grandson. However, due to his old age, her footing is quite unsure and she is seen to waver from side to side while walking. Imagery is also evident in the video. Throughout the

Respiratory Disease Paper Essay Example | Topics and Well Written Essays - 750 words

Respiratory Disease Paper - Essay Example So, when an allergy arrives in the form of asthma later in life, these cells become overreactive ending in constriction and spasm of airways. Asthma is classified on the basis of severity of symptoms. It is classified into different categories from intermittent to mild persistent to moderate persistent to severe persistent in an ascending order. The frequency of symptoms makes asthma classified as such. These symptoms include coughing, dyspnoea, wheezing of breath etc. This classification system is very important because it determines how treatment of a patient would proceed. Without classifying asthma first, treatment cannot be started because there is a different treatment plan for each category (Yawn, 2008, p. 139). Another way by which asthma is classified is related to allergens to see whether allergy is the factor responsible for precipitating symptoms or not. According to this classification, asthma can be divided into two categories, extrinsic (atopic) where allergens precipitate symptoms and intrinsic (non-atopic) where allergens are not involved. The classic disease prevention system for asthma is based on prima ry, secondary, and tertiary prevention. Primary prevention is based on risk reduction. So, it works by eliminating occupational and behavioural factors which promote development of asthmatic symptoms. Secondary prevention seeks to restrict disease progression by using screening tools. This makes it easier and more cost-effective to control asthma than when symptoms start appearing. Tertiary prevention seeks to lessen the disastrous effects produced by asthma on body. It can also include modification of behavioural and environmental factors to bring quality in life. Much research is done to scrutinize the impact of asthma on society. The cost of asthma to society is staggeringly huge. The relationship between asthma prevalence and society is well established. Research claims that one out of every 12 Americans is exposed to asthma. This means

Effects of Agenda for Change on Psychologists

Effects of Agenda for Change on Psychologists What is Agenda for Change? What are the likely implications of Agenda for Change for clinical  psychologists and other healthcare staff working in  the UK? Agenda for Change, implemented in December 2004, is a comprehensive pay reform package for 1.2 million NHS staff. It has brought about improved correlation between career and pay, proving to be the biggest overhaul in this area for 50 years. As part of Agenda for Change, the NHS Job Evaluation Scheme has helped coordinate rates of pay with a hierarchy of job profiles. The Job Evaluation Group, a subgroup of the NHS staff council, has so far produced over 200 national job profiles. On a more personal level the NHS Knowledge and Skills Framework was introduced to advance the interrelation between education, development and career progression. This Framework will develop a culture of lifelong learning in the NHS, promoting annual development reviews and encouraging staff learning. Agenda for Change aims to boost morale and staff retention, as well as improving diversity and family-friendly flexibility. Furthermore, as a result of pay improvements, it is hoped that the system will precipitate long term improvements in every aspect of patient care and service delivery. These changes aim to include a reduction in waiting times, improvement in the quality of treatment/care, and upgraded working practises. NHS Job Evaluation Scheme Job Evaluation attempts to provide a systematic approach to determining the relative worth of jobs within a workplace. The Scheme makes provision for most NHS jobs to be matched to nationally evaluated profiles on the basis of information from job descriptions, person specifications and additional information. National job profiles additionally provide a framework against which to check the consistency of local evaluations. Job Evaluation itself does not determine the rate of pay it simply produces a hierarchy of jobs. It examines the demands made by the job and the value of the job in the organisation. In March 2005 Clinical psychologists profiles were reviewed profiles are intended to apply to all psychologist jobs in the Health Service, (Amicus the Union: 2004). At the end of March 2006, 99% of all NHS staff had been moved to the Agenda for Change terms and conditions, and since June 2006 the NHS has invested  £ 1.1 billion in staff. The new pay system The impetus behind Agenda for Change was the need to address pay inequality, Thus the new system aims to create equal pay for equal work, with a series of three pay spines: Doctors and Dentists Nursing and Other Health Professionals NHS staff, (excluding the most senior managers). (Agenda for Change: NHS terms and conditions of service handbook, January 2005) Both the second and third pay spine will be divided into nine pay bands, and within each band there will be a number of pay points. The Job Evaluation Scheme determines the correct pay band for each post and thus the correct pay. The NHS Knowledge and Skills Framework (KSF) and the development review process. KSF and the development review process is the core of the career and pay progression outlined in Agenda for Change. By October 2005 all staff had in addition to updated job descriptions a description of the knowledge and skills needed to do a job. KSF concentrates on how acquired knowledge and skills might be applied in certain areas. (Department of Health: 2004) Everyone has their own personal development plan, created jointly in discussion with their line manager. Each year there will be a joint review of the work where new targets for development are set. At the first one, the psychologist (or other NHS staff) agrees on a personal development plan with their line manager. The aim is to meet these targets and then move up one pay point. There are two points called â€Å"gateways† in each pay band. The first gateway takes place no later than 12 months after appointment to ensure that the appointee can meet the basic demands of the post. The second gateway is set at a fixed point towards the top of the pay band. Implications Positive In June 2004 the final draft for psychology job profiles, job evaluation, job descriptions and person specifications was ready. It was a thorough and detailed document, agreed to be beneficial for clinical psychologists. For example, it included a Job description and Personal specification suitable for newly qualified clinical psychologists called Band 7 8a, making it possible to move from band 7 to 8 within a couple of years. (Amicus: 2004). KSF encourages positive learning development and career progression, giving the individual more freedom and control over their career. The objectivity of the frameworks for reviewing and evaluating clinical work can be advantageous. However, evaluations will always be dependant upon the relationship between the persons involved, giving room for differences of opinions and idiosyncrasies. Negative The announcement in autumn 2005 of around 13000 job cuts for nurses in NHS was in part the result of hospital trusts’ efforts to balance the books in the aftermath of the hugely increased wages bill brought about by the implementation of Agenda for Change (The Guardian, 2006). Although no job cuts for clinical psychologists have been announced, there is a tendency to withdraw funding when vacancies arise. (Amicus: 2006) The reduced staffing level increases the workload for existing staff, perhaps to a degree that the increased pay doesn’t compensate for. Increased demand for back pay[1] Conclusion Although the implementation of Agenda for Change has been fraught with difficulties and economic unrest there are indications that the new system is bringing about positive changes in some areas. In the Agenda for Change Briefing (June 2006) NHS employers stated that †the reform has been a success story.â€Å" However, many organisations are only now coming to the end of the implementation period and it will take at least a year or two for success criteria to emerge. In conclusion, it is perhaps too early to fairly evaluate the implications for clinical psychologists and other health care staff. References Agenda for Change: NHS terms and conditions of service handbook, January 2005: Available from: ‘http://www.dh.gov.uk/PolicyAndGuidance/HumanResourcesAndTraining/ModernisingPay/AgendaForChange/fs/en’  [Accessed 7/11/06] Amicus, the Union,: Clinical psychologist and psychology assistant profiles, 2004:  Available from:  Ã¢â‚¬Ëœhttp://www.amicustheunion.org’  [Accessed 8/11/06] Amicus, the Union: Grading guidance for clinical psychologists,2004  http://www.amicustheunion.org/ Amicus, the Union, Press Release, September 2006: Available From:  Ã¢â‚¬Ëœhttp://www.amicustheunion.org/’ Department of Health :Agenda for Change What will it mean for you? A guide for staff, 11/10/2004: Available from: ‘http://www.dh.gov.uk/PublicationsAndStatistics/Publications/PublicationsPolicyAndGuidance/PublicationsPolicyAndGuidanceArticle/fs/en?CONTENT_ID=4090842chk=djtkBc’  [Accessed 8/11/06] Department of Health: The NHS Knowledge and Skills Framework (NHS KSF) and the Development Review Process (October 2004): Available from: ‘http://www.dh.gov.uk’  [Accessed 8/11/06] The Guardian, April 24, 2006  Ã¢â‚¬ËœCumbrian nurses finally get equal pay cash’: Personnel Today, Jan 2006 Footnotes [1] See article in Personnel Today concerning the case of hundreds of nurses lodging equal pay complaints as a result of the new NHS Agenda for Change pay system (Personnel Today, January 2006).

Dna Identification System :: essays research papers

The Australian society would not benefit by the introduction of a DNA signature identification system for all citizens over the age of 18. This is the same thing as the Australian Card, which was stopped being released in the mid 1960’s. There were a number of reasons for this, as some being the government would know everything about you but maybe the government know more about you then you think. But is it all really that bad? Maybe it would help us as we could use it for identification purposes instead of carrying around a driver’s license or maybe a birth certificate it would all be held on this one card. Would the identification system be a benefit or not. It will defiantly change the way we do things. The DNA Identification System does have its benefits, as it would help in the medical department. If you were rushed to hospital from a car accident and you are unconscious the doctor will know if you were allergic to the anaesthetic or if you were a private patient or not. This would also help in the crime department, as it would store the whole of the Australian population of individuals over the age of 18. This would have all the information about each individual these would include their DNA, and other vital statistics. At the scene of the crime there is usually fingerprints or some kind of DNA trail left behind. The police would use this DNA to log into the database to track down the criminal. It would also tell the location of where that criminal is to make it easier to find them. The system also has its problems, Lets say that you were a carrier of a disease but it does not affect you at any way at all, this could effect your employability as your employer could have access to your information. This would destroy our right to privacy. “The right to privacy is one of the fundamental rights of any civilised society'; As quoted in the video ‘You have no secrets’ All of your information would be stored on a database, which would be accessible from the Internet.

Theories on Children’s Cognitive Development & Case Studies Illustrating Them

Gleaning insights proposed by the earliest psychologists like Jean Piaget, socio-cultural theorists like Lev Vygotsky, radical behaviorists like B. F. Skinner and other well-known psychologists like Howard Gardner, who challenged the earlier views on children’s cognitive development, can be very important. By drawing insights and gaining a better understanding of how children’s thought processes are formed, as well as the factors that influence them, and the overall impact on children, parents, caretakers, educators, and therapists find themselves in a better position to guide and help growing kids achieve their optimum potential. In most of the theories set forth , factors like genetics and the environment or outside influences come into play. Swiss psychologist Jean Piaget, who formed his theories after conducting actual observations of kids, opined, â€Å"The mind of the child is not that of a miniature adult†¦ the mind develops by forming schemas that help us assimilate our experiences and that must occasionally be altered to accomplish new information. In this way, children progress from the sensorimotor simplicity of the infant to more complex stages of thinking† (Myers 1989: 85). This theory, which presupposes that children’s cognitive skills develop spontaneously, is highlighted by the different developmental stages to which children’s learning must adjust. Most teachers rely on Piaget’s cognitive developmental theory which, in essence, maintains that â€Å"the reasoning processes of children at various ages†¦ cognitive development proceeds in four genetically determined stages that always follow the same sequential order† (Child Development Theories, n. d. ). The Piagetian theory boils down to the fact that children must not be forced to absorb concepts. Instead, knowledge and learning must take place at the designated time or age of the child. Even if they undergo the same stages – infancy, early childhood, adolescence, early adulthood, and so on, individuals, of course, exhibit varying capabilities or rate of cognitive development. Piaget presupposed that children gradually find out what there is to learn about the objects and people around them through a gradual learning process. Nothing must be foisted on young minds. Instead, the young mind should be allowed to form relationships and learn through a stage-by-stage assimilation of concepts and facts. The focus is on the knowledge learned, then. Most pre-schools find the Piagetian theory quite applicable and useful. In fact, the Piagetian theory has been widely used as underlying structure or foundation for child education & care in America and other parts of the world. There are some educators or schools, though, which combine the Piagetian concept on children’s cognitive development with other theories like the socio-cultural theory set forth by Russian developmental psychologist Lev Vygotsky, to let children realize their full potential. Vygotsky held that â€Å"cognitive processes are formed in the course of socio-cultural activities†¦ the individual comes into possession of a variety of cognitive processes engendered by different activities† (Kozulin, n. d. ) and with the guidance of a learned individual. â€Å"A knowledgeable person can help to add meaning to what is familiar to the child when he or she enters the child's zone of proximal development (ZPD), that place for learning located somewhere between the child's present understanding and potential understanding† (Steele 2001). Simply put, children’s cognitive skills are hastened when they come into contact with more knowledgeable elders, or more experienced, older mentors. There may be cases when even other kids of the same age but with greater intellectual capacity may help shape or form a slow-learning child’s understanding of basic concepts like music or the alphabet. The difference between the child’s own cognitive development and his potential to assimilate greater knowledge is the zone of proximal development. When schoolage kids interact and talk to and help each other learn, while also listening attentively to what their teacher says to them, they enter the zone of proximal development. In contrast to Piaget, Vygotsky laid greater emphasis in the way a child can utilize the joint approach or co-mingling with a well-informed adult in order to achieve full learning potential. Cases of teachers teaching young children to play a musical instrument like the piano may illustrate both the Piagetian concept of learning and Vygotsky’s socio-cultural theory. A child falling under the pre-operational stage, correlating to children in the age bracket of two to seven years, who is tinkering with the piano is still in the process of mastering symbols and will not really learn how to play the instrument well on his own. An adult’s expert guidance will jumpstart the child’s learning process. On the other hand, the piano teacher must prepare lessons that will suit the age of the child, or his developmental stage. Indeed, it can be noted that Piaget’s cognitive development theory has been used as jump-off point by his contemporaries and succeeding psychologists. One of those who challenged the Piagetian concept and maintained that a child’s cognitive ability is but one aspect of development is Howard Gardner. The latter proposed that individuals have â€Å"a number of domains of potential intellectual competence which they are in the position to develop, if they are normal and if the appropriate stimulating factors are available† (Gardner 2004: 287). Musical intelligence is one of the kinds of intelligence that Gardner said kids may cultivate. The example of a piano teacher giving a child his/her first set of piano lessons may encompass both the Piagetian concept, Vygotsky’s socio-cultural theory, and Howard Gardner’s theory on multiple intelligence. As far as Howard Gardner’s multiple intelligence theory is concerned, it runs counter to the Piagetian theory. Gardner believed in the vast potential each child has. He surmised that at any one instance, the well-nurtured child can be at different stages, honing his/her latent abilities – whether in spatial reasoning or body-kinesthetic or interpersonal skills, intrapersonal sensitivity, linguistic or musical inclinations. Even at a young age, children may nurture any of these multiple intelligences. A two-year-old child, for example, may be exposed to the piano playing of parents, and a couple of years later made to attend group lessons to observe, such that by the time the same child reaches the pre-teen years, he/she would have already developed a keen musical appreciation. Unlike the Piagetian method focus which tends to focus on test scores or the knowledge acquired per se, Gardner’s multiple intelligence theory focuses on forming â€Å"a strong, positive and attractive character† (Gardner 2004: 374). In the case of the child who grows up with musically inclined parents and eventually nurtures the talent , the resulting remarkable piano performance, is actually just a means to creating the child’s well-rounded character. Nonetheless, Piaget’s cognitive development concept has long been considered a universal learning theory which has found its way in numerous preschools all over the world. If most preschool classroom settings vividly illustrate Piaget’s cognitive developmental concept, particularly in the pre-operational stage, a clear-cut example of Vygotsky’s socio-cultural theory is the traditional education or cultural transmission taking place in most rural communities across the world. Let us take, for instance, the case of oral narratives about ancestral heroes and events transmitted by older males to their young in Ethiopian rural communities. â€Å"Children who sit patiently and silently on the periphery of the story-telling circle gradually absorb the cultural content and verbal technique (which) lasts for hours and constitutes an integral element of everyday life. † (Kozulin, n. d. ). By relying on their elders for their socio-cultural assimilation of ideas, the children very well mirror Vygotsky’s socio-cultural theory. An adult comes into the picture to impart greater learning at a quicker pace than if the children were to come across the same body of knowledge on their own. The traditional oral transmission of culture such as that perpetuated in the Ethiopian village, however, is no longer practiced in most other societies. Written records have supplanted the oral tradition. In his book, â€Å"Frames of Mind – The Theory of Multiple Intelligences,† Gardner cited numerous examples of people and situations affecting children’s cognitive learning skills. One of these is the structured method inspired by Japanese violinist Shinichi Suzuki to teach kids to learn music. Hinged on the basic principle that kids have an innate ability which â€Å"can be developed and enhanced through a nurturing environment† (The Suzuki Method 2005), the Suzuki Method lays emphasis on other intervening factors that may affect how young students learn music or instrument playing. These factors include starting lessons at an early age; recognizing just how important listening to music is; getting a first-hand grasp in learning how to play an instrument even before learning how to read; parental participation; well-trained teachers who instill quality teaching standard; realizing the importance of communicating and socially interacting with other children (The Suzuki Method 2005). Gardner also cited the method of imparting learning in traditional African bush society, wherein â€Å"the youngsters are divided into groups according to ages and aptitudes and receive instruction in the assorted lore of native life†¦particular stress on the historical background of the population as a means of stimulating group consciousness† (Gardner 2004: 343) is made. Gardner made the distinction of such ritualistic methods from more scientific ways of obtaining knowledge. â€Å"With formal schools, we behold a transition from tacit knowledge to explicit forms of knowledge† (Gardner 2004: 345). Such sensitivity to spoken knowledge displayed by native communities, when melded with modern methods of learning and technical requirements, may comprise what Gardner refers to as linguistic intelligence. When kids hailing from their native communities are absorbed in mainstream society, they are accorded the chance to fully develop this linguistic intelligence. Such language development also reflects or applies Vygotsky’s socio-cultural theory, which highlights the important role of language and social context in children’s cognitive processes. Language, in the case of African communities with an oral tradition of teaching kids, is used primarily to retain key concepts in the minds/memory of the youngsters. In such scenarios, children obtain greater understanding of their roots, including their ancestors, traditions, and culture as a whole, and piece together a logical picture in their minds by internalizing the various words and concepts articulated by knowledgeable elders. Vygotsky’s socio-cultural theory likewise finds itself applied in contemporary society. As an alternative to the Piagetian concept as well as to the behaviorist schools of thought which had theorists like B. F. Skinner postulating that mental processes or learning occurred as a consequence of the individual’s response to, or interaction with, the environment†¦ and with reinforcement and punishment playing a crucial part in molding behavior (Child development theories, n. d. ), Vygotsky’s socio-cultural theory articulated that learning is more of â€Å"a shared/joint process in a responsive social context† (Psychology applied, n. . ). Vygotsky debunked the view that learning depends or follows a child’s stage of development or maturation. Vygotsky veered away from the â€Å"biologically-based understanding of human behavior† or from the rewards and punishment concept set forth by behaviorists as main determinants of children’s thinking & behavior. Instead, he placed emphasis on the impact of social/cultural forces on human c ognitive processes and activity. He discovered the connecting links between socio-cultural processes taking place in society, and mental processes taking place in the individual† (Psychology applied, n. d. ). A modern example that applies in part Vgotsky’s learning theory of having a knowledgeable adult supervise the learning process and B. F. Skinner’s behaviorist approach is a structured skills-based tutoring service that offers individualized instruction to slow or advanced learners wishing to strengthen their foundation in key subjects like math, reading, and writing. Tutoring Club, one such company, has in its employ well-schooled and well-trained tutors who guide enrolled students who need to obtain better understanding of concepts in certain academic areas. The students work on modules of exercises designed to sharpen their cognitive skills, and every time they meet the desired output, an incentive (reward) comes in the form of a merchandise that they may get from a mini store inside the learning center, traded for chips which students accumulate for each module they complete. Another case in point is a modern-day Mathematics teacher who is instilling basic concepts to her students. An investigative research that zeroed in on a teacher who adopted the Vygotskian socio-cultural perspective in teaching Mathematics to her students showed how helpful it can be to encourage students to share their thoughts, ideas and assumptions with their peers under the teacher’s knowledgeable guidance and prodding. As the teacher opined, â€Å"Sharing clarifies their thinking. It lets them verbalize. nstead of just having it in their minds†¦ students become aware of how they think so that when they verbalized their thinking processes, she (the teacher) could help them with any difficulties they had† (Steele 2001). Based on the Vygotskian theory, language and communication – whether in remote rural communities or the contemporary setting, utilizes language and communication as essential tools to stimulate children’s cognitive development. The approach, of course, will vary depending on the physical state of each child. A different approach is taken for children with defects or physical impairment. Vygotsky may also be credited with tailorfitting the teaching method to the particular needs — as well as dysfunctions – of children. â€Å"Within his general theory of child development, (Vygotsky) created a comprehensive and practice-oriented paradigm of educating children with special needs (and) introduced the notion of `primary’ defects, `secondary’ defects, and their interactions in the field of psychopathology and different disabilities† (Psychology Applied, n. . ). Vygotsky believed that because cognitive development is hinged largely on stimulation of the senses, the physically and mentally impaired child is inhibited from obtaining knowledge at a generally accepted rate. More than the physical handicap of the special child, though, it is the â€Å"social consequences† (Psychology Applied, n. d) arising from that child’s impairment which must be gi ven focus. Cognitive developmental theories may be applied beyond the classroom, or in many other areas of children’s learning and lives. Various other factors that come into play which influence cognitive processes, like interactive media, also cannot be discounted. The condition of the child is likewise important in determining the right approach to inculcate learning. In any case, early cognitive developmental interventions, finetuned by succeeding theorists, serve not just to enhance academic outcomes but help shape the well-rounded personalities of today’s kids. Nowadays, the sound body of knowledge aimed at the workings of children’s mind continues to evolve and grow. In the end, it is up to parents, schools and other learning institutes, to determine which ones are truly suitable and will contribute in a healthy manner to the development of children’s cognitive skills. It can be seen that the pioneering works of such psychologists as Jean Piaget – who emphasized biologically-based or natural development of children’s cognitive skills — certainly provided good foundation or strong footing for succeeding child development theories to come out with improved concepts. Given the numerous cognitive development theories set forth and utilized for classroom teaching and/or child care, and the distinct differences and similarities in the main points of contention of the theorists laid out for people to grasp, which have undergone further study and enhancements and complemented by other theories throughout the years, parents and educators have been able to devise new and improved methods of enhancing children’s cognitive skills and potential.

Chapter 8 Mishkin Notes

An Economic Analysis of Financial Structure Why do Financial Institutions Exist? (Why is Indirect Finance so Important? ) Chapter 8 Chapter Preview W e take a closer look at why financial institutions exist and how they promote economic efficiency. Topics include: †¢ A Few Basic Facts About Financial Structure †¢ Transaction Costs †¢ Asymmetric Information: Adverse Selection and Moral Hazard Chapter Preview (cont. ) †¢ The Lemons Problem: How Adverse Selection Influences Financial Structure †¢ How Moral Hazard Affects the Choice Between Debt and Equity Contracts †¢ How Moral Hazard Influences Financial Structure in Debt Markets 1Basic Facts About Financial Structure Throughout the World †¢ The chart on the next slide shows how non-financial business get external funding in the U. S. , Germany, Japan, and Canada. †¢ Notice that, although many aspects of these countries are quite different, the sources of financing are somewhat consistent, with t he U. S. being different in its focus on debt. Sources of External Finance Copyright  © 2007 Pearson Addison-Wesley. All rights reserved. 8-5 Eight Basic Facts of Financial Structure 1. Stocks are not the most important source of external financing for businesses [Direct Finance] 2. Issuing marketable debt and equity ecurities is not the primary way in which businesses finance their operations [Direct Finance] 2 Eight Basic Facts of Financial Structure 3. Indirect finance, which involves the activities of financial intermediaries, is m any times more important than direct finance, in which businesses raise funds directly from lenders in financial markets. 4. Financial intermediaries, particularly banks, are the most important source of external funds used to finance businesses. Eight Basic Facts of Financial Structure 5. The financial system is among the most heavily regulated sectors of economy. 6. Only large, well -established corporations ave easy access to securities markets t o finance their activities. Eight Basic Facts of Financial Structure 7. Collateral is a prevalent feature of debt contracts for both households and businesses. 8. Debt contracts are typically extremely complicated legal documents that place substantial restrictions on the behavior of the borrowers. 3 W hy is Indirect Finance so Important? †¢ Transactions Cost †¢ Information Cost Transaction Costs †¢ Financial intermediaries to reduce transaction costs (and make profits) through – †¢ Economies of scale †¢ Expertise †¢ Read the municipal bond article. Transaction Costs †¢ Transactions costs ? ? ? E. g. a $5,000 investment only allows you to purchase 100 shares @ $50 / share (equity) No diversification Bonds even worse—most have a $1,000 size 4 Transaction Costs †¢ Financial intermediaries make profits by reducing transactions costs – Take advantage of economies of scale (example: mutual funds) – Develop expertise to l ower transactions costs – provide investors with liquidity and diversification Information Costs – Asymmetric Information †¢ symmetric information—the case where all parties to a transaction or contract have the same information. †¢ In many situations, this is not the case. We refer to this as asymmetric information.Asymmetric Information: Adverse Selection and Moral Hazard †¢ We will focus on two specific forms of asymmetric information: ? Adverse selection ? Moral hazard 5 Asymmetric Information: Adverse Selection and Moral Hazard †¢ Adverse Selection 1. Occurs when one party in a transaction has better information than the other party 2. Before transaction occurs 3. Potential borrowers most likely to produce adverse outcome are ones most likely to seek loan The Lemons Problem: How Adverse Selection Influences Financial Structure †¢ If quality cannot be assessed, the buyer is willing to pay at m ost a price that reflects the average qu ality Sellers of good quality items will not want to sell at the price for average quality †¢ The buyer will decide not to buy at all because all that is left in the market is poor quality items †¢ This result, when bad quality pushes good quality from the m arket because of an information gap, is known as â€Å"adverse selection† †¢ This problem explains fact 2 and partially explains fact 1 Asymmetric Information: Adverse Selection and Moral Hazard †¢ Moral Hazard 1. Occurs when one party has an incentive to behave differently once an agreement is made between parties 2. After transaction occurs 3. Hazard that borrower has incentives to ngage in undesirable (immoral) activities making it more likely that won't pay loan back 6 Health Insurance †¢ Symmetric Information: Suppose, if you get sick, drugs cost $10,000/year †¢ Everyone has a 1/10 chance of getting sick †¢ Solution – Insurance will be offered at $1,000 per year Health Insura nce – Symmetric Information continued †¢ Suppose 10% of the population (2 out of 20) is sickly and has a 50%(1/2) chance of getting sick – independent. †¢ Other 90% (18 people) only has 1/18 chance of getting sick. †¢ This information in known to everyone. †¢ How do you price the insurance? Health Insurance – Symmetric Information ontinued †¢ Sickly types pay? †¢ Healthy types pay? 7 Health Insurance – Asymmetric Information Adverse Selection †¢ Same as previous example, but one’s type (sick or healthy) is private information. Suppose insurance company offers policy at $1,000 per year? Suppose insurance company offers policy at $1,000 per year? †¢ Sickly type happy to save $4,000. †¢ Healthy drop out and go without insurance. †¢ Adverse selection: Bad quality pushes good quality from the market because of an information gap. 8 How about charging less say $555. 56 to everyone? How about charging less say $555. 56 to everyone? Break even on the healthy type, but lose on sickly type. †¢ Only way for insurance company in this case to break even is to charge $5,000 ? Healthy will go without insurance. Adverse Selection and Financial Structure Lemons Problem in Securities Markets †¢ Suppose investors cannot distinguish between good and bad securities, willing to pay only the average of the good and bad securities’ values. †¢ Result: Good securities undervalued and firms won’t issue them; bad securities overvalued, so too many issued. 9 Lemons Problem in Securities Markets †¢ Investors won’t want to buy bad securities, so m arket won’t function well. ?Explains Facts 1 and 2 ? Also explains Fact 6: only large well established firms have access to securities m arkets †¢ Bad quality pushes good quality from the m arket because of an information gap. Tools to Help Solve Adverse Selection Problems †¢ Private Production and Sale of Information ? Free-rider problem interferes with this solution †¢ Government Regulation to Increase Information (explains Fact # 5) Tools to Help Solve Adverse Selection Problems †¢ Financial Intermediation ? Analogy to solution to lemons problem provided by used car dealers ? Avoid free-rider problem by making private loans (explains Fact # 3 and # 4) ?Also explains fact #6—large firms are more likely to use direct instead of indirect financing 10 Tools to Help Solve Adverse Selection Problems †¢ Collateral and Net Worth ? Explains Fact # 7 How Moral Hazard Affects the Choice Between Debt and Equity Contracts †¢ Called the Principal -Agent Problem ? Principal: less information (stockholder) ? Agent: more information (manager) †¢ Separation of ownership and control of the firm ? Managers pursue personal benefits and power rather than the profitability of the firm Tools to help solve the Principal-Agent Problem: †¢ Monitoring ? Expensive †¢ G overnment regulation to increase information Fact 5 †¢ Financial Intermediation ? Venture capital firms provides the equity and place there own people in management †¢ Debt Contracts ? Reduces the need to monitor as long as borrower is performing. Explains Fact 1, why debt is used more than equity 11 How Moral Hazard Influences Financial Structure in Debt Markets †¢ Even with the advantages just described, debt is still subject to moral hazard. ? Debt may create an incentive to take on very risky projects. How Moral Hazard Influences Financial Structure in Debt Markets †¢ Most debt contracts require the borrower to pay a fixed amount (interest) and keep any ash flow above this amount. †¢ For example, suppose a firm owes $100 in interest, but only has $90? It is essentially bankrupt. The firm â€Å"has nothing to lose† by looking for â€Å"risky† projects to raise the needed cash. Tools to Help Solve Moral Hazard in Debt Contracts Lenders need t o find ways ensure that borrower’s do not take on too much risk. ? A good legal contract ? Bonds and loans often carry restrictive covenants †¢ Restrict how funds are used Require minimum net worth, collateral, bank balance, credit rating. †¢ Financial Intermediaries have special advantages in monitoring[Facts 3 and 4] ? 12 STOP HERE!! 13