persuasive advertising and product differentiation in a hotelling type differentiated products duopoly model we distinguish between three alternative ways that persuasive advertising may affect consumer perferences we illustrate the implications of our theory an contrast with results from models of informative advertising by analysing the relationship between the degree of product differentiation and equilibrium levels of advertising the analysis suggests that an positive relationship between equilibrium levels of advertising and inherent product substitutability is consistent only with advertising that increases perceived product differences

imperfect information and consumption in the united states and the united kingdom pischke 1995 has argued that imperfect information may account for the failure of hall s permanent income hypothesis to explain the behaviour of aggregate consumption we identify the restrictions that pischke s theory places on the dynamics of aggregate consumption and test them using quarterly data for the united kingdom and united states our results suggest that while pischke s model explains some features of the data which the hall model cannot it is formally rejected

investor flows and the 2008 boom bust in oil prices this paper explores the impact of investor flows and financial market conditions on returns in crude oil futures markets i argue that informational frictions and the associated speculative activity may induce prices to drift away from fundamental values and may result in price booms and busts particular attention is given to the interplay between imperfect information about real economic activity including supply demand and inventory accumulation and speculative activity in oil markets furthermore i present new evidence that there were economically and statistically significant effects of investor flows on futures prices after controlling for returns in the united states and emerging economy stock markets a measure of the balance sheet flexibility of large financial institutions open interest the futures spot basis and lagged returns on oil futures the largest impacts on futures prices were from intermediate term growth rates of index positions and managed money spread positions moreover my findings suggest that these effects were through risk or informational channels distinct from changes in convenience yield finally the evidence suggests that hedge fund trading in spread positions in futures impacted the shape of term structure of oil futures prices this paper was accepted by wei xiong finance

can costs of consumption adjustment explain asset pricing puzzles we investigate grossman and laroque s 1990 conjecture that costs of adjusting consumption can account in part for the empirical failure of the consumptionbased capital asset pricing model ccapm we incorporate small fixed costs of consumption adjustment into a ccapm with heterogeneous agents we find that undetectably small consumption adjustment costs can account for much of the discrepancy between the observed variance of nondurable aggregate consumption growth and the predictions of the ccapm and can partially reconcile nondurable consumption data with the observed equity premium we conclude that the ccapm s implications are nonrobust to extremely small adjustment costs the consumption based capital asset pricing models ccapms 1 of lucas 1978 breeden 1979 and grossman and shiller 1982 have difficulty matching the high volatility of equity returns and the high mean equity premium found in u s data first the variance of the ccapm asset pricing kernel is too low to generate plausible equity return volatility more precisely hansen and jagannathan 1991 and cochrane and hansen 1992 show that for any conjectured pricing kernel mean the variance of the kernel is too low to satisfy the hansen jagannathan bounds without implausibly high risk aversion or substantial habit formation 2 second the covariance between the ccapm asset pricing kernel and excess equity returns is too low to generate a plausible equity premium more precisely let us define ep as follows

entry facilitation by environmental groups we consider a model of vertical product differentiation where consumers care about the environmental damage their consumption causes an environmental group is capable of increasing consumers environmental concern via a costly campaign we show that the prospect of such a campaign can induce entry by a firm that is able to employ a cleaner technology than the one used by the incumbent we further demonstrate that the subsequent competition can lead to an adverse effect on aggregate pollution i e the decline in average industry pollution per product is offset by the increase in aggregate production

a new look at forecasting annual corporate earnings in the u s a abstract in this study composite earnings per share models are estimated for 35 chemical food and utility firms during the 1981 1982 period although it is generally held that financial analysts produce superior earnings forecasts when compared to time series model forecasts the results of this study indicate that analysts fared very poorly in 1982 and the average mean square forecasting error of analyst forecasts may be reduced by 74 2 percent by combining analyst and univariate time series model forecasts this reduction is very interesting when one finds that the univariate time series model forecasts do not substantially deviate from those produced by random walk drift models the arima 0 1 1 process moreover despite the high degree of correlation existing among analyst and time series forecasts the ordinary least squares estimation of the composite earnings model is a better forecasting model than the composite earnings models estimated with ridge regression and latent root regression techniques

security analyst superiority relative to univariate time series models in forecasting quarterly earnings abstract this paper provides evidence of security analyst sa superiority relative to univariate time series ts models in predicting firms quarterly earnings numbers and shows that sa forecast superiority in our sample is attributable to 1 better utilization of information existing on the date that ts model forecasts can be initiated a contemporaneous advantage and 2 use of information acquired between the date of initiation of ts model forecasts and the date when sa forecasts are published a timing advantage

deficits government expenditures and tax smoothing in the united states 1929 1988 abstract barro s tax smoothing hypothesis tsh implies that the government runs a budget deficit whenever it anticipates the growth rate of national income to increase or the growth rate of its expenditure to decline we test this implication of the hypothesis by examining the implied cross equation restrictions on a vector autoregression var model using u s data for the period ranging from 1929 to 1988 our formal tests reject the hypothesis for the full sample period but cannot reject it for the post 1947 period further investigations show that the statistical rejection should be attributed to sharp differences in the statistical properties of the pre 1947 and the post 1947 data rather than the failure of the hypothesis itself

bounds on elasticities with optimization frictions a synthesis of micro and macro evidence on labor supply how can price elasticities be identified when agents face optimization frictions such as adjustment costs or inattention i derive bounds on structural price elasticities that are a function of the observed effect of a price change on demand the size of the price change and the degree of frictions the degree of frictions is measured by the utility losses agents tolerate to deviate from the frictionless optimum the bounds imply that frictions affect intensive margin elasticities much more than extensive margin elasticities i apply these bounds to the literature on labor supply the utility costs of ignoring the tax changes used to identify intensive margin labor supply elasticities are typically less than 1 of earnings as a result small frictions can explain the differences between micro and macro elasticities extensive and intensive margin elasticities and other disparate findings pooling estimates from existing studies i estimate a hicksian labor supply elasticity of 0 33 on the intensive margin and 0 25 on the extensive margin after accounting for frictions

an evaluation of univariate time series earnings models and their generalization to a single input transfer function the development of statistical models for accounting earnings has been an evolving process earlier studies used simple index and or naive models e g ball and brown 1968 and brown and kennelly 1972 because of the lack of tools to deal with formal time series later dopuch and watts 1972 ball and watts 1972 and others employed formal time series models to annual earnings and collins and hopwood 1980 brown and rozeff 1979 foster 1977 griffin 1977 and watts 1975 did the same with quarterly earnings while this research has produced some conclusions with respect to the time series properties of earnings and how these may be used in predicting earnings brown and rozeff 1978 and then collins and hopwood 1980 recently provided evidence that financial analysts can produce forecasts more accurate than those based on the arima models alone this suggests that other information may be useful in providing estimates of future earnings when incorporated with knowledge of the time series properties of earnings the purpose of this study is twofold a we first evaluate the models used in past studies of quarterly time series of earnings in order to determine whether they are systematically misspecified due to the omission of other information which is implicitly contained in a market earnings index the evidence suggests that the misspecification exists and b we introduce a transfer function model which utilizes the timeseries properties of both the index and earnings numbers this model is obtained based on both theoretical derivation and inspection of data

commodity trade and international risk sharing how much do financial markets matter abstract this paper evaluates the social gains from international risk sharing in some simple general equilibrium models with output uncertainty a simulation model calibrated to selected moments of u s and japanese data estimates the incremental loss from a ban on international portfolio diversification to be on the order of 0 20 percent of output per year even the theoretical gains from asset trade may disappear under alternative sets of assumptions on preferences and technology the paper argues that the small magnitude of potential trade gains may help explain the apparently inconsistent findings of empirical studies on the degree of international capital mobility

customized advertising via a common media distributor we show that when a single media content distributor such as a television cable company or an internet provider delivers advertising messages on behalf of multiple competing brands it can sometimes utilize customized advertising to implement monopoly pricing even though such monopolistic pricing can be implemented with varying degrees of customization of commercials product revenues and consumer surplus are highest when the distributor chooses the highest level of customization feasible consumers would obviously prefer aggressive price competition in product markets however given that collusion on prices is facilitated anyway when the distributor acts as a common agent the welfare of consumers is enhanced when commercials are better aligned with their preferences

international evidence on sticky consumption growth abstract this paper estimates the degree of stickiness in aggregate consumption growth sometimes interpreted as reflecting consumption habits for thirteen advanced economies we find that after controlling for measurement error consumption growth has a high degree of autocorrelation with a stickiness parameter of about 0 7 on average across countries the sticky consumption growth model outperforms the random walk model of hall 1978 and typically fits the data better than the popular mankiw 1989 model though in a few countries the sticky consumption growth and campbell mankiw models work about equally well

iceland s natural experiment in supply side economics the move to a pay as you earn income tax system in iceland in 1987 1988 made income earned in 1987 tax free using a sample of 9 274 individuals for the years 1986 1987 and 1988 we calculate the labour supply response of this change and find that total labour supply rose by 6 7 in 1987 over the average of 1986 and 1988 when we correct for entry in 1988 this consists of an 8 6 increase in weeks supplied by those already in the labour market in 1986 and a 1 9 decline due to entry exit the elasticity of weeks worked to the rise in after tax wages was 0 41 for men and 0 11 for women while the participation rate of women increased somewhat in our sample participation by men fell this abstract was borrowed from another version of this item

near rationality in wage setting this study argues that it is interesting to examine near rational behaviour in the context of an efficiency wage model where there are positive if decreasing returns to increasing the wage beyond the efficient level previous research has found it difficult to distinguish between efficiency wage and bargaining models which have similar empirical predictions but unions are a priori more likely to develop in environments in which the technology favours efficiency wage payments this makes it interesting to investigate what it costs the firm to deviate from the efficiency wage if it does not cost a lot firms may give in to union demands this study derives expressions for the wage deviation and for the associated profit loss for illustrative purposes these are calibrated for uk us and indian manufacturing taking a plausible parameterization of the effort wage function and using available estimates of the wage and employment elasticities of output while there is evidence of positive effort returns t

business cycle dynamics under rational inattention we develop a dynamic stochastic general equilibrium dsge model with rational inattention and compare its predictions to data households and decision makers in firms have limited attention and optimally allocate their attention rational inattention is the only source of slow adjustment the model matches the empirical impulse responses to monetary policy shocks and aggregate technology shocks at the same time profit losses and utility losses from inattention are very small furthermore it matters whether one uses this model or a conventional dsge model for policy analysis

the response of expenditures to anticipated income changes panel data estimates standard models of intertemporal allocation predict that the time path of expenditures should be independent of the time path of income recently two papers parker 1999 and souleles 1999 have suggested that u s households have a high marginal propensity to spend within year anticipated income changes we use an expenditure survey panel from spain to re examine this issue we exploit two important features of the spanish data first we have quarterly panel data that follows households for more than four quarters second we use the fact that workers are exogenously sorted into one of two payment schemes some receive the same amount each month of the year and others receive an extra payment in june and december the extra payment is large and predictable we examine the detailed pattern of expenditures over the year to see whether they differ between the two groups we fail to find even weak differences we complement this with a conventional euler equation analysis of excess sensitivity our predicting equation for quarterly earnings growth is much better than usual and is likely to give a powerful test of the hypothesis that predictable changes in income do not lead to changes in expenditure patterns the results of this analysis confirm the graphical analysis we find no evidence of excess sensitivity we conclude that households in normal times do smooth consumption over the year we suggest a reconciliation of our results with those of parker and souleles

the sensitivity of american options to suboptimal exercise strategies the value of american options depends on the exercise policy followed by option holders market frictions risk aversion or a misspecified model for example can result in suboptimal behavior we study the sensitivity of american options to suboptimal exercise strategies we show that this measure is given by the gamma of the american option at the optimal exercise boundary more precisely if b is the optimal exercise price but exercise is either brought forward when or delayed until a price b has been reached the cost of suboptimal exercise is given by b b b 2 where b denotes the american option gamma therefore the cost of suboptimal exercise is second order in the bias of the exercise policy and depends on gamma this result provides new insights on american options

learning ricardian equivalence abstract this paper tests whether subjects learn to comply with the ricardian equivalence proposition in a life cycle consumption laboratory experiment our results suggest that ricardian equivalence does not hold on average tax changes have a significant and strong impact on consumption choice using individual consumption time series the behaviour of 56 of our subjects can be classified as inconsistent with the ricardian equivalence proposition classifying subjects according to rules of thumb that best describe their behaviour we find that subjects switch less to rules that theoretically violate ricardian equivalence in later rounds compared to earlier rounds this implies that some subjects learn to comply with ricardian equivalence by changing their consumption strategy however the aggregate effect of taxation on consumption persists even after eight rounds of repetition

informative advertising and product match abstract this paper studies informative advertising in a variety of market structures for which some consumers are informed about two differentiated products while other consumers are uninformed we characterize a unique symmetric subgame perfect nash equilibrium in advertising and pricing and analyze the welfare properties of the equilibrium remarkably total surplus is non monotonic in advertising in a duopoly market the equilibrium level of advertising may be more or less than socially optimal we also study the effect of a trade association and compare these results with the first best solution and a multiproduct monopolist

the effect of taxes on male and female labor supply in sweden this paper estimates labor supply functions for married men and women in sweden using data from 1980 taking account of the complete form of individuals budget constraints both linear and quadratic supply functions are estimated with and without random preferences a novel feature is that for women the wage rate and labor supply functions are estimated simultaneously using a full information maximum likelihood method this method yields substantially larger wage and income elasticities than does the previously used two step methods another result is that the quadratic supply function wage elasticities for men and women are virtually the same if the elasticities are evaluated at the same net wage rate and hours of work for men and women the estimated functions are used to calculate the effect of tax reforms

what has been learned about labor supply in the past twenty years the main advance in the study of labor supply in the past 20 years has come in recognizing and interpreting the variety of different labor supply functions that coexist in the empirical literature a crucial theoretical distinction with important empirical payoff is that between labor supply choices at the extensive margin i e labor force participation and employment choices and choices at the intensive margin i e choices about hours of work or weeks of work for workers another important distinction is the one between a descriptive labor supply function and a structural supply function that can be the basis for out of sample policy investigations concerning responses to tax and welfare programs and evaluations of welfare losses a full understanding of the participation hours dichotomy leads to an appreciation of the importance of the problem of selection bias what is the wage to impute to a nonworking person these distinctions are a legacy of the research conducted on labor supply over the past 20 years many important empirical questions have been addressed i how strong are the effects of taxes welfare and transfer programs on labor supply ii how important is intertemporal substitution can life cycle labor supply models explain business cycle labor supply behavior iii has the consensus view of the 1960 s of high labor supply elasticities for married women and low labor supply elasticities for married men held up all of the empirical evidence assembled on labor supply must be called into question in the light of important research on the basic quality of the data conducted by analysts at the university of michigan i discuss this evidence in a concluding section except for my discussion of measurement issues i focus only on the major discoveries about which a general consensus has emerged

negotiations and exclusivity contracts for advertising exclusive advertising on a given media outlet is usually profitable for an advertiser because consumers are less aware of competing products however for such arrangements to exist media must benefit as well we examine conditions under which such exclusive advertising contracts benefit both advertisers and media outlets referred to as stations by illustrating that exclusive equilibria arise in a theoretical model of the media advertisers and consumers who participate in both the product and media markets in the model stations sell advertising space to advertisers and broadcast advertising messages to consumers conditions leading to higher equilibrium levels of advertising can be unprofitable for advertisers because high levels of advertising make consumers better informed and thus lead to fiercer product price competition as a result media stations may be less profitable as well because their payoff is determined as a fraction of the advertiser surplus generated in the product market stations mitigate this effect by offering advertisers exclusive advertising contracts with such contracts consumers are less informed about competing products yielding higher producer surplus it is profitable for stations to offer exclusivity when commercial advertising is an important means for advertisers to inform consumers about their products

health and mortality delta assessing the welfare cost of household insurance choice we develop a pair of risk measures health and mortality delta for the universe of life and health insurance products a life cycle model of insurance choice simplifies to replicating the optimal health and mortality delta through a portfolio of insurance products we estimate the model to explain the observed variation in health and mortality delta implied by the ownership of life insurance annuities including private pensions and long term care insurance in the health and retirement study for the median household aged 51 to 57 the lifetime welfare cost of market incompleteness and suboptimal choice is 3 2 of total wealth

the effects of housing assistance on labor supply evidence from a voucher lottery this study estimates the effects of means tested housing programs on labor supply using data from a randomized housing voucher wait list lottery in chicago economic theory is ambiguous about the expected sign of any labor supply response we find that among working age able bodied adults housing voucher use reduces labor force participation by around 4 percentage points 6 percent and quarterly earnings by 329 10 percent and increases temporary assistance for needy families program participation by around 2 percentage points 15 percent we find no evidence that the housing specific mechanisms hypothesized to promote work such as neighborhood quality or residential stability are important empirically jel i38 j22 r23 r38

who benefits from misleading advertising considering a model of price and misleading advertising competition between two brands producing horizontally and vertically differentiated brands we investigate allocative implications of misinformation and related regulatory policies although misinformation distorts consumers decision making misinformation can correct inefficiencies resulting from misallocation of goods thereby increasing welfare however advertising competition may create a prisoner s dilemma for firms and reduce welfare but smart consumers unaffected by misinformation and consumers preferring low quality brands may gain we also demonstrate how a biased policymaker who places different weights on producers and consumers surpluses behaves in response to misinformation disseminated by firms

union contracts and the life cycle permanent income hypothesis this paper isolates households in the psid whose heads can be matched to particular long term union contracts with high confidence the author uses use published information on these contracts to construct a household specific measure of expected wage growth he finds that predictable wage movements are significantly correlated with consumption changes contrary to neoclassical consumption theory the author finds that consumption responds more strongly to predictable income declines than to predictable income increases this asymmetry is inconsistent with liquidity constraints and myopia but is qualitatively consistent with models in which preferences exhibit loss aversion copyright 1995 by american economic association

tax policy and consumer spending evidence from japanese fiscal experiments abstract this paper studies the extent to which the impact of tax policy on consumer spending differs between temporary and permanent as well as anticipated and unanticipated tax changes to discriminate between them we use institutional information such as legal distinction between temporary and permanent tax changes as well as timing of policy announcement and implementation we find that the impact of temporary changes is significantly smaller than the impact of permanent changes we also find that more than 80 percent of japanese consumers including those who distinguish between temporary and permanent tax changes respond to tax changes at the time of their implementation and not at the time of a policy announcement we suggest an interpretation that these consumers follow a near rational decision rule

excess sensitivity of high income consumers using new transaction data i find considerable deviations from consumption smoothing in response to large regular predetermined and salient payments from the alaska permanent fund on average the marginal propensity to consume mpc is 25 for nondurables and services within one quarter of the payments the mpc is heterogeneous monotonically increasing with income and the average is largely driven by high income households with substantial amounts of liquid assets who have mpcs above 50 the account level data and the properties of the payments rule out most previous explanations of excess sensitivity including buffer stock models and rational inattention how big are these mistakes using a sufficient statistics approach i show that the welfare loss from excess sensitivity depends on the mpc and the relative payment size as a fraction of income since the lump sum payments do not depend on income the two statistics are negatively correlated such that the welfare losses are similar across households and small less than 0 1 of wealth despite the large mpcs

asset bubbles and the cost of economic fluctuations lucas 1987 2003 estimates that the cost of economic fluctuations is low a social planner would pay no more than 0 1 of permanent consumption to eliminate all future business cycle fluctuations the current paper extends lucas calculations by studying the costs of fluctuations arising from asset bubbles we estimate two classes of costs consumption volatility due to asset bubbles in a representative agent economy and consumption volatility that arises because households have heterogeneous exposure to the bubble assets we show that the magnitude of welfare costs is primarily driven by the existence of heterogeneity our benchmark calibration implies that the asset bubbles of the last decade generated a social welfare cost equal to a permanent 3 reduction in the level of national consumption if assets are held proportionately across the population these welfare costs fall by an order of magnitude our calculations are sensitive to the details of the calibration including the degree of balance sheet and trading heterogeneity the coefficient of relative risk aversion and the magnitude of the asset bubble our preferred specifications generate welfare costs ranging from 1 to 10 of permanent national consumption

incomplete information and the time series behaviour of consumption pischke 1995 uses both microeconomic and macroeconomic us data to test the idea that within an otherwise standard pih framework ignorance by agents of aggregate labour income can account for the observed degree of excess smoothness and sensitivity in consumption his tests involve only the second moments of aggregate consumption and labour income in this paper our main aim is to identify and test the restrictions his model implies for aggregate consumption dynamics using us quarterly data over the period 1959 1996 but our framework allows us also to test an earlier related model of goodfriend 1992 we find that both models can be formally rejected ignorance of aggregate labour income cannot by itself account for aggregate consumption dynamics some other relaxation of the assumptions of the standard pih is required we give an example of one possible such relaxation and present evidence indicating that pischke s version of imperfect information may within that framework have a significant role to play copyright 2000 john wiley sons ltd

structural changes and the forecasting of quarterly accounting earnings in the utility industry abstract this paper presents a statistical procedure to identify effects of three potential structural changes on accounting earnings temporary short run and long run the procedure is applied to quarterly accounting earnings of 39 utility companies structural changes are found to be commonplace statistical forecasting models that explicitly incorporate structural change effects are found to generate more accurate forecasts than other statistical models in the literature although no statistical model significantly dominates value line a firm specific model with structural change adjustment forecasts as well as value line moreover all statistical models examined have significant marginal forecasting power to complement value line forecasts

a theory of combative advertising in mature markets with competing firms a common role for advertising is to shift consumer preferences towards the advertiser in a tug of war with no effect on category demand in this paper we analyze the effect of such combative advertising on market power we show that depending on the nature of consumer response combative advertising can reduce price competition to benefit competing firms however it can also lead to a procompetitive outcome where individual firms advertise to increase their own profitability but collectively become worse off this is because combative advertising can intensify price competition such that an advertising war leads to a price war similar to price competition advertising competition can result in a prisoner s dilemma where all competing firms make less profit even when the effect of each firm s advertising is to enhance consumer preferences in its favor given such procompetitive effects we further show that cost of combative advertising could be a blessing in disguise higher unit cost of advertising resulting in lower equilibrium levels of advertising leading to higher prices and profits we conduct a laboratory experiment to investigate how combative advertising by competing brands influences consumer preferences our experimental analysis offers strong support for our conclusions

the liquid hand to mouth evidence from personal finance management software we use a very accurate panel of all individual spending income balances and credit limits from a personal finance software to document spending responses to the arrival of both regular and irregular income these payday responses are robust and homogeneous for all income and spending categories throughout the income distribution moreover we find that few people hold little or no liquidity we then analyze whether people hold liquidity cushions to cope with future liquidity constraints however we find that peoples responses are consistent with standard models without illiquid savings in which neither present nor future liquidity constraints are frequently binding received may 31 2016 editorial decision september 30 2017 by editor itay goldstein

income and wealth heterogeneity in the macroeconomy how do movements in the distribution of income and wealth affect the macroeconomy we analyze this question using a calibrated version of the stochastic growth model with partially uninsurable idiosyncratic risk and movements in aggregate productivity our main finding is that in the stationary stochastic equilibrium the behavior of the macroeconomic aggregates can be almost perfectly described using only the mean of the wealth distribution this result is robust to substantial changes in both parameter values and model specification our benchmark model whose only difference from the representative agent framework is the existence of uninsurable idiosyncratic risk displays far less cross sectional dispersion and skewness in wealth than u s data however an extension that relies on a small amount of heterogeneity in thrift does succeed in replicating the key features of the wealth data furthermore this extension features aggregate time series that depart significantly from permanent income behavior

an investigation into adequate data for estimating annual earnings time series models abstract the purpose of this study is to examine the stability of corporate earnings per share eps time series models as the length of the time series are altered evidence is found to support the stationarity of corporate eps data furthermore outlier analysis is employed and supports the long run stability of corporate earnings series

inattention wealth inequality and equilibrium asset prices abstract heterogeneity in planning propensity affects wealth inequality and asset prices this paper presents an economy where attentive agents plan their consumption period by period while inattentive agents plan every other period inattentive consumers face more uncertainty and trade at unfavorable prices if the only source of uncertainty is future income inattentive consumers accumulate more wealth in contrast with uncertain asset returns inattentive investors accumulate less wealth asset prices must induce attentive consumers to voluntarily bear the burden of adjusting to aggregate shocks and as a result are much more volatile than in a representative agent model with full attention

induced uncertainty market price of risk and the dynamics of consumption and wealth abstract in this paper we examine the implications of model uncertainty or robustness rb for consumption and saving and the market price of uncertainty under limited information processing capacity rational inattention or ri first we show that ri by itself creates an additional demand for robustness that leads to higher induced uncertainty facing consumers second if we allow capacity to be elastic rb increases the optimal level of attention third we explore how the induced uncertainty composed of i model uncertainty due to rb and ii state uncertainty due to ri affects consumption and wealth dynamics the market price of uncertainty and the welfare losses due to incomplete information we find that induced uncertainty can better explain the observed consumption income volatility and market price of uncertainty low attention increases the effect of model misspecification

is there a daily discount rate evidence from the food stamp nutrition cycle abstract quasi hyperbolic discounting predicts impatience over short run tradeoffs i present a direct non laboratory test of this implication using data on the nutritional intake of food stamp recipients caloric intake declines by 10 to 15 percent over the food stamp month implying a significant preference for immediate consumption these findings constitute a rejection of the permanent income hypothesis and are extremely difficult to reconcile with exponential discounting the data support an explanation based on time preference and reject several alternative explanations including highly elastic intertemporal substitution i explore implications for the optimal timing of transfer payments under alternative assumptions about preferences

rules of thumb in life cycle saving decisions we analyse life cycle saving decisions when households use simple heuristics or rules of thumb rather than solve the underlying intertemporal optimisation problem we simulate life cycle saving decisions using three simple rules and compute utility losses relative to the solution of the optimisation problem our simulations suggest that utility losses induced by following simple decision rules are relatively low moreover the two main saving motives reflected by the canonical life cycle model long run consumption smoothing and short run insurance against income shocks can be addressed quite well by saving rules that do not require computationally demanding tasks such as backwards induction

the effects of government transfers on monthly cycles in drug abuse hospitalization and mortality this paper analyzes the monthly patterns of adverse outcomes due to the consumption of illegal drugs by recipients of government transfer payments we find evidence that certain subpopulations on government cash aid significantly increase their consumption of drugs when their checks arrive at the beginning of the month and as a result experience adverse events including hospitalization and death using data from california we find that the overall rate of drug related hospital admissions increases abruptly at the beginning of the month with admissions increasing 23 during the first five days of the month we find that this cycle is driven largely by recipients of supplemental security income ssi ssi recipients also experience an abrupt 22 increase in within hospital mortality after receiving their checks these findings suggest that full wallets adversely affect some aid recipients and that policymakers should explore alternate disbursement regimes such as a staggered disbursement schedule or in kind support that have the potential to reduce the rate of adverse events

a reconsideration of the in sensitivity of tests of the intertemporal allocation of consumption to near rational alternatives abstract this paper uses micro data to show that the utility loss from near rational behavior can be very significant we calculate the utility loss from using a sub optimal consumption allocation rule in a permanent income setting where utility is quadratic in contrast to estimates derived from aggregate data cochrane 1987 we find that small deviations from the optimal consumption allocation rule lead to large utility losses more than 100 quarter 1983 dollars

paycheque receipt and the timing of consumption this article examines the consumption response to monthly paycheque receipt since the amount and arrival date of paycheques are known in advance the receipt of a paycheque does not coincide with the receipt of new information under the basic rational expectations life cycle permanent income hypothesis household consumption should not respond to paycheque arrival using data from the uk s family expenditure survey this article finds that household consumption is excessively sensitive to paycheque receipt the results cannot be explained by any underlying monthly expenditure fluctuations common to all households the presence of liquidity constraints as measured by wealth and age can account for the excess sensitivity results

rather bait than switch abstract this paper reviews some of the theory e g postner 1973 on the incentives of firms to advertise deceptively it argues that the widely held belief that these incentives are small and are outweighed by important disincentives is based on unjustified assumptions about consumer rationality the paper presents a model of advertising and consumer reactions in which consumers manifest a form of bounded rationality given this it is demonstrated that under cogent assumptions about parameter values some firms will have an incentive to advertise deceptively causing a net welfare loss to society in the absence of corrective policy

the life cycle model of consumption and saving a central implication of life cycle models is that agents smooth consumption we review the empirical evidence on smoothing at frequencies from within the year up to across a lifetime we find that life cycle models particular those which incorporate realistic features of markets and goods have more empirical successes than failures we also show that some apparent deviations from theoretical predictions imply very small welfare losses for agents finally we emphasize that the coherence of life cycle models imposes an important discipline when incorporating new features into models

sensitivity of consumption to income and to government purchases some specification and estimation issues the paper derives a nonlinear error correction model ecm for consumption and shows that existing models that are based on quadratic utility combine permanent income and current income consumption and nest or could nest the hypothesis of substitutability between private consumption and government purchases are special cases of the ecm the importance of some econometric issues that have not received proper attention in the literature is demonstrated by estimating the models using us aggregate quarterly data 1953 1 1992 4 the evidence suggests that the ecm produces more reliable estimates than do the existing restrictive models

informative price advertising in a sequential search model the purpose of this paper is to study the role and implications of price advertising when shopping trips are costly to consumers to do so we introduce advertising into an optimal sequential search model information about prices is both gathered by consumers and disseminated by firms consumers search sequentially and stores advertise with various intensity when it is in their interest to do so our model has a unique equilibrium exhibiting priee dispersion the model generates predictions about the shape of the price distribution and firms advertising behavior we explore the effects of entry and find that when initial advertising costs at zero level of effort are precisely zero entry drives the equilibrium to the perfectly competitive outcome however when initial marginal advertising costs are positive entry drives prices higher and while the informed consumers almost surely locate competitive prices welfare does not necessarily increase finally we compare the effectiveness of the two informational channels when advertising costs shrink prices become competitive however when search costs shrink prices remain bounded above marginal production costs

minimal and maximal product differentiation in hotelling s duopoly abstract hotelling s 1929 model of duopolistic competition is re examined a family of utility functions is used which has as a special case hotelling s original utility function in a two stage location price game it is shown that an equilibrium exists when the curvature of the utility functions in the space of characteristics is sufficiently high the subgame perfect equilibrium never exhibits minimum product differentiation on the other hand not all equilibria are at maximal product differentiation

environmental groups in monopolistic markets we examine a market in which a monopolistic firm supplies a good the production of the good causes damage to the environment consumers are heterogeneous with respect to their disutility of the environmental damage an environmental group can enter the market and set up a campaign in order to influence consumers preferences we characterize the equilibrium of the resulting entry deterrence game and investigate its properties it turns out that the aggregated environmental damage is lowest if the firm is able to deter entry of the environmental group and moreover the fixed entry cost of the environmental group is small enough

limited asset markets participation monetary policy and inverted aggregate demand logic abstract this paper incorporates limited asset markets participation in dynamic general equilibrium and develops a simple analytical framework for monetary policy analysis aggregate dynamics and stability properties of an otherwise standard business cycle model depend nonlinearly on the degree of asset market participation while moderate participation rates strengthen the role of monetary policy low enough participation causes an inversion of results dictated by conventional wisdom the slope of the is curve changes sign the taylor principle is inverted optimal welfare maximizing discretionary monetary policy requires a passive policy rule and the effects and propagation of shocks are changed however a targeting rule implementing optimal policy under commitment delivers equilibrium determinacy regardless of the degree of asset market participation our results may justify fed s behavior during the great inflation period

price and advertising signals of product quality we present a signaling model based on ideas of phillip nelson in which both the introductory price and the level of directly uninformative advertising or other dissipative marketing expenditures are choice variables and may be used as signals for the initially unobservable quality of a newly introduced experience good repeat purchases play a crucial role in our model a second focus of the paper is on illustrating an approach to refining the set of equilibria in signalling games with multiple potential signals

preferences over wealth experimental evidence abstract preferences over wealth are a channel to explain why households in the aggregate are less responsive when real interest rates fall following such preferences they save more than would be optimal in a standard model however little is known about preferences over wealth empirically we run an intentionally simple lab experiment on intertemporal spending and saving decisions with 180 students under a positive discount factor zero interest and linear utility maximizing behaviour would imply spending any funds instantaneously while half of the participants behave optimally we find a robust pattern where participants on average form and maintain a stock of wealth consistent with wealth entering the utility function directly

how social security and medicare affect retirement behavior in a world of incomplete markets this paper provides an empirical analysis of how the u s social security and medicare insurance system affect the labor supply of older males in the presence of incomplete markets for loans annuities and health insurance we estimate a detailed dynamic programming dp model of the joint labor supply and social security acceptance decision focusing on a sample of males in the low to middle income brackets whose only pension is social security the dp model delivers a rich set of predictions about the dynamics of retirement behavior and comparisons of actual vs predicted behavior show that the dp model is able to account for wide variety of phenomena observed in the data including the pronounced peaks in the distribution of retirement ages at 62 and 65 the ages of early and normal eligibility for social security benefits respectively we identify a significant fraction of health insurance constrained individuals who have no form of retiree health insurance other than medicare and who can only obtain fairly priced private health insurance via their employer s group health plan the combination of significant individual risk aversion and a long tailed pareto distribution of health care expenditures implies that there is a significant security value for these individuals to remain employed until they are eligible for medicare coverage at age 65 overall our model suggests that a number of heretofore puzzling aspects of retirement behavior can be viewed as artifacts of particular details of the social security rules whose incentive effects are especially strong for lower income individuals and those who do not have access to fairly priced loans annuities and health insurance

advertising brand loyalty and pricing i consider an oligopoly model where prior to price competition firms invest in persuasive advertising and induce brand loyalty in consumers who would otherwise buy the cheapest alternative on the market this setting in which persuasive advertising is introduced to homogenous product markets provides an alternative explanation for price dispersion phenomena despite ex ante symmetry the equilibrium profile of advertising outlays is asymmetric it follows that endogenously determined brand loyal consumer bases are not symmetric across firms this raises a robustness question regarding varian s model of sales where symmetry is exogenously assumed

behaviour of non renewable natural resource firms under uncertainty optimizing or ad hoc abstract this paper tests the assumption of optimizing behaviour by natural resource firms in the framework of an intertemporal model of non renewable resource development and production using data from the petroleum industry it is argued that the presence of geological and price uncertainty presents a situation in which standard objections to non optimizing behaviour may not hold as an alternative it is proposed that firms use an ad hoc rule of thumb to update decisions as the values of variables change econometric results support ad hoc behaviour as opposed to intertemporal profit maximization

second third and higher order consumption functions a precautionary tale abstract no analytic solution exists to the consumption problem of an agent who faces uninsurable income shocks though perturbation methods can be used to derive approximate solutions this paper shows it is straightforward to extend the well known second order consumption function to third order however for every n there is a threshold interest rate below which the nth order correction diverges this puts a bound on the accuracy that can be achieved with perturbation methods even a second order consumption function can perform spectacularly worse than a zeroth order function that disregards precautionary saving and this cannot be rectified by going to higher orders

the social cost of near rational investment abstract we show that the stock market may fail to aggregate information even if it appears to be efficient and that the resulting decrease in the information content of prices may drastically red

price competition and advertising in oligopoly abstract this paper studies price advertising in an oligopoly market where consumers have only local price information sellers may attract consumers from other locations by advertising their price with positive probability they advertise a low price to attract customers from distant locations with the remaining probability they post a high price and serve only local customers the random advertising equilibrium approaches the equilibrium under perfect price information when the cost of advertising becomes small

a time domain transfer function model of wagner s law the case of the united kingdom economy the dynamic relationship which is implied by wagner s law is well established in the literature however the methodology which has been applied to investigate this dynamic relationship has tended to avoid a dynamic specification this paper investigates wagner s law employing transfer function methodology in the time domain for the uk over the period 1946 85

the debt crisis lessons of the 1980s for the 1990s abstract one of the salient characteristics of the 1980s is the growth collapse of the latin american debtor countries the debt overhang literature claims that the debt crisis is the main reason for the growth collapse however previous empirical work has failed to support this hypothesis we re examined this hypothesis further using simulation and econometric methods we found that once we account for the effects of social inequality on government policy and consumption the burden of servicing the debt becomes an important factor in explaining the collapse in investment and output growth in latin america we draw some conclusions for the 1990s

directed attention and nonparametric learning abstract this paper examines the implications of learning for the effects of ambiguity aversion the key result is that since agents naturally choose to learn about the sources of uncertainty that reduce utility the most information acquisition attenuates the most severe effects of ambiguity aversion the specific setting we study is the canonical consumption savings problem agents endogenously learn most about income dynamics at the very lowest frequencies while ambiguity aversion typically implies in this setting excessive extrapolation of income shocks that effect is eliminated here furthermore deviations of consumption from the full information benchmark are largest at high frequencies so the model naturally generates overreaction of consumption to predictable short run income variation

a tale of two stimulus payments 2001 versus 2008 fiscal stimulus payments i e direct lump sum payments from the government to households were used in the recessions of 2001 and 2008 in an attempt to simultaneously alleviate households economic hardship and stimulate aggregate demand despite the similarities between the two stimulus policies there were important differences in both their design and the prevailing economic conditions we use the model of kaplan and violante 2013 to compare the consumption response to these policies consistent with empirical evidence from microdata we find that the consumption response was around one third lower in 2008 primarily due to the larger size of the payments

the sensitivity of tests of the intertemporal allocation of consumption to near rational alternatives suppose a consumer sets consumption equal to income each period rather than following the optimal permanent income decision rule how much utility does he lose this paper finds that the answer is typically less than 10 cents 1 per quarter in environments specified by popular tests on aggregate data it includes calculations of the costs of excess sensitivity and excess smoothness to income and interest rate changes and the costs of ignoring information it concludes that the theory does not make predictions for aggregate tests that are robust to small costs such as information or transactions copyright 1989 by american economic association

robust permanent income and pricing i suppose there exists an extremely powerful and if i may so speak malignant being whose whole endeavours are directed toward deceiving me rene descartes meditations ii 1

product differentiation with imperfect information the paper employs a model of monopolistic competition and product differentiation with consumers who are not well informed about the specification of the offered brands welfare analysis of the degree of product differentiation in such a market concludes that the socially desirable product variety is limited due to consumers imperfect information consequently when the number of consumers is sufficiently large or economies to scale in production are sufficiently weak the market would offer excessive variety the literature on product differentiation is motivated by the observation that only some of the potential brands of a differentiated product are produced and sold it studies issues such as the role of the market structure in the determination of product diversity and the welfare performance of alternative markets in making this product selection for example see lancaster 1979 and salop 1979 in the spatial models tradition spence 1976 and dixit and stiglitz 1977 in the diversifying representative consumer tradition these studies model product selection as an equilibrium outcome of monopolistic competition the welfare analysis focuses on the tradeoff between consumer benefits which naturally increase with variety and production efficiency which owing to economies to scale decreases with variety they find no natural relation between the socially optimal variety and the market outcome the latter can be smaller or larger than the former depending on the parameters of the model although it is natural to expect that in some markets for differentiated products consumers are imperfectly informed about the available brands all these studies assume that consumers possess perfect information the present paper assumes that consumers are imperfectly informed and indeed obtains qualitatively different results first regardless of how significant are the production economies of scale the optimal variety is below a predetermined level that depends on the parameters of consumer utility and information second when consumer population is sufficiently large or economies to scale in production are sufficiently weak the market would offer excessive variety the explanation is that consumers imperfect information limits the extent to which they can exploit the variety offered in the market it is therefore a social waste to increase variety to a level that consumers cannot benefit from

adjustment of consumers durables stocks evidence from automobile purchases this paper tests an optimal s s rule in household durable purchases and examines directly the resulting aggregate expenditure dynamics the observed decision rule responds to income uncertainty and growth as predicted by an s s model resulting from transactions costs tests against liquidity constraints find that about half the households purchase according to an optimal s s rule aggregating the s s rule over households produces a cross section distribution of durables holdings the empirical distribution is similar to that predicted theoretically as is its response to aggregate shocks furthermore simulations of aggregate expenditure based on the household distribution exhibit dynamics consistent with those observed in the 1980s

present value tests of an intertemporal model of the current account abstract this paper first demonstrates that in a simple intertemporal open economy model the current account is equal to the expected decline of the present discounted value of net output of a country net output is defined as gross domestic product less the sum of investment plus government spending it then uses econometric methods for present value models to analyze the current account for four countries in two of these countries the model does a satisfactory job of explaining the current account

implications of rational inattention abstract a constraint that actions can depend on observations only through a communication channel with finite shannon capacity is shown to be able to play a role very similar to that of a signal extraction problem or an adjustment cost in standard control problems the resulting theory looks enough like familiar dynamic rational expectations theories to suggest that it might be useful and practical while the implications for policy are different enough to be interesting

financial liberalization and aggregate consumption the evidence from taiwan this paper considers the effect of financial liberalization on aggregate consumption with a special focus on taiwan which has sustained a high savings rate and a rapid rate of economic growth under financial dualism but has undertaken financial liberalization since the 1980s leading to an expansion of the formal financial sector the paper finds that because of an active informal financial sector consumers in taiwan are less credit constrained than in other developing countries however the expansion of the formal financial sector has contributed to some relaxation of consumer credit constraints and thereby changes in the income and interest elasticities of consumption it also has brought about a higher consumption growth rate offsetting at least partially the positive growth effect of financial liberalization which helps improve the efficiency in finanacial intermediation

3rd of tha month do social security recipients smooth consumption between checks this paper examines the response of consumption expenditures to the monthly receipt of social security checks since the amount and arrival date of these checks are known to the recipients the basic life cycle permanent income hypothesis lcpih predicts that consumption should not respond to the receipt of these checks using daily diary data from the consumer expenditure survey this paper finds evidence that both the dollar amount and probability of expenditures increase immediately following the receipt of this check most relevant to testing the lcpih categories of instantaneous consumption expenditure such as food away from home increase on the check arrival date the response is found primarily amongst households for whom social security is the primary source of income however the magnitude of the estimated responses are relatively small and do not suggest that the utility losses are large from this non smoothing behavior this abstract was borrowed from another version of this item

adaptive consumption behavior abstract in this paper we propose and study a theory of adaptive consumption behavior under income uncertainty and liquidity constraints we assume that consumption is governed by a linear function of wealth whose coefficients are revised each period by a procedure that places few informational or computational demands on the consumer we show that under a variety of settings the procedure converges quickly to a set of coefficients with low welfare cost relative to a fully optimal nonlinear consumption function