rationalization of market demand on finite domains the hypothesis that individuals behave as utility maximizers is the basis of the microeconomic theory of demand this hypothesis however is not observable and therefore its content and strength have to be evaluated through its implications for the properties of demand functions the implications for the properties of individual demand functions have been well known for some time but it is only recently that substantial work on the features of aggregate behavior has been undertaken in 1972 sonnenschein 6 conjectured that walras law homogeneity of degree zero in prices and boundedness from below characterize market excess demand functions i e functions defined on a set of normalized price vectors a succession of papers by sonnenschein 7 mantel 4 debreu 11 and mc fadden et al 3 established such a result in a variety of precise formulations after these conributions it could be said that the structure of excess demand functions was well understood an analogous problem concerning the decomposition of market demand functions i e functions defined on a set of price income vectors was also posed by sonnenschein 8 by means of a simple example he showed that when the income distribution is constant it is not possible in general to decompose functions that satisfy the balance and zero homogeneity conditions if we require postivity of individual demands he also conjectured that abstracting from restrictions which follow from the positivity of individual demand any function satisfying the two previously mentioned conditions can be decomposed into a finite number of individual demand functions derived from utility maximization and sharing market income in some fixed proportion a proof of the conjecture for the case of two commodities was also provided

wealth distribution in life cycle economies abstract this paper compares the age wealth distribution produced in life cycle economies to the corresponding distribution in the us economy the idea is to calibrate the model economies to match features of the us earnings distribution and then examine the wealth distribution implications of the model economies the findings are that the calibrated model economies with earnings and lifetime uncertainty can replicate measures of both aggregate wealth and transfer wealth in the us furthermore the model economies produce the us wealth gini and a significant fraction of the wealth inequality within age groups however the model economies produce less than half the fraction of wealth held by the top 1 percent of us households

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uniqueness of equilibrium in the classical capital asset pricing model general equilibrium in the classical two period mean variance capital asset pricing model is not unique corresponding to one single set of expectations utility functions and an initial wealth distribution there may be several equilibria and an asset may have different prices expected rates of return and betas in different equilibria however any equilib rium portfolio is sustained by a unique price system and if investors have decreasing risk aversion then any equilibrium allocation ofthe risky assets is sustained by a unique price system tion of the market portfolio of risky assets the other is the simple linear pricing relation expressed in terms of betas and rates of return by sharpe 1964 and in terms of prices by lintner 1965 these properties of equilibrium imply severe restrictions on the possible equilibrium portfolios and equilibrium asset prices and they have led to a presumption that the equilibrium in this model is unique see e g sharpe 1970 relying on mossin s 1966 interpretation ofthe model this paper shows that general equilibrium in the classical capm is not necessar ily unique there may be several equilibria even with the same expected total returns covariances utility functions and initial distribution ofthe assets an asset may have different prices expected rates of return and betas in different equilibria however if just one investor s equilibrium holdings of both the risk less and the risky assets are given then the price system is unique if investors have decreasing risk aversion then the price system is unique given the equilib rium allocation of the risky assets on the other hand if investors do not have decreasing risk aversion then an allocation of risky assets may be sustained by several different price systems

precautionary behavior migrant networks and household consumption decisions an empirical analysis using household panel data from rural china abstract we develop a test of precautionary behavior in the consumption decisions of rural agricultural households among surveyed households facing a median level of consumption risk 10 of savings can be attributed to a precautionary motive and this increases to 15 for households with consumption per capita below the poverty line we next use distant lags of local rainfall shocks uncorrelated with current consumption growth to identify the size of migrant networks outside the village and then present evidence that both poor and nonpoor households engage in less precautionary saving as the size of the village migrant network increases

requiem for the representative consumer aggregate implications of microeconomic consumption behavior macroeconomists pursuing microfoundations for aggregate consumption have generally adopted one of two approaches either to model microeconomic consumption behavior carefully and then to aggregate or to thoroughly understand the behavior of a representative consumer in general equilibrium then to introduce microeconomic risk and heterogeneity the broad conclusion from the bottom up approach has been that precautionary saving and microeconomic heterogeneity can profoundly change behavior stephen p zeldes 1989 angus s deaton 1991 christopher d carroll 1992 the broad conclusion from the top down approach has been that precautionary saving is of little importance in determining the aggregate capital stock s rao aiyagari 1994 per krusell and anthony a smith 1998 leading some economists to conclude that heterogeneity is unimportant for macroeconomic purposes this paper shows that while general equilibrium effects do imply that the aggregate magnitude of precautionary saving is modest nevertheless when a model with uninsurable idiosyncratic risk is modified so that it can match the key micro facts it produces behavior very different in important respects from that produced by the representative agent economy this leads to the conclusion that for many purposes the representative consumer model should be abandoned in favor of a model which matches key microeconomic facts this abstract was borrowed from another version of this item

excess demand functions and incomplete markets abstract this paper is aimed at characterizing excess demand functions around noncritical spot price systems in two period exchange economies with incomplete markets and real assets journal of economic literature classification numbers d52 c62

existence of equilibrium in capm abstract in the mean variance capital asset pricing model capm non monotonicity of preferences may lead to satiation and short selling as well as satiation may lead to non existence of equilibrium this paper identifies several sets of sufficient conditions for equilibrium to exist the nature of the central conditions is to impose bounds on the investors degree of risk aversion as measured by the marginal rate of substitution between mean and standard deviation of return these bounds do not need to hold globally but only in a relevant range of portfolios or combinations of mean and standard deviation

a theory of the consumption function with and without liquidity constraints fifteen years ago milton friedman s 1957 treatise a theory of the consumption function seemed badly dated dynamic optimization theory had not been employed much in economics when friedman wrote and utility theory was still comparatively primitive so his statement of the permanent income hypothesis never actually specified a formal mathematical model of behavior derived explicitly from utility maximization instead friedman relied at crucial points on intuition and verbal descriptions of behavior although these descriptions sounded plausible when other economists subsequently found multiperiod maximizing models that could be solved explicitly the implications of those models differed sharply from friedman s intuitive description of his model furthermore empirical tests in the 1970s and 1980s often rejected these rigorous versions of the permanent income hypothesis in favor of an alternative hypothesis that many households simply spent all of their current income today with the benefit of a further round of mathematical and computational advances friedman s 1957 original analysis looks more prescient than primitive it turns out that when there is meaningful uncertainty in future labor income the optimal behavior of moderately impatient consumers is much better described by friedman s original statement of the permanent income hypothesis than by the later explicit maximizing versions furthermore in a remarkable irony much of the empirical evidence that rejected the permanent income hypothesis as specified in tests of the 1970s and 1980s is actually consistent both with friedman s original description of the model and with the new version with serious uncertainty there are four key differences between the explicit maximizing models

saving and liquidity constraints this paper is concerned with the theory of saving when consumers are not permitted to borrow and with the ability of such a theory to account for some of the stylized facts of saving behavior the models presented in the paper seem to account for important aspects of reality that are not explained by traditional life cycle models copyright 1991 by the econometric society

health and productivity in a heterogeneous urban labour market the effects of changes in various health indicators on hourly earnings in different sectors of the labour market are examined using survey data from conakry guinea greater height which is associated with greater strength raises earnings of men both in self employment and the private wage sector where work is likely to involve physical labour height does not matter for women s earnings which likely reflects the less physically strenuous nature of most women s activities body mass index treated as an endogenous variable appears to raise earnings of men in self and private wage employment and of women in self employment no impacts are found for household per capita calorie and protein availability also treated as endogenous overall the results suggest that health matters for productivity in poor urban environments with these effects depending on gender and the sector of employment or type of work

why is consumption so smooth for thirty years it has been accepted that consumption is smooth because permanent income is smoother than measured income this paper considers the evidence for the contrary position that permanent income is in fact less smooth than measured income so that the smoothness of consumption cannot be straightforwardly explained by permanent income theory the paper argues that in postwar u s quarterly data consumption is smooth because it responds with a lag to changes in income

market demand functions in the capital asset pricing model abstract we demonstrate that in a capm economy homogeneity walras law and the tobin separation property characterize market demand on finite sets of prices consequently for any number n there exist capm economies which have at least n equilibria and hence have n different beta pricing formulas endowment perturbations in these economies cannot decrease the number of equilibria below n journal of economic literature classification numbers c62 d51 d52 g12

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

how does future income affect current consumption this paper tests a straightforward implication of the basic life cycle model of consumption that current consumption depends on expected lifetime income the paper projects future income for a panel of households and finds that consumption is closely related to projected current income but unrelated to predictable changes in income however future income uncertainty has an important effect consumers facing greater income uncertainty consume less the results are consistent with buffer stock models of consumption like those of deaton 1991 or carroll 1992a 1992b where precautionary motives greatly reduce the willingness of prudent consumers to consume out of uncertain future income

the sensitivity of consumption to transitory income estimates from panel data on households we investigate the stochastic relation between income and consumption specifically consumption of food within a panel of about 2 000 households our major findings are 1 consumption responds much more strongly to permanent than to transitory movements of income 2 the response to transitory income is nonetheless clearly positive 3 a simple test independent of our model of consumption rejects a central implication of the pure life cycle permanent income hypothesis the observed covariation of income and consumption is compatible with pure life cycle permanent income behavior on the part of80 percent of families and simple proportionality of consumption and income among the remaining 20 percent as a general matter our findings support the view that families respond differently to different sources of income variations in particular temporary income tax policies have smaller effects on consumption than do other more permanent changes in income of the same magnitude this abstract was borrowed from another version of this item

the productivity slowdown and the savings shortfall a challenge to the permanent income hypothesis i introduction the permanent income hypothesis has been extensively tested over the years most of these tests reject the permanent income hypothesis at conventional significance levels but the implied deviations are small in economic terms in this paper i argue that the savings shortfall that followed the post 1973 productivity slowdown constitutes a large deviation from the permanent income hypothesis according to the permanent income hypothesis current consumption depends upon preferences interest rates and expected future income in the united states the productivity growth rate sharply declined after 1973 and economic agents forecasted that the lower growth rate would persist the permanent income hypothesis generally predicts that a productivity slowdown by lowering future expected income will stimulate saving the slower growth rate reduces the ratio of permanent income to current income and thereby reduces the ratio of consumption to current income unless the intertemporal elasticity of substitution is high however the u s national saving rate instead fell to a postwar low after the productivity slowdown the permanent income hypothesis therefore appears to be inconsistent with recent economic experience carroll and summers 1991 327 328 briefly noted that these events pose a challenge to the permanent income hypothesis in this paper i extend their analysis along four dimensions first i calculate the savings response predicted by the permanent income hypothesis in an economy with declining returns to capital abandoning their assumption of a fixed rate of return second i consider the case in which consumers only gradually recognize the extent and duration of the slowdown third i examine published forecasts to demonstrate that the slowdown caused a fall in expected not merely realized growth rates which is necessary for the predicted savings increase fourth i consider the effects of other variables on saving during this period the paper is organized as follows in section ii i examine the permanent income hypothesis s prediction of the savings response to a productivity slowdown by solving a linearized infinite horizon specification of the permanent income hypothesis in a closed economy with concave production technology unless the intertemporal elasticity of substitution is high the permanent income hypothesis predicts rapid capital accumulation in response to the slowdown in section iii i document the post 1973 decline in productivity growth the downward revision in economic forecasts and the decline in national saving and capital accumulation i argue that other recent economic events cannot explain the saving decline and discuss the implications of these events for the permanent income hypothesis i briefly conclude in section iv ii effects of a productivity slowdown under the permanent income hypothesis in this section i show that the permanent income hypothesis predicts that a productivity slowdown increases saving unless the intertemporal elasticity of substitution is high specification of the permanent income hypothesis i use the model of ramsey 1928 and blanchard and fischer 1989 38 47 there is one good which can be consumed or costlessly transformed into capital labor supply is exogenous and factors are paid their marginal products the economy is closed relaxing this assumption increases the predicted savings effects of a slowdown the production function for gross output y is cobb douglas mathematical expression omitted where k is the capital stock z is the level of productivity l is labor supply and alpha is a constant between zero and one i refer to lz as the amount of effective labor gross output grows at rate 2 d y sub t dt y sub t alpha g sub t alpha n sub t 1 alpha d k sub t dt k sub t where g

precautionary portfolio behavior from a life cycle perspective abstract the literature on household asset accumulation draws a sharp distinction between short run precautionary motives to buffer consumption from annual income shocks and long run life cycle considerations under income certainty however estimates of shock persistence imply considerable career uncertainty we study long run precautionary motives for life cycle wealth accumulation and portfolios allowing for uncertain returns incomes and lifespan we separate the effects of various factors on mean and median asset holdings including education risk aversion household heterogeneity bequests impatience variance and serial correlation of income shocks numerical solutions are compared with data from the 1992 survey of consumer finances

consumption and capital market imperfections an international comparison the excess sensitivity of consumption to current income fluctuations is higher in countries where consumers borrow less low levels of consumer debt can result either from capital market imperfections or from a low demand for loans the evidence suggests that the former view is more appropriate than the latter and thus supports the hypothesis that excess sensitivity may be attributed to liquidity constraints rather than to other factors copyright 1989 by american economic association

on the concavity of the consumption function at least since keynes 1935 many economists have had the intuition that the marginal propensity to consume out of wealth declines as wealth increases nonetheless standard perfect certainty and certainty equivalent versions of intertemporal optimizing models of consumption imply a marginal propensity to consume that is unrelated to the level of household wealth we show that adding income uncertainty to the standard optimization problem induces a concave consumption function in which as keynes suggested the marginal propensity to consume out of wealth or transitory income declines with the level of wealth