the demand for a risky asset in the presence of a background risk abstract we examine the demand for a risky asset in the presence of two risks a financial risk and a background risk which need not be financial first we compute the necessary and sufficient condition for a positive demand for a risky asset showing that it depends on two terms capturing respectively the direct effect of risk premium and the dependence between the two risks second we develop higher order expectation dependence concept and show that the more information about the sign of higher cross derivatives of the utility function we have the weaker dependence conditions on distribution we achieve

land tenure arrangements and rural urban migration in china summary obstacles to internal migration in china contribute to inefficiency inequality and land degradation academic and policy debate has primarily focused on discrimination against rural migrants on arrival in urban areas meanwhile barriers to migration out of rural areas have received less attention this paper examines the role of incomplete rural property rights in the migration decisions of rural households we examine the relationship between tenure insecurity and restrictions on land rentals and participation in outside labor markets the results indicate that tenure insecurity reduces migration this relationship is particularly pronounced on forest land which has implications for the conservation of recently replanted forest areas

land rental development via institutional innovation in rural jiangsu china previous studies have demonstrated that there are two important preconditions for encouraging land rental in agriculture out migration and the enhancement of security and transferability of land rights focusing on the latter we scrutinize the impacts of institutions aimed at facilitating land use dynamism particularly the rural shareholding cooperatives rscs which have been established recently at the local level in rural china in general we find that rscs can pave the way for the extension of property rights to farmland and promote more efficient land use patterns using survey data collected from 300 village committees in rural jiangsu province we estimate the effectiveness of rscs in encouraging land rental our analysis reveals that rscs can serve as intermediate agents for reducing transaction costs associated with exchange of land use rights and thereby not only encourage land rental consolidation activities but also enable the entry of non farm household entities into the farm business

optimal production with learning by doing abstract this paper characterizes optimal production over time when production cost is a decreasing function of past accumulated output when production exhibits learning by doing monopolistic competitive and socially optimal solutions are considered

divergence in alternative hicksian welfare measures the case of revealed preference for public amenities this paper investigates the divergence between the two hicksian welfare measures of non traded amenity improvement associated with housing first the hicksian surplus measures for amenity changes are analytically developed based on explicit specification of utility structures a hedonic two stage approach is then applied to empirically show that for quantity changes in contrast to hypothetical markets divergence in real market is small the paper also analytically develops expressions for the income and substitution effects and empirically shows that for a given income effect the greater the substitution effect the smaller the divergence between the two measures copyright 2002 john wiley sons ltd

application of sample selection model to double bounded dichotomous choice contingent valuation studies modeling households behavior with the data from a contingentvaluation cv survey is often complicated by samplenon response which can cause non response bias and sampleselection bias leading to inconsistent parameter estimates and adistorted mean willingness to pay estimate this paper reportsthe results of empirical tests for both biases using householdsurvey data in which the double bounded dichotomous choice cvquestion involved the benefit of a tap water quality improvementpolicy in korea no non response bias but sample selection bias is detected in the sample to correct for sample selection bias a sample selection model is employed the authors also discusshow failure to correct for bias may distort aggregate benefitestimates

rural urban disparity and sectoral labour allocation in china this study examines china s rural urban segmentation and its causes in the context of economic reforms household survey and aggregate data indicate a v shaped process in which rural urban consumption and income differentials decreased between 1978 and 1985 but then have continually increased to historically high levels this sectoral division is consistent with production function estimates based on provincial data that reveal higher labour productivity in urban state owned industries than in rural industries and agriculture to explain the v shaped change we argue that the precedent of successful rural reforms raised farmers relative earnings but the remaining obstacles to an efficient sectoral allocation of labour have prevented china from eliminating dualism recent financial policies consisting of urban price subsidies and increased investment credits have also had influential distribution effects that are biased against the rural sector

mixed risk aversion abstract we analyze the class of increasing utility functions exhibiting all derivatives of alternating sign this property that we call mixed risk aversion is satisfied by the utility functions most commonly used in financial economics the utility functions displaying mixed risk aversion can be expressed as mixtures of exponential functions we characterize stochastic dominance and we find conditions for both mutual aggravation and mutual amelioration of risks when agents are mixed risk averse finally the analysis of the distribution function describing a mixed utility allows one to characterize the behaviour of its indexes of risk aversion and to discuss its implications for portfolio selection journal of economic literature classification numbers d81 g11

a characterization of ramsey equilibrium abstract consider a perfect foresight equilibrium model with a single capital good a borrowing constraint and many infinitely lived households with fixed but different discount factors the steady state capital stock is held by the most patient household quart j econ 95 1980 375 382 econ j 38 1928 543 559 an example shows the total capital can exhibit an equilibrium cycle in contrast to the stability property of the one household case in the example only the most patient household saves and his income deceases in capital we give a condition implying income is increasing in capital and use it to show any equilibrium converges to the steady state

how migration restrictions limit agglomeration and productivity in china china strongly restricts rural urban migration resulting in a well acknowledged surplus of labor in agriculture but migration is also restricted within sectors this paper argues that these intra sector restrictions lead to insufficient agglomeration of economic activity in both the rural industrial and urban sectors with resulting first order losses in gdp for urban areas the paper estimates a city productivity relationship based on city gdp numbers the effects of access educational attainment fdi and public infrastructure on productivity are estimated given these worker productivity is shown to be an inverted u shape function of city employment with the peak point shifting out as industrial composition moves from manufacturing to services as predicted by urban theory as far as we know this is the first paper to actually estimate the relationship between output per worker and city scale for any country the majority of chinese cities are shown to be potentially undersized below the lower bound on the 95 confidence interval about the size where their output per worker peaks the paper calculates the large gains from increased agglomeration in both the rural industrial and urban sectors

aggregation of heterogeneous time preferences we examine an economy whose consumers have different discount factors for utility possibly not exponential we characterize the properties of efficient allocations of resources and of the shadow prices that would decentralize such allocations we show in particular that the representative agent has a decreasing discount rate when as is usually posited all of a group s members have a constant discount rate and decreasing absolute risk aversion preferences we also identify conditions that lead the representative agent to have a rate of impatience that decreases with gross domestic product per capita

convex and decreasing absolute risk aversion is proper proper risk aversion a pivotal concept in the study of behavioral conditions on utility functions states that an undesirable risk can never be made desirable by the presence of an independent risk it is well known that standard risk aversion is sufficient for this concept we show in this short article that convex and decreasing absolute risk aversion is an alternative sufficient condition

putting risk in its proper place this paper examines preferences toward particular classes of lottery pairs we show how such concepts as prudence and temperance can be fully characterized by a preference relation over these lotteries if preferences are defined in an expected utility framework with differentiable utility the direction of preference for a particular class of lottery pairs is equivalent to signing the nth derivative of the utility function what makes our characterization appealing is its simplicity which seems particularly amenable to experimentation

public and private returns from joint venture research an example from agriculture public research institutions are turning increasingly to the private sector for additional financial support such a trend in the short run lessens the need for public research expenditures but may in the long run prove to be very costly to the economy as a whole this is because private funding increases the chance that the direction of research will shift so that private benefits are enhanced such a shift is especially costly if public research funds are then not forthcoming that would have the potential of producing the maximum level of benefits to the economy as a whole a case study of canadian barley research is used to illustrate this problem

urbanization rural land system and social security for migrants in china abstract temporary migration due to lack of social security for migrants rural land tenure insecurity due to frequent land reallocation and abusive land requisition due to lack of functioning land markets are all major policy challenges that china is facing in its yet to be finished economic transition although there have been intensive studies and various policy recommendations on these issues most discussions have so far neglected the close interrelationships between these issues and have failed to analyse them in an integrated framework the paper aims to establish such an analytical framework by taking into account the impacts of china s characteristics that is a large developing country in transition on the country s migration and rural land policies we propose a policy package to address these challenges in a holistic manner

the economic benefits of surface water quality improvements in developing countries a case study of davao philippines two nonmarket valuation techniques the contingent valuation method and travel cost model are used to estimate the economic value that people in davao philippines place on improving the water quality of the rivers and sea near their community the contingent valuation and travel cost estimates are very close to each other and are quite low both in absolute terms and as a percentage of household income these findings suggest that water pollution control is simply not a high priority for davao s residents and support the argument that households willingness to pay for environmental amenities such as improved water quality is low

time patience and specialization patterns in the presence of asset trade specialization patterns in an open economy two sector growth model with endogenous capital accumulation are examined in the presence of free international lending and borrowing without free international lending and borrowing it is known that whereas the less time patient country decumulates real capital the more patient country accumulates real capital and eventually specializes in a capital intensive industry however free trade of international financial assets causes a dramatic change in long run specialization patterns in this case the less patient country may well specialize in the capital intensive industry and the more patient country in the labor intensive industry

what do income tests tell us about the gap between wta and wtp for public goods abstract theory relates the gap between wta willingness to accept compensation and wtp willingness to pay to the income elasticity of wtp it has been suggested that empirical estimates of the income elasticity of wtp can therefore be used to test whether an observed gap between wta and wtp is consistent with rational behavior we examine this issue for the case of non market public goods we identify the theoretically appropriate tests of income sensitivity and examine conditions for valid income sensitivity tests we show that income tests may provide false signals in common settings indicating an inconsistency where none exists

welfare measurement in the household production framework the household production approach to consumer behavior developed from the work of gary becker william gorman and kelvin lancaster has considerable descriptive appeal in modelling the decisions of households the approach derives from the observation that households frequently purchase market goods that do not yield utility directly but are combined to produce commodity service flows which the household values thus observed behavior is determined by household production technology as well as by tastes the advantage of this distinction is that we can pose reasonable hypotheses about characteristics of technology though we rarely possess useful a priori information regarding tastes the putative advantages of the household production approach are questioned on empirical and conceptual grounds by robert pollak and michael wachter 1975 they show that jointness in production or nonconstant returns to scale cause implicit commodity prices to depend on both tastes and technology raising serious econometric difficulties in the estimation of commodity demand functions in addition since commodity prices become functions of the commodity bundle consumed the analogy to traditional demand theory breaks down joint production occurs when a good enters several production processes simultaneously or equivalently when a good in one production process also enters directly into the individual s utility function the most common example is time which provides the context for all production processes and is often associated with the production of several commodities simultaneously since joint production in the household is likely to be pervasive the critique by pollak and wachter cannot be ignored in response to the comment by william barnett pollak and wachter 1977 suggest dispensing with the notion of commodity prices and treating the demand for commodities as a function of goods prices this approach confounds tastes and technology but it eliminates the troublesome concept of commodity prices as parameters when in fact they are likely to be endogenous in this paper we show that results from positive analysis such as the critique by pollak and wachter have implications for the use of the household production framework for welfare analysis the household production function approach has had considerable appeal for measuring welfare effects of public actions in the environmental and natural resource areas gardner brown john charbonneau and michael hay elizabeth wilman yet traditional approaches to welfare measurement are frequently inapplicable we argue that welfare measurement in this framework is complicated by the difficulties of unravelling tastes and technology we extend pollak and wachter s results by demonstrating that marshallian demand functions for commodities cannot be uniquely defined thus marshallian functions cannot be used to derive exact compensated functions in the manner of jerry hausman and of george mckenzie and i f pearce nor can compensating and equivalent variation measures be bounded by marshallian consumer s surplus estimates following robert willig in fact duality results that normally allow us to move between marshallian and hicksian functions are not assistant and associate professors respectively department of agricultural and resource economics university of maryland college park md 20742 this paper is scientific article no a3404 contribution no 6476 of the maryland agricultural experiment station we wish to thank darrell hueth james opaluch v kerry smith and elizabeth wilman for comments on an earlier draft

introduction to a general equilibrium approach to economic growth abstract endogenous growth theory has had some success in explaining the observed data related to the process of economic growth however the results of the models in this literature are typically very sensitive to their micro economic structure it is therefore important to understand how the growth process behaves under more general specifications of such features as the number of commodities the number and preferences of consumers the factors of production and the financial and information structures in other words valuable insights can be gained by integrating growth theory into the framework of general equilibrium theory the summary of the papers in this volume focuses on seven issues that are crucial to this integration and highlights the contributions of the papers to the resolution of these issues journal of economic literature classification numbers c61 d50 d90 f43 o30 o41

utility over time the homothetic case the purpose of this paper is to show how the economics of choice over time can be strengthened by introduction of restrictive assumptions namely additivity and homotheticity of utility we consider applications to labor supply 2 savings behavior and long run distribution and welfare measurement labor supply is mainly a function of the ratio of non labor income to the wage rate savings generally increase with increases in the rate of interest in the long run distribution is not much dependent upon initial wealth and instead is mainly determined by attitudes towards time in the long run the as if social utility function is often well measured by consumer surplus the applications appear to be strong therefore it is appropriate to begin with a general argument for the main assumptions to be imposed two early contributions to the economics of time are by becker 1 and koopmans 111 the former presents a general framework without any specific assumptions about utility over time at most there is a homogeneous technology to produce consumption from goods and time pollak and wachter 131 koopmans 1 l adds highly intuitive assumptions to show utility additive and discounted over time koopmans analysis could be extended to cases where utility is additive merely between remote time periods see rader 15 pp 161 1851 this would correspond to the realistic case where the influence of distant consumption on preferences is negligible additivity must be reinterpreted in terms of a shifting environment of current consumption plus consumption sufficiently contiguous in time the analysis following could be adapted to this most compelling case merely adding utility over time does have implications for demand for example if complementaries occur between two goods they must occur between many others e g 15 pp 228 2331 however the results are meager and insufficient for the kind of analysis economists generally want to apply therefore we are led to add the assumption of homotheticity namely 219 0022 0531 81 050219 18 02 00 o

survival with ambiguity we analyze a market populated by expected utility maximizers and smooth ambiguity averse consumers we study conditions under which ambiguity averse consumers survive and affect prices in the limit if ambiguity vanishes with time or if the economy exhibits no aggregate risk ambiguity averse consumers survive but have no long run impact on prices in both scenarios ambiguity averse consumers are fully insured against ambiguity in equilibrium and thus behave as expected utility maximizers with correct beliefs if ambiguity averse consumers are not fully insured against ambiguity their behavior mimics expected utility maximizers with wrong beliefs and a stochastic discount factor which might be consistently higher or lower than their actual discount factor we use this insight to analyze a markov economy with large persistent ambiguity consumers with decreasing absolute ambiguity aversion whose prudence with respect to ambiguity exceeds twice their absolute ambiguity aversion a s survive in the presence of expected utility maximizers with correct beliefs if the economy further exhibits aggregate risk they drive the expected utility maximizers out of the market and determine prices in the limit in contrast consumers with increasing or constant absolute ambiguity aversion only survive in the absence of aggregate risk and have no impact on limit prices

consumer s surplus without apology the purpose of this paper is to settle the controversy surrounding consumer s surplus and by so doing to validate its use as a tool of welfare economics i will show that observed consumer s surplus can be rigorously utilized to estimate the unobservable compensating and equivalent variations the correct theoretical measures of the welfare impact of changes in prices and income on an individual i derive precise upper and lower bounds on the percentage errors of approximating the compensating and equivalent variations with consumer s surplus these bounds can be explicitly calculated from observable demand data and it is clear that in most applications the error of approximation will be very small in fact the error will often be overshadowed by the errors involved in estimating the demand curve the results in no way depend upon arguments about the constancy of the marginal utility of income consequently this paper supplies specific empirical criteria which can replace the apologetic caveats frequently employed by those who presently apply consumer s surplus moreover the results imply that consumer s surplus is usually a very good approximation to the appropriate welfare measures to preview below i establish the validity of these rules of thumb for a

approximating compensated income from ordinary demand functions abstract this paper proposes a re versible s econd or der t aylor resort approximation to compensated income from ordinary demand functions resort yields the malmquist vartia m v algorithm as a first order case using the slutsky equation resort obtains the substitution matrix and checks it for symmetry and negative semi definiteness to validate compensated income this validation procedure is an improvement over m v

when can expected utility handle first order risk aversion abstract expected utility functions are limited to second order conditional risk aversion while non expected utility functions can exhibit either first order or second order conditional risk aversion we extend the concept of orders of conditional risk aversion to orders of conditional dependent risk aversion we show that first order conditional dependent risk aversion is consistent with the framework of the expected utility hypothesis our theoretical result proposes new insights into economic and financial applications such as the equity premium puzzle the cost of business cycles and stock market participation our model is compared to the rank dependent expected utility model

despairing over disparities explaining the difference between willingness to pay and willingness to accept this paper examines the three major explanations for the disparity between willingness to pay wtp and willingness to accept wta observed in contingent value surveys and laboratory experiments a belief that the results must be biased in some fashion hanemann s 1991 substitutes hypothesis and the loss aversion model proposed by tversky and kahneman 1991 starting from the assumption that individuals make utility maximizing choices we develop structural equations that yield parametric tests of the hypotheses within a single non experimental framework the approach is flexible enough to incorporate a variety of functional form and distributional assumptions and can be applied to either data from either open ended bids or dichotomous choice questions the usefulness of the approach is demonstrated using data from a survey that asked both wtp and wta questions the results provide weak support for loss aversion

analysing rationing policies drought and its effects on urban users welfare analysing rationing policies during drought the aim of this paper is to study the impact on consumers of rationing policies implemented during water shortages water scarcity gives rise to the need for rationing and various methods including supply cutoffs can be used a model is devised to quantify the welfare losses associated with qualitive and quantitive restrictions based on virtual prices and using the consumer surplus as a welfare measurement welfare variations for different users have been calculated to achieve the aim information relative to seville spain has been used analysing the drought period that took place in the first half of the 1990s it has been possible to observe the main source that led to welfare losses for each kind of user

consumption dynamics in general equilibrium a characterisation when markets are incomplete we introduce a methodology for analysing infinite horizon economies with two agents one good and incomplete markets we provide an example in which an agent s equilibrium consumption is zero eventually with probability one even if she has correct beliefs and is marginally more patient we then prove the following general result if markets are effectively incomplete forever then on any equilibrium path on which some agent s consumption is bounded away from zero eventually the other agent s consumption is zero eventually so either some agent vanishes in that she consumes zero eventually or the consumption of both agents is arbitrarily close to zero infinitely often later we show that a for most economies in which individual endowments are finite state time homogeneous markov processes the consumption of an agent who has a uniformly positive endowment cannot converge to zero and b the possibility that an agent vanishes is a robust outcome since for a wide class of economies with incomplete markets there are equilibria in which an agent s consumption is zero eventually with probability one even though she has correct beliefs as in the example in sharp contrast to the results in the case studied by sandroni 2000 29 and blume and easley 2006 8 where markets are complete our results show that when markets are incomplete not only can the more patient agent or the one with more accurate beliefs be eliminated but there are situations in which neither agent is eliminated c 2010 elsevier inc all

the recursive core core allocations may be defined for infinite horizon capital accumulation models if agents cannot trust each other in the sense of gale then agents may renege on their commitments their decisions appear time inconsistent a core allocation is a recursive core allocation provided no coalition can improve upon its consumption stream at any time given its accumulation of assets up to that period we show for every allocation of consumption in the initial core one can find a distribution of capital stocks among the agents where no coalition of agents will break the initial core contract at any date it follows that if the proper distribution of the streams of capital is achieved then the allocation in the core is also in the recursive core the latter therefore forges a link between the distribution of wealth capital the problem of trust and time consistent intertemporal contracts

china s mobility barriers and employment allocations china s hukou system imposes two main barriers to population movements agricultural workers get land to cultivate but are unable to trade it in a frictionless market social transfers education health etc are conditional on holding a local hukou we show that the land policy leads to over employment in agriculture and it is the more important barrier to industrialization effective land tenure guarantees and a perfect competitive rental market would correct this inefficiency the local restrictions on social transfers favour rural enterprises over urban employment with a relatively smaller impact on industrialization

risky choices and correlated background risk the analysis of a risky project should take into account not only uncertainties about the return from that project project risk but also uncertainties associated with other ongoing projects and with exogenous factors that can impact final wealth background risk the presence of background risk can change the optimal course of action with respect to a project and ignoring such risk might lead to a poor decision most work on background risk assumes that project risk and background risk are independent and are additive in their impact on wealth however independence is often unrealistic and background risk operates in a multiplicative manner in many situations we relax the independence assumption and consider a model with both additive and multiplicative background risk the optimal decisions in the correlated setting can be very different than those that would appear optimal if the correlation were ignored the impact of correlation differs in the additive and multiplicative cases with positive correlation being beneficial in some cases and negative correlation in others the analytical and numerical results indicate that in analyzing decision making problems it is very important to understand the direction and degree of dependence between project risk and background risks

a review article the case against the use of the sum of compensating variations in cost benefit analysis this paper presents a case against the use of the sum of compensating varia tions as a cost benefit test we argue that 1 the ethical judginents implied by the test are not defensible 2 positive sums of compensating variations occur without potential pareto improvements resulting in social preference reversals without simultaneous scitovsky re versals 3 when lump sum transfers are feasible a positive sum of compensating variations is necessary but not sufficient for a potential pareto improvement 4 in order to eliminate preference reversals and intransitivities all households must have almost identical quasi homothetic preferences a condition that is not satisfied in real economies