a general mean variance approximation to expected utility for short holding periods the mean variance model is precisely consistent with the expected utility hypothesis only in the special cases of normally distributed security returns or quadratic utility functions there is little evidence however that security returns follow normal distributions see 13 for references and quadratic preferences can be shown to generate implausible results exhibiting increasing absolute risk aversion in the pratt ll arrow 1 2 sense and displaying negative marginal utility after some finite wealth level in addition hakansson 4 has shown that single period mean variance efficient portfolios can have disastrous consequences over time even when return distributions are stationary such criticisms of the mean variance approach within the von neumann morgenstern framework have prompted several writers to suggest that investors maximize the expected value of utility functions with more realistic properties while others have criticized the single period focus of the model one popular alternative utility function is the logarithmic function which exhibits decreasing absolute risk aversion and conveniently leads to myopic decision processes through time i e investors treat each period as if it were the last basing investment decisions on that period s wealth and return distributions only 8 4 other utility functions with constant relative risk aversion such as the power function also imply myopic decision rules within a multiperiod setting

expected utility chebichev bounds mean variance analysis this paper deals with and answers the following question what are the best upper and lower bounds on expected utility when we know the mean and variance of the random variable involved some applications are also indicated

why do farmers have so little interest in futures markets a farm financial model with leverage and investment in two farm enterprises is specified the model is extended to incorporate futures hedging and the separation theorem is used to show that optimal hedging is zero the assumption of a risk free asset is relaxed and while this leads to a violation of the separation theorem the result that optimal hedging is zero is maintained providing that futures markets are efficient it is concluded that if capital markets are efficient then farmers will have little interest in futures markets except to speculate

bargaining orders in a multi person bargaining game abstract this paper studies a complete information bargaining game with one buyer and multiple sellers of different sizes or bargaining strengths the bargaining order is determined endogenously with a finite horizon there is a unique subgame perfect equilibrium outcome in which the buyer purchases in order of increasing size from the smallest to the largest with an infinite horizon if the sellers have sufficiently different sizes there is a unique equilibrium outcome which has the same bargaining order if the sellers have similar sizes with an infinite horizon there may be multiple equilibrium outcomes with different bargaining orders

optimal market pools for agricultural cooperatives most agricultural marketing cooperatives distribute members net revenues on a pool basis the present paper outlines various pool options and provides a framework for identifying privately and collectively optimal pooling rules individual members pool choices are found to vary according to farm enterprise and risk aversion level a collectively optimal rule depends generally on risk aversion and on the method used to aggregate individuals expressed preferences in the instance examined here however the collective optimum is somewhat insensitive to assumed risk aversion

food grain policy in the republic of korea the economic costs of self sufficiency governments in many countries have manipulated agricultural prices to achieve a variety of social economic and political objectives these policies which often conflict with the prescriptions of neoclassical trade theory have led economists toward attempts to estimate the welfare losses associated with government intervention in the marketplace of more interest to many governments is the performance of changes in policy aimed at attaining specific national goals this paper addresses the case of food grain policy in the republic of korea and assesses the impacts of the change in grain price policy that occurred at the end of the 1960s in particular the success of price policy in attaining self sufficiency and raising farm incomes is evaluated the implications for consumers producers foreign exchange earnings and price stability are also analyzed it is worth noting here that through policy nations pursue a wide range of noneconomic objectives that are impossible to quantify in considering the findings of this analysis the reader should be cognizant of these other objectives and implications that are not specifically included

the rationale of the mean standard deviation analysis skewness preference and the demand for money publisher summary this chapter discusses the rationale of the mean standard deviation analysis skewness preference and the demand for money in january 1969 issue of the review of economic studies karl borch and martin feldstein separately criticized the widely used mean variance analysis of portfolio selection borch contended that any system of upward sloping mean standard deviation e s indifference curves can be shown to be inconsistent with the basic axiom of choice under uncertainty he pointed out that one can always pick any two points on an upward sloping indifference curve to represent two bernoulli distributions with probability 1 p of gaining the same amount x in both the cases and probability p of gaining y1 in the case of one distribution and y2 in the case of the second distribution with y2 y1 if the second distribution represents the point to the northeast of the other point then by the dominance axiom the second distribution must be preferred to the first which contradicts the basic meaning of indifference curves feldstein by using a log utility function and a lognormal distribution for investment outcome showed that e s indifference curves for a risk averter need not be convex downwards though upward sloping they would change from convex to concave once the standard deviation of the outcome exceeds the mean multiplied by on the face of it this seems to suggest that risk aversion might decrease as risk is increased beyond a certain extent

a new foundation for the mean variance analysis abstract in this paper i re examine how the mean variance analysis is consistent with its traditional theoretical foundations namely stochastic dominance and the expected utility theory then i propose a simplified version of the coarse utility theory as a new foundation i prove that by assuming risk aversion and the normality of asset variables the simplified model is well behaved indifference curves are convex and the opportunity set is concave therefore there exist global optimal portfolios in the market finally i prove that decision making in accordance with the simplified model is consistent with the mean variance analysis

bargaining and waiting until recently the final word on bargaining with full information had been rubinstein s 1982 seminal work which concluded that an agreement will be reached immediately and the first mover will have the advantageous share rubinstein s model was one of alternating offers made at fixed time intervals many variations of the model have emerged and until recently they mainly focus on asymmetric information with some having the uninformed agent making all the offers the conclusion from examining these variations is that the equilibrium is highly sensitive to the exact specification of the institutional structure in more recent work perry and reny 1990 perry and reny 1993 sakavics 1993 and nickerson sadanand and sadanand 1994 endogenize the structure of the bargaining by allowing the order and timing of play to be determined endogenously the first three papers endogenous structure models deal with the full information setting and the last is an asymmetric information model 2 in addition to the exogenously given minimum reaction time for responding to offers made by the other player the endogenous structure models introduce the important innovation of an exogenous waiting time a time between a player s offer and his next offer they also allow players to make simultaneous offers which sakovics later disallows the findings in this recent literature are rather startling i the waiting time has a profound impact the longer the time the greater the share the player can command 3 ii the consequence of simultaneous offers is multiple equilibria when the reaction time is zero a continuum of shares lying between the two unique rubinstein shares can result and additional continua of shares arise with delayed agreement when the reaction times are positive iii equilibrium paths are almost exclusively characterized by simultaneous offers in this paper we examine the question of simultaneous offers and reconcile the conflict between the infrequency of simultaneous offers in real life bargaining and their prevalence in the endogenous structure models we

optimal grain pricing and storage policy in controlled agricultural economies application to zimbabwe abstract maize pricing and storage policies of zimbabwe s grain marketing board are compared to those that would be optimal under certain objective function risk and risk aversion assumptions optimal producer prices and storage levels are found to be interdependent and to respond to prices at other levels of the marketing chain the ideal maize reserve stock increases with uncertainty over import transportation costs a factor to consider in light of the threat of south african sanctions but at a reasonable risk aversion level optimal reserves still are much lower than those presently held by the board

does mean variance portfoliomanagement deserve expected utility s approximative affirmation abstract this article is a comment on the paper by harry markowitz on mean variance approximations to expected utility european journal of operational research 234 2014 436 355 this comment is followed by the reply of harry markowitz

farmer organizations and food production in zimbabwe abstract institutional analysis of the food crisis in africa must extend beyond a concern with the operation of central states and markets collective action among smallholders is a necessary adjunct to outside intervention this article reports on the effect of farmer organization on food production in zimbabwe in the period 1980 1985 a typology of farmer groups in developed based upon the nature of the resources that are mobilized for agricultural production evidence is presented to show how farmer groups improve access to household assets and agricultural services for their members the impressive recent record of maize output in zimbabwe is traced in part to the initiatives of small farmers to organize themselves

simplified risk analysis in agricultural extension abstract attention is given to the major methods of assessing risk in order to make choices the literature frequently reports studies on mean variance e v analysis and stochastic dominance rules both of these methods are compared in an agricultural application with the approach outlined by hanoch and levy the empirical results suggests that hanoch and levy s criterion appear to reduce the size of the risk efficient set and that the sets of recommendations from the methods under comparison were consistent the two recommendations generated by hanoch and levy s rule were found to be reasonable for this particular decision process

risk efficient irrigation strategies for wheat abstract agricultural production is risky when farmers are risk averse they are likely to put a premium on production methods that reduce perceived risks irrigation is generally believed to be a risk reducing input by using the concept of stochastic dominance risk efficient irrigation policies for wheat grown in central india are identified and quantitative estimates of benefits due to risk reduction are obtained such benefits were found to be of a large order of magnitude the more common methods such as mean variance analysis tended to over estimate the benefits

optimal capital structure and bankruptcy choice dynamic bargaining versus liquidation abstract we model a firm s optimal capital structure decision in a framework in which it may later choose to enter either chapter 11 reorganization or chapter 7 liquidation creditors anticipate equityholders ex post reorganization incentives and price them into the ex ante credit spreads using a realistic dynamic bargaining model of reorganization we show that the off equilibrium threat of costly renegotiation can lead to lower leverage even with liquidation in equilibrium if reorganization is less efficient than liquidation the added option of reorganization can actually make equityholders worse off ex ante even when they liquidate on the equilibrium path

approximation methods for ranking risky investment alternatives abstract the paper develops and illustrates the application of criteria for ranking risky investment alternatives that are based on their certainly equivalent ce outcomes and determines expressions for approximating the ce outcomes by means of the central moments of their distribution the paper develops criteria on the basis of the ce outcomes for determining a complete ranking of risky investment alternatives that can represent the choice of many though not all risk averse agents

skewness preference risk aversion and the precedence relations on stochastic changes this paper provides a general choice theoretic characterization of the trade off between risk and skewness whose importance in understanding risk taking behavior is well documented in empirical studies the condition under which the prudence measure kimball 1990 characterizes the strength of an individual s downside risk aversion against his own risk aversion is identified and interpreted in a unifying framework based on the concept of one stochastic dominant change preceding another and that of the desirability of a stochastic change the framework is also shown to be useful for a better understanding of the arrow pratt measure the stronger ross measure and the coincidence of the characterizations of downside risk aversion and prudence as well as the relationship between stochastic dominances of different degrees

panterritorial versus regional pricing for maize in zimbabwe abstract this paper presents a spatial equilibrium model of zimbabwe s maize market designed to compare the current system of panterritorial prices with the pareto optimal pattern of regional price variation that would occur in a competitive market the model shows that under baseline 1988 conditions competitive pricing would raise aggregate welfare by about us 14 million annually about 4 of producer plus consumer surplus while improving income distribution by favoring the majority of smallholder farmers in southern deficit areas and urban consumers in northern surplus areas thus the model suggests that liberalization could improve both efficiency and equity administered regional prices in a controlled market could yield some of these gains to the extent that production and processing were brought closer to consumers

on the proportionality and homogeneity of consumption and income in its certainty equivalence form consumption is proportional to the sum of human and non human wealth with labour income uncertainty the proportionality takes the form of homogeneity of consumption with respect to the components of wealth in this paper we analyse the stochastic properties of labour income that yield the homogeneity property

regulated price and stock policies abstract setting administered domestic prices according to just c i f of f o b border price is advisable only if the direction of trade is certain and all groups interests are weighted equally if the good randomly may be imported of exported prices and stocks should be determined simultaneously on the basis of domestic demand and supply conditions as well as border prices a framework is proposed for testing which optimizing model an ldc government employs when administering price and stock levels the framework suggests zimbabwe policy makers have treated maize as an export crop weighting consumers interests moderately below those of producers and government

bargaining and reputation the paper develops a reputation based theory of bargaining the idea is to investigate and highlight the influence of bargaining postures on bargaining outcomes a complete information bargaining model a la rubinstein is amended to accommodate irrational types who are obstinate and indeed for tractability assumed to be completely inflexible in their offers and demands a strong independence of procedures result is derived after initial postures have been adopted the bargaining outcome is independent of the fine details of the bargaining protocol so long as both players have the opportunity to make offers frequently the latter analysis yields a unique continuous time limit with a war of attrition structure in the continuous time game equilibrium is unique and entails delay consequently inefficiency the equilibrium outcome reflects the combined influence of the rates of time preference of the players and the ex ante probabilities of different irrational types as the probability of irrationality goes to zero delay and inefficiency disappear furthermore if there is a rich set of types for both agents the limit equilibrium payoffs are inversely proportional to their rates of time preference

endogeneity of alternating offers in a bargaining game we investigate an infinite horizon two person simultaneous move bargaining game with incomplete information and discounted payoffs the game takes the form of a concession game in each period each player chooses to give in or hold out the game continues until at least one of the players chooses to give in at which point agreement has been reached and the game terminates for any discount factor if the players priors about each other s type are sufficiently asymmetric there is a unique nash equilibrium in which the two players alternate in their willingness to give in

food marketing and pricing policy in eastern and southern africa a survey abstract this article surveys the empirical record of grain marketing and pricing policy in eastern and southern africa over 1930 1995 the paper addresses five key issues with major implications for food policy throughout africa a why the anticipated supply response to market liberalization has not yet occurred b why the common assumption of state taxation of farmers to support a cheap food policy does not apply in most of the countries in the region c why the temporary successes of the state led approach to stimulating smallholder grain production were unsustainable d why the elimination of government food subsidies associated with market reform has not adversely affected consumers and e why the fiscal cost of the marketing systems at least initially worsened rather than improved after the reforms were implemented in most countries the key future challenges for marketing policy are how to develop coordinated and financially sustainable input finance and commodity marketing systems for raising productivity growth in smallholder agriculture while overcoming inherited agricultural dualism and how to mitigate the effects of food price instability in a cost effective manner

portfolio selection under strict uncertainty a multi criteria methodology and its application to the frankfurt and vienna stock exchanges abstract in modern portfolio theory it is common practice to first compute the risk reward efficient frontier and then to support an individual investor in selecting a portfolio that meets his her preferences for profitability and risk potential flaws include a the assumption that past data provide sufficient evidence for predicting the future performances of the securities under consideration and b the necessity to mathematically determine or approximate the investor s utility function in this paper we propose a methodology whose initial phase filters portfolios that are inefficient from a historical perspective while this is consistent with traditional approaches the second phase differs from the standard approach as it uses a decision table constructed by considering multiple scenarios assuming strict uncertainty the table cells measure consequences by a multi criteria linear performance index of simulated future returns which avoids difficulties with performance ratios the real world applicability is illustrated through two studies based on data from the stock exchanges in frankfurt and vienna

bargaining with endogenous deadlines we develop a two person negotiation model with complete information that makes endogenous both the deadline and the level of surplus destruction after the deadline we show that the undominated nash equilibrium outcome is always unique but might be inefficient moreover as the bargaining period becomes short or as the players become very patient the unique undominated nash equilibrium outcome is always inefficient

bargaining enforcement and international cooperation neoliberals and their neorealist critics have debated the relative importance of two main obstacles to international cooperation problems of cheating and enforcement and problems of relative gains by contrast i argue that problems of international cooperation have a common strategic structure in which a third distinct obstacle plays a crucial role almost regardless of the issue area states must first resolve the bargaining problem of agreeing on terms before they can implement and begin to enforce an agreement furthermore the bargaining and enforcement problems interact using a game model i show that if states must bargain to determine the deal to be enforced the shadow of the future cuts two ways a high expectation of continued interactions may make enforcing the agreement easier but it can also give states an incentive to bargain harder delaying agreement in hopes of getting a better deal empirical evidence from trade and arms control negotiations suggests that this mechanism may help to explain the costly standoffs that are often observed in international politics and are problematic for received neoliberal theories

tough negotiations bilateral bargaining with durable commitments abstract we offer a tractable model of tough negotiations and delayed agreement the setting is an infinite horizon bilateral bargaining game in which negotiators can make strategic commitments to durable offers commitments decay stochastically but uncommitted negotiators can make new commitments the game s unique markov perfect equilibrium outcome takes the form of a war of attrition negotiators initially commit to incompatible offers but agreement occurs once a negotiator s commitment decays if commitments decay more quickly the terms of the agreement become more equal in expectation more patient committed and less risk averse negotiators obtain a larger fraction of the surplus

maize food self sufficiency and policy in east and southern africa abstract in recent years maize has become a major food staple in the east and southern african region national average yields of maize remain low and yield gains are generally below population growth rates agricultural policy particularly maize pricing marketing and trade is examined and it is noted that despite an objective of maize self sufficiency many countries in the region continue to face erratic supplies finally a brief look is taken at the technologies available for maize and at those groups of smallholders who are unable to meet their annual household food requirements

lifetime consumption and investment retirement and constrained borrowing retirement flexibility and inability to borrow against future labor income can significantly affect optimal consumption and investment with voluntary retirement there exists an optimal wealth to wage ratio threshold for retirement and human capital correlates negatively with the stock market even when wages have zero or slightly positive market risk exposure consequently investors optimally invest more in the stock market than without retirement flexibility both consumption and portfolio choice jump at the endogenous retirement date the inability to borrow limits hedging and reduces the value of labor income the wealth to wage ratio threshold for retirement and the stock investment

delay in trade networks we study decentralized markets involving producers and consumers that are facilitated by middlemen we do this by analyzing a noncooperative networked bargaining game we assume a complete information setup wherein all the agents know the structure of the network the values of the consumers and the transaction costs involved but allow for some search friction when either producers or consumers trade with middlemen in such a setting we show that sunk cost problems and a heterogeneous network can give rise to delay or failure in negotiation and therefore reduce the total trade capacity of the network in the limiting regime of extremely patient agents we provide a sharp characterization of the trade pattern and the segmentation of these markets

is market liberalization compatible with food security storage trade and price policies for maize in southern africa abstract concern for the negative impacts of staple food price fluctuations limits the extent to which governments in low income countries are willing to liberalize their agricultural markets these concerns are legitimate as such price fluctuations can lead to high transactions costs for poor consumers in the short run and low growth in the long run however past government attempts to stabilize food prices completely have been expensive and ineffective use of a dynamic programming optimization model suggests that a different type of policy regime could reduce price variability significantly compared to what would prevail in free markets and could accomplish this at relatively low cost this policy regime includes allowing some official price flexibility with respect to changes in production and world price exporting when regional market opportunities exist and holding considerably lower stocks than in the past

price policy and agricultural export performance in jamaica abstract jamaica experienced one of the longest uninterrupted periods of negative growth among ldcs in the 1970s agricultural exports led this decline with an unusually poor growth performance exacerbating foreign exchange shortages commodity board pricing policies played a strong role in penalizing these exports further board policies appear to be inefficient in either maximizing profits or foreign exchange implicit and unstated objectives of board policies are discussed supply functions show that farmers do react positively to price changes contrary to board assumptions beneficiaries of this penalizing price policy are identified and an important implication for foreign aid policy is underscored

optimal procurement strategies for online spot markets abstract spot markets have emerged for a broad range of commodities and companies have started to use them in addition to their traditional long term procurement contracts forward contracts in comparison to forward contracts spot markets offer products at essentially negligible lead time but typically command a higher expected price for this added flexibility while also exhibiting substantial price uncertainty in our research we analyze the resulting procurement challenge and quantify the benefits of using spot markets from a supply chain perspective we develop and solve mathematical models that determine the optimal order quantity to purchase via forward contracts and the optimal quantity to purchase via spot markets we analyze the most general situation where commodities can be both bought and sold via a spot market and derive closed form results for this case we compare the obtained results to the reference scenario of pure contract sourcing and we include results for situations where the use of spot markets is restricted to either buying or selling only our approaches can be used by decision makers to determine optimal procurement strategies based on key parameters such as demand and spot price volatilities correlation between demand and spot prices and risk aversion the results of our analysis demonstrate that significant profit improvements can be achieved if a moderate fraction of the commodity demand is procured via spot markets the results also show that companies who use spot markets can offer a higher expected service level but that they might experience a higher variability in profits than companies who do not use spot markets we illustrate our analytical results with numerical examples throughout the paper

saving and investing for early retirement a theoretical analysis we study optimal consumption and portfolio choice in a framework where investors adjust their labor supply through an irreversible choice of their retirement time we show that investing for early retirement tends to increase savings and reduce an agent s effective relative risk aversion thus increasing her stock market exposure contrary to common intuition an investor might find it optimal to increase the proportion of financial wealth held in stocks as she ages and accumulates assets even when her income and the investment opportunity set are constant the model predicts a decrease in risk aversion following strong market gains like those observed in the nineties

zimbabwe s maize based green revolution preconditions for replication abstract the green revolution was launched in 1960 in zimbabwe five years before it got underway in india since zimbabwe s green revolution was spearheaded by white commercial farmers however it was ignored by africa s new leaders in the 1960s as they experimented with state farms from moscow communal farms from china and land settlement schemes from israel at zimbabwe s independence in 1980 the new majority ruled government introduced a number of programs to help smallholders increase food and cash crop production drawing on a backlog of hybrid maize varieties expanded access to credit higher guaranteed government maize prices and marketing subsidies smallholders doubled maize production during 1980 1986 zimbabwe s maize based green revolution challenges those who allege that hybrid maize cannot compete with sorghum in low rainfall areas and that it is unsuitable for resource poor farmers because of the need to purchase new seed each year today virtually 100 of zimbabwe s maize area is under hybrids and short season hybrids are outcompeting other foodgrains in many low rainfall areas zimbabwe s biggest challenge is to develop cost effective marketing policies and institutions to sustain its maize based green revolution countries trying to replicate zimbabwe s success story should focus on fulfilling four interrelated preconditions political technological economic and institutional

waiting to persuade i analyze a sequential bargaining model in which players are optimistic about their bargaining power measured as the probability of making offers but learn as they play the game i show that there exists a uniquely predetermined settlement date such that in equilibrium the players always reach an agreement at that date but never reach one before it given any discount rate if the learning is sufficiently slow the players agree immediately i show that for any speed of learning the agreement is delayed arbitrarily long provided that the players are sufficiently patient therefore although excessive optimism alone cannot cause delay it can cause long delays if the players are expected to learn

labor income uncertainty skewness and homeownership a panel data study for germany and spain abstract in this paper we empirically investigate the effect of labor income uncertainty on the probability of homeownership in germany and spain this study is motivated by two facts firstly theoretical models tend to provide ambiguous results on this issue secondly previous empirical evidence focuses exclusively on the us housing market to carry out our analysis we propose more precise income uncertainty measures based on panel data labor income equations we observe that households facing high levels of income uncertainty display a preference for renting while those located in more positively skewed income distributions show a greater propensity for homeownership

bargaining and reputation in search markets in a two sided search market agents are paired to bargain over a unit surplus the matching market serves as an endogenous outside option for a bargaining agent behavioral agents are commitment types that demand a constant portion of the surplus the frequency of behavioral types is determined in equilibrium even if the frequency of behavioral types is negligible they aect the terms of trade and eciency in an unbalanced market where the entering

coalition theory and its applications a survey we survey some of the major advances in coalition theory in recent years we then look at the recent applications of the theory in the area of political economy and touch upon some important theoretical and applied open questions in the field

land allocation under uncertainty for alternative specifications of return distributions using the expected utility moment generating function approach a land allocation rule is derived which is both independent of the nature of the underlying distribution of each element in the choice set and accounts for all moments of that distribution this decision rule is applied to the choice between cotton and corn in the mississippi delta to demonstrate that consideration of just the first two moments of the distribution can often be unjustified and damaging empirically theoretically and in terms of the utility of the decision maker

hedging with commodity options when price distributions are skewed lapan moschini and hanson have demonstrated that commodity options can be useful for hedgers who face a symmetric price distribution and who wish to maintain a net open market position this is because options skew the distribution of profits to the right and such skewness typically increases expected utility in this paper i use standard comparative statics to show that options are relatively more valuable for reducing the skewness of a nonsymmetric price distribution depending on the direction of the skewness and the underlying price expectations hedgers may write options as well as purchase them

compensating wage differentials for schooling risk in denmark in this paper we analyse the association between wage differentials and risk using detailed information on length and type of education as seen in danish administrative registers our contribution to the literature is that we distinguish between transitory time series and permanent cross sectional income shocks and estimate the compensation for both sorts of risk we find that wage risk in a given education cell is associated with higher wages while skewness is associated with lower wages as a robustness check we see that ad hoc risk measures based on earnings mobility indicators confirm these findings

a non cooperative bargaining model with strategically timed offers abstract rubinstein s alternating offers bargaining model is enriched by allowing players to choose when and whether or not to make an offer time is continuous and players make offers whenever they wish it is assumed that upon making an offer players must wait a fixed amount of time before making another it is shown that if players can react arbitrarily quickly to their opponent s offers then all subgame perfect equilibrium outcomes are rubinstein like in particular efficient however if it takes time to react then some delay can be supported this potential delay becomes arbitrarily large as reaction times increase journal of economic literature classification numbers c78 c72

annuities and individual welfare advancing annuity demand theory we present suffcient conditions for the optimality of full annuitization under market completeness that are substantially less restrictive than those used by yaari 1965 we examine demand with market incompleteness finding that positive annuitization remains optimal widely but complete annuitization does not how uninsured medical expenses affect demand for illiquid annuities depends critically on the timing of the risk a new set of calculations with optimal consumption trajectories very different from available annuity income streams still shows a preference for considerable annuitization suggesting that limited annuity purchases are plausibly due to psychological or behavioral biases

multilateral bargaining with concession costs this paper presents a new non cooperative approach to multilateral bargaining we consider a demand game with the following additional ingredients i there is an exogenous deadline by which bargaining has to end ii prior to the deadline players may sequentially change their demands as often as they like iii changing one s demand is costly and this cost increases as the deadline gets closer the game has a unique subgame perfect equilibrium prediction in which agreement is reached immediately and switching costs are avoided moreover this equilibrium is invariant to the particular order and timing in which players make demands this is important as multilateral bargaining models are sometimes too sensitive to these particular details in our context players with higher concession costs obtain higher shares of the pie their increased bargaining power stems from their ability to credibly commit to a demand earlier we discuss how the setup and assumptions are a reasonable description for certain real bargaining situations

social welfare of alternative controlled price policies recent developments in social welfare analysis provide insights into the selection of price policies in the presen t paper a ces social welfare function and a weighted average of utilitarian and leximin rules are used to identify optimal producer prices in an economy where government is the price setter and agents are risk averse the analysis distinguishes between the interests of commercial producers peasant producers consumers and taxpayers a n application to zimbabwe indicates that a maize producer price in the low medium to medium portion of the historical range would be social ly optimal if egalitarian preferences are moderate this outcome is somewhat insensitive to group weighting schemes and to interpersonal utility correspondences copyright 1993 by mit press

household portfolio diversification a case for rank dependent preferences the proliferation of novel preference theories in financial economics is hampered by a lack of non experimental evidence and by the theories additional complexity which has not been shown to be critical in applications in this article i present arguments in support of preferences with rank dependency using the survey of consumer finances data i document two widespread patterns inconsistent with expected utility i many households simultaneously invest in well deversified funds and in poorly diversified portfolios of stocks and ii some households with substantial savings do not invest anything in equities i show that portfolio choice models with rank dependent preferences plausibly parameterized and under fully rational assumptions are quantitatively consistent with the observed diversification these results call for further efforts to integrate the models of rank dependent preferences in portfolio theory and asset pricing the decision theoretic literature has long acknowledged the shortcomings of the expected utility theory of von neumann and morgenstern 1944 several generalizations of the theory are inspired by the experimental evidence and aimed at improving its descriptive accuracy however there are few applications of new models of preferences in finance and expected utility continues to dominate the field 1 two principal hurdles slow the proliferation of novel preferences in financial economics first the lack of empirical non experimental or field data confirming that the behavior motivating non expected utilities is widespread outside the laboratory settings second the additional and often significant complexity of the alternative preferences which has not been shown to be critical in applications where the models based on expected utility fall short of reasonable predictions this article presents empirical and theoretical this paper was previously circulated under the title household portfolio diversification the paper has benefited from the comments of shlomo benartzi luca benzoni markus brunnermeier john dickhaut maria perozek raj singh hersh shefrin and workshop participants at minnesota finance bag lunch 2003 wharton conference household financial decision making and portfolio choice and 2003 summer meetings of econometric society i would like to thank cam harvey the editor and an anonymous referee for many helpful comments and suggestions a special thanks to jack kareken for comments and editorial help on an earlier draft i am grateful to donna zerwitz for editorial assistance the views expressed herein are those of the author and not necessarily of the federal reserve bank of minneapolis or the federal reserve system all errors and omissions are the sole responsibility of the author address correspondence to valery polkovnichenko finance 3 122 csom 319 19 th

continuous time games of timing abstract we address the question of existence of equilibrium in general timing games with complete information under weak assumptions any two player timing game has a markov subgame perfect e equilibrium for each e 0 this result is tight for some classes of games symmetric games games with cumulative payoffs stronger existence results are established

distributional effects of maize self sufficiency in zimbabwe implications for pricing and trade policy abstract maize self sufficiency has normally been an explicit policy goal throughout eastern and southern africa because of the perception that it could be achieved at prices below import parity and that it contributes to rural income growth however this analysis based on household survey data from zimbabwe and the results of an econometrically based simulation model indicates that a pricing policy geared towards maize self sufficiency would mainly benefit a small set of well off farmers and require either greater subsidies or higher prices to consumers many of whom are low income rural farmers in low rainfall areas the broader implications of this analysis are that even if the producer price needed for self sufficiency is below import parity the pursuit of food self sufficiency may inflate food costs and exacerbate rural and urban food insecurity compared to a self rellance policy involving imports

bargaining with surplus destruction in a two player alternating offer bargaining model if one player can destroy the surplus to be allocated then the value to bargain for is endogenous except at the beginning even with complete information the model has perfect equilibria with delayed agreement and or surplus destruction the model therefore explains inefficiency and destruction that may appear irrational we characterize the set of equilibrium payoffs and its limiting be haviour as the time between offers vanishes real time delay remains possible even in the limit we also consider the case of surplus destruction that is exogenously limited by the

formal versus informal legislative bargaining we study how the formality of a bargaining procedure affects its outcome we compare a formal baron ferejohn bargaining procedure to an informal procedure where players make and accept proposals in continuous time both constitute non cooperative games corresponding to the same bargaining problem a three player median voter setting with an external disagreement point this allows us to study formality in the presence and absence of a core and provides a natural explanation for the effects of preference polarization our results show that polarization hurts the median player and that formality matters the median player is significantly better off under informal bargaining

bidding rings a bargaining approach we address the issue of bidder ring formation in single and multi unit vickrey auctions we address this issue in a bargaining game set up under the assumption that valuation of bidders is commonly known only amongst themselves in the single unit case we show that the equilibrium coalition structure can only be an order preserving r ring that includes the winner and the top r 1 losers in the multiple units case we specify sufficient conditions for formation of an interesting class of equilibrium coalition structures which we call single winner ring with free riding where exactly one winner colludes with all the losers and generates maximum possible bidders surplus and depending on the protocol the remaining winners free ride either by staying alone or by colluding in pairs

continuous time stochastic games abstract we study continuous time stochastic games with a focus on the existence of their equilibria that are insensitive to a small imprecision in the specification of players evaluations of streams of payoffs we show that the stationary namely time independent discounting game has a stationary equilibrium and that the discounting game and the more general game with time separable payoffs have an epsilon equilibrium that is an epsilon equilibrium in all games with a sufficiently small perturbation of the players valuations a limit point of discounting valuations need not be a discounting valuation as some of the mass may be pushed to infinity it is represented by an average of a discounting valuation and a mass at infinity we show that for every such limit point there is a strategy profile that is an epsilon equilibrium of all the discounting games with discounting valuations that are sufficiently close to the limit point

the shape of utility functions and organizational behavior based on measurements among 332 owner managers we investigate how theglobal shape of the utility function i e s shaped versus concave or convex over the total range of outcomes relates to choice behavior we find that the global shape of the utility function differs across decision makers about one third of the owner managers exhibit an s shaped utility function and that the global shape is linked to organizational behavior i e the production system employed a result that does not change when using different methods to identify the decision maker s global shape of the utility function the decision maker s risk attitude risk averse or risk seeking does not affect the choice of the production system whereas the degree of risk aversion based on thelocal shape of the utility function may be important in explaining owner managers trading behavior pennings and smidts 2000 more structural organizational behavior appears to be linked to theglobal shape of the utility function

distribution of surplus in sequential bargaining with endogenous recognition i examine a sequential bargaining situation in which agents contest the right to propose an allocation the contest can either take place at a pre bargaining stage yielding persistent recognition to propose or recur throughout the bargaining yielding transitory recognition equilibrium analysis reveals that surplus is distributed more unequally under persistent recognition social cost is higher under persistent recognition if and only if it attracts a sufficient number of active bargainers and individual s incentive to propose under transitory recognition may actually increase in the number of agents while this incentive always diminishes under persistent recognition

maize milling market reform and urban food security the case of zimbabwe abstract government policy in much of eastern and southern africa has encouraged the development of highly centralized large scale milling facilities which has in turn promoted the consumption of highly refined and expensive maize meal compared to that produced by small scale hammer mills policies to develop competitive small scale milling facilities in urban areas are apparently neglected because of the conventional perception in eastern and southern africa that urban consumers strongly prefer the refined industrially milled meals and are not responsive to price differences between various types of maize meals results of consumer and miller surveys in zimbabwe call into question the validity of these perceptions simulation analysis also indicates that the elimination of policy constraints that block small scale millers access to grain would reduce overall marketing costs thereby allowing higher producer prices lower consumer prices and or lower government subsidies the case of zimbabwe suggests that market reform may considerably reduce the magnitude of the tradeoff between governments food security and budget minimization objectives

self control and bargaining abstract this paper examines a bargaining game with alternating proposals where sophisticated quasi hyperbolic discounters negotiate over an infinite stream of payoffs in markov perfect equilibrium payoffs are almost always unique and a small advantage in self control can result in a large advantage in payoff in subgame perfect equilibrium a multiplicity of payoffs and delay can arise despite the complete information setting markov perfect equilibria are the best subgame perfect equilibria for the agent with more self control and the worst for the agent with less self control naivete can help a player by increasing their reservation value

a noncooperative view of coalition formation and the core a noncooperative implementation of the core is provided for games with transferable utility the implementation obtained here is meant to reflect the standard motivation for the core as closely as possible in the model proposed time is continuous this idealized treatment of time is most amenable for capturing an essential feature of the core there is always time to reject a noncore proposal before it is consumated

optimal retirement with unemployment risks abstract this paper investigates the optimal retirement of an individual in the presence of involuntary unemployment risks and borrowing constraints in a complete market with frictions we use an intensity model and loading factors to illustrate the involuntary unemployment risks and frictions in unemployment insurance markets using reasonably calibrated parameters we observe that high involuntary unemployment intensity and loading factors could be important explanations for the empirical findings emphasized in recent studies we also find that an individual with high leisure demand after retirement reduces consumption during retirement and increases stockholdings as retirement time approaches

strategic bargaining with firm inventories this paper characterizes how a firm s opportunity to sell from its stock of inventories affects the outcome of strategic wage negotiations with a union of workers in equilibrium the union and firm share the benefits from an immediate return to work less the costs of a strike of infinite duration this outcome is equivalent to a nash bargaining solution in which the threat points are the agents expected payoffs should a strike last forever we also demonstrate that for a given level of inventories the wage increases when demand is high conversely given demand the wage falls as inventories rise

new indices of money supply and the flexible laurent demand system the article begins by surveying the existing results on the new divisia monetary aggregates charts display the differences in behavior between the divisia aggregates and the federal reserve s official simple sum monetary aggregates the article then compares system wide fit for the simple sum and divisia monetary aggregates when used as data in the joint estimation of a system of demand equations the demand system is derived from a new laurent expansion approximation to the reciprocal indirect utility function the laurent expansion provides a better behaved remainder term than that of the more commonly used taylor series the results favor the divisia aggregates

necessary conditions for the capm abstract the general restrictions on all economic primitives i e a endowments b preferences and c asset return distributions that yield the capm under the expected utility paradigm are provided these results are then used to derive the class of restrictions on preferences and the distribution of asset returns alone that provides the capm we also show that the conditions that provide the capm and derived preferences over mean and variance are equivalent consequently this paper also resolves the question of when mean variance maximization is consistent with expected utility maximization journal of economic literatureclassification numbers g12 g11 d50

revenue management without commitment dynamic pricing and periodic flash sales a seller has a fixed number of goods to sell by a deadline at each time he posts a regular price and decides whether to hold a flash sale over time buyers privately enter the market and strategically time their purchases if a buyer does not purchase when she arrives she can pay an attention cost to recheck the regular price afterwards or she can wait for future flash sales where she may obtain a good at a discounted price in the unique markov perfect equilibrium the seller sporadically holds flash sales to lower the stock of goods a flash sale increases the willingness to pay of future buyers but decreases the willingness to pay of buyers who arrive early in the game when it is very likely that a buyer will obtain a good in a flash sale the seller holds a big initial flash sale for all but one unit of the good

the cost of annuities implications for saving behavior and bequests the fact that most elderly u s individuals maintain a flat age wealth profile rather than buy individual life annuities contradicts the standard life cycle consumption model average expected yields on individual life annuities in the united states during 1968 1983 were lower by 4 21 6 13 percent or 2 43 4 35 percent after allowing for adverse selection than yields on plausible alternative investments simulations of a model of saving and portfolio allocation show that during the early retirement years such yield differentials can account for the absence of annuity purchases even without a bequest motive at older ages the combination of such yield differentials and a bequest motive can do so it is common experience that as we grow older and nearer to eternity we become more not less anxious about money derek brewer chaucer and his world p 213

bargaining with history dependent preferences abstract two impatient players bargain over a pie of size one according to the infinite alternating offers procedure players payoffs depend not only on the outcome but also on the process of the bargaining specifically they prefer impasse to any agreement that gives them lower discounted utility than would have been derived from accepting earlier offers we characterize the essentially unique subgame perfect equilibrium path which consists of gradual concessions the more patient players are the longer it takes them to reach an agreement when players become infinitely patient the efficiency loss is substantial yet the equilibrium division converges to the nash solution

farmers long term investment decisions a study of sri lankan rubber smallholders planting and replanting of perennial crops confronts small farmers with a long term investment decision in this study we analyse the behaviour of rubber smallholders in sri lanka when faced with a replacement decision an intertemporal profit maximizing model maximizing discounted stream of expected future net revenues predicts behaviour of larger hired labour using farmers quite well the model can also be extended successfully to smaller family farms when a lower than market wage rate is imputed to family labour to better reflect opportunity cost of labour and risk considerations are incorporated in relatively simple fashion the difference between a cash investment and a labour investment is crucial for the poorer family farmers and an appropriate cash subsidy can play a vital role in inducing them to undertake long term investments

tri criterion inverse portfolio optimization with application to socially responsible mutual funds we present a framework for inverse optimization in a markowitz portfolio model that is extended to include a third criterion the third criterion causes the traditional nondominated frontier to become a surface until recently it had not been possible to compute such a surface but by using a new method that is able to generate the nondominated surfaces of tri criterion portfolio selection problems we are able to compute via inverse optimization the implied risk tolerances of given funds that pursue an additional objective beyond risk and return in applying this capability to a broad sample of conventional and socially responsible sr mutual funds we find that after the screening process there appears to be no significant di erence between how assets are allocated in socially responsible and conventional mutual funds which is likely to be di erent from what most sr investors would expect

a generalization of yaari s result on annuitization with optimal retirement abstract in this paper we generalize the following result of yaari 1965 on annuitization with an agent s optimal retirement it is optimal for individuals to annuitize all of their wealth in the absence of bequest motive we have other results that refine or extend the result of yaari 1965 full annuitization can be viewed as an american type option that allows an economic agent to exchange the value of labor income with the extra leisure that is brought about by annuitizing all of her wealth when the agent s wealth is above a certain wealth threshold annuitization is triggered otherwise it is not accordingly wealth plays a key role in controlling the distance to full annuitization

strategic choice of waiting and reaction times in bargaining abstract if two players first commit to waiting times in a sakovics bargaining technology and then bargain over the division of a known surplus zero waiting times are not subgame perfect choices and any division of the surplus is possible

portfolio selection and skewness evidence from international stock markets abstract this paper finds that the returns of the world s 14 major stock markets are not normally distributed and that the correlation matrix of these stock markets was stable during the january 1988 december 1993 time period polynomial goal programming in which investor preferences for skewness can be incorporated is utilized to determine the optimal portfolio consisting of the choices of 14 international stock indexes the empirical findings suggest that the incorporation of skewness into an investor s portfolio decision causes a major change in the construction of the optimal portfolio the evidence also indicate that investors trade expected return of the portfolio for skewness

integration of var and expected utility under departures from normality this article identifies the level of the expected utility eu risk aversion and value at risk var confidence level that yield the same choice from a given distribution of outcomes and thus allow for consistent application of the two criteria the result for a given distribution is an explicit mapping between risk aversion under eu and var for both normal and nonnormal distributions the cornish fisher expansion is used to establish adjusted mean deviates for nonnormal outcome distributions and the investor s preference function is expanded to include elements for variance skewness and excess kurtosis a farm level application with nonnormal revenue distribution illustrates these approaches

an efficient multi unit ascending auction we provide an ascending auction that yields an e cient outcome when there are many identical units for sale and bidders have interdependent values and downward sloping demand our ascending auction both extends and generalizes ausubel s 1997 and yields the same outcome as perry and reny s 2000 generalization of vickrey s 1961 sealed bid auction there are two key components to our auction bidders are permitted both to

selecting a portfolio with skewness recent evidence from us european and latin american equity markets abstract polynomial goal programming in which investor preferences for skewness can be incorporated is utilized to determine the optimal portfolio from latin american us and european capital markets the empirical findings suggest that the incorporation of skewness into an investor s portfolio decision causes a major change in the resultant optimal portfolio the empirical evidence indicates that investors do trade expected return of the portfolio for skewness

a dynamic equilibrium model of search bargaining and money abstract this paper considers dynamic equilibria in a model with random matching strategic bargaining and money equilibrium in the bargaining game is characterized in terms of a simple differential equation when we embed this characterization into the monetary economy the model can generate outcomes such as limit cycles that never arise if one imposes a myopic nash bargaining solution as has been done in the past journal of economic literature classification numbers c78 d83 e31

optimal fuel mix in chp plants under a stochastic permit price risk neutrality versus risk aversion abstract this paper studies the optimal fuel mix of a chp producer under emission permit price risk the producer s multi fuel plant uses two co2 intensive fuels and one clean fuel using a mean variance framework we develop three models the models are divided into spot models risk neutral and risk averse cases and a forward model risk averse case we derive the effects of price risk on optimal fuel use an increase in price risk can in fact increase the use of co2 intensive fuel in the spot model in the forward model the production and financial decisions are separate we also evaluate the risk bearing behavior of seven finnish chp producers we found that risk neutrality describes behavior better than risk aversion

portfolio selection in the mean variance model a note a little recognized feature of the mean variance portfolio selection model is that induced preferences for asset holdings are not necessarily monotone more of an asset or portfolio is not necessarily better even if the asset or portfolio has positive expected return the model predicts that an investor typically wants only a limited number of shares of an asset and beyond that the increase in mean return from costlessly getting more of an asset is not sufficient to compensate for the increased risk this is reasonable if the model describes a market for contracts with unlimited liability where total returns may be negative e g they may be normally distributed it is unreasonable however if the model is used to describe a stock market with limited liability in that case it is desirable to impose conditions that ensure that there is no upper limit to how much of an asset or portfolio the investor wants the sharpest possible conditions are identified in section i since portfolio preferences are not monotone global satiation is possible again this is unrealistic when liability is limited satiation is bothersome also because it may lead to nonexistence of equilibrium in black s 4 capm without a riskless asset as demonstrated in nielsen 9 uniqueness of equilibrium in capm is investigated in nielsen 10 section i identifies the exact conditions under which global satiation does or does not occur the conditions compare the maximum ratio of mean to standard deviation of total return available from the assets with the investor s limiting degree of risk aversion as measured by the slope of his or her indifference curves at high levels of risk an optimal portfolio may or may not exist in the portfolio selection problem depending on the asymptotic slopes of the efficient frontier and the investor s indifference curves section ii identifies the exact conditions mean variance behavior can arise from expected utility maximization based on normal distributions in that case the conditions for nonsatiation and for existence of optimal portfolios can be stated in terms of the von neumannmorgenstern utility function section iii relates the relevant properties of the utility function for standard deviation and mean to properties of the von neumann morgenstern utility function