bulls bears and market sheep abstract a deterministic excess demand model of stock market behavior is presented that generates stochastically fluctuating prices and randomly switching bear and bull markets

testing for evidence of adverse selection in the automobile insurance market a comment in 1994 puelz and snow presented empirical evidence of adverse selection in the market for automobile collision insurance using data from a private insurer they claimed to have found strong evidence of adverse selection in the insurer s portfolio their test was based on individuals choice of deductible in each risk class from the models of rothschild and stiglitz 1976 and wilson 1977 it is well known that if residual adverse selection is present in some risk classes insurers will offer menus of contracts from which insureds will self select at equilibrium higher risk individuals will choose the smaller deductible and will be charged the higher price per unit of insurance dionne doherty and fombaron 2000 an empirical test of the theory is to verify in each risk class whether lower deductibles are chosen by insureds with higher accident proba

testing for asymmetric information in insurance markets the first goal of this paper is to provide a simple and general test of the presence of asymmetric information in contractual relationships within a competitive context we also argue that insurance data are particularly well suited to such empirical investigations to illustrate this claim we use data on contracts and accidents to investigate the extent of asymmetric information in the french market for automobile insurance using various parametric and nonparametric methods we find no evidence for the presence of asymmetric information in this market

determining discount rates for the evaluation of natural assets in land use planning an application of the equivalency principle one of the most pressing issues when making decisions over long term environmental problems is deciding on an appropriate discount rate this can be a highly technical discussion while some argue in favour of market rates which usually tend to be high others support the use of near zero rates to ensure that both current and future generations are properly accounted for this paper presents an alternative approach to determining the discount rate for environmental assets in the case of land use planning the equivalency principle ep based on the normative proposition that the social value of protected natural land should be at least the same as the market price of an adjacent land with similar environmental characteristics that has been granted permission for development the paper first provides a theoretical overview of the approach followed by an application of the ep at the land plot level across 11 european countries based on the ep pure rates of social time preference that would equate natural and development land values within each administrative unit have been calculated the findings show that the application of the ep usually results in discount rates that are lower than market rates and that are geographically differentiated this implies discount rates that account for preferences of the society where the land or natural resource is located with results ranging between 0 and 11 with an average rate of 1 across study sites

the equivalency principle for discounting the value of natural assets an application to an investment project in the basque coast making decisions about optimal investments in green infrastructure necessitates setting social discount rates this paper suggests a practical way for determining the discount rate for projects or programmes in which one of the options is to maintain or improve land in its natural state we propose an a equivalency principlea to derive a simple rule that sets the discount rate the rule is based on the premise that the long term value of a naturally preserved land track ought to be at least the same as the value of an identical land track in the vicinity to which permission has been granted for development we illustrate this principle with various case studies and we apply it to a contentious investment project in the basque country associated with the regeneration of a large scale harbour in the province of gipuzkoa north of spain that involves reclaiming natural land that has important ecological value including for the conservation of a marine ecosystem

marriage divorce and asymmetric information we use data on people s valuations of options outside marriage and beliefs about spouses options the data demonstrate that in some couples one spouse would be happier and the other spouse unhappier outside of some marriages suggesting that bargaining takes place and that spouses have private information we estimate a bargaining model with interdependent utility that quantifies the resulting inefficiencies our results show that people forgo some utility in order to make their spouses better off and in doing so offset much of the inefficiency generated by their imperfect knowledge thus we find evidence of asymmetric information and interdependent utility in marriage

pattern based expectations international experimental evidence and applications in financial economics abstract we study how subjects extrapolate simple patterns in financial time series in order to develop a descriptive model of actual agent behavior the laboratory experiment for this analysis was conducted in germany and japan statistical analyses indicate considerable similarity in expectations formation across cultures and document that agents expectations are at variance with the notion of standard trend extrapolation the paper then proposes a method for computing expectations for any economic time series based on the experimental data such pattern based expectations are shown to explain stock prices and the dynamics of the forward discount on the foreign exchange market

the basic analytics of moral hazard the basic analytics of moral hazard are developed using the simplest possible model of the insurance market even when the underlying expected utility function and the function relating the accident probability to accident prevention effort are extremely well behaved the indifference curves and feasibility set the set of insurance contracts which at least break even are not indifference curves need not be convex and feasibility sets never are priceand income consumption lines may be discontinuous and effort is not in general a monotonic or continuous function of the parameters of the insurance policies provided

selection effects in the united kingdom individual annuities market this paper explores adverse selection in the voluntary and compulsory individual annuity markets in the united kingdom two empirical regularities support standard models of adverse selection first annuitants are longer lived than non annuitants these mortality differences are more pronounced in the voluntary than in the compulsory annuity market we estimate that the amount of adverse selection in the compulsory market is about one half of that in the voluntary market second the pricing of different types of annuity products within each annuity market is consistent with individuals selecting products based in part on private information about their mortality prospects the aging of populations in many developed nations has generated substantial interest in the way households finance consumption in their retirement years annuities insurance products that provide a payment stream for as long as the insured individual is alive offer one way to spread an accumulated stock of resources over a retirement period of uncertain length theoretical research beginning with yaari 1965 suggests substantial utility gains from annuitisation in the presence of stochastic length of life public policy discussions have also generated substantial current interest in the operation of annuity markets the decline in long term interest rates in the united kingdom since the early 1990s has coincided with a decline in annuity payouts relative to annuity premia this has sparked a debate

evaluation of the subjective probabilities of survival in the health and retirement study in the health and retirement study respondents were asked about the chances they would live to 75 or to 85 we analyze these responses to determine if they behave like probabilities of survival if their averages are close to average probabilities in the population and if they have correlations with other variables that are similar to correlations with actual mortality outcomes we find that generally they do behave like probabilities and that they do aggregate to population probabilities most remarkable however is that they covary with other variables in the same way actual outcomes vary with the variables for example respondents with higher socioeconomic status give higher probabilities of survival whereas respondents who smoke give lower probabilities we conclude that these measures of subjective probabilities have great potential use in models of intertemporal decision making under uncertainty

traders expectations in asset markets experimental evidence we elicit traders predictions of future price trajectories in repeated experimental markets for a 15 period lived asset we find that individuals beliefs about prices are adaptive and primarily based on past trends in the current and previous markets in which they have participated most traders do not anticipate market downturns the first time they participate in a market and when experienced they typically overestimate the time remaining before market peaks and downturns occur when prices deviate from fundamental values belief data are informative to an observer in predicting the direction of future price movements and the timing of market peaks

random choice and private information we consider an agent who chooses an option after receiving some private information this information however is unobserved by an analyst so from the latter s perspective choice is probabilistic or random we provide a theory in which information can be fully identified from random choice in addition the analyst can perform the following inferences even when information is unobservable 1 directly compute ex ante valuations of menus from random choice and vice versa 2 assess which agent has better information by using choice dispersion as a measure of informativeness 3 determine if the agent s beliefs about information are dynamically consistent and 4 test to see if these beliefs are well calibrated or rational

the efficiency of competitive equilibria in insurance markets with asymmetric information abstract this paper addresses the relationship between competitive equilibria and efficient allocations in an insurance market with asymmetric information using the definition of second best efficiency proposed by harris and townsend 1981 for environments characterized by informational assmmetry the efficiency properties of several proposed market equilibria are examined we find an analogue to the first optimality theorem a miyazaki wilson equilibrium always results in a second best allocation

eliciting temptation and self control through menu choices a lab experiment unlike present biased individuals agents who suffer self control costs as in gul and pesendorfer 2001 may choose to restrict their choice set even when they expect to resist temptation to identify these self control types i design an experiment in which the temptation was to read a story during a tedious task the identification strategy relies on a two step procedure first i measure commitment demand by eliciting subjects preferences over menus that did or did not allow access to the story i then implement preferences using a random mechanism allowing to observe subjects who faced the choice yet preferred commitment a quarter to a third of subjects can be classified as self control types according to their menu preferences when confronted with the choice virtually all of them behaved as they anticipated and resisted temptation these findings suggest that policies restricting the availability of tempting options could have larger welfare benefits than predicted by standard models of present bias

the environment as a luxury good or too poor to be green abstract this paper discusses the views of different authors on the relations between economic growth and environmental scarcities it lays out the common assumptions behind inglehart s postmaterialist thesis in environmental sociology krutilla s criterion for the valuation of environmental amenities hirsch s notion of the positional economy and pearce s numerical results on weak sustainability the paper shows how different views on the environmental consequences of economic growth imply at the same time different theories about environmental movements in rich countries there is an increasing demand for environmental amenities which cannot be substituted by products of the material economy and there are also environmental movements against the effluents of affluence in poor countries there are environmental movements characterized as the environmentalism of the poor

do momentum based strategies still work in foreign currency markets this paper examines the performance of momentum trading strategies in foreign exchange markets we find the well documented profitability of momentum strategies during the 1970s and the 1980s has continued throughout the 1990s our approach and findings are insensitive to the specification of the trading rule and the base currency for analysis finally we show that the performance is not due to a time varying risk premium but rather depends on the underlying autocorrelation structure of the currency returns in sum the results lend further support to prior momentum studies on equities the profitability to momentum based strategies holds for currencies as well

expectations life expectancy and economic behavior this study analyzes responses to a questionnaire designed to elicit subjective expectations and probabilities of survival people do extrapolate past improvements in longevity when they determine their subjective horizons and they are fully aware of levels of and movements within todays life tables the subjective distribution has greater variance than its actuarial counterpart and the subjective variance decreases with age the implications of these findings for optimal social security for the construction of annuities for the analysis of savings behavior and for evaluating lifetime earnings are discussed the data were collected in the united states from a sample of 411 white male economists and a sample of 363 white males in a midwestern smsa excerpt

behavioural characterizations of naivete for time inconsistent preferences we propose non parametric definitions of absolute and comparative naivete these definitions leverage ex ante choice of menu to identify predictions of future behaviour and ex post random choices from menus to identify actual behaviour the main advantage of our definitions is their independence from any assumed functional form for the utility function representing behaviour an individual is sophisticated if she is indifferent ex ante between retaining the option to choose from a menu ex post or committing to her actual distribution of choices from that menu she is naive if she prefers the flexibility in the menu reflecting a mistaken belief that she will act more virtuously than she actually will we propose two definitions of comparative naivete and explore the restrictions implied by our definitions for several prominent models of time inconsistency

the social cost of carbon and its policy implications the shadow price or social cost of carbon is an important indicator of the global incremental damage done by emitting greenhouse gases today cost benefit analysis would set the optimal amount of greenhouse gas emission reduction at the point where this social cost just equals the incremental cost of controlling emissions the higher the value for the social cost of carbon the more control is warranted this comparison assumes that cost benefit analysis is the correct way of determining climate change policy and many believe this is not the case because of the very long term irreversible and potentially catastrophic nature of global warming but in the short run at least a comparison of cost and benefits is required and in any event all decisions imply costs and benefits but what is the right figure for the social cost of carbon this paper reviews the uk government s assessment of the cost and concludes that it has been set far too high because of a misreading of the integrated assessment models used to balance costs and benefits moreover adoption of the uk government s shadow price would have formidable implications for energy policy in the uk and for policies on afforestation copyright 2003 oxford university press

a testable theory of imperfect perception we provide a new characterization of bayesian expected utility maximization the novel feature of the model is our separation of actions from prizes the signature of the resulting theory is the impossibility of raising utility by switching wholesale from one action to another we provide applications to robustness to the recovery of utility from choice data and to model

redistribution by insurance market regulation analyzing a ban on gender based retirement annuities we illustrate how equilibrium screening models can be used to evaluate the economic consequences of insurance market regulation we calibrate and solve a model of the united kingdom s compulsory annuity market and examine the impact of gender based pricing restrictions we find that the endogenous adjustment of annuity contract menus in response to such restrictions can undo up to half of the redistribution from men to women that would occur with exogenous social security like annuity contracts our findings indicate the importance of endogenous contract responses and illustrate the feasibility of employing theoretical insurance market equilibrium models for quantitative policy analysis

exchange rate expectations of chartists and fundamentalists this paper provides novel evidence on exchange rate expectations of both chartists and fundamentalists separately these groups indeed form expectations differently chartists change their expectations more often however all professionals expectations vary considerably as they generally follow strong exchange rate trends in line with non linear exchange rate modeling professionals expect mean reversion only if exchange rates deviate much from ppp chartists survive in fx markets as they forecast equally accurately as fundamentalists unexpected from an effcient market viewpoint chartists even outperform fundamentalists at short horizons overall these findings clearly support the chartist fundamentalist approach

multiple dimensions of private information evidence from the long term care insurance market we demonstrate the existence of multiple dimensions of private information in the long term care insurance market two types of people purchase insurance individuals with private information that they are high risk and individuals with private information that they have strong taste for insurance ex post the former are higher risk than insurance companies expect while the latter are lower risk in aggregate those with more insurance are not higher risk our results demonstrate that insurance markets may suffer from asymmetric information even absent a positive correlation between insurance coverage and risk occurrence the results also suggest a general test for asymmetric information

can higher prices stimulate product use evidence from a field experiment in zambia the controversy over how much to charge for health products in the developing world rests in part on whether higher prices can increase use either by targeting distribution to high use households a screening effect or by stimulating use psychologically through a sunk cost effect we develop a methodology for separating these two effects we implement the methodology in a field experiment in zambia using door to door marketing of a home water purification solution we find evidence of economically important screening effects by contrast we find no consistent evidence of sunk cost effects jel c93 d12 i11 m31 o12

separating moral hazard from adverse selection and learning in automobile insurance longitudinal evidence from france the identification of information problems in different markets is a challenging issue in the economic literature this paper performs tests of residual asymmetric information in the french automobile insurance market for the 1995 1997 period this market is characterized by the presence of a regulated experiencerating scheme bonus malus contract choices are strongly associated with the bonus malus of policyholders we have access to longitudinal survey data with dynamic information both on claims and accidents we propose a causality test to distinguish pathways through which a positive correlation arises between contract choice and accidents we find evidence of moral hazard among a sub group of policyholders with significant driving experience 5 15 years we distinguish this moral hazard estimate from adverse selection and learning policyholders with less experience have a combination of learning and moral hazard whereas no residual information problem is found for policyholders with more than 15 years of experience

advantageous selection in insurance markets this article reverses the standard conclusion that asymmetric information plus competition results in insufficient insurance provision risk tolerant individuals take few precautions and are disinclined to insure but they are drawn into a pooling equilibrium by the low premiums created by the presence of safer more risk averse types taxing insurance drives out the reckless clients allowing a strict pareto gain this result depends on administrative costs in processing claims and issuing policies as does the novel finding of a pure strategy partial pooling subgame perfect nash equilibrium in the insurance market copyright 2001 by the rand corporation

asymmetric information in insurance general testable implications several recent articles on empirical contract theory and insurance have tested for a positive correlation between coverage and ex post risk as predicted by standard models of pure adverse selection or pure moral hazard we show here that the positive correlationproperty can be extended to general setups competitive insurance markets and cases where risk aversion is public we test our results on a french dataset our tests confirm that the estimated correlation is positive they also suggest the presence of market power

speculative behaviour and complex asset price dynamics a global analysis this paper analyses the dynamics of a model of a share market consisting of two groups of traders fundamentalists who base their trading decisions on the expectation of a return to the fundamental value of the asset and chartists who base their trading decisions on an analysis of past price trends the model is reduced to a two dimensional map whose global dynamic behaviour is analysed in detail the dynamics are affected by parameters measuring the strength of fundamentalist demand and the speed with which chartists adjust their estimate of the trend to past price changes the parameter space is characterized according to the local stability instability of the equilibrium point as well as the non invertibility of the map the method of critical curves of non invertible maps is used to understand and describe the range of global bifurcations that can occur it is also shown how the knowledge of deterministic dynamics uncovered here can aid in understanding the behaviour of stochastic versions of the model

why the far distant future should be discounted at its lowest possible rate abstract a critical feature of the distant future is currently unresolvable uncertainty about what will then be the appropriate rate of return on capital to use for discounting this paper shows that there is a well defined sense in which the lowest possible interest rate should be used for discounting the far distant future part of any investment project some implications are discussed for evaluating long term environmental projects or activities like measures to mitigate the possible effects of global climate change

the stern review a deconstruction using a simple model designed for transparency but nonetheless calibrated to support the much quoted damage estimates of the stern review of the economics of climate change we demonstrate significant sensitivity of those results to assumptions about the pure rate of time preference the time horizon and the rates of risk and equity aversion used to compute certainty and equity equivalent annuities most importantly we demonstrate enormous sensitivity to presumed constant regional vulnerability and underlying assumptions about adaptive capacity manipulation of any of these parameters one at a time across reasonable ranges can diminish damage estimates by as much as 84 or in the case of extending the time horizon with the review s low discount rate increase damage estimates by 900 we also confirm the usual result that limiting atmospheric concentrations to specific benchmarks above 400 ppm cannot eliminate all damages nonetheless we applaud the stern review author team for reconfirming that the climate problem can be approached productively as an economic problem whose solutions can be explored with the tools of decision analysis 2008 elsevier ltd all rights reserved

foundations for optimal inattention abstract this paper models an agent who has a limited capacity to pay attention to information and thus conditions her actions on a coarsening of the available information an optimally inattentive agent chooses both her coarsening and her actions by maximization of an underlying subjective expected utility preference relation net of a cognitive cost of attention the main result axiomatically characterizes the conditional choices of actions by an agent that are necessary and sufficient for her behavior to be seen as if it is the result of optimal inattention observing these choices permits unique identification of the agent s utility index the information to which she pays attention her attention cost and her prior whenever information is costly

preference heterogeneity and selection in private health insurance the case of australia a basic prediction of theoretical models of insurance is that if consumers have private information about their risk of suffering a loss there will be a positive correlation between risk and the level of insurance coverage we test this prediction in the context of the market for private health insurance in australia despite a universal public system that provides comprehensive coverage for inpatient and outpatient care roughly half of the adult population also carries private health insurance the main benefit of which is more timely access to elective hospital treatment like several studies on different types of insurance in other countries we find no support for the positive correlation hypothesis because strict underwriting regulations create strong information asymmetries this result suggests the importance of multi dimensional private information additional analyses suggest that the advantageous selection observed in this market is driven by the effect of risk aversion the ability to make complex financial decisions and income

private information and insurance rejections across a wide set of nongroup insurance markets applicants are rejected based on observable often high risk characteristics this paper argues that private information held by the potential applicant pool explains rejections i formulate this argument by developing and testing a model in which agents may have private information about their risk i first derive a new no trade result that theoretically explains how private information could cause rejections i then develop a new empirical methodology to test whether this no trade condition can explain rejections the methodology uses subjective probability elicitations as noisy measures of agents beliefs i apply this approach to three nongroup markets long term care disability and life insurance consistent with the predictions of the theory in all three settings i find significant amounts of private information held by those who would be rejected i find generally more private information for those who would be rejected relative to those who can purchase insurance and i show it is enough private information to explain a complete absence of trade for those who would be rejected the results suggest that private information prevents the existence of large segments of these three major insurance markets publication abstract

family ties and the crowding out of long term care insurance insurance for long term care ltc has developed only moderately compared to other areas of welfare which has been explained variously as the result of market failures public misconceptions of the risk of ltc needs and intergenerational contracts this paper offers a cultural explanation for the limited ltc insurance development in europe it argues that family ties by enhancing informal care giving duties inhibit individuals expected public and private insurance coverage the empirical analysis of the paper exploits cross country and sub group variability of a representative database of european union member states containing records on ltc coverage and family structure drawing upon two measures of familistic culture or family ties we find a negative association between family ties and expected coverage of ltc for different sub samples these results are robust to a set of checks for different definitions of family ties and controls and for a sub sample of first and second generation migrants policy implications suggest that widespread expansion of ltc coverage might need to accommodate existing familistic cultural norms to avoid insurance crowding out

expectation formation in the foreign exchange market a time varying heterogeneity approach using survey data using consensus economics survey data on jpy usd and gbp usd exchange rate expectations for the 3 and 12 month horizons over the period november 1989 december 2012 we first show that expectations fail the conventional tests of unbiasedness and do not exhibit a learning process towards rationality our approach is consistent with the economically rational expectations theory feige and pearce 1976 which states that information costs and agents aversion to misestimating future exchange rates determine the optimal amounts of information on which they base their expectations the time variability of the cost aversion ratios justifies at the aggregate level a representation of expectations as a linear combination of the traditional extrapolative adaptive and regressive processes augmented by a forward market component whose parameters are allowed to change over time this mixed expectation model with unstable heterogeneity is validated by our kalman filter estimation results for the two currencies and

heterogeneous speculators endogenous fluctuations and interacting markets a model of stock prices and exchange rates abstract we develop a discrete time model in which the stock markets of two countries are linked via and with the foreign exchange market the foreign exchange market is characterized by nonlinear interactions between technical and fundamental traders such interactions may generate complex dynamics and recurrent switching between bull and bear market phases via a well known pitchfork and period doubling bifurcation path when technical traders become more aggressive the two stock markets are populated by fundamentalists and prices tend to evolve towards stable steady states driven by linear laws of motion a connection between such markets is established by allowing investors to trade abroad and the resulting three dimensional dynamical system is analyzed one goal of our paper is to explore potential spill over effects between foreign exchange and stock markets a second related goal is to study how the bifurcation sequence which characterizes the market with heterogeneous speculators is modified in the presence of interactions with other markets

heterogeneity in exchange rate expectations evidence on the chartist fundamentalist approach abstract this paper examines heterogeneity in exchange rate expectations whereas agents heterogeneity is key in modern exchange rate models evidence on determinants of heterogeneity is weak thus far our sample covering expectations from about 300 forecasters over 15 years shows remarkable time variation in dispersion determinants of dispersion are consistent with the chartist fundamentalist approach misalignments of the exchange rate and exchange rate changes explain heterogeneity the risk premium influences heterogeneity as well but possible impacts from macroeconomic variables and exchange rate s volatility are dominated by the other determinants

moral hazard and selection among the poor evidence from a randomized experiment not only does economic theory predict high risk individuals to be more likely to purchase insurance but insurance coverage is also thought to crowd out precautionary activities in spite of stark theoretical predictions there is conflicting empirical evidence on adverse selection and evidence on ex ante moral hazard is very scarce using data from the seguro popular experiment in mexico this paper documents patterns of selection on observables into health insurance as well as the existence of non negligible ex ante moral hazard more specifically the findings indicate that i agents in poor self assessed health prior to the intervention have all else equal a higher propensity to take up insurance and ii insurance coverage reduces the demand for self protection in the form of preventive care curiously however individuals do not sort based on objective measures of their health

managing rational routes to randomness abstract within the seminal cobweb model of brock and hommes firms adapt their price expectations by a profit based switching behavior between free naive expectations and costly rational expectations brock and hommes demonstrate that fixed point dynamics may turn into increasingly complex dynamics as the firms intensity of choice increases we show that policy makers are able to manage such rational routes to randomness by adjusting profit taxes in particular policy makers should increase decrease profit taxes if destabilizing expectations generate higher lower profits than stabilizing expectations to alter the composition of applied expectation rules and thereby to promote market stability our results are not restricted to cobweb models a huge body of literature demonstrates that rational routes to randomness may emerge in many different markets

a review of the stern review on the economics of climate change the stern review calls for immediate decisive action to stabilize greenhouse gases because the benefits of strong early action on climate change outweighs the costs the economic analysis supporting this conclusion consists mostly of two basic strands the first strand is a formal aggregative model that relies for its conclusions primari ly upon imposing a very low discount rate concerning this discount rate aspect i am skeptical of the review s formal analysis but this essay points out that we are actual ly a lot less sure about what interest rate should be used for discounting climate change than is commonly acknowledged the review s second basic strand is a more intuitive argument that it might be very important to avoid possibly large uncertain ties that are difficult to quantify concerning this uncertainty aspect i argue that it might be recast into sound analytical reasoning that might justify some of the review s conclusions the basic issue here is that spending money to slow global warming should perhaps not be conceptualized primarily as being about consump tion smoothing as much as being about how much insurance to buy to offset the small change of a ruinous catastrophe that is difficult to compensate by ordinary savings

evidence on adverse selection equilibrium signaling and cross subsidization in the insurance market the configuration of equilibrium in the market for automobile collision insurance is examined empirically by representing the premium deductible menu and the demand function as a standard hedonic system using contractual data from a representative insurer we estimate a reduced form hedonic premium equation and the inverse of the marginal bid equation for insurance coverage the data reveal an equilibrium with adverse selection and market signaling but lead us to reject the hypothesis that high risks receive contracts subsidized by low risks

the impact of fx central bank intervention in a noise trading framework abstract in this paper we analyse the effectiveness of the direct central bank interventions using a new effectiveness criterion to this aim we investigate the effects of central bank interventions cbi in a noise trading model with chartists and fundamentalists we first estimate a model in which chartists extrapolate past returns and fundamentalists forecast a mean reverting dynamics of the exchange rate towards a fundamental value then we investigate the role of central bank interventions for explaining the switching properties between the two types of agents we find evidence that in the medium run interventions increase the proportion of fundamentalists and therefore exert some stabilizing influence on the exchange rate

adverse selection in insurance markets policyholder evidence from the u k annuity market in this paper we investigate the importance of adverse selection in insurance markets we use a unique data set consisting of all annuity policies sold by a large u k insurance company since the early 1980s to analyze mortality differences among individuals who purchased different types of policies we find systematic relationships between ex post mortality and annuity policy characteristics such as whether the annuity will make payments to the estate in the event of an untimely death and whether the payments from the annuity rise over time these mortality patterns are consistent with the presence of asymmetric information in the annuity market we find no evidence of substantive mortality differences however across annuities of different size even though models of insurance market equilibrium with asymmetric information would predict such differences we also find that the pricing of various features of annuity contracts is consistent with the self selection patterns we find in mortality rates our results therefore suggest that selection may occur across many specific features of insurance contracts and that the absence of selection on one contract dimension does not preclude its presence on others this highlights the importance of considering the detailed features of insurance contracts when testing theoretical models of asymmetric information

do dollar forecasters believe too much in ppp this article extends earlier studies on exchange rate expectations formation by using new data and adding information about forecasters reliance on fundamental analysis for the first time we replicate the conventional result of nonrational expectations moreover biases in expectations are identified as professionals significantly believe too much in mean reversion mean being represented by purchasing power parity ppp when respondents are grouped on their reliance to fundamental analysis fundamentalists reveal an even stronger bias those who rely the least on fundamentals preferring technical analysis instead show a significantly smaller bias towards ppp in lieu of expecting too much trend extrapolation biased beliefs will grow stronger when the us dollar is further away from ppp finally the accuracy of the expectations is poor for both groups however we find directional forecasting ability

renewable resources and economic sustainability a dynamic analysis with heterogeneous time preferences abstract in recent years there has been increasing interest in the study of economic sustainability and its relationship with natural resources this paper attempts to shed some light on the issue by taking into account the individual variations in time preferences for consumption and resource amenity we characterize the long run steady state analyze its asymptotic stability and explore the transational dynamics from any initial state the welfare implications of the optimal path are also discussed

the use of technical analysis in the foreign exchange market abstract technica or chartist analysis of financial markets involves providing forecasts or trading advice on the basis of largely visual inspection of past prices without regard to any underlying economic or fundamental analysis this paper reports the results of a questionnaire survey conducted on behalf of the bank of england among chief foreign exchange dealers based in london in november 1988 amongst other findings it is revealed that at least 90 per cent of respondents place some weight on this form of non fundamental analysis when forming views at one or more time horizons there is also a skew towards reliance on technical as opposed to fundamentalist analysis at shorter horizons which becomes steadily reversed as the length of horizon considered is increased a very high proportion of chief dealers view technical and fundamental analysis as complementary forms of analysis and a substantial proportion suggest that technical advice may be self fulfilling jel f31

estimating welfare in insurance markets using variation in prices we provide a graphical illustration of how standard consumer and producer theory can be used to quantify the welfare loss associated with inefficient pricing in insurance markets with selection we then show how this welfare loss can be estimated empirically using identifying variation in the price of insurance such variation together with quantity data allows us to estimate the demand for insurance the same variation together with cost data allows us to estimate how insurers costs vary as market participants endogenously respond to price the slope of this estimated cost curve provides a direct test for both the existence and the nature of selection and the combination of demand and cost curves can be used to estimate welfare we illustrate our approach by applying it to data on employerprovided health insurance from one specific company we detect adverse selection but estimate that the quantitative welfare implications associated with inefficient pricing in our particular application are small in both absolute and relative terms

preference for flexibility and random choice we study a two stage model where the agent has preferences over menus as in dekel lipman and rustichini 2001 in the first period and then makes random choices from menus as in gul and pesendorfer 2006 in the second period both preference for flexibility in the first period and strictly random choices in the second period can be respectively rationalized by subjective state spaces our main result characterizes the representation where the two state spaces align so the agent correctly anticipates her future choices the joint representation uniquely identifies probabilities over subjective states and magnitudes of utilities across states we also characterize when the agent completely overlooks some subjective states that realize at the point of choice

environmental regulations and the problem of sustainability moving beyond market failure abstract the standard metaphor of market failure is an impediment to the crafting of environmental policy that can escape policy lock in sustainability requires a policy process that can avoid this lock in sustainability concerns the creation of dynamic human processes that can respond to indeed anticipate unanticipated feedback from biological processes

revealed preference rational inattention and costly information acquisition we develop a revealed preference test for optimal acquisition of costly information the test encompasses models of rational inattention sequential signal processing and search we provide limits on the extent to which attention costs can be recovered from choice data we experimentally elicit state dependent stochastic choice data of the form the tests require in simple cases tests con rm that subjects adjust their attention in response to incentives as the theory dictates

heterogeneous expectations exchange rate dynamics and predictability abstract this paper proposes a simple chartist fundamentalist model in which we allow for nonlinear time variation in chartists extrapolation rate estimation of the model using monthly data for the major currencies vis a vis the us dollar shows that the model is significant in sample and that it has out of sample predictive power for some of the currencies we investigate the power of tests of the random walk model to detect predictability against the alternative of the proposed model we find that the evidence of short term unpredictability and the long term predictability are consistent with our model

on the complicated price dynamics of a simple one dimensional discontinuous financial market model with heterogeneous interacting traders abstract we develop a financial market model with heterogeneous interacting agents market makers adjust prices with respect to excess demand chartists believe in the persistence of bull and bear markets and fundamentalists bet on mean reversion moreover speculators trade asymmetrically in over and undervalued markets and while some of them determine the size of their orders via linear trading rules others always trade the same amount of assets the dynamics of our model is driven by a one dimensional discontinuous map despite the simplicity of our model analytical graphical and numerical analysis reveals a surprisingly rich set of interesting dynamical behaviors

dynamic logit with choice aversion we characterize a generalization of discounted logistic choice that incorporates a parameter to capture different views the agent might have about the costs and benefits of larger choice sets the discounted logit model used in the empirical literature is the special case that displays a preference for flexibility in the sense that the agent always prefers to add additional items to a menu other cases display varying levels of choice aversion where the agent prefers to remove items from a menu if their ex ante value is below a threshold we show that higher choice aversion as measured by dislike of bigger menus also corresponds to an increased preference for putting off decisions as late as possible

foreign exchange rate expectations micro survey data this paper analyzes the panel data of biweekly surveys on the yen dollar exchange rate expectations of forty four institutions for two years and contains four major findings first market participants are heterogeneous that is significant individual effects exist in their expectation formation second the individual effects have a characteristic of wishful expectations exporters expect yen depreciation and importers expect yen appreciation relative to others third many violate the rational expectations hypothesis fourth forecasts with long horizons show less yen appreciation than those with short horizons cross equation constraints implied by the consistency of the forecast term structure are strongly rejected in the data copyright 1990 by american economic association

an empirical examination of information barriers to trade in insurance this paper uses direct evidence to evaluate whether asymmetric information is a barrier to trade in the largest market for private insurance in the world life insurance we report several findings that seem difficult to reconcile with the conventional theory of insurance under asymmetric information we conjecture that sellers may know their costs of production better than consumers in this market as in those for most other products

optimal information disclosure a sender randomly draws a prospect characterized by its profitability to the sender and its relevance to a receiver the receiver observes only a signal provided by the sender and accepts the prospect if his bayesian inference about the prospect s relevance exceeds his opportunity cost the sender s profits are typically maximized by partial information disclosure whereby the receiver is induced to accept less relevant but more profitable prospects switches by pooling them with more relevant but less profitable ones baits extensions include maximizing a weighted sum of sender profits and receiver surplus and allowing the sender to use monetary incentives

optimal mandates and the welfare cost of asymmetric information evidence from the u k annuity market much of the extensive empirical literature on insurance markets has focused on whether adverse selection can be detected once detected however there has been little attempt to quantify its welfare cost or to assess whether and what potential government interventions may reduce these costs to do so we develop a model of annuity contract choice and estimate it using data from the u k annuity market the model allows for private information about mortality risk as well as heterogeneity in preferences over different contract options we focus on the choice of length of guarantee among individuals who are required to buy annuities the results suggest that asymmetric information along the guarantee margin reduces welfare relative to a first best symmetric information benchmark by about 127 million per year or about 2 percent of annuitized wealth we also find that by requiring that individuals choose the longest guarantee period allowed mandates could achieve the first best allocation however we estimate that other mandated guarantee lengths would have detrimental effects on welfare since determining the optimal mandate is empirically difficult our findings suggest that achieving welfare gains through mandatory social insurance may be harder in practice than simple theory may suggest

nonlinear mean reversion in real exchange rates abstract this paper modifies a unit root test procedure in the nonlinear star framework recently advanced by kapetanios et al journal of econometrics 2001 in press using a detrending methodology suggested by schmidt and phillips oxford bulletin of economics and statistics 54 1992 257 we derive an alternative unit root test and apply it to the bilateral real exchange rates for the g7 countries we find that the use of our test is able to uncover evidence of nonlinear mean reversion for most cases whereas the standard dickey fuller test based on the linear model cannot

how should the distant future be discounted when discount rates are uncertain abstract the so called weitzman gollier puzzle is the fact that two seemingly symmetric and equally plausible ways of dealing with uncertain future discount rates appear to give diametrically opposed results the puzzle is resolved when agents optimize their consumption plans the long run discount rate declines over time toward its lowest possible value

explaining dispersion in foreign exchange expectations a heterogeneous agent approach this paper combines survey forecasts with a heterogeneous agent model to examine the dispersion of expectations of participants in the foreign exchange market we find distinct variations in the level of dispersion and document that dispersion arises because of the combined effect of market participants holding private information and attaching different weights to fundamental technical and carry trade analyses we estimate a heterogeneous agent model on the survey forecasts and show that the weight attached to the three forecast rules is adjusted over time in response to the relative importance of the rules in the actual foreign exchange market the weights are related to market circumstances the switching model is finally shown to outperform the random walk model in an out of sample forecast exercise

the adaptive markets hypothesis evidence from the foreign exchange market we analyze the intertemporal stability of excess returns to technical trading rules in the foreign exchange market by conducting true out of sample tests on previously studied rules the excess returns of the 1970s and 1980s were genuine and not just the result of data mining but these profit opportunities had disappeared by the early 1990s for filter and moving average rules returns to less studied rules also have declined but have probably not completely disappeared high volatility prevents precise estimation of mean returns these regularities are consistent with the adaptive markets hypothesis lo 2004 but not with the efficient markets hypothesis

the price dynamics of common trading strategies a deterministic trading strategy can be regarded as a signal processing element that uses external information and past prices as inputs and incorporates them into future prices this paper uses a market maker based method of price formation to study the price dynamics induced by several commonly used financial trading strategies showing how they amplify noise induce structure in prices and cause phenomena such as excess and clustered volatility

the interaction of public and private insurance medicaid and the long term care insurance market a long tradition in public finance examines how public programs can crowd out private activ ity in areas as diverse as education savings and insurance among others these studies typi cally focus on aggregate economic implications particularly for government expenditures and national savings in this paper we demonstrate that crowd out can also have an important effect on individual welfare specifically we show that the provision of even very incomplete public insurance can crowd out more comprehensive private policies by imposing a large implicit tax on private insurance benefits thus potentially increasing overall risk exposure for individuals we examine the interaction of public and private insurance for one of the largest uninsured financial risks facing the elderly in the united states long term care expenditures at 135 bil lion in 2004 long term care expenditures represented over 8 5 percent of total health expendi tures or all ages or roughly 1 2 percent of gdp moreover real long term care expenditures are projected to triple over the next 35 years due to rising medical costs and the aging of the baby boomers only 10 percent of the elderly however have any private long term care insurance and one third of expenditures are paid for out of pocket congressional budget office cbo 1999 cbo 2004 brown and finkelstein 2007 one potential explanation for the small size of the private market is that the public insurance provided by medicaid may crowd out demand for private insurance medicaid was designed to provide long term care insurance for the poor elderly mark v pauly 1989 1990 has established the qualitative result that as an incomplete but publicly funded source of long term care insur ance medicaid has the potential to reduce substantially demand for private long term care insur ance even among the nonpoor our work builds on this insight by quantifying the magnitude of medicaid s crowd out effect and the incomplete nature of medicaid coverage we also illustrate the mechanism behind medicaid s crowd out effect and are therefore able to assess the likely impact of alternative policies on private insurance demand we develop a utility based model of a 65 year old risk averse individual who chooses an opti mal intertemporal consumption path in the presence of uncertainty about long term care expen ditures we calibrate the model using data on the distribution of long term care expenditure risk common state medicaid rules and the prices and coverage of typical private long term care insurance policies

estimating risk preferences from deductible choice we develop a structural econometric model to estimate risk preferences from data on deductible choices in auto insurance contracts we account for adverse selection by modeling unobserved heterogeneity in both risk claim rate and risk aversion we find large and skewed heterogeneity in risk attitudes in addition women are more risk averse than men risk aversion exhibits a u shape with respect to age and proxies for income and wealth are positively associated with absolute risk aversion finally unobserved heterogeneity in risk aversion is greater than that of risk and as we illustrate has important implications for insurance pricing

dynamic inefficiencies in insurance markets evidence from long term care insurance we examine whether unregulated private insurance markets efficiently provide insurance against reclassification risk the risk of becoming a bad risk and facing higher premiums to do so we examine the ex post risk type of individuals who drop their long term care insurance contracts relative to those who are continually insured consistent with dynamic inefficiencies we find that individuals who drop coverage are of lower risk ex post than individuals who were otherwise equivalent at the time of purchase but who do not drop out of their contracts these findings suggest that dynamic market failures in private insurance markets can preclude the efficient provision of insurance against reclassification risk this abstract was borrowed from another version of this item

intrinsic variability in group and individual decision making the paper examines the random preference model which can explain inherent variability of preferences in managerial and individual decision making and provides axiomatizations for the utility components of two such models differentiated by the structure of core preferences expected utility eu and betweenness like preferences we then examine the possibility of violations of weak stochastic transitivity for these models and for a model with core dual eu preferences such violations correspond to the existence of condorcet cycles and therefore the analysis has implications for managerial decision making and for majority rule voting the paper also investigates implications of its findings for two popular experimental settings this paper was accepted by james smith decision analysis

a review of the stern review on the economics of climate change how much and how fast should we react to the threat of global warming the stern review argues that the damages from climate change are large and that nations should undertake sharp and immediate reductions in greenhouse gas emissions an examination of the review s radical revision of the economics of climate change finds however that it depends decisively on the assumption of a near zero time discount rate combined with a specific utility function the review s unambiguous conclusions about the need for extreme immediate action will not survive the substitution of assumptions that are consistent with today s marketplace real interest rates and savings rates

intrinsic preference for information abstract suppose agents value information not only to make contingent plans but also intrinsically how are such attitudes toward information related to attitudes toward risk we generalize the kreps porteus recursive expected utility model dropping both recursivity and expected utility there is a geometric analogy between risk and information we characterize intrinsic information loving in general by a substitution property analogous to multivariate risk loving and for smooth preferences by the convexity of gateaux derivatives even with recursivity preference for information does not imply expected utility we provide an example we examine connections between information loving and risk aversion for early and late resolving risks journal of economic literatureclassification numbers d80 d81

on modeling and interpreting the economics of catastrophic climate change with climate change as prototype example this paper analyzes the implications of structural uncertainty for the economics of low probability high impact catastrophes even when updated by bayesian learning uncertain structural parameters induce a critical tail fattening of posterior predictive distributions such fattened tails have strong im plications for situations like climate change where a catastrophe is theoretically possible because prior knowledge cannot place sufficiently narrow bounds on overall damages this paper shows that the economic consequences of fat tailed structural uncertainty along with unsureness about high temperature damages can readily outweigh the effects of discounting in climate change policy analysis

declining discount rates the long and the short of it the last few years have witnessed important advances in our understanding of time preference and social discounting in particular several rationales for the use of time varying social discount rates have emerged these rationales range from the ad hoc to the formal with some founded solely in economic theory while others reflect principles of intergenerational equity while these advances are to be applauded the practitioner is left with a confusing array of rationales and the sense that almost any discount rate can be justified this paper draws together these different strands and provides a critical review of past and present contributions to this literature in addition to this we highlight some of the problems with employing ddrs in the decision making process the most pressing of which may be time inconsistency we clarify their practical implications and potential pitfalls of the more credible rationales and argue that some approaches popular in environmental economics literature are ill conceived finally we illustrate the impact of different approaches by examining global warming and nuclear power investment this includes an application and extension of newell and pizer discounting the benefits of climate change mitigation how much do uncertain rates increase valuations journal of environmental economics and management 46 2003 52 to uk interest rate data

competitive insurance markets with two unobservables i study a screening game in a competitive insurance market in which insurance customers differ with respect to both accident probability and degree of risk aversion it is shown that indifference curves of customers may cross twice thus the single crossing property does not hold when differences in risk aversion are sufficiently large firms cannot use policy deductibles to screen high risk customers types may be pooled in equilibrium or are separated by raising premiums above actuarially fair levels this leads to excessive entry of firms in equilibrium