ex day behavior with dividend preference and limitations to short term arbitrage the case of swedish lottery bonds abstract swedish lottery bonds offer a unique opportunity to study ex day effects in an environment where cash distributions are tax advantaged relative to capital gains thus in the lottery bond market we observe a reversal of the preference for capital gains that researchers have cited as an explanation for the ex day behavior of u s equities further in this market there are barriers to short term arbitrage when prices do reflect the tax preferences of individual investors we find the bonds are priced around the ex day to reflect differential tax rates on income and capital gains consistent with the prevailing tax regimes the bonds consistently experience negative returns over the coupon payment period and in fact often sell at negative yields prior to the cash distribution as one would expect given tax motivated trading between high tax investors who buy prior to the distribution and low tax investors who buy after the distribution

the behavior of risk and market prices of risk over the nasdaq bubble period we exploit the information in the options market to study the variations of return risk and market prices of different sources of risk during the rise and fall of the nasdaq market we specify a model that accommodates fluctuations in both risk levels and market prices of different sources of risk and we estimate the model using the time series returns and option prices on the nasdaq 100 tracking stock our analysis reveals three key variations during the period from march 1999 to march 2001 first return volatility increased together with the rising nasdaq index level even though the two tend to move in opposite directions second although the market price of diffusion return risk averages around 1 82 over the whole sample the estimates reached negative territory at the end of 1999 the estimates reverted back to highly positive values after the collapse of the nasdaq market third the market price of jump risk increased with the rising nasdaq valuation and this increase in market price coincided with an increased imbalance in open interest between put and call options

private values of risk tradeoffs at superfund sites housing market evidence on learning about risk this paper incorporates a bayesian learning model into a hedonic framework to estimate the value that residents place on avoiding cancer risks from hazardous waste sites we show that residents are

labor migration and risk aversion in less developed countries in this paper we question the pioneering work of todaro which states that rural to urban labor migration in less developed countries ldcs is an individual response to a higher urban expected income we demonstrate that rural to urban labor migration is perfectly rational even if urban expected income is lower than rural income we achieve this under a set of fairly stringent conditions an individual decision making entity a one period planning horizon and global risk aversion we obtain the result that a small chance of reaping a high reward is sufficient to trigger rural to urban labor migration

consumption commitments and employment contracts we examine an economy in which the cost of consuming some goods can be reduced by making commitments that reduce exibility we show that such consumption commitments can induce consumers with risk neutral underlying utility functions to be risk averse over small variations in income but sometimes to seek risk over large variations as a result optimal employment contracts will smooth wages conditional on being employed but may incorporate a possibility of unemployment

security of supply and regulation of energy networks abstract in recent years the security of energy supplies has re emerged as a central issue in the energy policy arena in the uk and elsewhere this re emergence takes place against a backdrop of increased liberalisation of the energy markets so that security of supply needs to be revisited within this context security of supply is multifaceted but is often discussed in terms of physical availability of energy sources and their commodity price risk this paper discusses the relationship between security of supply and network regulation that is how the energy networks and appropriate regulation of them can contribute to security of supply in liberalised energy sectors energy networks are predominantly natural monopolies and as a result are generally subject to regulatory oversight we discuss a range of issues and trends that pose challenges and opportunities to network regulation and which call for new and innovative measures the paper identifies a number of areas where network regulation can play a significant role in increasing the security of supply of future energy systems

willingness to pay to reduce mortality risks evidence from a three country contingent valuation study valuing a change in the risk of death is a key input into the calculation of the benefits of environmental policies that save lives typically such risks are monetized using the value of a statistical life vsl since the majority of the lives saved by environmental policies are those of older persons there has been much recent debate about whether the vsl should be lower for the elderly to reflect their fewer remaining life years we conducted a contingent valuation survey in the uk italy and france designed to answer this question the survey was administered in these three countries following a standardized protocol our results suggest that the vsl is 1 022 million or 2 264 million depending on whether we use median or mean wtp the vsl is not significantly lower for older persons but is higher for persons who have been admitted to a hospital or emergency room for cardiovascular and respiratory problems income is positively and significantly associated with wtp the income elasticities of the wtp increase gradually with income levels and are between 0 15 and 0 5 for current income levels in eu countries we use the responses to the wtp questions to estimate the value of an extension in remaining life expectancy the value of a loss of one year s life expectancy is 54 000 or 163 000

rates of time preference and consumer valuations of automobile safety and fuel efficiency this article estimates hedonic price models for automobiles using a data set on almost 3 000 households from the u s department of energy residential transportation energy consumption survey the standard hedonic models are generalized to recognize the role of discounting of fuel efficiency and safety yielding an estimated rate of time preference ranging from 11 to 17 percent this range includes the prevailing rate of interest for car loans in 1988 and is consequently consistent with market rates purchasers exhibit an implicit value of life ranging from 2 6 to 3 7 million which is within the range found in the labor market as well as other market contexts the model also estimates a significant price effect for auto injury risks and fuel efficiency

alternative approaches to valuing intangible health losses the evidence for multiple sclerosis abstract this study uses both risk risk and risk dollar approaches to assess intangible health losses associated with multiple sclerosis ms using an estimation approach that adjusts for potential perceptional biases that may affect the expressed risk tradeoffs we estimated parameters of the utility function of persons with and without ms as well as the degree of subjects overestimation of the probability of obtaining ms the sample included subjects from the general population and persons with ms we found that marginal utility of income is lower in the state with ms than without it however the difference in marginal utility in the two states was greater for persons without ms than for those with the disease persons with ms overestimated the probability of acquiring ms to a greater extent than did persons within ms correcting for overestimation of this probability the value of intangible loss of a statistical case of ms derived from responses of the general population was us 350 000 to us 500 000 persons with ms were willing to pay somewhat more than this d80 i18 j17

efficient estimation of structural hedonic systems when a product or job is not homogeneous but instead embodies several different characteristics it is difficult to use price information about the product to learn anything about the structure of the supply and demand for the embodied characteristics s rosen 1974 highlighted this problem and suggested that the estimated slope of the price characteristic relation the marginal price could be used instead of standard prices in otherwise standard estimation of the supply and demand system however recently brown and h rosen 1982 brown 1983 and mendelsohn 1985 have pointed out that this method is applicable only when the marginal price depends on variables not found in the supply and demand equations in this paper we show that since the hedonic system matches consumers with high demand for the characteristic to firms with low costs of producing it exogenous variables from the supply equation are not valid instruments in the demand equation and vice versa therefore even when the brown rosen mendelsohn brm condition holds estimation of the identified system by standard simultaneous equations techniques will produce inconsistent estimates we then show that the system can be identified despite the absence of the standard instruments and develop an efficient estimator for the identified system since cross equation constraints make estimation of hedonic systems particularly vulnerable to specification error we also consider some specification tests in this section we consider a simple model with only one characteristic the extension to several characteristics is straightforward the basic model developed by rosen can be described as follows firms with different technologies produce products which provide consumers with varying levels of some characteristic z each consumer buys one unit of the good the product is such that an amount of z from two units of the good provides less utility than the same amount of z embodied in a single unit e g acceleration in a car safety in a job consumers

beyond implicit prices recovering theoretically consistent and transferable values for noise avoidance from a hedonic property price model using a two stage hedonic pricing methodology we estimate a system of structural demand equations for different sources of transport related noise in the first stage we identify market segments using model based clustering techniques and estimate separate hedonic price functions hpfs for each segment in so doing we show how a semiparametric spatial smoothing estimator outperforms other standard specifications of the hpf in the second stage we control for non linearity of the budget constraint and identify demand relationships using techniques that account for problems of endogeneity and censoring of the dependent variable our estimated demand functions provide welfare estimates for peace and quiet that we believe to be the first derived from property market data in a theoretically consistent manner

willingness to pay and the distribution of risk and wealth willingness to pay wtp most economists believe is an appropriate benefits metric for government expenditure and regulatory policies that reduce risks to human life it depends however on the distribution of risk and wealth currently society s expenditures overemphasize concentrated risks say after the fact treatment as opposed to prevention a dead anyway effect complements excess attention to intense interests in explaining this our normative criterion for spending on risk reduction is what a rational albeit uninsured individual confronting lotteries on future risks to life and wealth would choose for himself this requires correcting wtp to eliminate the dead anyway effect but continues to reflect that wealth enhances the utility of living

noxious facilities environmental damages and efficient randomized siting this paper considers the efficient siting of a noxious facility that causes environmental damages for example increased pollution in the host community the analysis shows that there can be multiple efficient locations without transfers and that an efficient location need not have the smallest wta or wtp in general there exist randomized outcomes that are ex ante efficient and that pareto dominate efficient outcomes the analysis also shows that a community s most preferred lottery never provides full insurance under some conditions lotteries with no host compensation are pareto superior to those with compensation

willingness to pay for car safety evidence from sweden this study estimates a marginal willingness to pay wtp function for a road mortality risk reduction observed marginal wtp from the swedish car market is used and found to be positively correlated with the baseline risk of the cars no statistically significant relationships between examined owner attributes e g wealth and background risk and marginal wtp are found when comparing the estimated monetary value of a non marginal risk reduction derived from the integral of the marginal wtp function with an estimate based on marginal wtp we find in line with expectations that the difference between the estimates is negligible for smaller risk reductions and small 4 10 also for relatively large risk reductions

testing for risk aversion a stochastic dominance approach we conduct an experiment based on the stochastic dominance framework in order to investigate risk aversion in isolation of other effects such as subjective probability distortion the certainty effect and framing effects the result is striking most individuals are not risk averse 2001 elsevier science b v all rights reserved

the estimation of demand parameters in hedonic price models this paper shows that the econometric problem of estimating hedonic demand parameters is not a standard identification problem caused by demand supply interaction as has been often assumed estimation procedures based on this assumption lead to biased results the hedonic estimation problem is instead caused by the endogeneity of both prices and quantities when households face a nonlinear budget constraint an instrumental variables solution to this problem is suggested using instruments that exogenously shift the budget constraint

integration of multiple national markets for electricity the case of norway and sweden during the second part of the 1990s the nordic denmark finland norway and sweden countries have created a unique multinational market for electricity this paper aims to analyse the degree of integration of the different national markets that constitute the nordic electricity market in particular the norwegian and swedish wholesale and retail electricity markets are analysed the results suggest that the wholesale markets are well integrated thus prices differ significantly only during periods with unusually high or low supply of hydropower however the retail markets are not integrated to the same degree thus retail prices and trade margins differ significantly differences in the national electricity market legislation seem to be a key factor behind these differences

identifying hedonic models economic models for hedonic markets characterize the pricing of bundles of attributes and the demand and supply of these attributes under different assumptions about market structure preferences and technology see jan tinbergen 1956 sherwin rosen 1974 and dennis epple 1987 for contributions to this literature while the theory is well formulated and delivers some elegant analytical results the empirical content of the model is under debate it is widely believed that hedonic models fit in a single market are fundamentally underidentified and that any empirical content obtained from them is a consequence of arbitrary functional form assumptions the problem of identification in hedonic models is a prototype for the identification problem in a variety of economic models in which agents sort on unobservable to the economist characteristics models of monopoly pricing michael mussa and sherwin rosen 1978 robert wilson 1993 and models for taxes and labor supply james heckman 1974 sorting is an essential feature of econometric models of social interactions see william brock and steven durlauf 2001 in this paper we address the sorting problem in hedonic models nesheim 2001 extends this analysis to a model with peer effects in this paper we note that commonly used linearization strategies made to simplify estimation and justify the application of instrumental variables methods produce identification problems the hedonic model is generically nonlinear it is the linearization of a fundamentally nonlinear model that produces the form of the identification problem that dominates discussion in the applied literature linearity is an arbitrary and misleading functional form when applied to empirical hedonic models our research establishes that even though sorting equilibrium in a single market implies no exclusion restrictions the hedonic model is generically nonparametrically identified instrumental variables and transformation model methods identify economically relevant parameters even 1 without exclusion restrictions multimarket data widely viewed as the most powerful source of identification achieves this result only under implausible assumptions about why hedonic functions vary across markets

can expected utility theory explain gambling we investigate the ability of expected utility theory to account for simultaneous gambling and insurance contrary to a previous claim that borrowing and lending in perfect capital markets rules out a demand for gambles we show that expected utility theory with non concave utility functions can still explain gambling when the rates of interest and time preference are equal agents will seek to gamble unless income falls in a finite set of exceptional values when these rates differ there will be a range of incomes for which gambles are desired in both cases repeated gambling is not explained but market imperfections such as different borrowing and lending rates can account for persistent gambling provided the rates span the rate of time preference

wealth inequality and asset pricing in an arrow debreu exchange economy with identical agents except for their initial endowment we examine how wealth inequality affects the equilibrium level of the equity premium and the risk free rate we first show that wealth inequality raises the equity premium if and only if the inverse of absolute risk aversion is concave in wealth we then show that the equilibrium risk free rate is reduced by wealth inequality if the inverse of the coefficient of absolute prudence is concave we also prove that the combination of a small uninsurable background risk with wealth inequality biases asset pricing towards a larger equity premium and a smaller risk free rate the model of the representative consumer a la lucas 1978 failed to explain observed security prices more specifically as first stated by mehra and prescott 1985 the model predicts an equity premium that is too low and a risk free rate that is too high given the observed low variability of consumption growth a recent strand of the literature with papers by constantinides and duffie 1996 heaton and lucas 1996 and krusell and smith 1997 for example explores whether incomplete asset markets and heterogeneity among consumers can explain these puzzles constantinides and duffie 1996 in particular conclude that it is at least in principle possible to generate larger equity premia when such ingredients are introduced the aim of this paper is not to provide another explanation of the puzzles but rather to better understand the relationship between asset prices the heterogeneity of consumers wealth and the market incompleteness when markets are complete heterogeneous consumers are able to equalize their marginal rates of substitution across states and across time as shown by constantinides 1982 this implies that the equilibrium of the heterogeneous consumer economy can be duplicated by the equilibrium in a lucas economy with a representative agent this means that taking account of the heterogeneity in the population alone cannot explain why the representative agent model is rejected hansen and singleton 1982 this does not mean however that the distribution of wealth in the population for example has no effect on asset prices in general in order to understand this consider the departure from an egalitarian distribution of wealth by introducing a mean preserving transfer of endowment under decreasing absolute risk aversion poorer agents will be more risk averse whereas wealthier people will be less risk averse there is no reason a priori for that the group s attitude towards risk be unaffected by this transfer we first show that if absolute risk tolerance i e the inverse of the arrow pratt coefficient of absolute risk aversion is concave then the risk aversion of the agent with the mean wealth will be smaller than the risk aversion of the representative agent thus if an outside observer overlooks wealth inequality he consequently underestimates the aversion to risk of society this leads to

market constraints as a rationale for the friedman savage utility function since the classic paper by friedman and savage 1948 it has generally been accepted that the observed fact that individuals or firms participate in unfair lotteries and other forms of unfair risk taking may be explained by a section in the individual s utility function in which the individual shows risk preference rather than risk aversion in their model friedman and savage specify a utility function which is in turn concave convex and concave thus allowing for simultaneous purchase of insurance risk aversion and participation in lotteries risk preference however while their specified utility function is indeed capable of explaining observed behavior it does seem to be rather unsatisfactory in that it is an ad hoc specification it is the purpose of this paper to suggest a set of circumstances which give rise to a friedmansavage type utility function in particular it is shown that when certain capital market imperfections exist the utility function defined over intermediate wealth should be distinguished from and may have different properties than the one defined on final wealth then even if we accept the common assumption made in the literature that individuals are risk averse that is that their utility function is concave over final wealth it is still possible that they participate in unfair gambling and of course may also purchase insurance

public finance of private goods the case of college education this paper describes a contract theory of public finance of college education that explains why everyone pays for the college education of a lucky minority the contract provides gambles that families desire optimizing the contract determines the taxes paid by all members of society fees paid by those whose children go to college the fraction of children who are admitted to college and the quality of college education changes in wealth lead to changes in taxes and admissions but fees and quality are invariant the practice of using a cutoff level of precollege achievement to determine admission to college is justified by the theory

equilibrium income inequality among identical agents the paper offers a theory of income differences in which income inequality exists and persists despite identical tastes and talents teams of unskilled labor supervised by schooled managers produce goods with increasing returns to scale agents are assumed unable to borrow to fund the human capital investment needed to become managers despite ex ante identical agents the model displays the following equilibrium phenomena i risk averse agents accept fair gambles implying an unequal ex post distribution of unearned income ii agents agree to publicly subsidize education although those receiving the subsidy have the highest material wealth and iii income and educational differences are perpetuated from generation to generation

do the near elderly value mortality risks differently wage hedonic models are estimated with the health and retirement study to measure the risk wage tradeoffs value of statistical lives for older workers the analysis explicitly allows for multiple employment states including retirement using a multinomial selection model the results suggest that the oldest and most risk averse workers require significantly higher not lower compensation to accept increases in job related fatality risks

an entry and exit model on the energy saving investment strategy with real options this paper presents an improved decision model based on the real options approach presented by ansar and sparks 2009 for the firms that have not yet established energy saving equipment under the entry and exit strategies furthermore the proposed model takes account of the inevitable equipment renewal and the occurrence of unexpected events under the poisson jump process the timing for terminating an investment when continuous operations of that business are unprofitable is also explored to realize the optimal timing of implementing the energy saving strategy the future discounted benefit b follows the geometric brownian motion with the poisson jump process and the replacement of investment equipment a numerical analysis is followed by a sensitivity study of various parameters to better realize their impacts on the entry and exit thresholds the results show that for the jump case the higher probability of occurrence of unfavorable events will result in a higher entry threshold and lower exit threshold investors are forced to request higher benefit thresholds to cover the higher probability of losses brought by unfavorable events

knowledge based growth abstract this paper presents a model displaying sustained growth in output resulting from the accumulation of knowledge the accumulation of knowledge is endogenous determined by a level of study chosen by optimizing agents although knowledge can be owned and sold its equilibrium price is below its value to future production implying that the equilibrium suffers from a paretononoptimal underaccumulation of knowledge these features of the equilibrium result from two special properties of knowledge i an agent s stock of knowledge is undiminished by the transmission of that knowledge to someone else and ii the transmission of knowledge cannot be fully observed

the valuation of risks to life evidence from the market for automobiles using hedonic regression techniques estimates of the willingness to pay for changes in the risks of dying can be inferred from actual behavior in market situations involving risk dollar tradeoffs thaler and rosen 1975 pioneered this approach obtaining estimates of the value of a statistical life using labor market data in this paper we use the hedonic technique to obtain the first estimates of the value of a statistical life from data on the market for automobiles our estimated value of a statistical life for the sample as a whole is 3 357 million 1986 dollars copyright 1990 by mit press

economic man as a moral individual first there is the broadly ethical question how should one live to emphasize this connection is not the same as asserting that people will always act in ways they will themselves morally defend but only to recognize that ethical deliberations cannot be totally inconsequential to actual human behavior sen 1988 3 4 i introduction it is a plausible proposition that some people s behavior is affected significantly by moral considerations a growing literature in economics and related disciplines reviewed and analyzed in earlier work by two of the authors goldfarb and griffith 1991a griffith and goldfarb 1991b explores the possibility and desirability of incorporating these moral considerations into the economic analysis of individual behavior 1 a variety of approaches to introducing moral considerations into economic analysis have been put forward by contributors within economics including sen 1974 1977 1988 hirschman 1985 phelps 1975 vanberg 1988 brunner 1987 frank 1987 1988 hirshleifer 1985 mueller 1986 and schotter 1981 among others among related disciplines the philosophers gauthier 1986 and ulman margalit 1977 the sociologists coleman 1987 and etzioni 1986 1988 and the political scientist axelrod 1984 all present relevant analyses as our earlier review indicated these authors pursue three competing approaches introducing moral values as part of preference functions introducing moral norms or rules as constraints and introducing such norms as decision rules for coping with strategic interaction gaming situations we propose here a concrete method for including moral values in the economist s model of preferences our method maintains the standard economic framework of an agent maximizing his or her utility subject to constraints but modifies the utility function so that the enjoyment or utility from consuming a given set of goods varies in a lumpy or discontinuous way depending on the concurrent moral content of the individual s behavior moreover it offers an analytical representation of the linkage between preferring to act morally and the individual s being faced with possibly significant differences in constraints because of such moral considerations 2 the paper proceeds as follows section ii indicates where our approach fits in the existing literature incorporating moral values into preference functions section iii sets forth our approach to specifying these utility functions section iv suggests some extensions section v presents further discussion and conclusions ii relation to the literature while not directly inspired by the occupational choice literature our approach can be usefully viewed as an application of the economic model of occupational choice to modelling moral preferences 3 this approach helps fill an analytical gap between hochman and rodgers 1969 small modification of the standard microeconomic framework and the more extensive departures suggested by etzioni 1986 and sen 1974 1977 our model helps fill this gap by providing what we think is an intuitively appealing treatment of the discontinuous or lumpy content of important classes of moral decisions hochman and rodgers 1969 present an analysis of the possible relationship between moral and other values in the context of charitable transfers their analysis is now a standard ingredient in intermediate microeconomics textbooks 4 their interdependent utility approach puts impoverished individual y s income or utility into individual x s utility function one then analyzes the conditions under which individual x will either himself transfer resources to individual y or vote for a government program to make such a transfer this approach allows transfers that vary continuously from zero to very large amounts of money with decisions involving trade offs at the margin for our purposes this marginal trade off feature so useful for analyzing charitable transfers presents a very significant limitation when attempting to apply the model to a wider range of moral behavior

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

induced global risk preference abstract risk preference may be induced by scale economies unrelated to taste structure for an important set of functions exhibiting scale economies we give a the necessary condition for global risk preference induction and b sufficient conditions that preserve risk aversion

behavioral portfolio theory we develop a positive behavioral portfolio theory bpt and explore its implications for portfolio construction and security design the optimal portfolios of bpt investors resemble combinations of bonds and lottery tickets consistent with friedman and savage s 1948 observation we compare the bpt efficient frontier with the mean variance efficient frontier and show that in general the two frontiers do not coincide optimal bpt portfolios are also different from optimal capm portfolios in particular the capm twofund separation does not hold in bpt we present bpt in a single mental account version bpt sa and a multiple mental account version bpt ma bpt sa investors integrate their portfolios into a single mental account while bpt ma investors segregate their port folios into several mental accounts bpt ma portfolios resemble layered pyramids where layers are associated with aspirations we explore a two layer portfolio where the low aspiration layer is designed to avoid poverty while the high aspiration layer is designed for a shot at riches

inequality lobbying and resource allocation this paper describes how wealth inequality may distort public resource allocation a government seeks to allocate limited resources to productive sectors but sectoral productivity is privately known by agents with vested interests in those sectors they lobby the government for preferential treatment the government even if it honestly seeks to maximize economic efficiency may be confounded by the possibility that both high wealth and true economic desirability create loud lobbies broadly speaking both poorer economies and unequal economies display greater public misallocation the paper warns against the conventional wisdom that this is so because such governments are more corrupt jel d72 d78 d82 016 in this paper we propose a particular channel through which wealth inequality distorts the resource allocation process our analysis rests on four premises

risk preference and the work leisure trade off the paper investigates the interrelationships between the wage rate period of employment work leisure choice and the attitude toward risk the model makes risk preference endogenous given external forces acting on individual choice beginning with assumptions normally considered consistent with risk aversion namely concave utility with respect to leisure and wealth along with perfect markets rational behavior consistent with the insurance buying gambler is shown to be a reasonable possibility the theory also provides an explanation for the repeating gambler paradox

property prices and exposure to multiple noise sources hedonic regression with road and railway noise this study examines the effect of road and railway noise on property prices it uses the hedonic regression technique on a swedish data set that contains information about both road and railway noise for each property and finds that road noise has a larger negative impact on the property prices than railway noise this is in line with the evidence from the acoustical literature which has shown that individuals are more disturbed by road than railway noise but contradicts recent results from a hedonic study on data of the united kingdom

syndication institutionalization and lottery play1 why do people play the lottery since lottery tickets are assets with negative expected return lottery play challenges the basic assumptions of economic theory this article approaches lottery play from a networks perspective and focuses on syndicate play a comparison of the development of lottery markets in germany austria spain and portugal from the 17th century onward shows that lottery play declined with rising incomes except in countries in which syndicate play diffused widely namely spain and to a lesser extent portugal although syndicating originated among the relatively poor as a response to an increase in lottery prices it persisted even when individual play became affordable this article contends that syndicating endured because of an institutionalization process by which lottery tickets have transformed from purely economic assets into symbolic carriers of interpersonal ties that convey membership and status position in relevant social networks

downside loss aversion and portfolio management downside loss averse preferences have seen a resurgence in the portfolio management literature this is due to the increasing use of derivatives in managing equity portfolios and the increased use of quantitative techniques for bond portfolio management we employ the lower partial moment as a risk measure for downside loss aversion and compare mean variance m v and mean lower partial moment m lpm optimal portfolios under nonnormal asset return distributions when asset returns are nearly normally distributed there is little difference between the optimal m v and m lpm portfolios when asset returns are nonnormal with large left tails we document significant differences in m v and m lpm optimal portfolios this observation is consistent with industry usage of m v theory for equity portfolios but not for fixed income portfolios

gambles and the shadow price of death recent papers on the value of life involve preferences of the sort introduced by milton friedman and leonard savage 1948 1 given the choice between undergoing a particular gamble in wealth and possessing the mathematical expectation of the payoffs of the gamble the consumers in these studies may prefer the gamble the presence of such risk loving preferences is inferred from two well established facts life is an indivisible commodity in the models and indivisibility leads to preference for gambles the former fact is made clear by philip cook and daniel graham the latter was first noted by yew kwang ng 1965 and is widely known in spite of the obvious connection the implications of risk loving tastes in this area have not been explored this paper examines some implications of such risk loving the idea that indivisibility produces friedman savage preferences and that such preferences create a demand for gambles is extended in section i to a theory of demand for indivisible goods and derived demand for associated optimum gambles this theory suggests that the price of an indivisible good will not compensate for possessing or not possessing the good section ii applies the demand theory to an equilibrium model of labor supply that is relevant to the determination of the value of life in this model the wage diflerential is useful in guiding policy toward public risks in spite of the fact that the differential is not compensating i demand for gambles and demand for goods

daily momentum and contrarian behavior of index fund investors we use a two year panel of individual accounts in an s p 500 index mutual fund to examine the trading and investment behavior of more than 91 000 investors who have chosen a low cost passively managed vehicle for savings we identify classes of momentum investors and contrarian investors we use these classes to build up behavioral factors based on contrarian and momentum flows and we show that they are relevant for pricing they perform well against a benchmark of loadings on latent factors extracted from returns

fixed cost of work and the demand for lotteries abstract a fixed cost of work is sufficient to induce risk averse individuals who obey the expected utility hypothesis to demand lotteries the critical assumption needed to generate this demand is that leisure is a normal good

simultaneity in the market for housing characteristics abstract the nature of simultaneity in the markets for housing characteristics is examined simultaneity is found to arise in the implicit markets for individual characteristics because of the presence of nonlinearity in the market hedonic price function for housing however this simultaneity is not the kind discussed by s rosen j political econ 82 34 55 1974 between firm supplies and household demands as a result the rosen suggestion of identifying demand with firm supply shifters is inappropriate among the alternative approaches to identification the most desirable involve use of data over two or more markets in which residence for a given household is exogenous to the choice of housing

prospect theory much ado about nothing prospect theory is a paradigm challenging the expected utility paradigm one of the fundamental components of prospect theory is the s shaped value function the value function is mainly justified by experimental investigation of the certainty equivalents of prospects confined either to the negative or to the positive domain but not of mixed prospects which characterize most actual investments we conduct an experimental study withmixed prospects using for the first time recently developed investment criteria called prospect stochastic dominance psd and markowitz stochastic dominance msd we reject the s shaped value function showing thatat least 62 76 of the subjects cannot be characterized by such preferences we find support for the markowitz utility function which is a reversed s shaped function exactly the opposite of the prospect theory value function it is possible that the previous results supporting the s shaped value function are distorted because the prospects had only positive or only negative outcomes presenting hypothetical situations which individuals do not usually face and which are certainly not common in financial markets

on efficient distribution with private information this paper is a study of the dynamics of the efficient distribution of consumption in an exchange economy with many consumers each of whom is subject to private idiosyncratic taste shocks we propose a recursive method for finding feasible allocations that are incentivecompatible and that are pareto optimal within this set the method is applied to several parametric examples we find that in an efficient allocation the degree of inequality continually increases with a diminishing fraction of the population receiving an increasing fraction of the resources we discuss the extent to which these allocations can be decentralized via market arrangements this paper is a study of the dynamics of the efficient distribution of consumption in an exchange economy with private information the economy we study has a constant endowment flow of a single non storable consumption good which is to be allocated each period among a large number of consumers each period these consumers experience unpredictable idiosyncratic privately observed taste shocks affecting their marginal utility of current consumption efficiency dictates that more resources be allocated to those consumers who in any given period have a high marginal utility of current consumption

inflow shortages in deregulated power markets reasons for concern in many countries hydropower constitutes a large share of the electricity producing capacity in the earlier regulated electricity markets production capacities exceeded demand due to security of supply concerns the present deregulated markets base investments upon profitability alone and security of supply issues are claimed to be less important market operators trust the pricing mechanism in competitive markets to clear then low inflow constitutes a less problem several markets both under regulated and deregulated regimes have faced serious droughts some of them have experienced problems with market clearance chile brazil california while other markets functioned well the nordic market important features to the market response are the flexibility of demand the pattern of inflow shortage the storage capacities the possibility of trade between regions with different production technologies and the market design and concentration we apply an empirical based market model to simulate the effects under two inflow shortage scenarios in an international market with combined hydro and thermal capacities and restricted transmission capacities we compare the scenarios with actual events and show that the model and the real market outcome are comparable the simulations do not reveal any problems with the functioning of the market which should calm down the anxiousness about security of supply in deregulated markets with stochastic energy supply

the valuation of nonsystematic risks and the pricing of swedish lottery bonds swedish government lottery bonds have coupon payments determined by lottery they offer a unique opportunity to study a security with uncertain payoffs having a known observable distribution the risk associated with the lotteries is idiosyncratic by construction and should not command a risk premium in equilibrium the bonds are traded in two forms allowing us to evaluate the rewards to bearing extra lottery risk despite its idiosyncratic nature we find prices appear to reflect aversion to this risk we evaluate the empirical determinants of this differential pricing and possible explanations for it article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

survival versus consumption we develop an indirect method to estimate utility and willingness to pay wtp for reductions in the risk of death at various ages using a life cycle model of consumption we assume that an individual sets his consumption level each year so as to maximize his expected lifetime utility alternative assumptions about opportunities for borrowing and annuities characterize two polar types of societies in our robinson crusoe case an individual must be entirely self sufficient and annuities are not available in our perfect markets case an individual can borrow against future earnings and purchase actuarially fair annuities we show that under these assumptions wtp is the sum of livelihood discounted expected future earnings and consumer surplus to illustrate our methods we derive wtp for an average financially independent american man under plausible assumptions the model is calibrated to 1978 earnings e g 18 000 per year for men aged 45 54 with at least some income in the robinson crusoe case wtp increases from 500 000 at age 20 to a peak of 1 250 000 at age 40 and declines to 630 000 at age 60 in the perfect markets case age variations are less pronounced wtp is 1 050 000 at age 20 peaks at 1 070 000 at age 25 and declines to 600 000 at age 60 these results suggest that individuals value risks to their lives at several times the pro rata share of their future earnings

a tale of two cities and a giffen good a scenario is provided in which a house in eden mills ontario is a giffen good the conditions derived in the example apply to other indivisible goods as well jel classification d11

an intertemporal analysis of the interdependence between risk preference retirement and work rate decisions indivisibilities in consumption investment choice of employment and so forth have been used by others to justify the behavior of the insurance buying gambler unfortunately these theories ignore the market incentives to make the indivisible divisible through leasing or variation in quality as well as individual initiative through borrowing and lending in this paper the same behavior toward risk is explained without resort to indivisibilities or market imperfections using the effect of work rates and retirement decisions on lifetime earning profiles this is done using assumptions normally consistent with risk aversion diminishing marginal utility of consumption and time separable utility

rational expectations equilibrium with conditioning on past prices a mean variance example abstract the paper uses an intertemporal mean variance model of the market for a dividend paying risky asset to analyse rational expectations equilibria when all agents condition their expectations on past rather than current prices the main result shows that if the time span between successive market periods is short the market will approximate full informational efficiency arbitrarily closely yet the returns to being informed are bounded away from zero this contrasts with the grossman stiglitz proposition that markets cannot come close to informational efficiency if the acquisition of information is costly

allocative efficiency of markets with zero intelligence traders market as a partial substitute for individual rationality we report market experiments in which human traders are replaced by zero intelligence programs that submit random bids and offers imposing a budget constraint i e not permitting traders to sell below their costs or buy above their values is sufficient to raise the allocative efficiency of these auctions close to 100 percent allocative efficiency of a double auction derives largely from its structure independent of traders motivation intelligence or learning adam smith s invisible hand may be more powerful than some may have thought it can generate aggregate rationality not only from individual rationality but also from individual irrationality

the marginal utility of income does not increase borrowing lending and friedman savage gambles there has been a great deal of discussion about whether the marginal utility of income rises with income most notably milton friedman and leonard j savage argued in their classic paper that the willingness to gamble implies that the marginal utility of income is rising over a range the discussions of rising marginal utility and of friedman savage gambles have proceeded independently of the literature on time preference although the issues are in fact related logically drawing on this logical relationship we shall show 1 that at least when intertemporal utility is separable the stable levels of consumption that are usually observed imply that the marginal utility of income decreases as income rises 2 even if the marginal utility of income does increase friedman savage gambles normally will not maximize utility saving and dissaving can attain the levels of consumption which generate the most utility per dollar of income at a lower cost than gambles unless imperfections in the capital market are severe 3 even when the utility function is not temporally separable repeated gambling cannot be a rational way of dealing with a rising marginal utility of income we therefore conclude that observed gambling is seldom if ever explained by the logic set out in friedman and savage s seminal paper in view particularly of the stability of consumption levels and the lack of friedmansavage gambles we conclude that marginal utility of income does not rise with income i a conceptual framework

willingness to pay and sensitivity to time framing a theoretical analysis and an application on car safety stated preference sp surveys attempt to obtain monetary values for non market goods that reflect individuals true preferences numerous empirical studies suggest that monetary values from sp studies are sensitive to survey design and so may not reflect respondents true preferences this study examines the effect of time framing on respondents willingness to pay wtp for car safety we explore how wtp per unit risk reduction depends on the time period over which respondents pay and face reduced risk in a theoretical model and by using data from a swedish contingent valuation survey our theoretical model predicts the effect to be nontrivial in many scenarios used in empirical applications in our empirical analysis we examine the sensitivity of wtp to an annual and a monthly scenario our theoretical model predicts the effect from the time framing to be negligible but the empirical estimates from the annual scenario are about 70 higher than estimates from the monthly scenario

a regional energy paradox the case of central norway abstract central norway is expected to have a gap of 8 twh in 2010 because of heavy investments in energy intensive industries the region has two landing sites for natural gas and a considerable potential for wind power to cover the gap small scale hydropower and upgrading of existing hydropower plants also constitute a regional energy potential paradoxically the most realistic investment prospect seems to be extensive investments in new transmission lines to cover the supply deficit the aim of this paper is to present a problem of regional supply security and public intervention to illustrate and discuss the challenges of arriving at long term capacity adequacy in deregulated electricity markets

challenges when electricity markets face the investment phase abstract deregulation of electricity industry in europe has tended to start with a grace period of energy surplus inherited from the previously expansive coordinated economies and further amplified by better resource utilisation from extended international trade the regulatory challenge has therefore primarily been to allocate existing generation to consumers in an efficient way however as energy demand increases due to economic growth the challenge of providing new capacity surfaces the nordic region which has been a pioneer in internationalising and deregulating electricity is now approaching this stage ahead of most of the rest of europe while the nordic case is characterised by specificities related to hydropower it also raises the more general challenge of capacity expansion under a deregulated market economy the article therefore discusses how the nordic investment challenges of today shed light on more generic challenges that may become more general european challenges of tomorrow in a final section the article discusses policy options available to address the investment price hike challenge the argument is put forward that recursion to some degree of coordinated governance might seem necessary if solutions are confined within large scale technical systems however within the context of a small scale decentralised technological development one may be more confident of competitive solutions

the spirit of capitalism and stock market prices in existing theory wealth is no more valuable than its implied consumption rewards in reality investors acquire wealth not just for its implied consumption but for the resulting social status max m weber 1958 refers to this desire for wealth as the spirit of capitalism the authors examine both analytically and empirically implications of weber s hypothesis for consumption savings and stock prices when investors care about relative social status propensity to consume and risk taking behavior will depend on social standards and stock prices will be volatile the spirit of capitalism seems to be a driving force behind stock market volatility and economic growth copyright 1996 by american economic association

individual vs aggregate preferences the case of a small fish in a big pond we study the relationship between the risk preferences of individuals and the risk preferences of the aggregate economy to emphasize the vast differences that can occur between individual and market preferences brought about through aggregation we assume an economy consisting entirely of risk seekers we show that such individuals can lead to an aggregate economy that is risk averse the converse is also true an aggregate economy that exhibits risk aversion does not imply an economy of individual risk averters an economy demanding a risk premium can be formed from individuals who do not demand such compensation understanding the relationship between the preferences of individuals and the preferences of the aggregate economy is crucial for understanding the connection between the behavioral finance literature which focuses on individual preferences and the asset pricing literature which focuses on aggregate prices we discuss empirical implications of these results this paper was accepted by wei xiong finance

optimal strike prices of stock options for effort averse executives abstract this paper evaluates the common practice of setting the strike prices of executive option plans at the money hall and murphy hall brian murphy kevin j 2000 optimal exercise prices for executive stock options american economic review 90 2 209 214 claim this practice to be optimal since it maximizes the sensitivity of compensation to firm performance however they do not incorporate effort and the possibility that managers are effort averse into their model we revisit this question while explicitly introducing these factors and allowing the reward package to include fixed wages options and stock grants we simulate the manager s effort choice and compensation as well as the value of shareholders equity under alternative compensation schemes and identify schemes that are optimal our simulations indicate that when abstracting from tax considerations it is optimal to award managers with options that will most likely be highly valuable i e substantially in the money on their expiration date prior to 2006 the tax code and financial reporting standards provided incentives to award options that are closer to the money when issued than the options that were optimal in the absence of these considerations recent tax and reporting changes voided these incentives and thus we predict that these changes will induce firms to issue options with lower strike prices than those that were issued prior to 2006

status the distribution of wealth private and social attitudes to risk this paper supposes an individual cares about his her own wealth not only directly but also via the relative standing that this wealth induces the implications for risk taking are investigated in particular such a model provides a natural explanation of the concave convex concave utility described by friedman and savage however there are a number of key differences between the present model and any model based on own wealth alone for example an equilibrium wealth distribution here may have a middle class further the status interaction involves an externality and an equilibrium wealth distribution may be pareto inefficient but also about the implied relative standing in the distribution of wealth has a long but checkered history an early exponent of such ideas was of course veblen 1899 it is indeed a notion which most economists reject albeit usually without explicit comment a notable and articulate exception however is frank 1985 for example see also the references frank cites on pp 33 34 it is however a notion with substantial intuitive appeal and it seems useful to ascertain its consequences before coming to a final judgement as to its merits the present paper is concerned with deriving the consequences of such valuation of status for risk taking what seems to be the sharpest possible model is adopted here this assumes that what is essentially ordinal rank in the wealth distribution enters von neumann morgenstern utility as an argument in addi tion to wealth itself thus higher wealth increases utility not only directly but also indirectly via higher status in the interests of both simplicity and drama it is typically assumed here that all individuals have identical utility functions which are concave in wealth but convex in status section 2 discusses how the model provides a natural explanation of the fundamental phenomenon addressed by friedman and savage 1948 that individuals may simultaneously purchase insurance and participate in lotteries although each individual here has a utility function which is concave in wealth itself utility can nevertheless be convex in wealth over some range when the indirect effect via status is included this effect is enhanced by the convexity of utility in status but will follow in any case if increasing wealth entails moving up in status much more rapidly than losing wealth entails moving down it is shown

risk preferences and transaction costs kahneman and tversky have collected evidence of behavior in the face of risk which is seemingly at odds with von neumann morgenstern expected utility theory to account for their observations they propose a new approach which they christen prospect theory this note argues that introducing transactions costs into expected utility theory systematically accounts for many empirical results without unduly straining the conventional analysis it may therefore be premature to abandon expected utility theory

hedonic pricing of agriculture and forestry externalities in this study the hedonic price method was used toidentify and monetarize some of the external effectsof agricultural and sylvicultural activities weexamined the renting price of ruralself catering cottages or gites intensivelivestock farming caused the renting price ofgites to decrease whereas permanent grassland hadthe opposite effect

exploring benefit transfer disamenities of waste transfer stations the benefit transfer method was developed as an alternative way to value externalities using values from studies of similar circumstances carried out at similar sites somewhere else given the challenges and high costs inherent in assessing the actual cost specifically in order to test the performance of the benefit transfer method employing hedonic price models this study focused on estimates of disamenities associated with waste transfer stations at four different cities in israel the sites were intentionally selected to represent a variety of circumstances we transferred the estimated benefit function from a study site to a policy site the goodness of fit was examined by comparing the calculated value with actual data from the policy site to test the sensitivity of the benefit transfer function to socioeconomic and housing characteristics it was repeatedly applied to different sets of observations the findings suggest that a relatively large number of alternative benefit functions are transferable statistical inequality outcome regarding the degree of similarity between samples does not unequivocally rule out the appropriateness of transferring environmental values across studies transfer errors varied between 21 and 29 and the absolute average error for all transfers was 15 4 errors were lower for transfer between relatively similar cities in terms of size and location and between sub samples that were similar in socioeconomic characteristics and housing type however when a site with very dissimilar data was involved the average absolute error rose to 19

hedonic prices and implicit markets estimating demand and supply functions for differentiated products in choosing the level of quality to purchase the buyer of a differentiated product also chooses a point on the marginal price schedule for that product hence in general the demand functions for product characteristics cannot be consistently estimated by ordinary least squares market equilibrium results in a matching of characteristics of demanders and suppliers this matching restricts the use of buyer and seller characteristics as instruments when estimating demand and supply functions for product characteristics the paper develops these issues a stochastic structure for hedonic equilibrium models is then proposed identification results are presented and estimation procedures are outlined