securitization of taxes implicit in payg pensions to preserve solvency a pay as you go payg pension system needs to adjust contribution rates and pension promises over time currently it is not possible to hedge in the financial market against politically determined uncertainty as regards these parameters i consider a policy reform whereby property rights are established on the implicit lifetime tax levied by payg finance and are assigned to the pension institution these property rights are well defined if the reform also features rule based allocation of aggregate risk in the form of defined contribution or defined benefit schemes i show that a payg pension system may indeed be instantly restructured so as to minimize political risk and allow financial market diversification of risk a side benefit is securitization of human capital flows which are not traded in existing financial markets the new securities if traded in appropriately competitive financial markets are complementary to the notional account reforms of the 1990s however fiscal instability can increase if securitization is implemented in the absence of initial solvency and credible adoption of rule based methods to allocate aggregate risk salvador valdes prieto

new results on the relationship among risk aversion prudence and temperance abstract this note studies the relationships between different aspects of agent s preferences toward risk we show that under the assumptions of non satiation and bounded marginal utility prudence implies risk aversion imprudence implies risk loving and that temperance implies prudence intemperance implies imprudence the implications of these results for comparing risks in the cases of increase in risk increase in downside risk and increase in outer risk are discussed

willingness to pay for stochastic improvements of future risk under different risk aversion abstract within a general intertemporal decision making framework this work shows one individual with more k th degree k 2 n ross risk aversion always chooses more current paying to improve his future payoff distribution when such stochastic improvement satisfies the n th degree mean preserving stochastic dominance moreover when stochastic improvement of the future payoff distribution is not mean preserving the notions of linearly quadratically restricted more ross risk aversion proposed by eeckhoudt liu and meyer 2017 can help provide a clear cut comparative statics analysis

the nonparametric risk adjusted efficiency measurement an application to taiwan s major rural financial intermediaries in this article a nonparametric approach is used to incorporate risk into the measurement of technical efficiencies of the major financial intermediaries in rural taiwan risk is treated as a joint but undesirable output given the fact that various regulatory actions may prevent its free disposability three risk indicators nonperforming loans allowance for loan losses and risky assets are employed alternatively in the empirical work results suggest that all three risk constraints are binding regulations on controlling risky assets and loan loss reserves are effective but more burdensome than those on controlling loan quality

ambiguity aversion in buyer seller relationships a contingent claims and social network explanation negotiations between buyers and sellers or suppliers of goods and services have become increasingly important due to the growing trend towards international purchasing outsourcing and global supply networks together with the high uncertainty associated with them this paper examines the effect of ambiguity aversion on price negotiations using multiple priors based real options with non extreme outcomes we study price negotiation between a buyer and seller in a dual contingent claims setting call option holding buyer vs put option holding seller to derive optimal agreement conditions under ambiguity with and without social network effects we find that while higher ambiguity aversion raises the threshold for commitment for the seller it has equivocal effects on the buyer s negotiation prospects in the absence of network control conversely when network position and relative bargaining power are accounted for we find the buyer s implicit price or negotiation threshold decreases or increases unequivocally with increasing aversion to ambiguity extending extant real options research on price negotiation to the case of ambiguity this set of results provides new insights into the role of ambiguity aversion and network structures in buyer seller relationships including how they influence the range of negotiation agreement between buyers and sellers the results also help assist managers in formulating robust buying selling strategies for bargaining under uncertainty by knowing their network positions and gathering background information or inferring the other party s ambiguity tolerance beforehand buyers and sellers can anticipate where the negotiation is heading in terms of price negotiation range and mutual agreement possibilities

optimal self protection in two periods on the role of endogenous saving self protection is a costly investment to reduce the probability of loss this paper studies optimal self protection in a two period model with endogenous saving in a setting with a binary loss we show that prudence is negatively associated with the optimal level of self protection consistent with results obtained in single period models we provide intuition for this finding with the help of a recent approach based on stochastic dominance furthermore we determine the effect of interest rate risk on optimal self protection and study a model in which a decision maker engages in advance effort to increase the probability of facing a better risky situation all our results suggest that the understanding of advance self protection crucially hinges on whether the decision maker also uses saving to optimize intertemporal consumption utility if so the fact that self protection expenditures are upfront turns out to be irrelevant

meaning and credibility in cheap talk games i define neologism proofness a refinement of perfect bayesian equilibrium in cheap talk games it applies when players have a preexisting common language so that an unexpected message s literal meaning is clear and only credibility restricts communication i show that certain implausible equilibria are not neologism proof in some games no equilibrium is journal of economic literature classification numbers d83 d82 c73

dynamic delegation of experimentation i study a dynamic relationship where a principal delegates experimentation to an agent experimentation is modeled as a one armed bandit that yields successes following a poisson process its unknown intensity is high or low the agent has private information his type being his prior belief that the intensity is high the agent values successes more than the principal does so prefers more experimentation the optimal mechanism is a cutoff rule in the belief space the cutoff gives pessimistic types total freedom but curtails optimistic types behavior pessimistic types over experiment while the most optimistic ones under experiment this delegation rule is time consistent

governing adaptation super 1 to remain competitive an organization must both respond to information about its environment and coordinate its activities we analyse how the allocation of decision rights within an organizational hierarchy influences the organization s ability to solve such problems of coordinated adaptation when information is both soft and distributed inside the organization and the organizational participants behave strategically the results show that contrary to the common intuition the performance differential between centralized and decentralized decision making is non monotone in the importance of coordination further both these common structures are dominated by asymmetric structures in sufficiently asymmetric environments such as a small division developing a new product in the presence of a large division with an established product finally if the incentive conflicts between the participants can be made sufficiently small centralized decision making is always dominated by decentralized decision making copyright 2008 wiley blackwell

risk and precautionary saving in two person households the existing literature on precautionary saving is based almost entirely on the assumption that the household acts as if it consisted of a single individual decision taker in reality saving decisions are typically taken by two person households this paper examines the implications of this observation for the existence of precautionary saving and shows that the assumption that the individual utility functions satisfy the conditions for precautionary saving to exist can imply that the household exhibits precautionary saving but only under strong assumptions on the type of risk change being considered

the political intergenerational welfare state abstract using a three period overlapping generations economy framework we characterize an intergenerational welfare state with endogenous education and pension under voting we show that although politically establishing pay as you go payg social security in isolation in a dynamically efficient economy will always reduce the capital investment and therefore the social welfare as expected in contrast politically implementing education pension policy package instead can improve both human and physical capital accumulation and social welfare over laissez faire however for this the political influence of the old has to be small thus limiting the size of the payg social security program

credit rationing or entrepreneurial risk aversion a comment cressy 2000 argues that the positive correlation between assets and the rate of business startups is due to dara preferences we show however that the required property is prudence and prudence is consistent with dara iara or cara

economic efficiency and downside risk this article investigates the impact of downside risk on cost and revenue efficiency re for a sample of farms downside risk or loss below a certain level of return is a concern regardless of producer risk preferences and thus a suitable measure of risk to use downside risk was measured as the weighted summation of net farm income below the amount needed for unpaid labour during the previous 10 years cost and re were estimated using traditional input and output measures and then re estimated including each farm s downside risk comparisons were made between the efficient farms with and without downside risk and the average for all farms as expected downside risk plays an important role in explaining farm inefficiency failure to account for downside risk overstates inefficiency and can lead to unrealistic expectations in potential efficiency improvements

ranking contingent monitoring systems this paper seeks to provide a ranking of information systems in a setting of contingent monitoring control strategies that make the acquisition of additional information conditional on observing certain outcomes largely elude the existing ranking criteria we show that this happens because contingent monitoring involves more than the classical trade off between risk sharing and incentives it also requires a balancing of incentives and downside risk we then develop a refinement of the most common information system orderings that conveys this feature this allows us to reinterpret and generalize some of the literature s key results concerning for instance auditing policies with independent or with correlated signals and monitoring systems where the precision of an added signal is endogenous

social security privatization a structure for analysis this paper identifies the key economic issues that must be addressed in the debate over a privatized social security system we examine a two pillar plan the first pillar would consist of a demogrant a small indexed pension of the same dollar amount for all retirees who had contributed to the system over a full lifetime of work the second pillar would consist of a fully funded individual defined contribution account financed by payroll taxes held in financial institutions and directed by participants we explore how such a system would affect the risks households face how it would alter the distribution of income and how it might influence household behavior including incentives to work and save and portfolio choices we also examine macroeconomic issues how the transition to a private plan would occur and what the likely effects would be on national saving we conclude that a two pillar system offers several positive features namely a reduction in political risk an increase in household portfolio choice and improved work incentives disadvantages include less redistributiveness and national risk sharing and increased administrative costs this abstract was borrowed from another version of this item

a theory of credibility this paper presents models in which one agent must decide whether to trust another whose motives are uncertain reliability can only be communicated through actions in this context it pays for people to build a reputation based on reliable behaviour someone becomes credible by consistently providing accurate and valuable information or by performing useful services the theory provides a justification for long term arrangements without binding contracts it also describes those situations where it pays an agent to cash in on his reputation many decisions depend on trusting someone consumers must decide whether to believe advertisements banks need to judge the reliability of loan applicants and employers must decide how much responsibility to delegate to their employees this paper attempts to model situations that arise when someone is uncertain about whether to trust the people he deals with in this context reputations for reliability are valuable an agent becomes credible by consistently providing accurate valuable information or by always acting responsibly i analyse a series of simple abstract models of information transmission in the basic model there are two agents the sender s and the receiver r who are to play the game a known finite number of times at each stage both players learn the value of a parameter measuring the importance of that period s play of the game that is the value of making a correct decision and s obtains payoff relevant information s then sends a signal to r who makes a decision that affects the welfare of both players after both players learn the consequences of r s decision the process repeats at each stage r must decide what action to take in order to do that he must assess the credibility of s the difficulty arises because r is uncertain about s s preferences when play begins i model this by assuming that with positive probability s has identical preferences to r s is a friend and with positive probability s has completely opposed preferences to r s is an enemy this uncertainty creates a trade off for enemy senders at each stage providing honest information enhances s s reputation but only at the expense of foregoing an opportunity for immediate gain by duping r the possibility that s is a friend lends credibility to what he says but this credibility may also be exploited by an enemy s the principal equilibrium has the following form in the basic model where s has no control over the importance of a given play s typically conveys accurate information for the first several periods r raises the probability he places on s being friendly after receiving accurate information if he believes that an enemy would have lied to him with positive probability the more important the information the more likely an enemy will attempt to deceive r an enemy will eventually take advantage of r by misleading him when this happens the sender loses all opportunities for deception in the future i

on the productive value of biodiversity the paper investigates the value of biodiversity as it relates to the productive value of services provided by an ecosystem the value of biodiversity is linked with a deterioration in the functioning of the ecosystem the analysis examines how the value of an ecosystem can be greater than the sum of its parts first we propose a general measure of the productive value of biodiversity the measure involves an experiment that divides the ecosystem into sub systems that are less diverse keeping aggregate resources constant second the value of biodiversity is decomposed into four components reflecting the role of complementarity scale convexity and catalytic effects this provides new and useful information on the sources determinants and dynamics of biodiversity value

negotiating the italian pension reform with the unions lessons for corporatist theory using field research at both the national and the local levels the author reconstructs the process that led to pension reform in italy this reconstruction becomes the basis for a critical re examination of corporatist theory which has recently been challenged by the emergence of social pacts in a host of unlikely countries including italy the author argues that the theory s traditional emphasis on hierarchical and internally undemocratic interest groups is fundamentally at odds with the particular organizational mechanisms through which consensus was mobilized among both middle level union structures and rank and file workers in italy in contrast with standard neo corporatist theory the italian pension reform shows that organizational democracy far from weakening the hands of reformist union leaders may actually strengthen them

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

a study of bank efficiency taking into account risk preferences abstract i use the stochastic cost frontier approach to investigate efficiency of banks operating in the third federal reserve district accounting for the quality and riskiness of bank output in addition to the mean and mode of the conditional distribution of the one sided error term i calculate confidence intervals for the inefficiency measures based on the conditional distribution the results indicate that third district banks are operating at cost efficient output levels and product mixes but are not efficiently using their inputs the second part of the article relates the inefficiency measures to several correlates

regulating a model abstract we study a situation in which a regulator relies on risk models that banks produce in order to regulate them a bank can generate more than one model and choose which models to reveal to the regulator the regulator can find out the other models by monitoring the bank but in equilibrium monitoring induces the bank to produce less information we show that a high level of monitoring is desirable when the bank s private gain from producing more information is either sufficiently high or sufficiently low when public models are more precise banks produce more information but the regulator may end up monitoring more

decentralization duplication and delay we argue that although decentralization has advantages in finding low cost solutions these advantages are accompanied by coordination problems which lead to delay or duplication of effort or both consequently decentralization is desirable when there is little urgency or a great deal of private information but it is strictly undesirable in urgent problems when private information is less important we also examine the effect of large numbers and find that coordination problems disappear in the limit if distributions are common knowledge

monotonicity of asset price toward higher changes in risk abstract this note gives the conditions on preferences to guarantee the monotonicity of asset prices when the payoffs of the risky asset change in the sense of the n th stochastic dominance and with an n th degree increase in risk those conditions are expressed in terms of the sign of the successive derivatives of the utility function coupled with the relative risk aversion of higher orders less than their benchmark values

the future of pensions in europe rescuing unfunded pensions suitably amended unfunded schemes remain a good idea unfunded state pension schemes are projected to become financially unsustainable this is usually attributed to demographic trends yet trends in unemployment and in female labour force participation are quantitatively as important improvements in either or both might be sufficient to rescue existing state schemes especially if combined with an end to the practice of allowing even after retirement the value of a pension to rise with national earnings rather than prices attempts at piecemeal reform are important because nothing in economic theory suggests a switch to the alternative fully funded pensions is desirable not only would such a transition be costly and therefore politically difficult it also neglects the fact that it makes sense to diversify the retirement portfolio holding claims both on labour productivity and on capital assets one can even view pensions as part of a more sophisticated system of intergenerational transfers through which workers finance their earlier education and subsequent retirement michele boldrin juan j dolado juan f jimeno and franco peracchi

tailored to the extremes quantile regression for index based insurance contract design a new approach for weather index based insurance design based on quantile regression qr to condition the yield index dependency is developed and compared to standard regression technique three conceptual different risk measures i e expected utility expected shortfall and a spectral risk measure are used to evaluate the risk reducing properties of these contracts our findings show that qr is much more powerful in establishing the yield index dependency and lead for all risk measures to a higher risk reduction than the standard technique ordinary least squares ols thus qr leads to a more efficient contract design which is beneficial for both the insurer smaller remaining risk and the insured higher demand and willingness to pay our empirical application is based on a 31 years long time series of wheat yield data from northern kazakhstan

the missing piece in policy analysis social security reform this lecture discusses the economic losses that result from an unfunded social security retirement system and the potential gain from shifting to a funded system the social security payroll tax distorts labor supply and the form in which compensation is paid although each individual s benefits are linked to that individual s previous payroll tax payments the low equilibrium rate of return inherent in an unfunded system implies a net payroll tax that causes distortions the resulting deadweight loss is 1 of each year s gdp in perpetuity an amount equal to 20 of payroll tax revenue and a 50 increase in deadweight loss of the personal income tax also there is the loss of investment income resulting from forcing employees to accept the low implicit return of an unfunded program rather than the much higher return paid on private saving or in a funded social security program the present value of the annual losses from using an unfunded system exceeds the benefit to those who received windfall transfers when the program began and when it expanded shifting to a funded program cannot reverse the crowding out of capital that has already occurred recognizing the existing unfunded obligation only makes that piece of the national debt explicit but shifting to a funded program limits crowding out of capital formation to the amount that already occurred future increases in annual saving that result from economic growth are able to earn the higher rate of return on real capital the present value of these gains is equivalent to a perpetuity of more than 2 of gdp a year the combi nation of improved labor market incentives and higher real return on saving has a net present value gain of more than 15 trillion an amount equivalent to three percent of each future year s gdp forever this abstract was borrowed from another version of this item

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

liability insurance under the negligence rule we analyze the e ciency properties of the negligence rule with liability insurance when the tort feasor s behavior is imperfectly observable both by the insurer and the court e ciency is shown to depend on the extent to which the evidence is informative on the evidentiary standard for nding negligence and on whether insurance contracts can condition directly on the same evidence as used by courts to assess behavior when evidence is not directly contractible the negligence rule with compensatory damages is generally ine cient

the welfare effects of crop biodiversity as an adaptation to climate shocks in kenya abstract this paper investigates the effects of crop biodiversity on farm income and production risk using a large panel dataset of rural households in kenya we consider three different metrics of in situ on farm crop diversification richness evenness and concentration we apply a partial moments based model to test the effects of each strategy on welfare defined as expected crop income variability variance and downside risk skewness our comprehensive econometric approach differentiates climatic shocks weather and climate change the results suggest that the benefits from greater diversification in terms of enhanced land productivity and lower production costs could surpass the foregone benefit from greater efficiency associated with more concentrated production systems crop richness and evenness each reduce exposure to crop income risk especially for more vulnerable farmers who produce below the expected revenue threshold farmers who rely on greater crop specialization on the contrary are more exposed to crop income risk

alternative approaches to comparative nth degree risk aversion this paper extends the three main approaches to comparative risk aversion the risk premium approach and the probability premium approach of pratt 1964 risk aversion in the small and in the large

asset smoothing consumption smoothing and the reproduction of inequality under risk and subsistence constraints abstract a growing literature asks whether low wealth agents can accumulate assets over time or whether they are trapped in poverty this paper develops a stochastic dynamic programming model with endogenous asset price risk to explore savings and portfolio decisions in a resource poor environment characterized by risk and subsistence constraints optimal portfolio strategies are found to bifurcate despite divisible assets and fully rational agents wealthier agents acquire a higher yielding portfolio and pursue conventional consumption smoothing poorer agents acquire a less remunerative portfolio and pursue asset smoothing rather than consumption smoothing asset based risk coping thus results in positive correlation between initial wealth and portfolio rate of return

risk efficiency and the adoption of modern crop varieties evidence from the philippines efficiency among farmers of less developed countries has been the focus of numerous studies since t w schultz hypothesized that farmers in developing agricultures are poor but efficient 1 a growing body of literature supports schultz s argument that farmers in developing agricultures have low incomes not because they use their resources inefficiently but because they lack the technology and resources they need to realize higher productivity and thus higher incomes a high priority in agricultural development assistance since the 1960s has been the generation of technology that would enable farmers to increase their productivity much research has been devoted to the causes of low agricultural productivity and the longer term productivity gains that may be forthcoming from modern technology but less attention has been devoted to the process of technology adoption by low income farmers as noted in the recent survey of adoption of agricultural innovations by g feder r e just and d zilberman there have been efforts to model adoption in the context of risk but there is a dearth of empirical evidence on the ways that farmers respond over time as a new production technology is introduced in a risky environment 2 in this article we address the empirical analysis of technical efficiency as farmers adopt new production technology taking into account production risk and learning we utilize recently developed efficiency criteria applicable when production is risky and implement these criteria using an approximation to a representative farmer s decision model 3 pooled time series and cross sectional data collected by the international rice research institute are used to investigate the

consistency of higher order risk preferences risk aversion a second order risk preference is a time proven concept in economic models of choice under risk more recently the higher order risk preferences of prudence third order and temperance fourth order also have been shown to be quite important while a majority of the population seems to exhibit both risk aversion and these higher order risk preferences a significant minority does not we show how both risk averse and risk loving behaviors might be generated by a simple type of basic lottery preference for either 1 combining good outcomes with bad ones or 2 combining good with good and bad with bad respectively we further show that this dichotomy is fairly robust at explaining higher order risk attitudes in the laboratory in addition to our own experimental evidence we take a second look at the extant laboratory experiments that measure higher order risk preferences and we find a fair amount of support for this dichotomy our own experiment also is the first to look beyond fourth order risk preferences and we examine risk attitudes at even higher orders

on the microeconomics of food and malnutrition under endogenous discounting abstract this paper explores the microeconomics and dynamics of food and nutrition it examines the linkages between malnutrition and the incentive to invest and accumulate capital the analysis focuses on a dynamic model where preferences about the future depend on nutrition and health situations of malnutrition cover both ends of the spectrum from nutrient deficiency to obesity the model involves preferences that are not time additive and exhibit endogenous discounting this provides a framework to investigate the factors affecting consumption and investment behavior the adverse investment incentives of malnutrition are examined

timing decisions in organizations communication and authority in a dynamic environment this paper develops a theory of how organizations make timing decisions we consider a problem where an uninformed principal decides when to exercise an option and interacts with an informed but biased agent this problem is common examples include headquarters deciding when to close a plant drill an oil well or launch a product because time is irreversible the direction of the agent s bias is crucial for communication and allocation of authority when the agent favors late exercise centralized decision making where the principal retains authority and communicates with the agent often features full information revelation but ine cient delay delegation is never optimal in this case in contrast when the agent favors early exercise communication under centralized decision making is partial while option exercise is unbiased or delayed delegation is optimal if the bias is small or delegation can be timed thus delegating decisions such as plant closures is never optimal while delegating decisions such as product launches may be optimal

the comparative statics of a competitive industry facing demand uncertainty abstract the comparative statics of a competitive industry under uncertainty with free entry is clarified and extended using the general structure of random demand due to leland 1972 while strong results are obtained for the industry few unambiguous results can be derived for the firm

on skewed risks in economic models and experiments many of the most significant risks that people face in their lives are left skewed i e imply large losses with only small probability i characterize skewness in binary risks which are widely applied in both economic models and experiments moreover i provide an explicit re parametrization of binary risks in terms of their first three moments these results allow for the conducting of comparative statics analysis with regard to skewness and provide a useful tool for the calibration of lotteries in experiments i apply them to show that left skewed background risks give rise to a very strong precautionary saving motive and to collect additional laboratory evidence on skewness preference and risk seeking behavior

priority setting in health care and higher order degree change in risk this paper examines how priority setting in health care expenditures is influenced by the presence of uncertainty about the severity of the illness and the effectiveness of medical treatment we provide necessary and sufficient conditions on social preferences under which a social planner will allocate more health care resources to populations at higher risk changes in risk are defined by the concept of stochastic dominance up to order n the shape of the social utility function and an equity weighting function are used to model the inequality aversion of the social planner we show that for higher order risk changes the usual conditions on preferences such as prudence or relative risk aversion are not necessarily required to prioritise health care when there are different levels of uncertainty associated with otherwise similar patient groups

optimal contracts for experimentation this paper studies a model of long term contracting for experimentation we consider a principal agent relationship with adverse selection on the agent s ability dynamic moral hazard and private learning about project quality we find that each of these elements plays an essential role in structuring dynamic incentives and it is only their interaction that generally precludes efficiency our model permits an explicit characterization of optimal contracts

privatizing social security at home and abroad a century has passed since otto von bismarck instituted the first social security system in germany since then government provision of retirement income has spread around the globe alleviating poverty among the elderly providing life span insurance via old age annuities overcoming the samaritan s dilemma by forcing everyone to save and in many countries extending coverage to include old age health insurance but for all the good it has done social security is severely limiting world saving investment and growth it threatens to bankrupt the young and future generations of some of the world s leading nations see jagadeesh gokhale et al 1996 it is the chain letter pay as you go method of financing social security that lies at the heart of the problem taking income from young savers and giving it to old spenders while placating the young with promises of repayment not only reduces national saving but straddles the next generation with the obligation the debt to meet these promises the size of these debts and the burden on the next generation will be much greater for countries with rapidly aging populations would privatization solve social security s problems this paper provides a framework for thinking about this issue

asset allocation in a downside risk framework 1991 asset allocation in a downside risk framework financial analysts journal vol 47 no 5 pp 28 40

relational contracts and the value of relationships this article studies optimal relational contracts when the value of the relationship between contracting parties is not commonly known i consider a principal agent setting where the principal has persistent private information about her outside option i show that if the principal has the bargaining power she wants to understate her outside option to provide strong incentives and then renege on promised payments while if the uninformed agent has the bargaining power the principal wants to overstate her outside option to capture more surplus i characterize how information is revealed how the relationship evolves and how this depends on bargaining power jel c78 d82 d83 d86

var seductive but dangerous value at risk var has gained rapid acceptance as a valuable approach to risk management not all vars are equal however a study of var techniques used by dealers and end users reveals that var calculations differ significantly for the same portfolio vars are extremely dependent on parameters data assumptions and methodology calculation of eight common vars for three hypothetical portfolios demonstrates the potentially seductive but dangerous nature of any single approach to risk management in sum although var and other quantitative techniques are necessary aspects of an effective risk management program they are not sufficient to control risk

risk lovers and the rent over investment puzzle in this paper we prove existence and uniqueness of equilibrium in a rent seeking contest given a class of heterogeneous risk loving players we explore the role third order risk attitude plays in equilibrium and find that imprudence is sufficient for risk lovers to increase rent seeking investment above the risk neutral outcome moreover we show that rent can be fully dissipated in a standard tullock contest played by a large number of risk lovers

third degree stochastic dominance here f x and g x are less than cumulative probability distributionis where x is a continuous or discrete random variable representing the outcome of a prospect the closed interval a b is the sample space of both prospects the integral shown in rule 2 and those shown throughout the paper are stieltjes integrals recall that the stieltjes integral fb f x dg x exists if one of the functions f and g is continuous and the other has finite variation in a b let d1 d2 and d3 be three sets of utility functions x d1 is the set containing all utility functions with 4 x and 1 x continuous and 41 x 0 for all xe a b d2 is the set with x 1 x 2 x continuous and q j x 0 02 x o for all xc a b d3 is the set with x 1 x 2 x 3 x continuous and 1 x 04 2 x o o for all xc a b here 1 x denotes the ith derivative of x hadar and russell proved that rule 1 is valid for all cd1 and rutle 2 is valid for all ed2 the authors point out that the set of probability distributions that can be ordered by means of second degree stochastic dominance is in general larger than that which can be ordered by means of first degree stochastic dominance note that in rule 2 they assume that x is not only an increasing function of x but also exhibits weak global risk aversion a condition guaranteed by requiring the second derivative of x to be nonpositive in this paper a condition which will be called third degree stochastic dominance is considered it is based on the following assumption about the form of the utility function x from a normative point of view one expects the risk premium associated with an uncertain prospect to become smaller the greater is the individual s wealth the plausibility and implications of this assumption h ave been explored by john pratt as well as others the risk premium of an uncertain prospect is that amount by which the certainty equivalent of the prospect differs from its expected value in mathematical terms given the prospect f x with expected value a the corresponding risk premium t is obtained by solving the following equation rb

risk aversion and the propensities for self insurance and self protection for a risk averse individual the methods for reducing the expected financial impact of a loss include reducing the severity of any loss that occurs self insurance and reducing the probability of the occurrence of a loss self protection the literature on this topic has pointed to several anomalies whereby the use of self protection and self insurance yield quite unsimilar results for example ehrlich and becker 5 show that self insurance is always a substitute for market insurance an insurance company s indemnifying a loss whereas self protection and market insurance might be complements dionne and eeckhoudt 4 show that a more risk averse consumer would always invest more in self insurance activities but not necessarily more in self protection activities they argue 4 42 that this result is counterintuitive and provides an exception to the widely accepted result that increased risk aversion reduces risky activities ehrlich and becker 5 639 argue that the incentive to self protect is not so dependent on attitude towards risk both of the above papers seem to take for granted that self protection activities reduce the riskiness of the final wealth distribution however as we argue below this is not the case if riskiness is defined as in rothschild and stiglitz 14 even if we use the variance as our risk measure we do not always reduce risk via self protection dionne and eeckhoudt suggest that these results might not be robust enough to extend to models that incorporate random initial wealth risk and state dependent preferences we show that the model seems to be very robust we also explain why self protection is not at all an exception to the long standing result of arrow 1 whereby more risk averse individuals undertake a lower

stronger measures of higher order risk attitudes this paper aims to extend the results by ross 1981 15 and by modica and scarsini 2005 13 to stochastic dominance of degree 4 and over specifically it is shown that ross approach can be extended to any order of risk attitude beyond the generalization proposed by modica and scarsini by means of sth degree increase in risk defined by ekern 1980 8 c 2010 elsevier inc all rights reserved

when does coordination require centralization this paper compares centralized and decentralized coordination when manag ers are privately informed and communicate strategically we consider a multi divisional organization in which decisions must be adapted to local conditions but also coordinated with each other information about local conditions is dispersed and held by self interested division managers who communicate via cheap talk the only available formal mechanism is the allocation of decision rights we show that a higher need for coordination improves horizontal com

stochastic dominance and expected utility survey and analysis while stochastic dominance has been employed in various forms as early as 1932 it has only been since 1969 1970 that the notion has been developed and extensively employed in the area of economics finance agriculture statistics marketing and operations research in this survey the first second and third order stochastic dominance rules are discussed with an emphasis on the development in the area since the 1980s

on crop biodiversity risk exposure and food security in the highlands of ethiopia this paper investigates the effects of crop genetic diversity on farm productivity and production risk in the highlands of ethiopia using a moment based approach the analysis uses a stochastic production function capturing mean variance and skewness effects welfare implications of diversity are evaluated using a certainty equivalent measured as expected income minus a risk premium reflecting the cost of risk we find that the effect of diversity on skewness dominates its effect on variance meaning that diversity reduces the cost of risk the analysis also shows that the beneficial effects of diversity

measuring stochastic technology the case of tulare milk production the flexible moment based approach to production analysis is used to measure the stochastic structure of large scale dairy production in tulare county california this approach is flexible because it does not impose restrictions on the relationships between decision variables and the moments of the probability distribution of output the parameter estimates support the hypothesis that second and third moments are functions of inputs and indicate that capital intensive dairies are riskier the implied behavior of a risk averse dairy manager changed markedly when the effects of inputs on the skewness of the output distribution were included in a decision model

a bargaining model with incomplete information about time preferences etude d un jeu de negociation strategique sequentiel avec information incomplete caracterisation d une classe d equilibres sequentiels appeles equilibres sequentiels de negociation et demonstration de l unicite de cet equilibre

life cycle earnings cohort size effects and social security a quantitative exploration one of the features of the large overlapping generations model pioneered by auerbach and kotlikoff 1987 dynamic fiscal policy is that individuals with different experience levels are perfect substitutes in production this paper replaces this assumption with a labor market characterized by imperfect substitutability between less and more experienced workers by comparing the quantitative properties of both cases in a calibrated model for spain it is found that in the model economy with imperfect substitution the effects of aging on the financial viability of the pension system are less severe than in the standard model economy with perfect substitution

the strategy of professional forecasting we develop and compare two theories of professional forecasters strategic behavior the first theory reputational cheap talk posits that forecasters endeavor to convince the market that they are well informed the market evaluates their forecasting talent on the basis of the forecasts and the realized state if the market expects forecasters to report their posterior expectations honestly then forecasts are shaded toward the prior mean with correct market expectations equilibrium forecasts are imprecise but not shaded the second theory posits that forecasters compete in a forecasting contest with pre specified rules in a winner take all contest equilibrium forecasts are excessively differentiated

the impact of prudence on optimal prevention revisited this paper re examines the link between absolute prudence and self protection activities we show that the level of efiort chosen by an agent with positive and decreasing absolute prudence is larger than the optimal efiort chosen by a risk neutral agent if the degree of absolute prudence is less than a threshold that is utility independent and empirically veriflable we explain this threshold by a trade ofi between the variation of the variance and the level of the third moment of the loss distribution we also discuss our result in terms of skewness our contribution extends the model of eeckhoudt and gollier 2005

tax rate uncertainty factor supplies and welfare uncertainty about prospective changes in tax rates may increase factor supplies and hence the tax base permitting a reduction in tax rates that could result in a net increase in welfare under empirically relevant assumptions about attitudes towards risk we find that when an individual exclusively saves or works the tax base rises in response to greater tax rate uncertainty so that welfare could indeed increase however when an individual both saves and works the supply of the randomly taxed factor declines with increased uncertainty implying that tax revenue and welfare decrease when the nonrandom tax rate is sufficiently low

risk preferences production risk and firm heterogeneity a new technique is proposed for deriving the risk preference function under production risk and expected utility of profit maximization the derivation depends on neither a specific parametric form of the utility function nor any distribution of the error term representing production risk the proposed risk preference function is flexible enough to test different types of risk behavior and symmetry of the output distribution furthermore our production risk specification allows for inputs with positive and negative marginal risk the econometric model accommodates production risk risk preferences and firm heterogeneity simultaneously norwegian salmon farming data are used as an application

substituting one risk increase for another a method for measuring risk aversion abstract this paper defines the rate of substitution of one stochastic change to a random variable for another it then focuses on the case where one of these changes is an nth degree risk increase and the other is an mth degree risk increase where n m 1 the paper shows that the rate of substitution for these two risk increases can be used to provide a broader definition and two additional characterizations of the nth degree ross more risk averse partial order the implications for local intensity measures of nth degree risk aversion are also examined the analysis organizes the existing results as well as generates new ones

the effect of risk based capital requirements on profit efficiency in banking the purpose of this paper is twofold to show how to measure profit efficiency in banking using a newly developed technique and to use that technique to determine the effect of risk based capital requirements on the profit performance of us banks the measure of profit efficiency used captures deviations from profit maximization arising from technical inefficiency caused by a lack of managerial oversight and allocative inefficiency which is caused by managers choosing a nonoptimal mix of inputs and outputs a leverage ratio constraint and a risk weighted capital ratio constraint are explicitly included in the model which allows identification of the effect on profits of those constraints the techniques are applied to random samples of us banks for 1990 1992 and 1994 the results indicate that allocative inefficiency is a larger source of profit loss than technical inefficiency and that the risk based capital standards have a significant effect on bank allocative efficiency

experiential learning competitive selection and downside risk a new perspective on managerial risk taking it is part of managerial wisdom that managers need to take risks in order to succeed this is in stark contrast to the prominent agent based theories of experiential learning and competitive selection that are known to be biased against risky alternatives in the long run how can the positive managerial view on risk taking prevail given these results qualitative surveys of managers suggest risks to be acceptable if their outcome distribution meets certain criteria we argue in this paper that these criteria are widely congruent with low downside risk using a novel simulation design we analyze the effects of experiential learning and competitive selection on downside risk preferences in an ecology of agents in the long run experiential learning implies weak downside risk seeking whereas competitive selection leads to strong downside risk aversion furthermore competitive selection leads to the prevalence of outcome distributions with low downside risk in an ecology even if they have a significantly higher level of total risk than comparable distributions with more downside risk we draw implications for empirical studies on managerial behavior the online appendix is available at https doi org 10 1287 orsc 2017 1149

testing for prudence and skewness seeking numerous theoretical predictions such as precautionary saving or preventive behavior have been derived for prudent decision makers further prudence can be characterized as downside risk aversion and plays a key role in preference for skewness we use a simple experimental method to test for prudence and skewness preference in the laboratory and compare the two to this end we introduce a novel graphical representation of compound lotteries that is easily accessible to subjects and test it for robustness using a factorial design prudence is observed on the aggregate and individual level we find that prudence does not boil down to skewness seeking we further provide some theoretical explanations for this result this paper was accepted by peter wakker decision analysis

do risk lovers invest in self protection we show that there is a class of risk lovers who optimally choose a positive level of self protection investment in most cases a risk lover increases his self protection investment as he becomes less downside risk averse

optimal dissent in organizations we model an organization as a two agent hierarchy an informed decision maker in charge of selecting projects and a possibly uninformed implementer in charge of their execution both have intrinsic preferences over projects this paper models the costs and benefits of divergence between their preferences that is dissent within the organization dissent is useful to 1 foster the use of objective and sometimes private information in decision making and 2 give credibility to the decision maker s choices however dissent comes at the cost of hurting the implementer s intrinsic motivation thereby impairing organizational efficiency we show that dissent can be optimal in particular when information is useful and uncertainty is high moreover dissent remains an optimal organizational form even when implementers can choose their employer or when decision makers have real authority over hiring decisions

when to drop a bombshell sender who is either good or bad wishes to look good at an exogenous deadline sender privately observes if and when she can release a public flow of information about her private type releasing information earlier exposes to greater scrutiny but signals credibility in equilibrium bad sender releases information later than good sender we find empirical support for the dynamic predictions of our model using data on the timing of u s presidential scandals and u s initial public offerings in the context of elections our results suggest that october surprises are driven by the strategic behaviour of bad sender

sunflower management and capital budgeting in organizations ideas are often delegated for evaluation as a means of efficiently aggregating multiple information signals however those who delegate often find it impossible to separate the evaluation of the ideas they delegate from the evaluation of abilities of those delegated the task of assessing these ideas this commingling of the assessment of the idea with that of the individual agent generates a tendency for the agent to ignore his or her own information and instead attempt to confirm the superior s prior belief we refer to this as sunflower management and examine its effects on capital budgeting practices

stochastic dominance analysis without the independence axiom we characterize the consistency of a large class of nonexpected utility preferences including mean variance preferences and prospect theory preferences with stochastic orders for example stochastic dominances of different degrees our characterization rests on a novel decision theoretic result that provides a behavioral interpretation of the set of all derivatives of the functional representing the decision maker s preferences as an illustration we consider in some detail prospect theory and choice acclimating preferences two popular models of reference dependence under risk and we show the incompatibility of loss aversion with prudence this paper was accepted by james smith decision analysis

the story of the moment risk averse cypriot farmers respond to drought management this article illustrates the importance of estimating risk preferences when evaluating water policy using agricultural production data from the kiti region of cyprus we estimate farmers risk preferences a la antle journal of business and economic statistics 1 192 201 1983 american journal of agricultural economics 69 509 22 1987 and show sensitivity to higher order moments of profit such as skewness we show that farmers in the kiti region are risk averse with risk premiums in the region of 20 of expected profit we use these estimates to analyse the impact of a water quota from the perspective of three policy makers who differ only in their understanding of farmers risk preferences we show in the case of kiti that policy makers who model risk preferences incorrectly that is either a assume risk neutrality or b ignore down side risk wrongly predict the magnitude and direction of input responses and therefore the magnitude of welfare changes this highlights the importance of accomm

using privileged information to manipulate markets insiders gurus and credibility access to private information is shown to generate both the incentives and the ability to manipulate asset markets through strategically distorted announcements the fact that privileged information is noisy interferes with the public s attempts to learn whether such announcements are honest it allows opportunistic individuals to manipulate prices repeatedly without ever being fully found out this leads us to extend sobel s 1985 model of strategic communication to the case of noisy private signals our results show that when truthfulness is not easily verifiable restrictions on trading by insiders may be needed to preserve the integrity of information embodied in prices

changes in risk and the demand for saving abstract how does risk affect saving empirical work typically examines the effects of detectible differences in risk within the data how these differences affect saving in theoretical models depends on the metric one uses for risk for labor income risk second degree increases in risk require prudence to induce increased saving demand however prudence is not necessary for first degree risk increases and not sufficient for higher degree risk increases for increases in interest rate risk a precautionary effect and a substitution effect need to be compared this paper provides necessary and sufficient conditions on preferences for an n th degree change in risk to increase saving

conditional coskewness in stock and bond markets time series evidence in the context of a three moment intertemporal capital asset pricing model specification we characterize conditional coskewness between stock and bond excess returns using a bivariate regime switching model we find that both conditional u s stock coskewness the relation between stock return and bond volatility and bond coskewness the relation between bond return and stock volatility command statistically and economically significant negative ex ante risk premiums the impacts of stock and bond coskewness on the conditional stock and bond premiums are quite robust to various model specifications and various sample periods and also hold in another major developed country the united kingdom the findings also carry important implications for portfolio management