resolving new keynesian anomalies with wealth in the utility function at the zero lower bound the new keynesian model predicts that output and inflation collapse to implausibly low levels and that government spending and forward guidance have implausibly large effects to resolve these anomalies we introduce wealth into the utility function the justification is that wealth is a marker of social status and people value status since people partly save to accrue social status the euler equation is modified as a result when the marginal utility of wealth is sufficiently large the dynamical system representing the zero lower bound equilibrium transforms from a saddle to a source which resolves all the anomalies

a method for solving general equilibrium models with incomplete markets and many financial assets abstract this paper presents a numerical method for solving stochastic general equilibrium models with dynamic portfolio choice the method can be applied to models with heterogeneous agents time varying investment opportunity sets and incomplete asset markets we illustrate the method using a two country model with production we check the accuracy of our method by comparing the numerical solution to a complete markets version of the model against its known analytic properties we then apply the method to an incomplete markets version where no analytic solution is available in all versions the standard accuracy tests confirm the effectiveness of our method

a random walk through mayfair art as a luxury good and evidence from dynamic models abstract the movement of international art prices in conjunction with other asset prices is preliminary to our understanding whether art is a luxury good it is well known that there are linkages between art market prices and equity prices however less is known about the structure of dependence between these variables and the influence of gold prices and sentiment we analyse art prices at the outset using granger causality and error correction models ecm to capture the long term dynamics between art prices equity markets gold prices and investor sentiment the dataset we use is unique and covers british art prices from 1895 to the present initial results do not give a complete picture of price movements or a fitting description of wealth effects to rectify this we look at short term dynamics in the art market we assume a regime switching model to describe the movement of prices using a threshold variable that drives prices into possibly locally explosive regimes these results indicate a dynamic wealth effect in that high low stock prices lead to subsequent increases decreases in art prices however this approach means that elasticities are now stochastic and we redefine what a luxury good is this is further explored by directly calculating elasticities from our model and its variants to analyse properties of art as a luxury good our threshold approach gives deeper insight into the impact of different market conditions than conventional ecm and cointegration modelling

the new institutional economics this outstanding book presents new original contributions from some of the world s leading economists including ronald coase douglass c north masahiko aoki oliver e williamson and harold demsetz it demonstrates the extent and depth of the new institutional economics research programme which is having a worldwide impact on the economics profession

stochastic optimization applied to self financing portfolio does bequest matter the article studies stochastic optimization of an intertemporal consumption model to allocate financial assets between risky and risk free assets we use a stochastic optimization technique in which utility is maximized subject to a self financing portfolio constraint the papers in literature have estimated the errors of euler equations using data from financial markets it has been shown that it is sufficient to test the first order euler equation implied by the model however they all assume a constant consumption wealth ratio that constrains the boundary conditions hence influencing the coefficient of the risk premium the main contribution of our article is that we drop the assumption of a constant consumption wealth ratio we have an analytical solution using a utility maximization model with a stochastic self financing portfolio we introduce a terminal condition of wealth with and without bequests we also simulate the stochastic optimization with a self financing portfolio distinguishing risk

occupation induced status social norms and economic growth abstract we analyse a monetary growth model where entrepreneurs borrow funds to invest in projects that produce capital goods in addition to their varying pecuniary returns different projects also vary with respect to the status they confer to the entrepreneurs who operate them we show that i social status increases the growth rate but this effect is mitigated by a social norm that inversely links overall levels of employment in the high return project with the status conferred to it ii the combined effect of social status and inflation is a source of transitional dynamics in an environment where such dynamics would not emerge if considerations of occupational prestige were absent iii when the social norm affects social status the economy s dynamics may be manifested in the form of endogenous volatility iv the presence and characteristics of social status can generate a negative correlation between volatility and growth

military spending and stochastic growth abstract this study examines capital accumulation military spending arms accumulation and output growth in a stochastic endogenous growth model the analysis shows that higher lower growth in foreign military spending leads to faster slower economic growth in the home country if the home country s intertemporal substitution elasticity in consumption is smaller larger but more volatility in foreign military spending can lead to higher economic growth in the home country when its intertemporal substitution elasticity is large in addition shocks to output production may stimulate economic growth

closing large open economy models abstract a large class of international business cycle models admits multiple locally isolated deterministic steady states if the elasticity of substitution between traded goods is sufficiently low i explore the conditions under which such multiplicity occurs and characterize the dynamic properties in the neighborhood of each steady state models with standard incomplete markets portfolio costs a debt elastic interest rate or an overlapping generations framework allow for multiple steady states if the model features multiple steady states under financial autarchy if the excess demand for the foreign traded good is increasing in the good s own price in a given steady state the equilibrium dynamics around this steady state are unbounded otherwise the dynamics are bounded and unique by contrast with uzawa type preferences the steady state is always unique and the associated equilibrium dynamics are always bounded and unique the same results obtain under complete markets

a time series analysis of representative agent models of consumption andleisure choice under uncertainty this paper investigates empirically a model of aggregate consumption and leisure decisions in which utility from goods and leisure is nontime separable the nonseparability of preferences accommodates intertemporal substitution or complementarity of leisure and thereby affects the comovements in aggregate compensation and hours worked these cross relations are examined empirically using postwar monthly u s data on quantities real wages and the real return on the one month treasury bill the estimated values of the parameters governing preferences differ significantly from the values assumed in several studies of real business models several possible explanations of these discrepancies are discussed

relative wealth concerns and financial bubbles we present a rational general equilibrium model that highlights the fact that relative wealth concerns can play a role in explaining financial bubbles we consider a finite horizon overlapping generations model in which agents care only about their consumption though the horizon is finite competition over future investment opportunities makes agents utilities dependent on the wealth of their cohort and induces relative wealth concerns agents herd into risky securities and drive down their expected return even though the bubble is likely to burst and lead to a substantial loss agents relative wealth concerns make them afraid to trade against the crowd

twin picks disentangling the determinants of risk taking in household portfolios this paper investigates risk taking in the liquid portfolios held by a large panel of swedish twins we document that the portfolio share invested in risky assets is an increasing and concave function of financial wealth leading to different risk sensitivities across investors human capital which we estimate directly from individual labor income also affects risk taking positively while internal habit and expenditure commitments tend to reduce it our microfindings lend strong support to decreasing relative risk aversion and habit formation preferences furthermore heterogeneous risk sensitivities across investors help reconcile individual preferences with representative agent models

the spirit of capitalism and savings behavior abstract this paper presents a capitalist spirit model of savings by including wealth in the intertemporal utility function while this model includes the life cycle model and bequest model as two special cases it sheds light on why wealth holding has tended to increase with age why decumulation of wealth after retirement has not happened and why households with and without children have not shown significant differences in their savings behavior the capitalist spirit approach is especially useful for understanding savings by the rich and savings across countries and over time jel e21 b10

the contained rivalry requirement and a triple feature program for business ethics this paper proposes a description of the moral obligations of economic agents it will show that a threefold division should be adopted to distinguish moral obligations applying to their interactions in the market obligations applying to their interactions inside business firms and obligations applying to their interactions with agents outside the market competition might be permissible in the first case since markets are special patterns of social interactions called adversarial schemes they produce their benefits when agents try to satisfy exclusive preferences at the expense of others however moral obligations inside the firm and moral obligations outside the market are of a different nature this argument will be developed in the two first parts of this paper in the third part it will outline the relevant strengths of that account in relation with two popular views of economic agents moral obligations the shareholder primacy view and the stakeholder theory

optimal dynamic taxation with distinctive forms of social status attainment we examine the role of both consumption and wealth induced social comparisons in setting dynamic optimal income taxation under complete information state invariant labor income taxes are used to remedy the externality caused by consumption induced social comparisons while state contingent capital income taxes are used to remedy the externalities caused by both consumption and wealth induced ones under incomplete information distinct types of agents are subject to an identical marginal capital income tax which removes social comparisons to solve the information problem low productivity agents could be subject to a lower marginal labor tax than high productivity agents which contradicts the traditional result in the mirrlees stiglitz models this article is protected by copyright all rights reserved

macroeconomic implications of conspicuous consumption a sombartian dynamic model this chapter presents a dynamic general equilibrium model in which consumers have status preference i investigate the manner in which capital accumulation is impeded by conspicuous consumption a la corneo and jeanne j public econ 66 55 71 1997a following the literature social norms are given as either bandwagon type or snob type i then show that when the economy is characterized by a bandwagon type social norm capital accumulation exhibits interesting patterns those patterns include for example an oscillating convergence path the rise of the economy feeds its decay through conspicuous consumption and that decay suppresses conspicuous consumption and engenders prosperity as predicted by sombart liebe luxus und kapitalismus reprinted 1967 deutscher taschenbuch verlag munchen 1912

a critique of milton friedman s essay the social responsibility of business is to increase its profits the main arguments of milton friedman s famous and influential essay are unsuccessful he fails to prove that the exercise of social responsibility in business is by nature an unfair and socialist practice

non libertarianism and shareholder theory a reply to schaefer libertarianism and the shareholder model of corporate responsibility have long been thought of as natural bedfellows in a recent contribution to the journal of business ethics brian schaefer goes so far as to suggest that a proponent of shareholder theory cannot coherently and consistently embrace any moral position other than philosophical libertarianism the view that managers have a fiduciary obligation to advance the interests of shareholders exclusively is depicted as fundamentally incompatible with the acknowledgement of natural positive duties duties to aid others that have not been acquired by some prior commitment or transaction i argue that schaefer is mistaken positive duties are incompatible with the shareholder model only if we must contribute to their fulfilment in the corporate context only if we have some reason to think that it is not possible or not permissible to discharge these obligations entirely in our private lives or through our various other roles and capacities but we have no good reason to accept this i argue that individuals are presumptively free to decide how and when to discharge their positive duties and that buying shares does not cause this presumption to lapse hence a non libertarian moral theory can be held without incoherence by a proponent of the shareholder model

a reply to thomas mulligan s critique of milton friedman s essay the social responsibility of business to increase its profits professor thomas mulligan undertakes to discredit milton friedman s thesis that the social responsibility of business is to increase its profits he attempts to do this by moving from friedman s paradigm characterizing a socially responsible executive as willful and disloyal to a different paradigm i e one emphasizing the consultative and consensus building role of a socially responsible executive mulligan s critique misses the point first because even consensus building executives act contrary to the will of minority shareholders but even more importantly because he assumes that the mandate of a shareholder majority brings legitimacy to efforts of corporate managers to utilize corporate wealth in solving social problems it is the role of our democratic institutions to deal with national agenda issues such as inflation unemployment and pollution not that of the private sector corporations and private individuals do have a role to play in enhancing the quality of the human environment however and the author suggests a coherent means of developing that role in an effort rescue corporate social responsibility from mulligan no less than from friedman

asset pricing with beliefs dependent risk aversion and learning abstract this paper studies equilibrium in a pure exchange economy with unobservable markov switching growth regimes and beliefs dependent risk aversion bdra risk aversion is stochastic and depends nonlinearly on consumption and beliefs equilibrium is obtained in closed form the market price of risk the interest rate and the stock return volatility acquire new components tied to fluctuations in beliefs a three regime specification is estimated using the generalized method of moments gmm model moments match their empirical counterparts for a variety of unconditional moments including the equity premium stock returns volatility and the correlations between stock returns and consumption and dividends dynamic features of the data such as the countercyclical behaviors of the equity premium and volatility are also captured model volatility provides a good fit for realized volatility a new factor the information risk premium is found to be a strong predictor of future excess returns these results are obtained with an estimated risk aversion fluctuating between 1 44 and 1 93

inequality leverage and crises the paper studies how high leverage and crises can arise as a result of changes in the income distribution empirically the periods 1920 1929 and 1983 2007 both exhibited a large increase in the income share of the rich a large increase in leverage for the remainder and an eventual financial and real crisis the paper presents a theoretical model where these features arise endogenously as a result of a shift in bargaining powers over incomes a financial crisis can reduce leverage if it is very large and not accompanied by a real contraction but restoration of the lower income group s bargaining power is more effective

closing international real business cycle models with restricted financial markets abstract several authors argue that international real business cycle irbc models with incomplete financial markets offer a good explanation of the ranking of cross country correlations this conclusion is suspect because it is based on an analysis of the near steady state dynamics using a linearized system of equations the baseline irbc model with incomplete markets does not possess a unique deterministic steady state and as a result its linear system of difference equations is not stationary we show that the ranking of cross country correlations is robust to modifications that ensure a unique steady state and a stationary system of linear difference equations we find however that the modifications affect the quantitative predictions of the model

why countries with the same technology and preferences can have different growth rates abstract a standard ak model of endogenous growth has been extended to allow for an intertemporal conflict between capitalists and workers for the dynamic game thus obtained an equilibrium solution in feedback nash markovian strategies have been computed however many equilibria in trigger strategies can dominate the former there are dominating strategies that depend on the country specific bargaining power of the workers versus capitalists they are both pareto optimal and subgame perfect this provides an explanation why countries which are completely identical in preferences technology and factor endowments can experience different long term growth rates

forecasting bank loans loss given default abstract with the advent of the new basel capital accord banking organizations are invited to estimate credit risk capital requirements using an internal ratings based approach in order to be compliant with this approach institutions must estimate the loss given default the fraction of the credit exposure that is lost if the borrower defaults this study evaluates the ability of a parametric fractional response regression and a nonparametric regression tree model to forecast bank loan credit losses the out of sample predictive ability of these models is evaluated at several recovery horizons after the default event the out of time predictive ability is also estimated for a recovery horizon of 1 year the performance of the models is benchmarked against recovery estimates given by historical averages the results suggest that regression trees are an interesting alternative to parametric models in modeling and forecasting loss given default

social organization status and savings behavior abstract we develop a model of status seeking in the presence of incomplete information and derive its implications for aggregate savings status seeking endogenously takes the form of conspicuous consumption its impact on savings depends on the scheduling of the contests for status over the life cycle if individuals engage in conspicuous consumption when old aggregate savings are increased we also study the role of social segmentation while social segmentation reduces the inequality across status seekers and fuels social rivalry under complete information we show that under incomplete information social segmentation weakens the incentive to strive for greater status

support vector regression for loss given default modelling abstract loss given default modelling has become crucially important for banks due to the requirement that they comply with the basel accords and to their internal computations of economic capital in this paper support vector regression svr techniques are applied to predict loss given default of corporate bonds where improvements are proposed to increase prediction accuracy by modifying the svr algorithm to account for heterogeneity of bond seniorities we compare the predictions from svr techniques with thirteen other algorithms our paper has three important results first at an aggregated level the proposed improved versions of support vector regression techniques outperform other methods significantly second at a segmented level by bond seniority least square support vector regression demonstrates significantly better predictive abilities compared with the other statistical models third standard transformations of loss given default do not improve prediction accuracy overall our empirical results show that support vector regression techniques are a promising technique for banks to use to predict loss given default

on the origin content and relevance of the market failures approach the view of business ethics that christopher mcmahon calls the implicit morality of the market and joseph heath calls the market failures approach has received a significant amount of recent attention the idea of this view is that we can derive an ethics for market participants by thinking about the point of market activity and asking what the world would have to be like for this point to be realized while this view has been much discussed it is still not well understood this paper seeks to remedy this problem i begin by showing against some recent commentators that mcmahon s view and heath s view are fundamentally the same second i clarify the sense of efficiency at work in the market failures approach finally i argue that in its current form this view has little relevance to the real world of business i conclude by sketching two ways of modifying it to fit our world

temptation and self control some evidence and applications this paper studies the empirical relevance of temptation and self control using household level data from the consumer expenditure survey we construct an infinite horizon consumption savings model that allows but does not require temptation and self control in preferences in the presence of temptation a wealth consumption ratio in addition to consumption growth becomes a determinant of the asset pricing kernel and the importance of this additional pricing factor depends on the strength of temptation to identify the presence of temptation we exploit an implication of the theory that a more tempted individual should be more likely to hold commitment assets such as individual retirement account ira or 401 k accounts our estimation provides empirical support for temptation preferences based on our estimates we explore some quantitative implications of this class of preferences for capital accumulation in a neoclassical growth model and the welfare cost of the business cycle

asset pricing with heterogeneous beliefs and relative performance we propose an equilibrium asset pricing model in which agents with heterogeneous beliefs care about relative performance we find that the concern with relative performance leads agents to trade more similarly a development that has two effects first similar trading directly decreases volatility second similar trading decreases the impact of dominant agents the second effect dominates the first when agents expect large differences between their final performances and vice versa when agents expect small differences between their final performances compared with the case in which agents are unconcerned about relative performance the stock return volatility is higher when the second effect dominates and lower when the first effect dominates this paper also demonstrates that the concern about relative performance influences investors holdings stock prices and risk premia

shareholders and social responsibility the article presents an analysis and critique of milton friedman s argument that the social responsibility of business is merely to increase its profits the analysis uncovers a central claim that friedman implies but does not explicitly defend namely that the shareholders of a corporation have no duty to direct that corporation s management to exercise social responsibility an argument against this claim is then advanced by way of a convergence strategy whereby multiple influential moral approaches are shown to align themselves against friedman the convergence strategy shows that friedman s position lies on the lonely fringes of western moral thought and that at least some of friedman s professed adherents appear to offer incoherent moral views the convergence strategy is shown to suggest but not entail a stakeholder model of the corporation the article concludes by considering two objections

how does the spirit of capitalism affect stock market prices bakshi and chen 1996 suggest that the spirit of capitalism affects stock prices by increasing society s aversion to risk in this article i show that the way in which the spirit of capitalism impinges upon asset prices depends on the interaction of impatience willingness to substitute over time and ordinal preferences between consumption and status in addition to risk aversion i develop a general model that charts the channels through which the spirit of capitalism affects asset prices an increase in the capitalist spirit may increase or decrease risk aversion and may actually decrease the prices of risky assets article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

international business cycles with endogenous incomplete markets backus kehoe and kydland 1992 baxter and crucini 1995 and stockman and tesar 1995 find two major discrepancies between standard international business cycle models with complete markets and the data in the models cross country correlations are much higher for consumption than for output while in the data the opposite is true and cross country correlations of employment and investment are negative while in the data they are positive this paper introduces a friction into a standard model that helps resolve these anomalies the friction is that international loans are imperfectly enforceable any country can renege on its debts and suffer the consequences for future borrowing to solve for equilibrium in this economy with endogenous incomplete markets the methods of marcet and marimon 1999 are extended incorporating the friction helps resolve the anomalies more than does exogenously restricting the assets that can be traded

an adversarial ethic for business or when sun tzu met the stakeholder in the economic literature on the firm especially in the transaction cost tradition a sharp distinction is drawn between so called market transactions and administered transactions this distinction is of enormous importance for business ethics since market transactions are governed by the competitive logic of the market whereas administered transactions are subject to the cooperative norms that govern collective action in a bureaucracy the widespread failure to distinguish between these two types of transactions and thus to distinguish between adversarial and non adversarial relations has led many business ethicists to develop a uniform moral code yet in market transactions the checks and balances built into the system of commercial exchange are such as to permit more instrumental forms of behavior in administered transactions by contrast these checks and balances are absent and thus the institutional context calls for much greater exercise of moral restraint in this paper i begin the task of developing an adversarial ethic for business according to this view the competitive environment licenses a greater range of self interested behavior but also imposes its own constraints on the strategies that firms may adopt in the pursuit of their interests

international status seeking trade and growth leadership we study a two country endogenous growth model where the utility of agents in developing countries is affected by consumption gaps with advanced economies international status seeking tends to revert growth differentials in favour of the developing country preferences with endogenous status desire generate convergence in growth rates in the presence of structural gaps and convergence in income levels if productivity differences disappear this process is driven by declining terms of trade and faster capital accumulation of the status seeker the model predictions are shown to be consistent with the stylized facts that characterized the growth performance of east asian economies

loss functions for loss given default model comparison abstract we propose a new approach for comparing loss given default lgd models which is based on loss functions defined in terms of regulatory capital charge our comparison method improves the banks ability to absorb their unexpected credit losses by penalizing more heavily lgd forecast errors made on credits associated with high exposure and long maturity we also introduce asymmetric loss functions that only penalize the lgd forecast errors that lead to underestimate the regulatory capital we show theoretically that our approach ranks models differently compared to the traditional approach which only focuses on lgd forecast errors we apply our methodology to six competing lgd models using a sample of almost 10 000 defaulted credit and leasing contracts provided by an international bank our empirical findings clearly show that models rankings based on capital charge losses differ from those based on the lgd loss functions currently used by regulators banks and academics

business ethics from the internal point of view the notion that the firm and economic activity in general is inherently amoral is a central feature of positive economics that is also widely accepted in business ethics theories as disparate as stockholder and stakeholder theory both leave this central assumption unchallenged each theory argues for a different set of external ethical restrictions but neither adequately provides an internal connection between business and the ethical rules business people are obliged to follow this paper attempts to make this connection by arguing that the purpose of business is to produce a good or service for trade trade involves both a respect for individual autonomy and property rights and squarely places moral norms internal to the practice of business trade is not a contingent activity of business it is a practice rule which also provides the common sense boundary between business and charity on the one hand and crime on the other business and those who engage in it are from the internal point of view bound by the purpose of trade and not just the laws of the land

marshallian recursive preferences and growth abstract although alfred marshall adhered to the classical doctrine of impatience he thought that the act of saving might itself confer utility we model this by making the discount factor a function of savings in addition to providing an intuitive rationale for increasing marginal impatience marshallian time preference has interesting implications for macroeconomics marshallian preferences lower interest rates by stimulating savings paradoxically it is possible for a tax cut to lower interest rates in a marshallian economy in a growth model with marshallian consumers a permanent increase in government expenditures causes super crowding out of consumption and reduces the steady state capital stock

time preference and the distributions of wealth and income this paper presents a dynamic competitive equilibrium model in which heterogeneity in time preferences alone can generate the observed patterns of wealth and income inequality in the united states this model generalizes the standard deterministic neoclassical growth model by introducing i a direct preference for wealth by the consumers and ii human capital formation the rst feature prevents the wealth distribution from collapsing into a degenerate distribution the second feature generates a strong positive correlation between earnings and wealth across agents a calibrated version of this model is able to replicate the wealth and income distributions of the united states

an optimally viable version of stakeholder theory this article is the final one in a series of four papers investigating the stakeholder approach to running businesses it argues that the optimally viable version of that approach is one in which employees have a co equal status as stakeholders with shareholders the maximum allowed for under stakeholder theory while other groupings only have a minimal status as stakeholders and are generally restricted to just customers suppliers and lenders this version is argued for on the grounds that it both overcomes the implementation problems attendant upon having to serve the interests of a range of groupings and is justified in terms of stakeholder membership being confined to those groupings with a claim on the services of a business in virtue of directly contributing to its economic functioning the ranking of non shareholder stakeholders in the recommended version and in particular the maximal ranking granted to employees is argued to reflect the scale of the various contributions as measured by the degree to which making it exposes those stakeholders to both financial risk and a non financial work related risk peculiar to employees it is concluded that although this is the best available version of the stakeholder approach it may not be the best of all possible ways of running a business

the spirit of capitalism and expectation driven business cycles abstract while news shocks are believed to be instrumental in explaining business cycles many existing models fail to predict a boom in consumption investment employment output and asset prices in response to good news about future productivity a model with the intrinsic desire for wealth is shown to generate the aforementioned responses a news driven boom is explained predominantly by an expansion of labor supply and is characterized by the falling real wage the simulated model not only captures well conventional business cycle statistics but also reproduces countercyclical real returns and hump shaped responses of hours and output to an unexpected technology shock

do tax cuts generate twin deficits a multi country analysis we study the eects of tax shocks on the budget and external deficits for 16 industrialized countries over the post 1975 period our structural approach is based on a tractable small open economy model where a tax cut generates a budget deficit in turn the budget deficit aects the external deficit by two distinct channels the demographic channel works through the overlapping generation structure of the model the forecasting channel works through the dynamic structure of the model our empirical analysis documents that tax shocks generate significant positive comovements between the budget and external deficits we also find that both the demographic and forecasting channels are important to explain the comovements

the determinants of bank loan recovery rates in good times and bad new evidence abstract we find that factors explaining bank loan recovery rates differ depending on the state of an underlying credit cycle our modelling approach incorporates a two state markov switching mechanism to capture underlying economic conditions this latent credit cycle variable helps to explain differences in observed recovery rates over time using us bank default loan data from moody s ultimate recovery database and covering the pre and post global financial crisis gfc period the paper develops and implements a dynamic model for bank loan recovery rates we accommodate the distinctive empirical features of the recovery rate data while incorporating a large number of possible determinants we find that certain loan specific and other variables hold different explanatory power with respect to recovery rates in good versus bad times in the credit cycle i e depending on underlying credit market conditions our findings demonstrate the importance of accounting for counter cyclical expected recovery rates when determining capital retention levels

the spirit of capitalism asset pricing and growth in a small open economy abstract conventional models of economic behavior have failed to account for a number of observed empirical regularities in macroeconomics and international economics this may be due to preference specifications in conventional models in this paper we consider preferences with the spirit of capitalism the desire to accumulate wealth as a way of acquiring status we analyze a number of potential effects of international catching up and the spirit of capitalism on savings growth portfolio allocation and asset pricing moreover we obtain a multi factor capital asset pricing model capm our results show that status concerns have non trivial effects on savings growth portfolio allocation asset prices and the foreign exchange risk premium

systematic effects among loss given defaults and their implications on downturn estimation abstract banks are obliged to provide downturn estimates for loss given defaults lgds in the internal ratings based approach while downturn conditions are characterized by systematically higher lgds it is unclear which factors may best capture these conditions as lgds depend on recovery payments which are collected during varying economic conditions in the resolution process it is challenging to identify suitable economic variables using a bayesian finite mixture model we adapt random effects to measure economic conditions and to generate downturn estimates we find that systematic effects vary among regions i e the us and europe and strongly deviate from the economic cycle our approach offers straightforward supportive tools for decision makers risk managers are enabled to select their individual margin of conservatism based on their portfolios while regulators might set a lower bound to guarantee conservatism in comparison to other approaches our proposal appears to be conservative enough during downturn conditions and inhibits over conservatism

recovery rates uncertainty certainly matters abstract previous studies identify default rate as the main systematic determinant of bond recovery rates we revisit this paradigm by investigating the impact of another factor economic uncertainty based on a wide sample of american default issues and relying on beta regression models well suited for the bounded heteroskedastic and skewed sample of recovery rates we analyze the determinants of recovery rate distributions we find economic uncertainty to be of paramount importance as it proves to be the most important systematic determinant of recovery rate distributions significant for both their mean and dispersion by contrast default rate remains a key determinant of the dispersion of these distributions but not for their means considering this evidence is critical to the sound implementation of stochastic recovery rate models used by financial institutions for the computation of regulatory capital

the spirit of capitalism and optimal capital taxation abstract the paper reexamines the famous chamley judd zero capital tax theorem in model economies where the agents are endowed with the spirit of capitalism it is shown that the limiting capital income tax is not zero in general and depends on the utility specifications rather than the production technology the similar formulas of optimal capital taxes are derived in more general settings with multiple physical capitals or heterogeneous agents capitalists and workers

money social status and capital accumulation in a cash in advance model this paper presents an infinite horizon model of optimal capital ac cumulation with the social status concern and the cash in advance constraint when the cash in advance constraint applies to both consumption and investment money is not supemeutral if only consumption is subject to the cash in advance constraint inflation increases capital accumulation

patience persistence and welfare costs of incomplete markets in open economies abstract we investigate the welfare implications of alternative financial market structures in a two country endowment economy model we obtain an analytic expression for the expected lifetime utility of the representative household when sovereign bonds are the only internationally traded asset and we compare this welfare level with that obtained under complete asset markets the welfare cost of incomplete markets is negligible if agents are very patient and shocks are not very persistent but this cost is dramatically larger if agents are relatively impatient and shocks are highly persistent for realistic cases in which agents are very patient and shocks are highly persistent the welfare cost of incomplete markets is highly sensitive to the specific values of these parameters

how do investment ideas spread through social interaction evidence from a ponzi scheme a unique data set from a large ponzi scheme allows me to study word of mouth diffusion of investment information investors could join the scheme only by invitation from an existing member which allows me to observe how the idea spreads from one person to the next based on inviter invitee relationships i find that the observed social network has a scale free connectivity structure which significantly facilitates the diffusion of the investment idea and contributes to the growth and survival of the socially spreading ponzi scheme i further find that investors invest more if their inviter has comparatively higher age education and income

asset returns and state dependent risk preferences we propose a consumption based capital asset pricing model with state dependent risk aversion the corresponding risk premium includes consumption risk and the risk associated with variations in preferences our model can be estimated without specifying the functional form linking risk aversion with state variables the estimates are based on markov chain monte carlo estimation of exact discrete time parameterizations for linear diffusion processes we find estimates for relative risk aversion that are reasonable by usual standards correlated with both consumption and returns and indicative of an additional preference risk of holding the assets

dynamic asset allocation with relative wealth concerns in incomplete markets abstract in dynamic portfolio choice problems stochastic state variables such as stochastic volatility lead to adjustments of the optimal stock demand referred to as hedge terms or merton breeden terms by deriving an explicit solution in a two agent framework with a stochastic opportunity set we show that relative wealth concerns give rise to new hedge terms beyond the ordinary ones this is because the agents hedge against both exogenous changes in the state variable and endogenous decisions of the other agent depending on the parametrization of the model these new terms can significantly change the investors hedging demands we also show that both heterogeneity in risk aversion or relative wealth concerns can have similar effects on the heterogeneity in portfolio decisions formally we study a non cooperative non zero sum stochastic differential game for which we prove a verification theorem in a setting with an unspanned state variable

preferences over wealth experimental evidence abstract preferences over wealth are a channel to explain why households in the aggregate are less responsive when real interest rates fall following such preferences they save more than would be optimal in a standard model however little is known about preferences over wealth empirically we run an intentionally simple lab experiment on intertemporal spending and saving decisions with 180 students under a positive discount factor zero interest and linear utility maximizing behaviour would imply spending any funds instantaneously while half of the participants behave optimally we find a robust pattern where participants on average form and maintain a stock of wealth consistent with wealth entering the utility function directly

risk aversion and rising wage inequality abstract we propose a model in which as incomes grow workers become less risk averse and move from fixed wage contracts to variable pay this can explain the recent increase in wage dispersion between groups within groups and over the lifecycle

keeping one step ahead of the joneses status the distribution of wealth and long run growth assuming that the utility of each agent depends on its relative wealth position in the society this chapter constructs an endogenous growth model it is shown that even if the subjective discount rates differ across agents there exists a unique balanced growth equilibrium in which each agent owns a positive share of the world wealth it is also shown that if the agents are identical then an increase in savings incentives always raises the long run growth rate but if they are heterogeneous then an increase in savings incentives may lower the long run growth rate

european exchange trading funds trading with locally weighted support vector regression in this paper two different locally weighted support vector regression wsvr algorithms are generated and applied to the task of forecasting and trading five european exchange traded funds the trading application covers the recent european monetary union debt crisis the performance of the proposed models is benchmarked against traditional support vector regression svr models the radial basis function the wavelet and the mahalanobis kernel are explored and tested as svr kernels finally a novel statistical svr input selection procedure is introduced based on a principal component analysis and the hansen lunde and nason 2011 model confidence test the results demonstrate the superiority of the wsvr models over the traditional svrs and of the v svr over the e svr algorithms we note that the performance of all models varies and considerably deteriorates in the peak of the debt crisis in terms of the kernels our results do not confirm the belief that the radial basis function is the optimum choice for financial series

dynamic analysis in the viner model of mercantilism abstract this paper models the central theme of mercantilism in jacob viner s interpretation power vs plenty in a framework of modern theory of international finance it is shown that in the viner model of mercantilism a nation with strong mercantilist sentiment ends up with large foreign asset accumulation and high consumption in the long run an import tariff leads to more foreign asset holding and more total consumption furthermore in the viner model the harberger laursen metzler effect exists unambiguously a permanent terms of trade deterioration causes a current account deficit in the short run

near unit root small open economies abstract the marginal utility of wealth in incomplete markets small open economy models follows a unit root process i study the nonlinear properties of devices often used to remove the unit root and i find that they generate different dynamics when matching emerging markets models with endogenous discount factors reinforce consumption response to shocks and increase the countercyclicality of the trade balance to output ratio conversely models with debt frictions ameliorate the responses of consumption and trade balance hence to generate dynamics similar to those in emerging economies the debt frictions need to be small inducing a near unit root behavior in their euler equations this difference across models is hidden when matching developed economies because of consumption smoothing and the mild countercyclicality of the trade balance

an empirical investigation of asset pricing models using japanese stock market data abstract this article examines the empirical performance of the following asset pricing models i a time separable model ii abel s model with a consumption externality iii the time non separable model iv the consumption based recursive utility model and v the ad hoc factor pricing model the testing framework includes the hansen jagannathan volatility bounds test the hansen jagannathan specification error test and euler equation based generalized method of moments estimation the test evidence indicates that habit forming preferences are empirically supportable and provide a good characterization of the japanese security market data

stakeholder theory corporate governance and public management what can the history of state run enterprises teach us in the post enron era this paper raises a challenge for those who assume that corporate social responsibility and good corporate governance naturally go hand in hand the recent spate of corporate scandals in the united states and elsewhere has dramatized once again the severity of the agency problems that may arise between managers and shareholders these scandals remind us that even if we adopt an extremely narrow concept of managerial responsibility such that we recognize no social responsibility beyond the obligation to maximize shareholder value there may still be very serious difficulties associated with the effective institutionalization of this obligation it also suggests that if we broaden managerial responsibility in order to include extensive responsibilities to various other stakeholder groups we may seriously exacerbate these agency problems making it even more difficult to impose effective discipline upon managers hence our central question is a strong commitment to corporate social responsibility institutionally feasible in searching for an answer we revisit the history of public management and in particular the experience of social democratic governments during the 1960s and 1970s and their attempts to impose social responsibility upon the managers of nationalized industries the results of this inquiry are less than encouraging for proponents of corporate social responsibility in fact the history of public sector management presents a number of stark warnings which we would do well to heed if we wish to reconcile robust social responsibility with effective corporate governance

why firms should not always maximize profits though corporate social responsibility csr is on the agenda of most major corporations corporate executives still largely support the view that corporations should maximize the returns to their owners there are two lines of defence for this position one is the friedmanian view that maximizing owner returns is the social responsibility of corporations the other is a position voiced by many executives that csr and profits go together this article argues that the first position is ethically untenable while the latter is not supported by empirical evidence the implication is that there may be good reason for firms to deviate from a maxim of profit maximization

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

household portfolio choice and retirement this study examines household portfolio choice through the retirement transition i show that couples significantly decrease their stock allocations after retirement whereas singles allocations remain relatively unchanged reallocations are concentrated among couples in which the wife is more risk averse than her husband husbands and wives respective retirement events are followed by opposite signed changes in stock allocations these findings are consistent with a model of collective household decision making in which spouses have heterogeneous risk preferences and suggest that dynamics in the distribution of intrahousehold bargaining power generate time varying household risk aversion

economic backwardness and social tension we propose that relative economic backwardness contributes to the build up of social tension and non violent and violent conflict we test our hypothesis using data on organized mass movements and armed civil conflict the findings show that greater economic backwardness is consistently linked to a higher probability of onset of violent and especially non violent forms of civil unrest we provide evidence that the relationship is causal in instrumental variables estimations using new instruments including mailing speeds and telegram charges around 1900 the magnitude of the effect of backwardness on social tension increases in the two stage least squares estimations

efficiency and ethically responsible management one common justification for the pursuit of profit by business firms within a market economy is that profit is not an end in itself but a means to more efficiently produce and allocate resources profit in short is a mechanism that serves the market s purpose of producing pareto superior outcomes for society this discussion examines whether such a justification if correct requires business managers to remain attentive to how their firm s operation impacts the market s purpose in particular it is argued that the value of efficiency despite views to the contrary cannot be fully separated from the planning and intentions of business managers as long as those managers direct their firms in an ethically responsible fashion this position is inspired by and serves as a supportive clarification of joseph heath s so called market failures approach to business ethics

secular stagnation theory and remedies abstract to investigate secular stagnation i add two features to a standard ramsey model with money i households have a preference for wealth ii wages are downward rigid in this framework there exists a frictionless neoclassical steady state equilibrium characterized by a low natural real interest rate in addition if wages are sufficiently rigid and the natural real interest rate sufficiently low then there also exists a keynesian secular stagnation steady state characterized by under employment low inflation and a binding zero lower bound on the nominal interest rate as wages become more flexible the keynesian steady state diverges away from the neoclassical steady state until wages are so flexible that it ceases to exist if monetary policy is excessively restrictive then the secular stagnation steady state is the unique steady state equilibrium of the economy the optimal policy response to secular stagnation is to move the economy to the neoclassical steady state this can either be achieved by raising the central bank s inflation ceiling or by taxing wealth and subsidizing investment in physical capital this optimal tax policy is revenue neutral

aggregate volatility and international dynamics the role of credit supply abstract changes in country specific aggregate volatility are positively correlated with the current account but negatively correlated with investment output and credit flows an international real business cycle model with time varying aggregate uncertainty through a precautionary savings channel can account for the positive correlation but implies counterfactual comovements for the other variables adding a credit supply channel with default and lenders exposed to aggregate risk allows the model to match all the facts higher volatility contracts credit supply and lowers investment and output the current account turns to a surplus because savings increase but also because investment collapses

diversification and its discontents idiosyncratic and entrepreneurial risk in the quest for social status social status concerns influence investors decisions by driving a wedge in attitudes toward aggregate and idiosyncratic risks i model such concerns by emphasizing the desire to get ahead of the joneses which implies that aversion to idiosyncratic risk is lower than aversion to aggregate risk the model predicts that investors hold concentrated portfolios in equilibrium which helps rationalize the small premium for undiversified entrepreneurial risk in the model status concerns are more important for wealthier households consequently these households own a disproportionate share of risky assets particularly private equity and experience greater volatility of consumption consistent with empirical evidence diversification and risk sharing are fundamental principles of modern finance and macroeconomics however empirical evidence suggests that household portfolios are poorly diversified with many people reporting substantial holdings of a single stock for the wealthiest households large shares in closely held businesses constitute a particularly important source of risk e g heaton and lucas 2000a it is not surprising that entrepreneurs bear substantial undiversified risk since it is important for mitigating moral hazard and or adverse selection problems yet from a standpoint of portfolio theory entrepreneurship does not appear to be well compensated implying that many investors are willing to take poorly rewarded risks despite the availability of superior investment opportunities such as public equity that earns a large risk premium e g moskowitz and vissing j0rgensen 2002 hall and woodward 2007

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

is wealth accumulation a luxury good abstract this paper structurally estimates the capitalist spirit model in which utility derives from direct preferences for wealth its results support the hypothesis that wealth accumulation is a luxury good by showing that the marginal utility from wealth declines more slowly than that from consumption

international real business cycles we ask whether a two country real business cycle model can account simultaneously for domestic and international aspects of business cycles with this question in mind we document a number of discrepancies between theory and data the most striking discrepancy concerns the correlations of consumption and output across countries in the data outputs are generally more highly correlated across countries than consumptions in the model we see the opposite

evaluating stakeholder theory this paper is the third in a series of four that is directed at understanding and assessing stakeholder theory for the purposes of business ethics it addresses the suitability and viability of the theory rejecting objections of a moral and efficiency sort based respectively on claims about property rights and the economic superiority of the alternative stockholder approach but accepting that implementation problems require limiting both the number of groupings admitted to stakeholder status and the degree of responsibility towards them the conclusion looks forward to the construction of a suitably limited version of the stakeholder approach in a fourth paper drawing upon this one and the previous two