on the conditions for precautionary saving abstract this paper shows that if the signs of the first three derivatives of the utility function are assumed to be invariant in the consumption level then nonsatiation and risk aversion are sufficient conditions for the presence of precautionary saving moreover a similar set of assumptions ensures that the necessary conditions for decreasing absolute risk aversion and for decreasing absolute prudence are automatically satisfied journal of economic literature classification numbers d11 e21

on the concavity of the consumption function at least since keynes 1935 many economists have had the intuition that the marginal propensity to consume out of wealth declines as wealth increases nonetheless standard perfect certainty and certainty equivalent versions of intertemporal optimizing models of consumption imply a marginal propensity to consume that is unrelated to the level of household wealth we show that adding income uncertainty to the standard optimization problem induces a concave consumption function in which as keynes suggested the marginal propensity to consume out of wealth or transitory income declines with the level of wealth

proper risk aversion on introduit et on etudie une condition comportementale significative sur les fonctions d utilite pour les richesses qui signifie qu une loterie indesirable ne peut jamais etre rendue desirable par la presence d une loterie indesirable independante

standard risk aversion this paper introduces the concept of standard risk aversion a von neumann morgenstern utility function has standard risk aversion if any risk makes a small reduction in wealth more painful in the sense of an increased reduction in expected utility also makes any undesirable independent risk more painful it is shown that given monotonicity and concavity the combination of decreasing absolute risk aversion and decreasing absolute prudence is necessary and sufficient for standard risk aversion standard risk aversion is shown to imply not only pratt and zeckhauser s proper risk aversion individually undesirable independent risks always being jointly undesirable but also that being forced to face an undesirable risk reduces the optimal investment in a risky security with and independent return similar results are established for the effect of broad class of increases in one risk on the desirability of or optimal investment in a second independent risk

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

a note on comparative downside risk aversion abstract we provide comparative global conditions for downside risk aversion which are similar to the ones studied by ross for risk aversion we define a coefficient of downside risk aversion and study its local properties

interregional redistribution and budget institutions under asymmetric information empirical evidence from the u s and the european union suggests that regions which contribute to interregional redistribution face weaker borrowing constraints than regions which benefit from interregional redistribution this paper presents an argument in favor of such differentiated budget institutions it develops a two period model of a federation consisting of two types of regions the federal government redistributes from one type of regions contributors to the other type recipients it is shown that a fiscal constitution with lax budget rules for contributors and strict budget rules for recipients solves the self selection problem the federal government faces in the presence of asymmetric information regarding exogenous characteristics of the regions

a note on the production possibility frontier with pure public intermediate goods some recent studies have shown that certain forms of production functions satisfy the convexity of the production set in the presence of pure public intermediate goods this note permits a broader form of the production functions to reach the same result and further investigates the condition for the production surface to contain a flat portion une note sur la frontiere des possibilites de production quand des biens intermediaires sont purement publics certaines etudes recentes ont montre qu il existe certaines formes de fonctions de production susceptibles d assurer la convexite du bloc des possibilites de production quand existent des biens intermediaires purement publics cette note developpe certaines conditions plus generales des fonctions de production qui assurent le meme resultat de plus les auteurs examinent a quelles conditions le bloc des possibilites de production va avoir une portion plate

portfolio choice and liquidity constraints we study the infinite horizon model of household portfolio choice under liquidity constraints and revisit the portfolio specialization puzzle we show why the puzzle is robust to several model variations and argue that positive correlation between earnings shocks and stock returns is unlikely to provide an empirically plausible resolution we find that relatively small fixed costs for stock market entry are sufficient to deter stockholding because for a plausible range of parameter values households can achieve desired consumption smoothing with small or zero holdings of stocks such costs could arise from informational considerations sign up fees and investor inertia

transfer pricing in a dynamic marketing operations interface abstract a transfer price mechanism is proposed to coordinate the strategies of the marketing and operations functional areas operating in a dynamic interface environment in a decentralized firm marketing and operations are strategic decision makers in a differential game in which marketing has price and advertising and operations has production as control variables and advertising goodwill and production backlog are state variables a constant transfer price is entered into the objective functionals for marketing and operations and subgame perfect feedback strategies are derived for price advertising and production as functions of the state variables the feedback strategies allow a solution for the dynamic system involving goodwill and backlog and the total payoff to the firm the sum of the payoffs to marketing and operations is determined as a function of the transfer price finally for certain parameter conditions an interior maximum of the payoff function is achieved and the optimal transfer price is identified

new results on precautionary saving under two risks this paper identifies a new sufficient condition for a prudent agent to have positive precautionary saving in the presence of labor income and interest rate risks of any size we also provide three economic interpretations for this condition focusing respectively on the marginal effect of saving on total income variance on the sign of the covariance between total income and the return of saving and on the effect of saving on the utility premium

decreasing risk aversion and mean variance analysis on formule un ensemble de postulats d aversion pour le risque absolu decroissant et on montre que seules les fonctionnelles d utilite moyenne variance peuvent les satisfaire

return and dynamics the path of labor migration when workers differ in their skills and information is asymmetric an implementation of the theory of labor migration under asymmetric information shows that return migration arises from the reinstatement of informational symmetry which induces low skill workers who are no longer pooled with high skill workers to return when workers in an occupation constitute more than two skill levels say four without loss of generality the following patterns emerge migration is sequential that is it proceeds in waves each wave breaks into workers who return and workers who stay within waves the returning migrants are the low skill workers the average skill level of migrants is rising in the order of their wave excerpt

the determinants of household risky asset holdings australian evidence on background risk and other factors we study the portfolio allocation decisions of australian households using the relatively new household income and labour dynamics in australia hilda survey we focus on household allocations to risky financial assets our empirical analysis considers a range of hypothesised determinants of these allocations we find background risk factors posed by labor income uncertainty and health risk are important credit constraints and observed risk preferences play the expected role a positive age gradient is identified for risky asset holdings and home ownership is associated with greater risky asset holdings a unifying theme for many of our empirical findings is the important role played by financial awareness and knowledge in determining risky asset holdings many non stockholding households appear to lack the experience and financial literacy that might enable them to benefit from direct investment in stocks

production possibilities with a public intermediate good this paper considers the shape of the production possibility set with a public intermediate good of the atmos phere type the elements which tend to give rise to a concave product ion frontier are isolated from those which tend to generate a convex one by using the notion of the production surface the results from earlier models are both generalized and sharpened

filling potholes macroeconomic effects of maintenance versus new investments in public infrastructure abstract the maintenance of existing public infrastructure has often been neglected in favor of building new infrastructure in developing countries this paper develops a dynamic general equilibrium model that analyzes the reasons and effects of such neglect first the optimal level of maintenance is shown to depend on the size of new investments as a share of existing public infrastructure and on the productivity of infrastructure second the model is parameterized and solved numerically for a sample of latin american countries quantitative results show that reallocating funds from new infrastructure to maintenance can have positive effects on these countries gdp

a game theoretic approach to transfer pricing in a vertically integrated supply chain we study the problem of setting transfer prices in a vertically integrated supply chain in which the divisions share technology and transactions costs we develop a cooperative game that provides transfer prices for the intermediate products in the supply chain this model is applied both when the market prices for these products are known and also when their valuations differ we provide a solution that is fair and acceptable to all divisions in the perfect information case the shapley value generates the transfer prices while in the asymmetric case we obtain transfer prices from the solution to a linear program

dynamics of public infrastructure industrial productivity and profitability a restricted equilibrium framework is utilized to estimate the contribution of public investment in infrastructure to private sector profitability a restricted cost function in translog form which treats labor and materials as variable inputs and private capital and public sector capital stock in transportation communications and electricity as quasi fixed inputs is specified a system of non linear equations comprising variable cost function and derived input demand equations is estimated using data from 1970 to 1987 for twenty six mexican three digit manufacturing industries the divergence of private and public capital stocks from their static equilibrium levels is estimated the net rate of return to fixed factors is also calculated estimates of allocative efficiency are derived the study further provides estimates of short run and long run scale economies output elasticity of factors measures of productivity growth and technical change economic significance and policy implications of the findings are also presented copyright 1992 by mit press

company tax reform with a water s edge this paper analyzes the effects of switching from a corporate tax system based on separate accounting sa towards a system in which two countries form a formula apportionment fa union while a third country sticks to sa water s edge our analysis draws a positive picture on the water s edge regulation in the short run for given tax rates the transition from sa to fa is likely to reduce profit shifting from the fa union to non fa tax havens in a long run tax competition analysis we find a negative water s edge externality under fa that tends to be less detrimental than the profit shifting externality under sa and may offset other externalities under fa

time horizon and the discount rate abstract we consider an economy a la lucas 1978 econometrica46 1429 1446 with a risk averse representative agent the exogenous growth rate of the economy follows a random walk we characterize the set of utility functions for which it is efficient to discount more distant cash flows at a lower rate the benchmark result is that when the growth rate is almost surely nonnegative the yield curve is decreasing if and only if relative risk aversion is decreasing with wealth relaxing the assumption on the absence of recession requires more restrictions on preferences such as increasing relative prudence journal of economic literature classification numbers d81 d91 q25 q28

foreign subsidiary transfer pricing and tariffs in the transfer pricing literature horst 12 concludes that the multinational firm mnf will generally charge a low transfer price ltp while other authors are ambivalent on this question this paper shows that less than whole ownership over the subsidiary generally makes the mnf change its transfer pricing strategy from desiring a ltp to wanting a high transfer price htp the conditions for an htp are fairly broad so that we are more likely to observe it than has been suggested in the literature the mnf literature also presumes that the host country loses revenue due to an htp however this view ignores the effects of tariffs on a government s revenue if tariff revenue is included an htp can increase the host country s revenue

precautionary saving a review of the empirical literature standard macroeconomic models show that uncertainty plays a significant role in consumption and saving decisions under rather mild conditions namely the convexity of the marginal utility of consumption increased uncertainty generates a positive extra saving the so called precautionary saving although this hypothesis has been tested by a large number of authors both at macro and micro level the empirical results are not conclusive and the main conclusion than can be drawn is that there is neither consensus on the intensity of that motive for saving nor on the most appropriate measure of uncertainty this paper provides a comprehensive review of the empirical literature discussing the main controversial issues and the different approaches followed by the studies addressing empirically the test of precautionary saving

portfolio selection with mental accounts and background risk abstract das et al 2010 develop a model where an investor divides his or her wealth among mental accounts with motives such as retirement and bequest nevertheless the investor ends up selecting portfolios within mental accounts and an aggregate portfolio that lie on the mean variance frontier importantly they assume that the investor only faces portfolio risk in practice however many individuals also face background risk accordingly our paper expands upon theirs by considering the case where the investor faces background risk our contribution is threefold first we provide an analytical characterization of the existence and composition of the optimal portfolios within accounts and the aggregate portfolio second we show that these portfolios lie away from the mean variance frontier under fairly general conditions third we find that the composition and location of such portfolios can differ notably from those of portfolios on the mean variance frontier

transfer pricing and ownership structure we study the performance of jointly owned production units where upstream firms sell inputs to a downstream final market producer it is found that compared to integrated firms co ownership leads to overinvoicing of input prices transfer prices resulting in lower aggregate profits tax and tariff policy may lessen the organizational inefficiencies of jointly owned firms the analysis suggests that firms must have other reasons for forming jointly owned production units than those guided by production efficiency and benefits from delegation of decision making jel classification f23 l23

is public expenditure productive abstract this paper considers the relationship between aggregate productivity and stock and flow government spending variables the empirical results indicate that i the nonmilitary public capital stock is dramatically more important in determining productivity than is either the flow of nonmilitary or military spending ii military capital bears little relation to productivity and iii a core infrastructure of streets highways airports mass transit sewers water systems etc has most explanatory power for productivity the paper also suggests an important role for the net public capital stock in the productivity slowdown of the last fifteen years

exploring higher order risk effects higher order risk effects play an important role in examining economic behavior under uncertainty a precautionary demand for saving has been linked to the property of prudence and the property of temperance has been used to show how the presence of an unavoidable risk affects one s behavior towards a second risk these two properties also play key roles in aversion to negative skewness and to kurtosis respectively both properties recently have been characterized by preferences over lottery pairs in simple 50 50 gambles the simplicity of this characterization is ideal for experimental investigation this article reports the results of such experiments and concludes that there is behavioral evidence for prudence but not for temperance implications of these results for both expected utility and non expected utility models are examined

risk aversion wealth and background risk we use household survey data to construct a direct measure of absolute risk aversion based on the maximum price a consumer is willing to pay for a risky security we relate this measure to consumer s endowments and attributes and to measures of background risk and liquidity constraints we find that risk aversion is a decreasing function of the endowment thus rejecting cara preferences we estimate the elasticity of risk aversion to consumption at about 0 7 below the unitary value predicted by crra utility we also find that households attributes are of little help in predicting their degree of risk aversion which is characterized by massive unexplained heterogeneity we show that the consumer s environment affects risk aversion individuals who are more likely to face income uncertainty or to become liquidity constrained exhibit a higher degree of absolute risk aversion consistent with recent theories of attitudes toward risk in the presence of uninsurable risks jel d1 d8

public infrastructure and the productive performance of canadian manufacturing industries this article examines the effects of public infrastructure on the productive performance of 12 two digit canadian manufacturing industries a flexible cost function incorporating public capital infrastructure is estimated for each industry separately using annual time series data for 1961 1995 the effects of public infrastructure on productivity are measured in terms of both cost saving dual and output augmenting primal measures we also investigate how public capital influences the input demand and cost structure in each industry and calculate the rate of return to public capital the empirical results provide strong evidence of the important role public infrastructure plays in the productivity of manufacturing industries the public capital serves as a substitute for both private capital and labor in most industries the rates of return to public capital are significant and vary over the years

health and portfolio choices a diffidence approach the effect of health status on portfolio decisions has been extensively studied from an empirical viewpoint in this paper we propose a theoretical model of individuals choice of financial assets under bivariate utility functions depending on wealth and health our approach makes an extensive use of the diffidence theorem we establish the conditions under which the share of wealth held in risky assets falls as 1 individuals health status deteriorates and 2 individuals health status becomes risky these conditions are shown to be related to the behavior of the intensities of correlation aversion and of cross prudence as wealth increases

investment flexibility and the acceptance of risk abstract the hypothesis examined in this paper is that the greater the investor s flexibility the easier it is for him to change his portfolio depending on his results the more willing he will be to accept risks when the investor has no control on the size of the risky investment but can choose between one risky and one riskless asset this conjecture is shown to be correct however if there is more than one risky asset each period counterexamples demonstrate that flexibility rarely ensures greater risk taking for the standard portfolio problem in which investors are free to determine the size of their investment in a risky asset flexibility always raises the demand for the risky asset if constant relative risk aversion is less than unity but counterexamples can always be found when the constant relative risk aversion is larger than unity journal of economic literatureclassification numbers g11 d81 d84

some stronger measures of risk aversion in the small and the large with applications the arrow pratt measures of risk aversion for von neumann morgenstern utility functions have become workhorses for analyzing problems in the microeconomics of uncertainty they have been used to characterize the qualitative properties of demand in insurance and asset markets to examine the properties of risk taking in taxation models and to study the interaction between risk and life cycle savings problems to name just a few applications equally importantly they have generated the linear risk tolerance class of utility functions which has provided canonical examples in such diverse areas as portfolio theory and the theory of teams despite these successes there have been a number of areas for which the results have been weaker than hoped it is natural to use the risk aversion measures to compare the behavior of individuals in risky choice situations for example consider the individual portfolio choice problem in a two asset world with a riskless asset and a risky asset if individual a has a uniformly higher arrow pratt coefficient of risk aversion than individual b then b will always choose a portfolio combination with more wealth invested in the risky asset but suppose that both assets are risky now there is no obvious sense in which the more risk averse individual can be said to hold a less risky portfolio but it seems strange that such a simple alteration should destroy the analytics which support the basic intuition similarly consider the basic insurance problem if one individual a is more risk averse than another b in the arrow pratt sense it follows that a will pay a larger premium to insure against a random loss than will b typically though an individual evaluates partial rather than total insurance that is only some gambles can be insured against and others must be retained in this case even when the gambles which are retained are independent from those which are insured it is no longer true that the individual whose arrow pratt measure of risk aversion is higher will pay a larger insurance premium the situation is no better when we consider comparative statics exercises for a single individual decreasing absolute risk aversion in the sense of arrow and

increasing returns public inputs and transformation curves this paper shows that despite the presence of increasing returns to scale caused by a public input the transformation curve of an economy will be concave to the origin if the market for the public input is marshall stable it also shows that when the public input is a natural friend to both labor and capital marshallian stability holds if and only if the relative price version of the stolper samuelson theorem holds

precautionary saving and the timing of taxes this paper analyzes the effects of government debt and income taxes on consumption and saving in a world of infinitely lived households having uncertain and heterogeneous incomes the special structure of the model allows exact aggregation across households despite incomplete markets the effects of government debt are shown to be substantial roughly comparable to those resulting from finite horizons and crucially dependent on the length of time until the debt is repaid also anticipated changes in taxes are shown to cause anticipated changes in consumption finally an index of fiscal stance is derived

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

public investment optimal provision of hicksian public inputs a considerable portion of government spending is devoted to commodities that are not public goods but that directly affect production possibilities examples include public infrastructure like roads and dams educational facilities and research projects in basic science and some forms of information such commodities are public inputs in a small open economy context the focus of this paper is on those that are hicksian in nature an interesting decomposition of the beneficial impact of a hicksian public input is developed then first best and second best optimality conditions for public inputs that are comparable to those for collective consumption goods are derived

paying for public inputs with public consumption goods pareto optimality can be achieved in equilibrium through lindahl pricing this requires that each consumer pays a price proportional to his marginal utility from the public good the marginal cost of providing the good is then equated to the sum of the marginal benefits some public goods serve as inputs into production processes rather than as consumption goods the lighthouse is an example efficiency in an economy with public intermediate goods requires that the marginal cost of providing them equals the sum of their marginal benefits to firms by analogy with the case of public consumption goods it might seem that lindahl pricing can be extended to public intermediate goods by requiring that firms pay in proportion to the marginal contribution of these goods to profits agnar sandmo 1972 explicitly proposes this for convex technologies for nonconvex technologies that arise with an important class of production functions essentially those exhibiting atmosphere externalities in the phrase of james meade 1952 lindahl pricing for such public inputs is infeasible the principal result derived here is a sim

distortionary taxation and optimal public spending on productive activities mutsumi matsumoto using a general equilibrium model with endogenous factor supplies this article investigates the provision of factor augmenting public inputs such inputs are intermediate goods that affect production functions in a collective manner and give rise to increasing returns unlike with collective consumption goods deviation from the first best condition for a public input is inappropriate if taxes are set optimally when taxes are not optimal a second best rule must include a feedback effect on revenue as well as the deadweight cost of taxes implications for benefit cost analysis and for interpretation of estimates of the social returns to public capital are explored jel h21 h54 o4 i introduction government spending on public infrastructure and on human capital formation are often cited as important contributing forces to economic growth with reference to less developed economies isham and kaufmann 1999 show that the returns from public infrastructure investments are very high where the overall policy regime is basically sound turning to human capital psacharopolous and woodhall 1985 point out the sizable excess of social over private returns from education temple 1999 indicates that the importance of these public investments and others like them for example research and development is not limited to less developed countries appropriate levels are important across all economies the key characteristic of these sorts of commodities is that they exhibit positive externalities across productive entities in short they may be categorized as public intermediate goods or public inputs although such commodities are beneficial they are also costly spending on them takes a large portion of p ublic budgets moreover government financing of these costs typically involves the use of distortionary taxes those taxes create excess burden the magnitudes of which may be substantial for instance in an influential contribution browning 1987 21 suggests the marginal excess burden of taxes on labor income ranges from 31 8 to 46 9 the crux of this article is the relevance of distortionary taxes to decisions about public input expenditure bruce 1998 457 and musgrave et al 1987 288 89 suggest the incorporation of the deadweight cost of taxation as a cost when evaluating public projects boardman et al 1996 62 64 in their authoritative benefit cost text recommend the inclusion of deadweight loss in the assessment of net benefits of tax funded public projects these recommendations are intuitively appealing they are also consistent with the second best expenditure condition for spending on public consumption goods atkinson and stern 1974 show that marginal cost of a public consumption good must include the excess burden of the tax system indeed some of the most important recent empirical work on the returns from public capital have assessed those returns after netting out the deadweight loss of the tax system see morrison and schwartz 1996 and nadiri and mamuneas 1994 this article investigates the theoretical basis for deviating from the first best rule for public input provision when taxes are distortionary 1 one finding is that despite the deadweight losses a second best rule for public inputs should not be followed when taxes are set optimally the first best condition remains appropriate in effect the production efficiency theorem of diamond and mirrlees 1971 extends to a public input economy however and importantly for actual policy when taxes are not optimal then not only the excess burden but the impact of the public input on the government s budgetary position must be taken into account these qualifications need to be incorporated into empirical studies and benefit cost analysis ii the model the analysis makes use of a general equilibrium model of a competitive economy in which factor supplies are variable and there is a public input

precautionary saving in the small and in the large the theory of precautionary saving is shown to be isomorphic to the arrow pratt theory of risk aversion making possible the application of a large body of knowledge about risk aversion to precautionary saving and more generally to the theory of optimal choice under risk in particular a measure of the strength of the precautionary saving motive analogous to the arrow pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving and to give a new interpretation of the dreze modigliani substitution effect copyright 1990 by the econometric society

risky choices and correlated background risk the analysis of a risky project should take into account not only uncertainties about the return from that project project risk but also uncertainties associated with other ongoing projects and with exogenous factors that can impact final wealth background risk the presence of background risk can change the optimal course of action with respect to a project and ignoring such risk might lead to a poor decision most work on background risk assumes that project risk and background risk are independent and are additive in their impact on wealth however independence is often unrealistic and background risk operates in a multiplicative manner in many situations we relax the independence assumption and consider a model with both additive and multiplicative background risk the optimal decisions in the correlated setting can be very different than those that would appear optimal if the correlation were ignored the impact of correlation differs in the additive and multiplicative cases with positive correlation being beneficial in some cases and negative correlation in others the analytical and numerical results indicate that in analyzing decision making problems it is very important to understand the direction and degree of dependence between project risk and background risks

a public input as a determinant of trade this paper examines how the difference in the level of the public input supplied by the government affects the trade patterns between the countries by the use of the decomposition of the comparative advantage due to the public input the author clarifies the determinants of trade in the public input economy