when do losses loom larger than gains abstract in defining limits to loss aversion novemsky and kahneman 2005 offer important new data and a needed summary of appropriate ways to think about loss aversion in this comment to novemsky and kahneman s article the authors consider the new empirical results that involve probabilistic buying and selling suggesting caution in generalizing the results to nonprobabilistic commerce the authors expand novemsky and kahneman s summary by exploring two critical constructs that help define the boundaries of loss aversion emotional attachment and cognitive perspective emotional attachment alters loss aversion by moderating the degree to which parting with an item involves a loss whereas shifts in cognitive perspective explain why items typically viewed as a loss are given more or less weight the goal is to use these constructs to characterize more specifically contexts in which losses loom larger than gains and to suggest specific ways that research into loss aversion could evolve

a median voter model of social security this paper presents a theoretical median voter analysis of the determination of the level of social security the framework for the analysis is a continuous time overlapping generations model with nonaltruistic households facing borrowing constraints in the capital market a majority voting equilibrium is shown to exist in which the median voter is liquidity constrained the desired level of social security for each voter is a declining function of the preexisting level of social security as a consequence in a sequence of votes on social security beginning with a zero level the program initially overshoots its steady state value copyright 1989 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

the boundaries of loss aversion abstract in this article the authors propose some psychological principles to describe the boundaries of loss aversion a key idea is that exchange goods that are given up as intended do not exhibit loss aversion for example the authors propose that money given up in purchases is not generally subject to loss aversion the results of several experiments provide preliminary support for the hypotheses the authors find that consistent with prospect theory loss aversion provides a complete account of risk aversion for risks with equal probability to win or lose the authors propose boundaries for this result and suggest further tests of the model

equilibrium policy in an overlapping generations economy abstract this paper offers a mechanism for reducing the number of stationary equilibria that arise in a simple two period lived overlapping generations economy since each equilibrium is associated with a different combination of monetary and fiscal policies i assume that at each date the agent in his second period of life determines how that period s monetary and fiscal instruments will be set i show that the set of stationary equilibria where this occurs is a proper and nonempty subset of the set of stationary competitive equilibria and that at least one such equilibrium is a pareto optimum

do pensions foster education an empirical perspective the paper examines the effect of population ageing on public education spending on the one hand ageing is expected to have a negative effect on education as an increasing number of retirees resu

the social security system the provision of human capital and the structure of compensation in this paper i examine the effect of the current social security system on the structure of compensation that a wealth maximizing worker selects i show that the current method of benefit determination encourages an upward sloping wage profile and that the social security system alters the mix of wage and pension payments in addition the intragenerational transfers of the social security system alter the level of investment in human capital as a result the social security system reduces the disparity of income within the economy

the rise and evolution of public pension systems security crisis basically the crisis manifests itself by the fact that if young participants in the existing public pension plans were allowed to withdraw and invest voluntarily in their own preferred privately marketed insurance plans they would be able to secure a rate of return that is substantially higher than the rate of return under the existing plan of course this would not be the case if public pension plans were financed by a funding system rather than the existing pay as you go payg system given the paygsystem and the actual decline of birth rates in many western countries future pension tax rates can reach levels as high as 40 percent or more it might be suspected that future generations will not be willing to contribute to the system by the necessary amount making declining benefit rates inevitable if not the altogether elimination of the system notice that if the present generations expects this future development to arise they can calculate their rate of return under the present benefit tax structure to be even lower the inevitable conclusion thus seems to be that if the implicit claims build up under the existing system can be expected not to be allowed by future generations the present generation will do likewise with respect to the claims of the now living older generation however the popular support for public pension plans is not detoriating at present in many western countries thus falsifying the foregoing observation

intergenerational redistribution with short lived governments we study the politics of intergenerational redistribution in an overlapping generations model with short lived governments the successive governments who care about the welfare of the currently living generations and possibly about campaign contributions are unable to pre commit the future course of redistributive taxation in a stationary politico economic equilibrium the intergenerational transfer in each period depends on the current value of the state variable and all expectations about future political outcomes are fulfilled we find that there exist multiple stationary equilibria in many political settings steady state welfare is often lower than it would be in the absence of redistributive politics

credit rating inflation and firms investments we analyze credit rating effects on firm investments in a rational bond financing game that features a feedback loop the credit rating agency cra inflates the rating providing a biased but informative signal to creditors creditors response to the rating affects the firm s investment decision and thus its credit quality which is reflected in the rating the cra might reduce ex ante economic efficiency which results solely from its strategic effect the cra assigns more firms high ratings and allows them to gamble for resurrection we derive empirical predictions on the determinants of rating standards and inflation and discuss policy implications

voting on pensions a survey abstract the paper presents a nonexhaustive survey of the literature designed to explain emergence size and political sustainability of pay as you go pension systems it proposes a simple framework of analysis a small open two overlapping generation economy model around which some variants are displayed dictatorship of the median voter is assumed the text is organized to answer the following questions i do political equilibria with payg pension schemes exist ii why do they emerge iii what are the conditions for the participation constraint of the pension game to be verified and finally iv what is the size of the pension system chosen by the median voter and how is this size influenced by an exogenous e g demographic shock

rating the raters are reputation concerns powerful enough to discipline rating agencies abstract credit rating agencies cras are accused of bearing a strong responsibility for contributing to the subprime crisis by having been deliberately too lax in the ratings of some structured products in response to this accusation cras argue that such an attitude would be too dangerous for them since their reputation is at stake the objective of this article is to examine the validity of this argument within a formal model are reputation concerns sufficient to discipline rating agencies we show that the reputation argument only works when a sufficiency large fraction of the cra income comes from other sources than rating complex products by contrast when rating complex products becomes a major source of income for the cra we show that it is always too lax with a positive probability and inflates ratings with probability one when its reputation is good enough we provide some empirical support for this prediction by showing that ceteris paribus the proportion of subprime residential mortgage backed securities rmbs that were rated aaa by the three main cras indeed increased over the last eight years we analyze the policy implications of our findings and advocate for a new business model of cras that we call the platform pays model

the political economy of social security we consider a two period overlapping generations model in which individual voters differ by age and by productivity in such a setting a redistributive pay as you go system is politically sustainable even when the interest rate is higher than the rate of population growth the workers with medium wages not those with the lowest wages and the retirees form a majority which votes for a positive level of social security this level depends on the difference between the rates of population growth and interest as well as on the redistributiveness of the benefit rule

ratings quality over the business cycle credit rating agencies cras have long held that reputational concerns discipline their behavior the value of reputation however depends on economic fundamentals that vary over the business cycle in a model of ratings incorporating endogenous reputation and a market environment that varies we find that ratings quality is countercyclical specifically a cra is more likely to issue less accurate ratings when fee income is high competition in the labor market for analysts is tough and securities default probabilities are low persistence in economic conditions can diminish our results while mean reversion exacerbates them the presence of naive investors reduces overall quality but quality remains countercyclical finally we demonstrate that competition among cras yields similar results

productivity growth and the political economy of social security the present paper provides an analysis of unfunded social securityas the outcome of a public decision making process in an endogenousgrowth economy it employs a model in which there is a non monotonic relationship beween productivity growth and the scale ofpublic intergenerational redistribution the paper shows thatalthough unfunded social security need not harm growth in general it is likely to harm growth in a democracy this effect isreinforced by population aging

social security reform and investment in education is there scope for a pareto improvement we propose a pareto improving policy which reduces the overall wage tax burden in an economy with intergenerational trade in a fixed factor of production here labelled as land we analyse a second best environment in which the government cannot resort to non distortionary land taxes reducing the social security contribution rate encourages investment in human capital future efficiency gains accruing to complementary land are capitalized in its value the capital gains may compensate land owning pensioners for reduced benefits we also explain why the unfunded pension system may have lost its appeal even for pensioners after its introduction

social security universal versus earnings dependent benefits i compare the welfare implications of bismarckian earnings dependent benefits and beveridgean universal benefits social security systems agents are better off with a beveridgean system than with a comparable bismarckian system in an environment with intragenerational homogeneity the latter results in a larger decrease in net wages with intragenerational skill heterogeneity most agents benefit from the more redistributive beveridgean system when agents vote for the replacement rates with intragenerational homogeneity the resulting bismarckian system is larger than the beveridgean system with intragenerational skill heterogeneity the beveridgean system is larger overall agents are worse off with the larger system

the moderating effect of relationship norm salience on consumers loss aversion people are said to be loss averse when their pain of losing something exceeds their joy of gaining it this research proposes and tests a new moderator of loss aversion the type of relationship norms salient at the time the loss or the gain is experienced we suggest that mere salience of the norms of a communal relationship based on concern for the partner relative to those of an exchange relationship based on quid pro quo leads to a greater degree of loss aversion a typical endowment effect study supports our overall thesis and shows that differences across relationship norms are stronger in selling prices willingness to accept than in buying prices willingness to pay

human capital technical change and the welfare state i study the interactions between the distribution of human capital technological choice and redistributive institutions i first ask what makes alternative social contracts such as a european style welfare state and u s style laissez faire sustainable and in particular how each is affected by skill biased technical change i then endogenize technological or organizational choice and show that firms respond to greater human capital heterogeneity with more flexible technologies that further exacerbate wage equality i then analyze the simultaneous determination of technology income distribution and redistributive institutions and as well as spillovers between the social contracts of different countries jel d31 o33 j3 h10

estimating the costs of issuer paid credit ratings we compare the stability and timeliness of credit ratings produced by a traditional issuer paid rating agency moody s investors service and a subscriber paid rater rapid ratings moody s ratings exhibit less volatility but are slower to identify default risk we control for moody s aversion to ratings volatility and still find its ratings lag rapid ratings more importantly accuracy ratios indicate that rapid ratings provides a better ordinal ranking of credit risk we quantify the loss avoidance associated with rapid ratings signals to estimate costs associated with regulatory and contractual systems based on issuer paid ratings the author 2013 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

reforming our pension system is it a demographic financial or political problem we argue that economic and demographic factors play a relatively small role in the old age crisis political factors are far more important a benevolent social planner can address the problems raised by population ageing and declining productivity growth however in reality social security systems are established and reformed through the political process majority voting and lobbying consequently the outcome is likely not to be socially optimal majority voting typically results in overspending on social security but also in rapidly phasing it out in case of unexpected shocks then the entrenched interests of retirees that oppose drastic cuts in benefits can be socially desirable

the limits of fungibility relational schemata and the value of things four experiments test predictions on endowment and mental accounting effects of a theoretical perspective that stresses the symbolic relational significance for consumer transactions and that posits the placement of qualitative boundaries on fungibility although people accepted proposals to buy objects acquired in market pricing relationships as routine the same proposals in communal sharing authority ranking and equality matching relationships triggered distress and erratically high dollar valuations symbolic ownership history also moderated valuations in a purely market setting and the effects of symbolic relational source of income extended even to spending decisions examination of the model s ordinal predictions revealed stronger effects for equality matching than for authority ranking relationships

the macroeconomics of child labor regulation we develop a positive theory of the adoption of child labor laws workers who compete with children in the labor market support a child labor ban unless their own working children provide a large fraction of family income fertility decisions lock agents into specific political preferences and multiple steady states can arise the introduction of child labor laws can be triggered by skill biased technological change which induces parents to choose smaller families the theory can account for the observation that in britain regulations were first introduced after a period of rising wage inequality and coincided with rapid fertility decline

towards a politico economic theory of social security social security which will be taken here in its wide european sense not only encompassing public pension schemes but also other income transfers such as to unemployed sick and disabled persons and to widows and orphans nowadays figures large among government outlays after its continuous and fast expansion over especially the past two decades see e g saunders and klau 1985 and table 0 1 accordingly social security is receiving increasing attention in the economic profession recent discussions have focused on the effects of social security on capital accumulation and on its ability to achieve a more desirable distribution of income in these studies social security programs are typically treated as exogenously determined little attention has hitherto been paid to the explanation of social security policies

the survival of the welfare state this paper provides an analytical characterization of markov perfect equilibria in a model with repeated voting where agents vote over distortionary income redistribution a key result is that the future constituency for redistributive policies depends positively on current redistribution since this affects both private investments and the future distribution of voters the model features multiple equilibria in some equilibria positive redistribution persists forever in other equilibria even a majority of beneficiaries of redistribution vote strategically so as to induce the end of the welfare state next period skill biased technical change makes the survival of the welfare state less likely

intergenerational altruism with future bias abstract we show that standard preferences of altruistic overlapping generations exhibit future bias which involves preference reversals associated with increasing impatience this underlies a conflict of interest between successive generations we explore the implications of this conflict for intergenerational redistribution when there is a sequence of utilitarian governments representing living generations and choosing policies independently over time we argue that future bias creates incentives to legislate and sustain a pay as you go pension system which every government views as a self enforcing commitment mechanism to increase future old age transfers

ratings shopping and asset complexity a theory of ratings inflation abstract many identify inflated credit ratings as one contributor to the recent financial market turmoil we develop an equilibrium model of the market for ratings and use it to examine possible origins of and cures for ratings inflation in the model asset issuers can shop for ratings observe multiple ratings and disclose only the most favorable before auctioning their assets when assets are simple agencies ratings are similar and the incentive to ratings shop is low when assets are sufficiently complex ratings differ enough that an incentive to shop emerges thus an increase in the complexity of recently issued securities could create a systematic bias in disclosed ratings despite the fact that each ratings agency produces an unbiased estimate of the asset s true quality increasing competition among agencies would only worsen this problem switching to an investor initiated ratings system alleviates the bias but could collapse the market for information

sources of inefficiency in a representative democracy a dynamic analysis this paper studies the efficiency of policy choice in representative democracies it extends the citizen candidate model of democratic policy making to a dynamic environment equilibrium policy choices are shown to be efficient in the sense that in each period conditional on future policies being selected through the democratic process there exists no alternative current policy choices which can raise the expected utilities of all citizens however policies that would be declared efficient by standard economic criteria are not necessarily adopted in political equilibrium the paper argues that these divergencies are legitimately viewed as politicalfailures

expectations on pension schemes under non stationary conditions abstract the way expectations are treated in models concerning pension schemes in generally decisive for their predicted development in this letter we show how these expectations can consistently be modeled in a dynamic context without having to rely on adhoc assumptions

bond rating agencies and stock analysts who knows what when both bond rating agencies and stock analysts evaluate publicly traded companies and com municate their opinions to investors comparing the timeliness of each we find that granger causality flows both ways while most bond downgrades are preceded by declines in actual and forecast earnings both actual earnings and forecasts of future earnings tend to fall following downgrades although part of this post downgrade forecast revision can be attributed to negative news regarding actual earnings most appears to be reaction to the downgrade itself we find little change in actual earnings following upgrades analysts however tend to increase their forecasts of future earnings

explaining the endowment effect through ownership the role of identity gender and self threat the price people are willing to pay for a good is often less than the price they are willing to accept to give up the same good a phenomenon called the endowment effect loss aversion has typically accounted for the endowment effect but an alternative explanation suggests that ownership creates an association between the item and the self and this possession self link increases the value of the good to test the ownership account this research examines three moderators that theory suggests should affect the possession self link and consequently the endowment effect self threat identity associations of a good and gender after a social self threat the endowment effect is strengthened for in group goods among both men and women but is eliminated for out group goods among men but not women these results are consistent with a possession self link explanation and therefore suggest that ownership offers a better explanation for the endowment effect

market based corrective actions many economic agents take corrective actions based on information inferred from market prices of firms securities examples include directors and activists intervening in the management of firms and bank supervisors taking actions to improve the health of financial institutions we provide an equilibrium analysis of such situations in light of a key problem if agents use market prices when deciding on corrective actions prices adjust to reflect this use and potentially become less revealing we show that market information and agents information are complementary and discuss measures that can increase agents ability to learn from market prices the author 2009 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please email journals permissions oxfordjournals org oxford university press

focusing on the forgone how value can appear so different to buyers and sellers we propose that buying and selling price estimates reflect a focus on what the consumer forgoes in the potential exchange and that this notion offers insight into the well known difference between those two types of value assessment buyers and sellers differ not simply in their valuation of the same item but also in how they assess the value buyers tend to focus on their sentiment toward what they forgo typically the expenditure and buying prices are thus heavily influenced by variables such as salient reference prices by the same token sellers tend to focus on their sentiment toward surrendering the item and selling prices are hence more heavily influenced by variables such as benefits of possessing the item four studies examining buying and selling price estimates of tickets for national collegiate athletic association basketball games offer consistent support for these ideas the studies show that naturally occurring differences among respondents in attitudes relating to the tickets that sellers forgo e g significance of the game corresponded more closely to variation in selling prices than in buying prices conversely measures relating to the expenditure e g respondents concern with money corresponded more closely to buying prices than to selling prices using controlled manipulations we then showed that changes in aspects relating to the game e g expected climate in the stadium affected selling prices more than buying prices but changes relating to the expenditure e g list price of the ticket influenced buying prices more than selling prices we also showed that drawing attention to the benefits of possessing a ticket before asking for the price estimates influenced buying prices more than selling prices supporting our claim that otherwise these benefits are naturally more salient to sellers than buyers similarly drawing attention to alternative uses of money before asking for price estimates influenced selling prices more than buying prices

aging population and education finance abstract conventional wisdom suggests that aging of population will increase political pressure to tilt the composition of social spending in favor of the elderly while potentially sacrificing other publicly provided goods such as education this view seems to be supported by recent empirical findings that per child public education spending tends to be lower in us jurisdictions with higher fraction of elderly residents do these cross sectional findings also carry the dynamic implication that longevity will lead over time to waning political support for funding of public education this paper challenges such implication we present a model that is consistent with the aforementioned cross sectional regressions yet predicts an overall positive impact of increasing longevity on public education funding and economic growth

anchoring effects on consumers willingness to pay and willingness to accept we examine the susceptibility of consumers willingness to pay wtp and willingness to accept wta judgments to influence by arbitrary anchors the results of four studies suggest that although circumstantial differences between buying and selling decisions can lead to systematic differences in susceptibility to anchoring effects the principles governing the impact of anchoring on wtp and wta judgments are essentially the same in particular robust anchoring effects are observed when the anchor relates to the focal source of uncertainty further wtp and wta judgments are most susceptible to anchoring and endowment effects under uncertainty about the desire to trade the implications of this research for our understanding of anchoring and endowment effects are discussed

factor shares and savings in endogenous growth in models of steady investment driven growth an individual s propensity to save depends on how much of his income is drawn from accumulated factors of production capital rather than from nonaccumulated factors when agents are heterogeneous in this respect growth oriented policies have distributional consequences and in the absence of lump sum redistribution their implementation faces political constraints if the median voter is capital poor relative to the economy s representative agent political interactions tend to slow down growth when policy acts on capital s income share and tend to accelerate it when investment subsidies are the policy instrument of choice copyright 1993 by american economic association

vested interests in a positive theory of stagnation and growth we study a positive theory of stagnation and growth aimed at understanding the large variations in growth outcomes across actual economies the theory points to the fundamental role played by vested interests in determining policies which are key to the growth process some agents seek to prevent the adoption of new technologies we develop a model of technology adoption and show how technological innovation may sow the seeds of its own destruction in particular we find that the equilibrium is characterized by a long cycle of stagnation and growth over this cycle incumbents are phased out of the economy will new innovation occur in formalizing our theory we make a methodological contribution by characterizing dynamic voting equilibria when voters must forecast the effects of different current policies on future prices and policy outcomes

three cheers psychological theoretical empirical for loss aversion abstract this note emphasizes the special role of prospect theory in drawing psychophysical considerations into theories of decision making with respect to risk an example of such a consideration is the dependence of outcome value on a reference point and the increased sensitivity of loss relative to gain i e loss aversion loss aversion can explain the st petersburg paradox without requiring concave utility it has the correct psychological foundation it is theoretically useful and it is a parsimonious principle that can explain many puzzles a few open questions are whether loss aversion is a stable feature of preference whether it is an expression of fear and what are its properties

does the source of capital affect capital structure prior work on leverage implicitly assumes capital availability depends solely on firm characteristics however market frictions that make capital structure relevant may also be associated with a firm s source of capital examining this intuition we find firms that have access to the public bond markets as measured by having a debt rating have significantly more leverage although firms with a rating are fundamentally different these differences do not explain our findings even after controlling for firm characteristics that determine observed capital structure and instrumenting for the possible endogeneity of having a rating firms with access have 35 more debt copyright 2006 oxford university press

does rating analyst subjectivity affect corporate debt pricing we find evidence of systematic optimism and pessimism among credit analysts comparing contemporaneous ratings of the same firm across rating agencies these differences in perspectives carry through to debt prices and negatively predict future changes in credit spreads consistent with mispricing moreover the pricing effects are the largest among firms that are the most opaque likely exacerbating financing constraints we find that masters of business administration mbas provide higher quality ratings however optimism increases and accuracy decreases with tenure covering the firm our analysis demonstrates the role analysts play in shaping investor expectations and its effect on corporate debt markets

a positive theory of social security in many countries social security accounts for a large fraction of the government budget why is this so given that at any point in time the number of recipients of social security benefits is smaller than the number of contributors in the overlapping generations model studied in this paper all individuals currently alive vote on social security in every period in equilibrium the size of social security is larger the greater is the proportion of elderly people in the population and the greater is the inequality of pre tax income within each generation both predictions of the theory are supported by the empirical evidence in cross country data

the endowment effect rose tinted and dark tinted glasses the endowment effect predicted by prospect theory is a robust finding in behavioral decision theory extending recent examinations of the underlying processes we present evidence for differential perceptions of the traded item with sellers focusing more on positive features and less on negative features relative to buyers in experiment 1 sellers and buyers access information of differing valence in a free recall task experiment 2 utilizes error rates and response latencies to demonstrate systematic and differing patterns of errors and biases in reactions to valenced stimuli experiment 3 utilizes contrast effects to manipulate these foci thereby moderating the endowment effect

the political feasibility of pension reform options the case of switzerland this paper investigates the political feasibility of different hypothetical reform options of an unsustainable pay as you go public pension system in calibrating the model to the swiss economy we find that low internal rates of return and high distortions can reduce political support for an increase in earmarked taxes up to a point where a reduction in the size of the social security program receives a majority of votes our simulations show that the consideration of non social security taxes is crucial in welfare analysis this is especially true for countries in which the public pension system is explicitly or implicitly subsidized