are there environmental limits to cost benefit analysis this paper considers the problem areas found in applying cost benefit analysis cba to projects involving environmental costs or benefits this is particularly relevant given recent moves by the uk government to include environmental valuations in cba exercises and in other related appraisal activities following the publication of the pearce report the paper argues that a major problem lies in placing monetary values on non market goods the paper also addresses the problems of i differences between citizen and consumer values ii complexity of ecosystems iii irreversibility and uniqueness and iv intergenerational equity and discounting the extent to which cba is an institution open to capture is also discussed

regulating stock externalities under uncertainty abstract using a simple analytical model incorporating benefits of a stock costs of adjusting the stock and uncertainty in costs we uncover several important principles governing the choice of price based policies e g taxes relative to quantity based policies e g tradable permits for controlling stock externalities as in weitzman rev econom stud 41 4 1974 477 the relative slopes of the marginal benefits and costs of controlling the externality continue to be critical determinants of the efficiency of prices relative to quantities with flatter marginal benefits and steeper marginal costs favoring prices but some important adjustments for dynamic effects are necessary including correlation of cost shocks across time discounting stock decay and the rate of benefits growth applied to the problem of greenhouse gases and climate change we find that a price based instrument generates several times the expected net benefits of a quantity instrument

the design of ambiguous mechanisms this paper considers a mechanism design framework that is standard except for the agents preferences which exhibit ambiguity aversion in the sense of gilboa and schmeidler 1989 we show that in this framework the optimal strategic form mechanism is an ambiguous mechanism an ambiguous mechanism specifies a message space and a set of outcome functions after showing that a version of the revelation principle holds in our environment we give an exact characterization of the smallest optimal ambiguous mechanism for the single agent case if the type set is composed of n finite elements then the smallest optimal ambiguous mechanism contains n 1 outcome functions we show how the extra revenue that the designer obtains by employing an ambiguous mechanism as opposed to a standard non ambiguous mechanism depends on the parameters of the model in particular we prove that the share of the surplus that the designer can extract from the agent increases as the type set becomes larger and the probability of each single type decreases in the limiting case where the agent s type is drawn from a nonatomic distribution on an interval the optimal ambiguous mechanism extracts all the rent from the agent

risk rationality and time diversification the validity of the concept of time diversification is the subject of long running debate supporters of the concept argue that risk decreases as investment horizon increases detractors suggest that the concept is false on the face of it we argue that time diversification is consistent both theoretically and empirically with current conceptions of risk and rationality and we also note the implications of changes in investment horizon for stock market behavior

anomalies the equity premium puzzle stable url http links jstor org sici sici 0895 3309 28199724 2911 3a1 3c191 3aatepp 3e2 0 co 3b2 0the journal of economic perspectives is currently published by american economic association your use of the jstor archive indicates your acceptance of jstor s terms and conditions of use available athttp www jstor org about terms html jstor s terms and conditions of use provides in part that unless you have obtainedprior permission you may not download an entire issue of a journal or multiple copies of articles and you may use content inthe jstor archive only for your personal non commercial use please contact the publisher regarding any further use of this work publisher contact information may be obtained athttp www jstor org journals aea html each copy of any part of a jstor transmission must contain the same copyright notice that appears on the screen or printedpage of such transmission the jstor archive is a trusted digital repository providing for long term preservation and access to leading academicjournals and scholarly literature from around the world the archive is supported by libraries scholarly societies publishers and foundations it is an initiative of jstor a not for profit organization with a mission to help the scholarly community takeadvantage of advances in technology for more information regarding jstor please contact support jstor org http www jstor orgfri aug 17 15 58 04 2007

voting and optimal provision of a public good in this paper we study the optimal provision of a costly public good using an average efficiency criterion for every fixed cost we identify a quota mechanism as the optimal mechanism among those that are dominant incentive compatible deficit free and kind moreover we also consider the asymmetric case and demonstrate that a committee mechanism is optimal for a large class of mechanisms in particular this mechanism dominates all vcg pivotal mechanisms

eliciting welfare preferences from behavioural data sets an individual displays various preference orderings in different payoff irrelevant circumstances it is assumed that the variation in the observed preference orderings is the outcome of some cognitive process that distorts the underlying preferences of the individual we introduce a framework for eliciting the individual s underlying preferences in such cases and then demonstrate it for two cognitive processes satisficing and small assessment errors

foundations of dominant strategy mechanisms wilson 1987 criticizes applied game theory s reliance on common knowledge as sumptions in reaction to wilson s critique the recent literature of mechanism design has adopted the goal of finding detail free mechanisms in order to eliminate this re liance in practice this has meant restricting attention to simple mechanisms such as dominant strategy mechanisms however there has been little theoretical foundation for this approach in particular it is not clear the search for an optimal mechanism that does not rely on common knowledge assumption would lead to simpler mechanisms rather than more complicated ones this paper tries to fill the void in the context of an expected revenue maximizing auctioneer we investigate some foundations for using simple dominant strategy auctions

robust auctions for revenue via enhanced competition in robust auctions for revenue via enhanced competition t roughgarden i talgam cohen and q yan revisit the classic bulow klemperer result this result compares the revenues of two well know

sound taxation on the use of self declared value abstract in the 16th century foreign ships passing through the sound had to pay ad valorem taxes known as the sound dues to give skippers an incentive to declare the true value of their cargo the danish crown reserved the right to purchase it at the declared value we show that this rule does not induce truth telling but does allow the authorities to effectively implement a given tax rate

robustly ranking mechanisms for a mechanism designer with an objective such as welfare we propose a method for robustly ranking mechanisms the method is based on eliminating weakly dominated strategies only and thus does not require any assumptions about agents beliefs about each other except full support we illustrate the usefulness of this method in two examples in both examples we show that there are mechanisms that are ranked by our method above dominant strategy mechanisms these examples question the liter ature s focus on dominant strategy mechanisms in cases when such mechanisms yield undesir able outcomes i informal examples

properties of the social discount rate in a benthamite framework with heterogeneous degrees of impatience this paper derives the properties of the discount rate that should be applied to a public sector project when the affected population has heterogeneous degrees of impatience we show that for any distribution of discount rates the social discount rate has the following properties it decreases over time it is lower than the average of the discount rates in the population and it converges to the discount rate of the most patient individual in the economy these properties hold for both constant and decreasing individual discount rates finally we evaluate how changes in the distribution of individual discount rates affect the social discount rate

quasi robust multiagent contracts a criticism of mechanism design theory is that the optimal mechanism designed for one environment can produce drastically different actions outcomes and payoffs in a second even slightly different environment in this sense the theoretically optimal mechanisms usually studied are not robust to study robust mechanisms while maintaining an expected utility maximization approach we study a multiagent model in which the mechanism must be designed before the environment is as well understood as is usually assumed the particular model is of an auction setting with binary private values our main result is that if the prior belief about the correlation in the agents values is diffuse enough the optimal bayesian nash auction must also satisfy dominant strategy incentive constraints furthermore when the optimal auction does provide dominant strategy incentives it takes one of two forms i if perfect correlation and negative correlation are excluded as possibilities the auction incorporates all information about the prior belief over the possible correlations and ii if either perfect correlation or negative correlation is a possibility the auction does not incorporate any correlation information and can be described as a modified vickrey auction

optimal allocation of an indivisible good abstract in this paper we consider the problem of allocating an indivisible good efficiently between two agents with monetary transfers we focus on allocation mechanisms that are dominant strategy incentive compatible when agents types are private information inefficiency of an allocation mechanism may come from two sources misallocation of the indivisible good and an imbalanced budget unfortunately as green and laffont 1979 demonstrate no allocation mechanism can always overcome both kinds of inefficiency we identify allocation mechanisms that maximize the expected total utilities of agents and characterize optimal mechanisms for a large class of agents type distributions for strongly regular type distributions we show that the optimal mechanisms must be budget balanced they are either fixed price mechanisms or option mechanisms the result may not hold for other type distributions for certain type distributions we show that optimal mechanisms are hybrids of vickrey clarke groves mechanisms and budget balanced mechanisms

optimality and robustness of the english auction abstract in milgrom and weber s 1982 econometrica 50 1089 1122 general symmetric model under a few additional regularity conditions the english auction maximizes the seller s expected profit within the class of all posterior implementable trading procedures and fails to do so among all interim incentive compatible procedures in which losers do not pay these results suggest that appropriate notions of robustness and simplicity which imply the optimality of the english auction for a risk neutral seller must impose bargaining like features on the set of feasible trading mechanisms journal of economic literature classification numbers d44 d82

investor heterogeneity market segmentation leverage and the equity premium puzzle abstract financial economists for the past two decades have attempted to explain why the equity premium is so high now known as the equity premium puzzle epp we model investor heterogeneity market segmentation and optimal leverage using the time separable standard power utility market completeness and ignoring transaction costs to explain the epp we explain both the epp and the related risk free rate puzzle without resorting to preference modification furthermore we show a unique interior equilibrium for the debt ratio contrary to the work by f modigliani m h miller the cost of capital corporation finance and the theory of investment american economic review 48 1958 261 297 corporate income taxes and the cost of capital american economic review 53 1963 433 443 and s c myers presidential address the capital structure puzzle journal of finance 39 1984 575 592 our simulations show the relevance of our models

the effect of myopia and loss aversion on risk taking an experimental test myopic loss aversion is the combination of a greater sensitivity to losses than to gains and a tendency to evaluate outcomes frequently two implications of myopic loss aversion are tested experimentally 1 investors who display myopic loss aversion will be more willing to accept risks if they evaluate their investments less often 2 if all payoffs are increased enough to eliminate losses investors will accept more risk in a task in which investors learn from experience both predictions are supported the investors who got the most frequent feedback and thus the most information took the least risk and earned the least money language en

implementation in weakly undominated strategies optimality of second price auction and posted price mechanism we study the mechanism design problem of guaranteeing desirable performances whenever agents are rational in the sense of not playing weakly dominated strategies we first provide an upper bound for the best performance we can guarantee among all feasible mechanisms the bound is represented as the maximized value of the designer s objective subject to the inequality version of the standard envelope incentive conditions we then prove the bound to be tight under certain conditions on the designer s prior over the agents pay off types in auction and bilateral trade applications in private value auction and bilateral trade the optimal mechanisms a second price auction and posted price mechanism respectively satisfy dominant strategy incentive compatibility the classical notion of robust mechanisms in an interdependent value auction we find that a second price auction is optimal in revenue with interdependent values which is neither dominant strategy nor ex post incentive compatible but satisfies the novel incentive compatibility introduced in this analysis

guaranteeing individual accounts global aging is prompting workers and taxpayers everywhere to recognize their vulnerability to the inherent uncertainty of unfunded social security systems this has generated an international wave of social security reforms over the last two decades prompting more than 20 countries to establish individual account ia plans in the united states the idea of individual accounts has attracted recent interest with the release of the final report of the president s commission to strengthen social security csss here voluntary individual accounts were proposed as a key element of a reformed national old age system see commission to strengthen social security 2001 john f cogan and mitchell 2003 strengths of ia s include the fact that participants gain ownership in their accounts and diversify their pension investments nevertheless ia participants also must bear capital market risk recent market volatility has reminded investors of the importance of capital market fluctuations and their potential impact on retirement income in response some policymakers have suggested that guarantees be designed to help protect ia investments abroad such guarantees have been adopted in several latin american countries undergoing reform and most recently in japan and germany mitchell and kent smetters 2003 sensible public policy recommending the adoption of guarantees must identify their costs and who will pay for them in this paper we discuss how to evaluate such costs in the context of a social security reform that includes ia s along with ways to finance them

robustness and linear contracts abstract we consider a moral hazard problem where the principal is uncertain as to what the agent can and cannot do she knows some actions available to the agent but other unknown actions may also exist the principal demands robustness evaluating possible contracts by their worst case performance over unknown actions the agent might potentially take the model assumes risk neutrality and limited liability and no other functional form assumptions very generally the optimal contract is linear the model thus offers a new explanation for linear contracts in practice it also introduces a flexible modeling approach for moral hazard under nonquantifiable uncertainty jel d81 d82 d86

toward choice theoretic foundations for behavioral welfare economics interest in behavioral economics has grown in recent years stimulated largely by accumulating evidence that the standard model of consumer decision making provides an inadequate positive description of human behavior behavioral models are increasingly finding their way into policy evaluation which inevitably involves welfare analysis no consensus concerning the appropriate standards and criteria for behavioral welfare analysis has emerged yet this paper summarizes our effort to develop a unified framework for behavioral welfare economics for a detailed discussion see bernheim and rangel 2007 one that can be viewed as a natural extension of standard welfare economics standard welfare analysis is based on choice not on utility or preferences in its simplest form it instructs the planner to respect the choices an individual would make for himself the guiding normative principle is an extension of the libertarian deference to freedom of choice which takes the view that it is better to give a person the thing he would choose for himself rather than something that someone else would choose for him we show that it is possible to extend the standard choice theoretic approach to welfare analysis to situations where individuals make inconsistent choices which are prevalent in behavioral economics

resource compensation and negotiation support in an aboriginal context using community based multi attribute analysis to evaluate non market losses abstract compensation for losses of non market values experienced by aboriginal peoples due to adverse impacts on their land or resource base caused by others is an important issue for law and social justice yet the standard methods of economic valuation as a basis for determining compensation are not always suited to addressing the diverse values of aboriginal people this paper discusses an approach to valuation that employs concepts and methods of decision analysis informed by behavioral decision research in an applied context it uses a multi attribute value assessment as a basis for characterizing the relative significance of resource damages that affect deeply held complex intangible values we draw on the experience of conducting analyses for three metis settlements in alberta canada to illustrate the approach using a case study interpretations of the results as a basis for negotiation regarding compensation are examined

applications of option pricing theory twenty five years later nobel lecture to the memory of alfred nobel december 9 1997 this abstract was borrowed from another version of this item

a theory of the consumption function with and without liquidity constraints fifteen years ago milton friedman s 1957 treatise a theory of the consumption function seemed badly dated dynamic optimization theory had not been employed much in economics when friedman wrote and utility theory was still comparatively primitive so his statement of the permanent income hypothesis never actually specified a formal mathematical model of behavior derived explicitly from utility maximization instead friedman relied at crucial points on intuition and verbal descriptions of behavior although these descriptions sounded plausible when other economists subsequently found multiperiod maximizing models that could be solved explicitly the implications of those models differed sharply from friedman s intuitive description of his model furthermore empirical tests in the 1970s and 1980s often rejected these rigorous versions of the permanent income hypothesis in favor of an alternative hypothesis that many households simply spent all of their current income today with the benefit of a further round of mathematical and computational advances friedman s 1957 original analysis looks more prescient than primitive it turns out that when there is meaningful uncertainty in future labor income the optimal behavior of moderately impatient consumers is much better described by friedman s original statement of the permanent income hypothesis than by the later explicit maximizing versions furthermore in a remarkable irony much of the empirical evidence that rejected the permanent income hypothesis as specified in tests of the 1970s and 1980s is actually consistent both with friedman s original description of the model and with the new version with serious uncertainty there are four key differences between the explicit maximizing models

robustness of simple menus of contracts in cost based procurement abstract we consider a model of cost based procurement in which the principal faces knightian uncertainty about the agent s preferences for cost reduction we show that a particularly simple incentive scheme a menu comprising a fixed price contract and a cost reimbursement contract minimizes the maximum expected payment where this maximum is taken over the set of possible agent preferences for some parameters of the problem a range of alternative incentive schemes also satisfy this criterion we show that the simple incentive scheme is not weakly dominated by any of the alternatives there does not exist an alternative mechanism for which the expected payment is no higher for all realizations of the agent s preferences and strictly lower for some realization

optimal robust bilateral trade risk neutrality a risk neutral seller and buyer with private information bargain over an indivisible item we prove that optimal robust bilateral trade mechanisms are payoff equivalent to non wasteful randomized posted prices

on the risk of stocks in the long run a resolution to the debate in response to the ongoing debate in this journal about whether the risk of investments in the stock market is increased or decreased by lengthening the investment period we show that bodie s attempt to identify market risk with the price of put options leads to a circular argument within the workings of arbitrage free option pricing models thus bodie failed to rebut the conventional view that longer investment horizons may be thought of as less risky bodie s put option prices are relevant however to determining market prices of stock investment insurance

misconceptions about optimal equity allocation and investment horizon our analysis and results offer some resolution to a debate that has continued for 30 years we demonstrate that in contrast to prior claims no conflict exists between the implications of economic models of choice under uncertainty and a rational investor preference for larger equity allocations at longer investment horizons using examples of expected utility of wealth and mean variance utility we show that the effect of a longer horizon on risky asset allocation is consistent with increasing or decreasing optimal equity allocations even under the assumption of constant relative risk aversion

ex post renegotiation proof mechanism design we study what kind of equilibria of which mechanisms are ex post renegotiation proof eprp i e robust against the possibility of ex post renegotiation under a variety of renegotiation procedures and which social choice functions are eprp implementable in complete information environments with two agents only budget balanced groves allocations are eprp implementable while with three or more agents all ex post efficient allocations are in environments with independent private values essentially only the budget balanced groves in expectations allocations are eprp implementable while with three or more agents and correlated beliefs all ex post efficient allocations are

sequentially rationalizable choice a sequentially rationalizable choice function is a choice function that can be retrieved by applying sequentially to each choice problem the same xed set of asymmetric binary relations rationales to remove inferior alternatives these con cepts translate into economic language some human choice heuristics studied in psychology and explain cyclical patterns of choice observed in experiments we study some properties of sequential rationalizability and provide a full character ization of choice functions rationalizable by two and three rationales

the effectiveness of english auctions abstract we study the performance of the english auction under different assumptions about the seller s degree of bayesian sophistication we define the effectiveness of an auction as the ratio between the expected revenue it generates for the seller and the expected valuation of the object to the bidder with the highest valuation total surplus we identify tight lower bounds on the effectiveness of the english auction for general private values environments and for private values environments where bidders valuations are non negatively correlated for example when the seller faces 12 bidders who the seller believes have non negatively correlated valuations whose expectations are at least as high as 60 of the maximal possible valuation an english auction with no reserve price generates an expected price that is more than 80 of the value of the object to the bidder with the highest valuation

the equity premium stock and bond returns since 1802 1992 the equity premium stock and bond returns since 1802 financial analysts journal vol 48 no 1 pp 28 38 46

myopic risk taking in tournaments abstract there is a common notion that incentive schemes in the financial industry trigger myopia and risk taking in some sense this contrasts with the concept of myopic loss aversion mla which implies that myopia mitigates risk taking a number of experimental studies support the mla hypothesis by showing that people take less risk the more frequently their investments are evaluated in this paper we show experimentally that if subjects are exposed to tournament incentives the standard mla effect disappears rather there is a tendency towards more risk taking the more frequently investments are evaluated

auction choice for ambiguity averse sellers facing strategic uncertainty abstract the robustness of the bayes nash equilibrium prediction for seller revenue in auctions is investigated in a framework of interdependent valuations generated from independent signals seller expected revenue may fall well below the equilibrium prediction even though the individual payoff consequences of suboptimal bidding may be small for each individual bidder this possibility would be relevant to a seller who models strategic uncertainty as ambiguity and who is ambiguity averse in the sense of gilboa and schmeidler it is shown that the second price auction is more exposed than the first price auction to lost revenue from the introduction of bidder behavior with small payoff errors

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

robust contracting with additive noise abstract we investigate the idea that linear contracts are reliable because they give the same incentives for effort at every point along the contract we ask whether this reliability leads to a microfoundation for linear contracts when the principal is profit maximizing we consider a principal agent model with risk neutrality and limited liability in which the agent observes the realization of a mean zero shock to output before choosing how much effort to exert we show that such a model can indeed provide a foundation for reliable contracts and illustrate what elements are required in particular we must assume that the principal knows a lower bound but not an upper bound on the shocks

asset returns with transactions costs and uninsured individual risk abstract we explore whether incorporating an explicit motive for holding liquid assets within an equilibrium asset pricing model helps explain the following features of asset returns and turnover in the post war u s economy i the low risk free real interest rate ii the large spread between returns on liquid assets and stocks and iii the greater transaction velocity of liquid assets relative to stocks we introduce a demand for liquid assets by adding uninsured individual risk together with differential costs of trading securities numerical simulations attempting to match the return data generate a ratio of liquid assets to income considerably below observed levels

short term planning and the life cycle consumption puzzle abstract we develop a new life cycle consumption model where the individual has a short planning horizon standard life cycle consumers with perfect foresight and hand to mouth consumers are both special limiting cases of our model where the length of the planning horizon is set to the entire lifetime and zero respectively we derive an analytical solution to the time inconsistent short term planning problem which reveals the inner workings of the model and facilitates its use in other settings we also show that the short term planning mechanism is powerful enough to generate a consumption hump with the right size and location

interest rates and expected future budget deficits in the united states several recent empirical studies have found no evidence of a positive association between interest rates and current and past budget deficits one possible explanation for this finding is that interest rates are related much more to the expectation of future budget deficits than to current and past budget deficits in this paper i investigate whether this explanation is valid finding no evidence that it is section ii briefly formulates and discusses the hypothesis under consideration stating some of its implications section iii presents the results of regressing the commercial paper rate moody s aaa bond rate and the ex post real commercial paper rate on current and past government spending budget deficits and real money supplies the regressions have been fitted to the entire sample of monthly data spanning the period between june 1908 and march 1984 and to 11

efficiency in economic growth models under uncertainty abstract we consider an infinite horizon economy with stochastic production and consumption we define efficiency of feasible production consumption programs without referring to a particular utility function using stochastic ordering a complete characterization of inefficiency of type i is obtained equivalence between type ii efficiency and a certain optimality notion when decision makers are risk averse is proved when the number of states of nature is finite at each date

federal discount rate policy the shadow price of capital and challenges for reforms abstract this paper addresses the problem of determining discount rate policies that are both consistent with basic economic principles and implementable given real world constraints the paper first examines the discounting policies of the three federal oversight and budget agencies as they apply to public investment regulation lease purchase and asset divestiture decisions one prominent technique that has been suggested as a means of improving discounting policy the shadow price of capital approach is then considered in detail key aspects of its implementation are considered including the determination of program cost incidence rates of saving and reinvestment and proper aggregation of capital costs the analysis suggests that there are significant empirical challenges associated with this approach

optimal pricing mechanisms with unknown demand the standard profit maximizing multi unit auction intersects the submitted demand curve with a preset reservation supply curve which is determined using the distribution from which the buyers valuations are drawn however when this distribution is unknown a preset supply curve cannot maximize monopoly profits the optimal pricing mechanism in this situation sets a price to each buyer on the basis of the demand distribution inferred statistically from other buyers bids the resulting profit converges to the optimal monopoly profit with known demand as the number of buyers goes to infinity and convergence can be substantially faster than with sequential price experimentation

auction design with endogenously correlated buyer types abstract this paper studies optimal auction design when the seller can affect the buyers valuations through an unobservable ex ante investment the key insight is that the optimal mechanism may have the seller play a mixed investment strategy so as to create correlation between the buyers otherwise conditionally independent valuations assuming that the seller announces the mechanism before investing the paper establishes conditions on the investment technology so that a mechanism exists which leaves buyers no information rent and leaves the seller indifferent between his investments under these conditions the seller can in fact extract the first best surplus almost fully

one thousand points of light seeking a number a case study of cbo s search for a discount rate policy abstract several years ago the congressional budget office cbo published several studies in quick succession each of which employed a discount rate to convert future values into present ones each study used a different discount rate no rationale was given for the choices and it did not seem sensible to let dealer s choice be the regime for cbo discount rate policy this paper describes how cbo established a provisional policy how that policy confronted subsequent demands for analysis and where we now stand

discounting the distant future how much do uncertain rates increase valuations abstract we demonstrate that when the future path of the discount rate is uncertain and highly correlated the distant future should be discounted at significantly lower rates than suggested by the current rate we then use two centuries of us interest rate data to quantify this effect using both random walk and mean reverting models we compute the certainty equivalent rate that summarizes the effect of uncertainty and measures the appropriate forward rate of discount in the future under the random walk model we find that the certainty equivalent rate falls continuously from 4 to 2 after 100 years 1 after 200 years and 0 5 after 300 years at horizons of 400 years the discounted value increases by a factor of over 40 000 relative to conventional discounting applied to climate change mitigation we find that incorporating discount rate uncertainty almost doubles the expected present value of mitigation benefits

multicointegration and sustainability of fiscal practices i introduction governments are charged with the responsibility of crafting national budgets over time budgets tend to move between balance surplus and deficit these fluctuations result from the fact that all too often a government makes financial decisions in one year that have implications for spending commitments and revenue streams a number of years down the road thus responsible government budgeting involves examining the budget position over time that is engaging in intertemporal budgeting economists generally utilize two criteria to assess the intertemporal budget s sustainablity does the government run persistent deficits if so what is the resulting level of debt are these two criteria sufficient to make predictions regarding budget sustainability recent work by bohn 1995 1998 and ball et al 1998 suggests that budgets are far too complicated to be evaluated with respect to deficits and debt alone these authors have shown that persistent deficits and accumulation of debt does not necessarily imply that the debt is unmanageable and hence fiscal processes unsustainable the implication of their work is that the standard approach to testing whether government adheres to its intertemporal budget constraint cointegration analysis does not provide sufficient criteria for determining whether the fiscal process is truly sustainable consequently in this article we develop a more encompassing set of criteria under more realistic assumptions for determining whether a country exhibits a sustainable budgeting process our criteria for sustainability are based the multicointegration approach first presented by granger and lee 1989 1990 and further developed in engsted gonzalo and haldrup 1997 and haldrup 1998 the budgeting practices of 15 industrialized countries belgium canada denmark finland france great britain greece italy the netherlands norway portugal spain sweden switzerland and the united states are evaluated in terms of the criteria our sample spans the modern era 1960 98 we extend the intertemporal budgeting literature by employing the multicointegration framework to develop the appropriate policy responses to deficits and debt accumulation and to test for their presence the methodology assesses both the stock and flow relationships that should characterize sustainable fiscal processes when the data are nonstationary cointegration between the spending revenue flow relationship is the first component of our criteria cointegration between the flow of revenue spending and the stock of debt is the second jointly these conditions characterize multicointegration between government spending and revenue in the multicointegration case the system is characterized by a complex stock flow equilibrium relationship that is not uncommon in intertemporal models of economic behavior such a relationship is typically associated with issues of optimal control where the levels and rates of change of the variables making up the system are determinants of the policy response multicointegration can ensure that a country s budgeting strategy is sustainable in bad states of nature that is when the rate of economic growth falls short of the real interest rate on sovereign debt 1 bohn 1995 and ball et al 1998 point out that existing theoretical models that underpin traditional sustainability tests are too simple specifically bohn 1995 shows that the sustainability of imbalances in a stochastic setting involves satisfying an intertemporal budget constraint and a transversality condition that differs from that implicit in simple deterministic models the transversality condition requires that the limit of the debt discounted at a rate that is a function of the probability distribution of future debt and the marginal rate of substitution between present and future consumption be zero this correct discounting is critical in economies where the rate of growth has been higher than the real interest rate

beyond revealed preference choice theoretic foundations for behavioral welfare economics we propose a broad generalization of standard choice theoretic welfare economics that encompasses a wide variety of nonstandard behavioral models our approach exploits the coherent aspects of choice that those positive models typically attempt to capture it replaces the standard revealed preference relation with an unambiguous choice relation roughly x is strictly unambiguously chosen over y written xp y iff y is never chosen when x is available under weak assumptions p is acyclic and therefore suitable for welfare analysis it is also the most discerning welfare criterion that never overrules choice the resulting framework generates natural counterparts for the standard tools of applied welfare economics and is easily applied in the context of specific behavioral theories with novel implications though not universally discerning it lends itself to principled refinements

rational choice with status quo bias abstract motivated by the empirical findings concerning the importance of one s current situation on her choice behavior the main objective of this paper is to propose a rational choice theory that allows for the presence of a status quo bias and that incorporates the standard choice theory as a special case we follow a revealed preference approach and obtain two nested models of rational choice that allow phenomena like the status quo bias and the endowment effect and that are applicable in any choice situation to which the standard static choice model applies

government financing decisions and asset returns abstract this paper presents an empirical investigation of the relation between government financing decisions and asset returns in particular the focus is on whether a substitution of debt financing for tax financing of a given level of expenditures is associated with an increase in interest rates the paper brings a different perspective to empirical investigations of government fiscal policies by examining the response of asset prices in an efficient capital market to such policies rather than focusing on aggregate consumption behavior the results are consistent with the idea that asset prices are unrelated to how the government finances its expenditures the results however also indicate that the capital market is not indifferent with respect to the level of government expenditures as higher interest rates are associated with increases in government purchases

on public good provision mechanisms with dominant strategies and balanced budget abstract consider a mechanism for the binary public good provision problem that is dominant strategy incentive compatible dsic ex post individually rational epir and ex post budget balanced epbb it is well known that if there are only two agents then any such mechanism must have a threshold or fixed cost sharing form providing the public good if and only if both agents have values that are at least their respective thresholds when there are more than two agents there are mechanisms that are dsic epir and epbb that are not of the threshold form any dsic epir and epbb mechanism that additionally satisfies that the lowest types expect zero net utility from participating are again of the threshold form this additional condition arises endogenously when maximizing expected welfare subject to dsic epir and epbb

the relevance of private information in mechanism design abstract recent results in mechanism design show that as long as agents have correlated private information and are sufficiently risk neutral it is possible to design mechanisms that leave agents with arbitrarily small information rents we show that these full rent extraction results hinge on the implicit assumption that the agents beliefs uniquely determine their preferences we present an example of the voluntary provision of a public good in which this assumption is relaxed and consequently even in highly correlated environments if agents beliefs do not uniquely determine their preferences then the extraction of the agents entire information rents is impossible

a generalized approach to multigeneration project evaluation 1 introductionit is well known that the choice of discount rate plays a significant role in the ranking of projects with varying time paths of costs and benefits for public projects the choice of the appropriate social discount rate sdr is not clear cut even in the context of short lived projects in which costs and benefits occur within a single generation in particular when capital taxes produce a wedge between gross and net rates of return should one discount at the economy s rate of return the before tax rate or the individual s rate of return the after tax rate in the single generation context the literature falls in two camps 1 one camp argues that the appropriate sdr is a weighted average of the gross and net rates of return with weights typically determined by the fractions of resources drawn from consumption and private investment respectively 2 a second camp argues that future benefits should be discounted at the net rate of return but that the initial investment should be multiplied by a scale factor so that the direct costs of the project can be expressed in terms of consumption units 3both approaches suffer from severe implementation problems for the first approach there is no general formula for the weights needed to calculate the sdr as a weighted average of two market rates of return dreze 1974 indeed the appropriate sdr to use is project specific stiglitz 1982 without a systematic methodology to derive project specific sdrs the weighted average approach is hard to implement for the second approach which equalizes the sdr to the net rate of return the scale factor the opportunity cost of public investment must be quantified the opportunity cost of public investment depends on whether resources come from private investment or consumption and on the calculation of the present value of the future consumption yielded by a unit of capital discounted at the net rate of return that is the shadow price of capital as lind 1997 points out however there is no general agreement on a specific procedure for calculating the shadow price of capital indeed the concept of the opportunity cost of public investment suffers the same project dependence problem as the first view of the sdr diamond 1968 multigeneration projects such as nuclear waste disposal natural resource conservation or even social security reform further complicate discount rate choice specifically intergenerational equity in addition to intertemporal efficiency plays a role in determining the appropriate social discount rate for multigeneration public project evaluation 4 as in the single generation context there are two competing views on the appropriate discount rate when evaluating multigeneration projects the descriptive and the prescriptive approaches 5the descriptive approach to discounting is a market based approach it does not rely on an explicit social welfare function swf or the pure time preference rate embedded in the swf however the descriptive approach works under the assumption that intergenerational compensation through changes in the tax debt policy is available 6 it is argued that under appropriate intergenerational compensation the market rates of return are still relevant for calculating the sdr for multigeneration project evaluation and in general the sdr should be a weighted average of the gross and net rates of return this descriptive view of setting the sdr equal to the market return appears to underlie the office of management and budget s omb adoption of 7 as the appropriate discount rate for federal programs 7the intent of the prescriptive approach is to use the social discount rate as an expression of ethical judgment on how consumption of future generations should be compared to consumption of current generations

a measure of rationality and welfare evidence showing that individual behavior often deviates from the classical principle of preference maximization has raised at least two important questions 1 how serious are the deviations 2 what is the best way to analyze choice behavior in order to extract information for the purpose of welfare analysis this paper addresses these questions by proposing a new way to identify the preference relation that is closest in terms of welfare loss to the revealed choice

case based decision theory this paper suggests that decision making under uncertainty is at least partly case based we propose a model in which cases are primitive and provide a simple axiomatization of a decision rule that chooses a best act based on its past performance in similar cases each act is evaluated by the sum of the utility levels that resulted from using this act in past cases each weighted by the similarity of that past case to the problem at hand the formal model of case based decision theory naturally gives rise to the notions of satisficing decisions and aspiration levels

choice and individual welfare we propose an abstract method of systematically assigning a rational ranking to non rationalizable choice data our main idea is that any method of ascribing welfare to an individual as a function of choice is subjective and depends on the economist undertaking the analysis we provide a simple example of the type of exercise we propose namely we define an individual welfare functional as a mapping from stochastic choice functions into weak orders a stochastic choice function or choice distribution gives the empirical frequency of choices for any possible opportunity set framing factors may also be incorporated into the model we require that for any two alternatives x and y if our individual welfare functional recommends x over y given two distinct choice distributions then it also recommends x over y for any mixture of the two choice distributions together with some mild technical requirements such an individual welfare functional must weight every opportunity set and assign a utility to each alternative x which is the sum across all opportunity sets of the weighted probability of x being chosen from the set it therefore requires us to have a prior view about how important or representative a choice of x at a given situation is

no trade and yes trade theorems for heterogeneous priors abstract we show that contrary to currently widely held misperceptions the classical no trade theorem obtains even under heterogeneous priors that is when priors are not common speculative trade is still impossible under common knowledge of rationality however trade becomes mutually acceptable if at least one party to the trade puts at least some slight probability on the other party being irrational we also derive bounds on disagreements in the case of heterogeneous priors and common p beliefs

on the robustness of laissez faire abstract this paper considers a model economy in which agents are privately informed about their type their endowments of various goods and their preferences over these goods while preference orderings over observable choices are allowed to be correlated with an agent s private type we assume that the planner government is both uncertain about the nature of this joint distribution and unable to choose among multiple equilibria of any given social mechanism we model the planner government as having a maxmin objective in the face of this uncertainty our main theorem is as follows once we allow for this kind of uncertainty and assume no wealth effects in preferences the uniquely optimal social contract is laissez faire in which agents trade in unfettered markets with no government intervention of any kind

informationally robust trade and limits to contagion abstract two agents can each accept or reject a proposed deal whose value for each agent depends on an unknown state and may be positive or negative the deal takes place only if both accept each agent can be imperfectly informed in an arbitrary way about both her own value and the other agent s in such environments contagious adverse selection may prevent the deal from being reached even when it is mutually beneficial ex post we give an upper bound on the ex ante expected welfare loss in equilibrium due to such contagion valid for any information structure the welfare loss is small if negative values are unlikely ex ante and under an assumption of known aggregate gains from the deal our bound is sharp the bound has a succinct description even though the equilibrium itself in any given information structure may be hard to describe explicitly

tools or toys the impact of high technology on scholarly productivity i introduction and motivation in the past several decades investment that makes communication easier has increased rapidly in the united states and other developed economies since the mid 1980s a combination of technical change and deregulation has also reduced long distance telephone rates in the united states by 50 reported by allen 1995 pitney bowes 1997 reported that fax usage increased by 20 between 1996 and 1997 alone and electronic mail e mail unknown before 1985 is ubiquitous today popular discussion of a wide range of additional examples of rapidly declining prices and explosive growth of the use of telecommunications is provided by cairncross 1997 attempts to measure the impact on aggregate total factor and labor productivity of these supposedly productivity enhancing investments in broad reaching technical improvements such as computing machinery and communications equipment have not met with great success as in morrison 1997 but see greenan and mairesse 1996 1 an alternative to measuring effects on the broader economy is to measure the impact of generalized technical change on productivity in specific activities observed at the micro level an earlier literature including griliches 1958 and trajtenberg 1989 has clearly traced the effect of specific innovations in raising productivity in specific sectors of the economy this article expands on that tradition by trying to identify the effect of the recent broad revolution in communications on one activity scholarly publishing we propose studying scholarly publishing before and after technical change greatly lowered communication costs we examine in particular whether increasing ease of communication has altered scholars choices about their methods of production and whether those methods yielded changes in the productivity of scholarly activity that are consistent with increasing access to new communications technologies 2 in section ii we discuss a model of the production process in scholarly writing in relation to the cost of communications in section iii we describe the unique data set we assembled to examine the relation between technical change and scholarly productivity section iv presents the results of using these data to test the hypotheses that we develop and section v compares coauthored to solo authored studies and provides a suggestion for the increased prevalence of the former section vi offers a consistent explanation for most of the results ii a model of scholarly production the example that we use in this study of the impact of technology is the nature and outcomes of the choices of co workers by authors of scholarly publications in economics the importance of team research has been stressed by a number of authors studying the economics of innovation including dasgupta 1988 who also presents a research summary so that our specific example has broader implications for the study of technical change has the decline in the cost of communication altered scholars choices in a way consistent with these technologies increasing scholarly productivity in examining scholarly productivity we focus on research output in particular we view scholars as having three production choices 1 work solo s 2 work with close by coauthor s c or 3 work with distant coauthor s d in the model in this section the scholar is assumed to choose a production technology that maximizes his or her scholarly productivity measured as the quality of the article produced in section vi we a dopt an alternative characterization of a scholar s choices we assume that the scholar has a wide range of potential research activities to choose among and has perfect knowledge of the productivity p valued in dollars of all potential matches s c sub i member of c and d sub i member of d 3 each match generates one solo equivalent article per period

ricardian equivalence in the presence of capital market imperfections abstract it is a common claim that ricardian equivalence fails if capital markets are imperfect the validity of this claim is examined for the case of informationally imperfect capital markets we present three alternative models of adverse selection and analyze the effects of debt finance in these models it is shown that a debt financed tax cut can lead to pareto improvement in some cases in the theoretically most preferable model however ricardian equivalence survives in spite of genuine imperfections in the capital market the results point to the importance of specifying the exact nature of imperfection

on the risk of stocks in the long run a familiar proposition is that investing in common stocks is less risky the longer an investor plans to hold them if this proposition were true then the cost of insuring against earning less than the risk free rate of interest should decline as the investment horizon lengthens this paper shows that the opposite is true even if stock returns are mean reverting in the long run the case for young people investing more heavily than older people in stocks cannot therefore rest solely on the long run properties of stock returns for guarantors of money fixed annuities the proposition that stocks in their portfolios are a better hedge the longer the maturity of their obligations is unambiguously wrong

labor supply flexibility and portfolio choice in a life cycle model abstract this paper examines the effect of the labor leisure choice on portfolio and consumption decisions over an individual s life cycle the model incorporates the fact that individuals may have considerable flexibility in varying their work effort including their choice of when to retire given this flexibility the individual simultaneously determines optimal levels of current consumption labor effort and an optimal financial investment strategy at each point in his life cycle we show that labor and investment choices are intimately related the ability to vary labor supply ex post induces the individual to assume greater risks in his investment portfolio ex ante

predictive power in behavioral welfare economics when choices appear inconsistent duet obehavioral biases there is a theoretical debate about whether or not it is necessary to impose the structure of a model in order to provide meaning ful welfare guidance based on such choices to address this question empirically we evaluate the predictive power of the model free and non parametric approach to welfare analysis proposed by bernheim and rangel 2009 in two standard choice settings we show that for most hypothetical demands this approach does not offer clear welfare guidance however we find that for most observed demands this approach can be used to make tight predictions even though these demand functions exhibit inconsistencies for the experimental choices of manzini and mariotti 2010 we show that the welfare guidance provided by these predictions is consistent with delaya version eventhough the guidance provided by revealed preferences is more ambiguous

leverage time preference and the equity premium puzzle abstract we re examine the mehra and prescott 1985 model a combination of the time preference factor greater than one and reasonable leverage ratios in the equity market resolve the equity premium puzzle such parameter values can be consistent with finite expected utility and a positive risk free rate of interest rate the model performs better for the mp target values than for economically reasonable variations around those values

the sub optimality of the majority rule abstract we consider collective choice from two alternatives ex ante each agent is uncertain about which alternative she prefers and may be uncertain about the intensity of her preferences an environment is given by a probability distribution over utility vectors that is symmetric across agents and neutral across alternatives in many environments the majority voting rule maximizes agents ex ante expected utilities among all anonymous and dominant strategy implementable choice rules but in some environments where the agents utilities are stochastically correlated other dominant strategy choice rules are better for all agents if utilities are stochastically independent across agents majority voting is ex ante optimal among all anonymous and incentive compatible rules we also compare rules from an interim viewpoint

robustly optimal auctions with unknown resale opportunities the standard revenue maximizing auction discriminates against a priori stronger bidders so as to reduce their information rents we show that such discrimination is no longer optimal when the auction s winner may resell to another bidder and the auctioneer has non bayesian uncertainty about such resale opportunities we identify a worst case resale scenario in which bidders values become publicly known after the auction and losing bidders compete bertrand style to buy the object from the winner with this form of resale misallocation no longer reduces the information rents of the high value bidder as he could still secure the same rents by buying the object in resale under regularity assumptions we show that revenue is maximized by a version of the vickrey auction with bidder specific reserve prices first proposed by ausubel and cramton 2004 the proof of optimality involves constructing lagrange multipliers on a double continuum of binding non local incentive constraints

discounting inside the washington d c beltway places more weight on costs and benefits in the near term over costs and benefits in the future the choice of the discount rate is therefore critical in evaluating the merits of many public policy proposals this article focuses on how the choice of discount rate can dramatically affect policy choices these policies include whether to build a bridge whether to privatize a power marketing administration which sells electricity generated by government owned facilities such as dams how much money should be spent on early childhood education or options for reforming social security the ongoing challenge is to discount future costs or benefits in a way that matches the project s level of riskiness we begin by discussing the underlying issues in choosing an appropriate discount rate we then discuss the variety of different discount rates that are actually used by various washington policymakers and the biases they often generate

government asset and liability management in an era of vanishing public debt the paper examines alternative options for managing public debt and public assets in a government balance sheet framework that includes the treasury the federal reserve and social security even after september 11 u s fiscal policy is on a trajectory to accumulate substantial uncommitted funds the paper examines how such funds should be invested i conclude that high quality fixed income securities are the best benchmark and that social security is the most appropriate government asset manager the analysis of policy alternatives reveals a trilemma between maintaining a liquid treasury market minimizing rent seeking and facilitating intergenerational risk sharing

uncertain discount rates in climate policy analysis abstract consequences in the distant future such as those from climate change have little value today when discounted using conventional rates this result contradicts our gut feeling about such problems and often leads to ad hoc application of lower rates for valuations over longer horizons a step facilitated by confusion and disagreement over the correct rate even over short horizons we review the theory and intuition behind the choice of discount rates now and importantly the impact of likely variation in rates in the future correlated changes in future rates imply that the distant future should be discounted at much lower rates than suggested by the current rate thereby raising the value of future consequences regardless of opinions concerning the current rate using historic data to quantity the likely changes and correlation in changes in future rates we find that future valuations rise by a factor of many thousands at horizons of 300 years or more almost doubling the expected present value of climate mitigation benefits relative to constant 4 discounting ironically uncertainty about future rates reduces the ratio of valuations based on alternate choices of the current rate

myopic loss aversion disappointment aversion and the equity premium puzzle abstract this paper takes a close look at the behavioural finance explanations of the equity premium puzzle namely myopic loss aversion benartzi s thaler r h 1995 myopic loss aversion and the equity premium puzzle quarterly journal of economics 110 73 92 and disappointment aversion ang a bekaert g liu j 2005 why stocks may disappoint journal of financial economics 76 471 508 the paper proposes a simple specification of loss and disappointment aversion and brings these theories to the data the main conclusion is that a highly short sighted investment horizon is required for the historical equity premium to be explained by loss aversion while reasonable values for disappointment aversion are found also for long investment horizons stocks may not only lose in the short term but also disappoint in the long term

fiscal policy and the mehra prescott puzzle on the welfare implications of budget deficits when real interest rates are low historically average real returns on u s government debt have been far below the rate of economic growth allowing the u s government to roll over its debt at a rather low cost at the same time the rate of return on capital has generally been above the growth rate suggesting that the u s economy is dynamically efficient the paper shows that the welfare implications of budget deficits in this scenario depend critically on why interest rates have been so low if the government can offer low returns on its debt because of some unique ability to create default free claims persistent primary budget deficits may be unproblematic but if low interest rates are due to high risk aversion policies that exploit the low cost of government debt to run frequent budget deficits will impose significant risks on future taxpayers in essence safe government debt is safe for the debt holders but it is very risky for the taxpayers who are implicitly taking a short position in the safe security

calibrated incentive contracts this paper studies a dynamic agency problem which includes limited liability moral hazard and adverse selection the paper develops a robust approach to dynamic contracting based on calibrating the incentive properties of simple benchmark contracts that are attractive but infeasible due to limited liability constraints the resulting dynamic contracts are detail free and satisfy robust performance bounds independently of the underlying process for returns which need not be i i d or even ergodic publication abstract

balanced ranking mechanisms abstract in the private values single object auction model we construct a satisfactory mechanism a symmetric dominant strategy incentive compatible and budget balanced mechanism the mechanism converges to efficiency at an exponential rate it allocates the object to the highest valued agent with more than 99 probability provided there are at least 14 agents it is also ex post individually rational we show that our mechanism is optimal in a restricted class of satisfactory ranking mechanisms since achieving efficiency through a dominant strategy incentive compatible and budget balanced mechanism is impossible in this model our results illustrate the limits of this impossibility

choosing a government discount rate an alternative approach abstract this paper examines the choice of a government discount rate under the reasonable assumption that the level of government spending is determined in a top down fashion by macroeconomic and political considerations rather than in a bottom up fashion it is shown that setting the discount rate at the maximal internal rate of return available from unfunded government projects leads to an efficient portfolio choice under current and foreseeable conditions this implies a discount rate in the 10 or more real range rather than the 2 4 real discount rate recommended by second best theorists