monotone stochastic choice models the case of risk and time preferences suppose that when evaluating two alternatives x and y by means of a parametric utility function low values of the parameter indicate a preference for x and high values indicate a preference for y

quantitative restrictions and the welfare effects of capital inflows abstract this paper explores the welfare effects of capital inflows when some imports are subject to quantitative restrictions it is shown that in a heckscher ohlin model where all imports are restricted by quotas and some fraction of the initial domestic capital stock is foreign owned a capital inflow is welfare improving regardless of the ranking of sectoral factor intensities with sector specific capital stocks and both tariff ridden and quota restricted imports the consequences of direct foreign investment in any sector are uncertain and depend upon whether the two imports are compensated substitutes or complements as well as the characteristics of production

anomalies risk aversion economists ubiquitously employ a simple and elegant explanation for risk aversion it derives from the concavity of the utility of wealth function within the expected utility framework we show that this explanation is not plausible in most applications since anything more than economically negligible risk aversion over moderate stakes requires a utility of wealth function that is so concave that it predicts absurdly severe risk aversion over very large stakes we present examples of how the expected utility framework has misled economists and why we believe a better explanation for risk aversion must incorporate loss aversion and mental accounting

a measurement error approach for modeling consumer risk preference von neumann morgenstern vn m utility theory is the dominant theoretical model of risk preference recently market researchers have adapted vn m theory to model consumer risk preference but most applications assess utility functions by asking just n questions to specify n parameters however any questioning format especially under market research conditions introduces measurement error this paper explores the implications of measurement error on the estimation of the unknown parameters in vn m utility functions and provides procedures to deal with measurement error we assume that the functional form of the utility function but not its parameters can be determined a priori through qualitative questioning we then model measurement error as if question format and other influences cause the consumer to choose the unknown risk parameter from a probability distribution and to make his decisions accordingly we provide procedures to estimate the unknown parameters when the measurement error is eith

investment the current account and the relative price of non traded goods in a small open economy abstract this paper incorporates traded and non traded investment expenditure into an infinite horizon setting with optimizing economic agents extending previous research that has incorporated traded and non traded investment into a two period setting the paper analyzes the dynamic adjustment of the relative price of non traded output the market price of capital and the current account following exogenous shocks to the system the exogenous shocks considered by the paper include permanent transitory and anticipated changes in an income tax and an investment subsidy as well as changes in the level of government purchases of traded and non traded output

impacts of eu carbon emission trade directive on energy intensive industries indicative micro economic analyses the cost impacts from the european emission trading system ets on energy intensive manufacturing industries have been investigated the effects consist of direct costs associated to the co2 reduction requirements stated in the eu directive and of indirect costs of comparable magnitude that originate from a higher electricity price triggered by the ets in the power sector the total cost impacts remain below 2 of the production value for most industries within the ets in the kyoto period in the post kyoto phase assuming a 30 co2 reduction the total cost impact may raise up to 8 of production value in the heaviest industry sectors in steel and cement industries the cost impacts are 3 4 fold compared to the least affected pulp and paper and oil refining electricity intensive industries outside the ets will also be affected for example in aluminum and chlorine production the indirect cost impacts from ets could come up to 10 of production value already in the kyoto period as industry sectors are affected differently by the ets some correcting mechanisms may be worthwhile to consider in securing the operation of the most electricity intensive sectors e g balancing taxation schemes that may include as income source a levy on the wind fall profits of the power sector due to ets a future improvement in ets for industries within the scheme could be scaling of the emission reduction requirement so that the relative total emission reduction costs are at about the same level

international investment and immiserizing growth abstract a country with significant foreign investment can be immiserized by growth of its labor force because this increases the payments that have to be made to foreign investors we show that this occurs when the elasticity of supply of foreign capital and the elasticity of substitution between labor and capital in the host country are low we relate this phenomenon to bhagwati s general analysis of immiserizing growth and identify several new sources of immiserization that can arise from the interaction of the bhagwati johnson mechanisms and international investment

protection and the harmful effects of endogenous capital flows abstract assume a country has in place a binding tariff and is a price taker on world markets in which capital is internationally mobile and unimpeded regardless of trade patterns possible specificity of capital or factor intensities an increase in the tariff harms the country if capital is frozen and harms the country even more when capital mobility brings rates of return into line among countries

asymmetric effects of endowment changes on foreign investment source and host countries this paper explores the asymmetric impact of factor endowment changes on foreign investment source and host countries using a ricardo wilson multifactor continuum of goods model where there is a technological basis for trade even if the countries are equivalent in all respects except for capital endowments it is discovered that host country capital growth must be immiserizing in the source country provided that the two countries are initially alike in all respects except for capital endowments while a stringent single good macdougall kemp restriction suffices to guarantee that source country labor growth is immiserizing in the host country initial equivalence between countries is insufficient

fiscal deficits and relative prices in a growing world economy abstract this paper studies the transmission of fiscal disturbances between countries and the effect of those disturbances on worldwide capital intensity in a context of growth the model developed to address these issues allows for the production of both nontradable and relatively capital intensive tradable goods a central finding is that factor markets can be a major channel for the communication of fiscal policy shocks to world interest rates to private saving decisions and ultimately to global asset supplies and their distribution among countries particular predictions of the model illustrate how changes in public debt ratios and shifts in government spending patterns affect resource allocation and the welfare of various generations both at home and abroad

tariffs investment and the current account a dynamic specific factors model with adjustment costs of investment is used to study the impact of tariffs on the current account a permanent increase in tariffs generates a current account deficit as the import competing sector spreads the increase of the capital stock over time a temporary increase in tariffs has ambiguous effects if the size and duration of the tariff are large enough a strong response in investment could outweigh the increased savings and the current account deteriorates for small and short lived tariffs the postponement of investment reinforces that of consumption leading to a current account surplus copyright 1991 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

industrial structure and capital flows this paper provides a new theory of international capital flows in a framework that integrates factor proportions based trade and financial capital flows a novel force emerges capital tends to flow toward countries that become more specialized in capital intensive industries this composition effect competes with the standard force that channels capital toward the location where it is scarcer if the composition effect dominates capital flows away from the country hit by a positive labor force productivity shock a flow reversal extended to a quantitative framework the model generates sizable current account imbalances between developing and developed countries broadly consistent with the data

international effects of government expenditure in interdependent economies a dynamic analysis of the international transmission of government expenditure shocks under alternative methods of finance is presented the benchmark case of lump sum tax financing yields an expansion in both the short run and the long run levels of domestic activity while crowding out domestic consumption activity abroad declines in the short run and while it is stimulated during the transition long run activity abroad also declines with capital income tax financing the accompanying distortion outweighs the direct expenditure effects so that all these responses are reversed financing with a tax on labour produces ambiguous responses the welfare implications of these policies are also examined

welfare gains from capital inflows under import quotas abstract the presence of tariffs was assumed in the literature which examined the effect of additional foreign investment on the welfare of the host country in the small country setting however this paper analyzes the case of import quotas and shows that additional inflows of foreign capital improve the host country s welfare when import quotas are kept constant

on the theory of rational insurance purchasing a note the authors consider the optimal amount of insurance purchased by an individual who behaves according to the hurwicz criterion of choice under uncertainty their results are compared with earlier results obtained in alternative frameworks expected utility maximization and savage s regret criterion it is shown that a positive amount deductible is often suboptimal

tariff induced capital inflow and welfare under variable returns to scale abstract this paper extends recent studies on tariff immiserization in the presence of internationally mobile sector specific capital to include the possibility of non constant returns to scale it is shown that brecher and diaz alejandro s 1977 proposition does not necessarily hold that is under certain conditions tariff induced capital inflow improves the host country s welfare even if the foreign capital receives the full untaxed value of its marginal product

rejecting small gambles under expected utility this paper contributes to an important recent debate around expected utility and risk aversion rejecting a gamble over a given range of wealth levels imposes a lower bound on risk aversion using this lower bound and empirical evidence on the range of the risk aversion coefficient we calibrate the relationship between risk attitudes over small stakes and large stakes gambles we find that rejecting small gambles is consistent with expected utility contrary to a recent literature that concludes that expected utility is fundamentally unfit to explain decisions under uncertainty paradoxical behavior is only obtained when calibrations are made in a region of the parameter space that is not empirically relevant

aggregation and the role of energy in the economy methods for investigating the role of energy in the economy involve aggregating different energy flows a variety of methods have been proposed but none has received universal acceptance this paper shows that the method of aggregation has crucial effects on the results of the analysis we review the principal assumptions and methods for aggregating energy flows the basic heat equivalents approach economic approaches using prices or marginal product for aggregation emergy analysis and thermodynamic approaches such as exergy we argue that economic approaches such as the index or marginal product method are superior because they account for differences in quality among fuels we apply various economic approaches in three case studies in the us economy in the first we account for energy quality to assess changes in the energy surplus delivered by the extraction of fossil fuels from 1954 to 1992 the second and third case studies examine the importance of energy quality in evaluating the relation between energy use and gdp first a quality adjusted index of energy consumption is used in an econometric analysis of the causal relation between energy use and gdp from 1947 to 1996 second we account for energy quality in an econometric analysis of the factors that determine changes in the energy gdp ratio from 1947 to 1996 without adjusting for energy quality the results imply that the energy surplus from petroleum extraction is increasing that changes in gdp drive changes in energy use and that gdp has been decoupled from between aggregate energy use all of these conclusions are reversed when we account for changes in energy quality 2000 elsevier science b v all rights reserved

trade imbalance and domestic market competition policy this study investigates the effect of a country s suppression of competition in its market for nontradables it assumes that the initial equilibrium is stationary and demonstrates that if competition is suppressed in a small country the country s trade surplus increases in the short run in the large country case the same change creates an excess demand for future tradables and affects the relative price between present and future tradables using a two country model the study shows that this price change redistributes real wealth from the country with a trade deficit to the country with a trade surplus

how general are risk preferences choices under uncertainty in different domains we analyze the extent to which individuals choices over five employer provided insurance coverage decisions and one 401 k investment decision exhibit systematic patterns as would be implied by a general utility component of risk preferences we provide evidence consistent with an important domain general component that operates across all insurance choices we find a considerably weaker relationship between one s insurance decisions and 401 k asset allocation although this relationship appears larger for more financially sophisticated individuals estimates from a stylized coverage choice model suggest that up to thirty percent of our sample makes choices that may be consistent across all six domains

a micro econometric analysis of risk aversion and the decision to self insure this study estimates a von neumann morgenstern utility function using market data and micro econometric methods we investigate the decision whether to purchase insurance against the risk of telephone line trouble in the home using the choices of approximately 10 000 residential customers we determine the shape of the utility function and the degree of risk aversion we find that risk aversion varies systematically in the population and varies with the level of income and that the observed choice behavior is consistent with expected utility maximization we are unable to detect the presence of ambiguity effects or over weighting of low probability events

consumer rationality and the status quo received microeconomic theory presumes rational consumers maximize utility over all commodity bundles recent analysis however suggests that a consumer s status quo may limit economic rationality bias consumer decisions and induce serious errors in survey based valuations of public and private goods using regression and choice theoretic frameworks we investigate the existence of status quo effects in the consumer valuation of a particular unpriced product the reliability of residential electrical service such valuations have become important in electric utility resource planning and rate making we find substantial status quo effects which must be addressed in welfare comparisons regarding electric service reliability

large is beautiful the welfare effect of technology transfer reconsidered abstract this paper demonstrates that a technology transfer via foreign owned firms always reduces the host country s national income if the new technology is localized in the atkinson stiglitz sense at a capital labor ratio higher than prevails locally although developing countries can mitigate this negative impact of technology transfer by restricting the activities of foreign firms we argue that complete capital market liberalization yields even higher national income

international capital mobility shadow prices and the cost of protection this paper studies the welfare losses from tariff protection in a small open economy when some factors are internationally mobile our principal result is that international fictor mobility must raise the cost of protection more specifically the welfare loss resulting from a uniform increase in tariffs in a competitive small open economy is greater when tariff induced international factor movements take place than when factors are internationally immobile by contrast an exogen1ous inflow of factors in the presence of tariffs may increase or reduce the welfare loss associated with protection depending on whether or not the protected commodities use the foreign owned factors intensively relative to domestically owned factors these results are proven for a very general specification of the economy s technology in particular no restrictions are placed on the degree of vertical integration in production on the sectors into which factors are internationally mobile or on the number of goods and factors our main result holds whether or not an increase in tariff rates leads the economy to specialise in addition we show how our results relate to earlier work on immiserising capital inflows and on negative shadow prices for factors of production thus synthesizing a number of recent results within a common framework the paper is organised as follows in section 2 we explain our framework and derive expressions for the welfare effects of tariffs when all factors are domestically owned and when some factors are foreign owned but not internationally

international equity markets and trade policy abstract this paper derives optimal trade policies for exporting and importing countries when a market is imperfectly competitive and firms are internationally owned it is shown that an increase in foreign ownership of firms lowers both the optimal export subsidy of the exporting country and the optimal import tariff of the importing country at the same rate foreign ownership also affects the distribution of world welfare between countries however it does not affect trade patterns and firm values

is risk aversion really correlated with wealth how estimated probabilities introduce spurious correlation economists frequently focus on correlations between wealth and risk preferences but rarely observe the probabilities needed to test this relationship empirically these unobserved probabilities are typically estimated via profit or production functions conditioned on wealth correlates which may leave statistical fingerprints on subsequently estimated risk aversion coefficients and confound correlations between wealth and risk preferences using data from an experiment with observable probabilities we compare risk aversion coefficients based on true probabilities with those based on probabilities estimated using standard approaches and show how estimated probabilities can change risk aversion coefficients substantially and introduce spurious correlation between risk aversion and wealth

tariff protection and taxation of foreign capital the welfare implications for a small country abstract this paper extends recent studies by deriving sufficient conditions for tariff immiserization in a small country in the presence of internationally mobile sector specific capital the returns of which are taxed or subsidized necessary conditions for a welfare augmenting tariff are also discussed and the analysis is extended to the welfare implications of changes in the tax or subsidy rate on the earnings of migrating capital

trade and protection with multistage production this paper analyses trade in manuf acutured goods that are produced via a vertical production structure with many stages where some value is added at each to an intermediate product to yield a good in process ready for the next stage we consider the stage at which a good is traded to be an economically endogenous variable with comparative advantage determining the pattern of production specialization by stages across countries we study how endowment changes and policy shifts move the margin of comparative advantage which thus provides a channel for resource allocation adjustment that is additional to the usual ones of factor substitution and changes in the quantity of output

the growth and welfare consequences of differential tariffs this paper analyzes the impact of differential tariffs on consumption and investment in a specific factors model of a small open economy in which capital is accumulated over time particular attention is devoted to the welfare aspects highlighting the cost of the intertemporal distortions produced by protective trade policies several specific welfare propositions are obtained first tariff protection is shown to create short run benefits but long run costs in welfare second the second best policy for the two tariffs is characterized finally several propositions summarizing the implications of our analysis for tariff reform are derived

international factor movements commodity trade and commercial policy in a specific factor model two events in the decade of the 1970s had a major impact on world trade and factor movements the collapse of the bretton woods fixed exchange rate system and opec s success in raising petroleum prices the enormous current account surplus accruing to some of the opec members was successfully recycled by the international capital markets to among others the oil importing developing countries in addition the vastly increased tempo of investment in the capital rich labour poor opec members in west asia attracted migration of labour skilled as well as unskilled to these countries from some of the oil importing developing countries the remittances from these workers in turn eased the problem of the labourexporting countries in adjusting to the increased cost of oil imports thus both borrowing from private capital markets and export of labour became very important elements in cushioning the oil shock for a number of countries the post opec movements of labour and financial capital while dramatic are only the more recent instances of a phenomenon of much greater antiquity the seventeenth and eighteenth centuries saw vast migration of people out of europe though these movements were the result of conquests and colonization rather than movements from one sovereign state into another but the nineteenth century particularly the latter half saw migration of the latter kind from europe to countries of north and south america as well as capital investment by residents of europe in these

taxation unemployment and growth dynamic welfare effects of green policies abstract this paper analyzes the effects of environmental tax reforms on a small open economy the labor market is characterized by union wage setting the carbon tax acts as an implicit tariff which gives rise to terms of trade gains the terms of trade effect together with the union wage setting leads to a positive relationship between the capital labor ratio and net foreign wealth in the short run the disinvestments in real and financial capital give temporary room for higher consumption and instantaneous utility the long run effect on instantaneous utility is more uncertain a strong double dividend may exist

tariffs and exchange rate dynamics redux abstract this paper builds a two country intertemporal macroeconomic model similar to one developed recently by obstfeld and rogoff imperfectly competitive producer consumers maximize an intertemporal utility function with consumption real money balances and output as arguments we use the framework to examine both the short run and steady state effects of the imposition of a tariff in one of the countries this results in a fall in the tariff imposer s output in both the steady state and in the short run a small tariff may make a country worse off contrary to the usual result under perfect competition spillover effects are also considered

analyzing the economic cost of the kyoto protocol abstract this paper examines the cost of meeting the kyoto protocol commitments under alternative assumptions regarding technology and technical change real gdp is modeled as a function of the capital labor and energy inputs the analysis is based on data for 23 annex 1 countries from 1965 to 1999 two important results emerge first the standard assumption of hicks neutral technical change and time and scale independent output elasticities is not supported by the data second when technical change is allowed to be biased in favor of the energy and capital inputs and when the output elasticities vary with the level of factor use and over time the loss in real gdp due to the kyoto commitments rises substantially on average the loss in real gdp is one and a half times higher than obtained under the standard assumptions

strategic trade policy and welfare foreign equity ownership is shown empirically to weaken significantly and occasionally reverse common strategic trade policy results existing levels of u s cross ownership for example reduce the average optimal export subsidy by 47 relative to the brander and spencer journal of international economics 1985 18 83 100 value in industries with particularly high cross ownership and relatively small imputed labor rents optimal subsidies fall to less than one seventh of their former level previous studies which overlook high rates of cross ownership overstate the effectiveness of strategic policies most sharply in sectors with above average expected profitability scope for strategic investments and barriers to rent dissipation

categorizing risks in the insurance industry this paper analyzes the welfare implications of imperfectly categorizing risks in the insurance industry under conditions of asymmetric information firms initially unable to distinguish the risk type of individuals are provided with imperfect information concerning risk membership the paper then compares various wilson type equilibria to determine the welfare implications of firms imperfectly categorizing risks it is shown that only in the case where the initial equilibrium is of the nash no subsidy type is there a pareto type improvement in welfare

theories of choice under risk insights from financial markets abstract to date the plausibility of theories of choice under risk hinges are mainly on experimental evidence this paper devises and implements an approach amenable of assessing the performance of three families of models expected utility rank dependent expected utility and the cumulative prospect theory using information from financial asset markets our findings unequivocally support reference point dependence diminishing marginal sensitivity loss aversion and nonlinear weighting of gain and loss physical probabilities the empirical observations are found to be robust to inter alia the parameterization of the utility and probability weighting functions day of the week effects the choice of a reference point and the introduction of possible low probability market crashes peso component

current account dynamics in a finite horizon model abstract this paper examines the response of the current account in a small open economy to a permanent change in the price of imported intermediate goods to do so it extends blanchard s 1985 open economy model to incorporate the capital stock with adjustment costs a la hayashi 1982 a price increase in imported intermediate goods can be viewed as a combination of transfer payments abroad and capital taxation the former effect leads to a current account deficit and the latter leads to a current account surplus the overall effect depends on the relative magnitude of these effects

foreign ownership non traded goods and the effects of terms of trade changes on national welfare abstract this paper extends the theory of international trade in the presence of foreign ownership to incorporate non traded goods it is shown that with non traded goods national and aggregate welfare might move in opposite directions in response to a terms of trade deterioration even when national and aggregate trade specialization patterns coincide

the welfare effects of foreign investment in tariff distorted economies abstract the welfare effects of foreign investment in the presence of large tariffs are examined in models where capital is endogenously mobile capital flows induced by large tariffs may be welfare improving a numerical example is provided

quid pro quo foreign investment and welfare a political economy theoretic model abstract the classic paper by brecher and diaz alejandro 1977 analyzed the implications of tariff jumping direct foreign investment dfi induced by the imposition of an import tariff we analyze a new type of dfi where it occurs with a view to defusing not circumventing protection or rather the threat of protection by the host country an example is the dfi by japan in the united states the decision about the level of foreign investment is taken in the first of a two period horizon period this together with the level of exports in the first period determines the probability of a quota on exports being imposed in the second period policy makers aware of the effects of the first period decisions on the second period will impose an optimal tariff and an optimal tax subsidy on capital exports

risk preferences and demand drivers of extended warranties we disentangle and study the relative importance of different risk preferences in explaining extended warranty purchases and the high premia paid for them empirical and behavioral research on insurance is at odds with whether diminishing returns curvature of the utility function or loss aversion and nonlinear probability weighting lead to observed consumer behavior this lack of consensus is primarily due to the inability of standard choice data to separate different risk preferences and the consequent need to rely on strong parametric assumptions we design two conjoint studies consistent with simultaneous and sequential decision making with choices about washing machines and extended warranties where subjects are given failure probabilities and repair costs using stated choice data from the surveys we can nonparametrically identify product and risk preferences we find that loss aversion is significantly more important than curvature and probability weights in explaining extended warranty choices importantly failure to decompose risk averse behavior into that arising from curvature loss aversion and probability weighting leads to lower washer prices and profits these findings are robust to alternate reference point assumptions we rationalize the premia paid for warranties by exploring retailer incentives to price discriminate and test the theory on complementary goods pricing finally based on counterfactual analysis forcing separate retailers to sell washers and extended warranties is not necessarily welfare enhancing as cited in the media and previous literature

insurance and giffen s paradox abstract the letter gives a brief account of how insurance appears as an inferior good in standard economic analysis it is argued that this result is due to unrealistic assumptions about how insurance premiums are calculated

indivisibilities inferior goods and giffen goods the paper shows how the presence of an indivisible good can cause a divisible good to be inferior and possibly giffen indivisibility is shown to be central to a discussion by j r hicks on inferior goods

mental accounting access motives and overinsurance people exercising mental accounting have an additional motive for buying insurance they perceive a risk of having insu cient funds available to self insure in this way insurance protects the consumption value of the insured asset beyond the expenditure to acquire replace it this complements previous approaches based on probability weighting and loss aversion to explain the high pro tability of warranties and an aversion toward deductibles it helps to account for why the value of a warranty is found to be positively related to the value of the product and why there is seemingly contradictory empirical evidence on how household income a ects demand for warranties the adapted model rationalizes a strong aversion to deductibles and explains the observed sensitivity of this aversion to the insurance context finally it predicts a strong impact of how an insurer pays out bene ts on the value and cost of insurance this can explain both the evidence on strong deductible aversion for ood insurance and the lack of such evidence for long term care insurance jel classi cation d11 d14 d81 g22

the shadow pricing of factors in a multicommodity specific factors model this paper derives the shadow prices of specific and mobile factors in a multicommodity specific factors small economy subject to product market or factor market distortions the shadow price of the mobile factor labour is shown to be positive except under conditions of unemployment the shadow prices of the specific factors can exceed or fall short of their market prices and can even be negative the higher the tariff rate in a given sector or the lower its wage rate given an intersectoral wage differential the lower the shadow price of the factor specific to it compared to its market price les prix fictifs des facteurs de production dans un modele a plusieurs biens ou certains facteurs de production sont spc ils peuvent meme etre negatifs plus le droit de douane est eleve dans un secteur donne ou plus le niveau de salaire y est bas quand il existe un differentiel de salaire entre secteurs plus le prix fictif d un facteur specifique est bas par rapport a son prix de marche

welfare consequence of capital inflow for a small tariff protected economy abstract capital inflow is generally immiserizing when the capital intensive import competing sector is tariff protected and profits are repatriated in full in this paper we construct a model with increasing returns embedded in a monopolistically competitive market to show that capital inflow might lead to higher factor income and interestingly enough growth of import competing sector might lead to still higher imports thus two distinct possible channels are identified through which welfare might improve

estimation of state dependent utility functions using survey data surveys of individual s risk dollar trade offs illuminate not only the local trade off rates but also can be used to address more fundamental questions about the structure of utility functions this largely unexplored empirical area is investigated by developing an econometric technique to estimate utility functions based on survey data on risk dollar trade offs for minor health effects the empirical tests indicate that for all but one of the temporary health effects considered consumers treat injuries as tantamount to a drop in income implying that the health impact does not alter the structure of the utility function in a fundamental way copyright 1991 by mit press

rational insurance purchasing consideration of contract nonperformance much of the analysis of rational insurance purchasing and hedging strategies has been undertaken on the basis of the expected utility hypothesis this decision framework has been used to reformulate the bernoulli principle that a risk averter rationally would fully insure at a fair premium other applications include the analysis of insurance at unfair premiums mossin 1968 and smith 1968 the effects of state dependent utility on the rational insurance purchase cook and graham 1977 the effects of risky background wealth doherty and schlesinger 1983 and mayers and smith 1983 and the design of the optimal insurance policy raviv 1979 such analyses have been conducted on the assumption that insurance policies are free of insolvency default risk this assumption stands in sharp contrast to the actuarial literature in which the insolvency risk or probability of ruin is a central focus of attention

the curse and blessing of fixed specific factors in small open economies abstract this paper investigates how a country s specific factor endowment affects its long run economic performance we build an open economy version of the two sector neoclassical growth model in which we introduce fixed industry specific inputs in both activities we show that differences in input shares between sectors can contribute to explain why nations that seem to have similar factor endowments can show very different income levels in particular under productivity adjusted factor price equalization larger amounts of factors specific to the industry with a lower larger labor share lead the economy to enjoy larger smaller long run income levels the model can also account for overtaking episodes between countries along their development paths

are risk preferences stable across contexts evidence from insurance data using a unique dataset we test whether households deductible choices in auto and home insurance reflect stable risk preferences our test relies on a structural model that assumes households are objective expected utility maximizers and claims are generated by household coverage specific poisson processes we find that the hypothesis of stable risk preferences is rejected by the data our analysis suggests that many households exhibit greater risk aversion in their home deductible choices than their auto deductible choices our results are robust to several alternative modeling assumptions jel d11 d83

trade and capital flows a financial frictions perspective the classical heckscher ohlin mundell paradigm states that trade and capital mobility are substitutes in the sense that trade integration reduces the incentives for capital to ow to capital scarce countries in this paper we show that in a world with heterogeneous nancial development the classic conclusion does not hold in particular in less nancially developed economies south trade and capital mobility are complements within a dynamic framework the complementarity carries over to nancial capital ows this interaction implies that deepening trade integration in south raises net capital in ows or reduces net capital out ows it also implies that at the global level protectionism may back re if the goal is to rebalance capital ows when these are already heading from south to north our perspective also has

tariffs foreign capital and national welfare with sector specific factors abstract this paper examines the effect on national welfare of an endogenously determined inflow of foreign capital in the context of a well known model with sector specific inputs both for the case of unrestricted international trade and investment and in the presence of a tariff the second best problem of the optimal tax on foreign investment for a given tariff level is also investigated by application of the concept of shadow prices for primary factors in distorted open economies the results obtained are then related to analogous propositions derived previously for the standard heckscher ohlin model

a note on risk aversion and preferences a note on risk aversion and preferences i introduction the theory of choice under uncertainty as presented for instance by debreu 1959 is formally identical with the theory of choice under certainty 1 yet the terminology used in the two types of problems is in practice quite different leading perhaps to an unnecessary amount of confusion use of the measures of absolute and relative risk aversion introduced by arrow 1971 and pratt 1964 provides a good example the analysis of economic behavior under uncertainty uses these measures extensively and the literature often attempts to give them intuitive appeal however some of the relationships between these risk aversion measures and basic properties of an individual s preference map remain unexplored this paper examines the relationship between arrow pratt measures of risk aversion and the standard income and substitution effects in certaintly problems in deriving and stating the main results section ii places particular emphasis on the relationship between relative risk aversion and the appropriately defined elasticity of substitution 2 section iii then shows how these results may be useful in such areas as the demand for insurance and in models with asymmetric information ii risk aversion and preferences to begin consider the following simple model of individual behavior under uncertainty there are taken to be two states of the world 1 and 2 w sub 1 alpha and w sub 2 alpha represent income in these states alpha is the individual s choice variable that affects w the specification of alpha depends on the problem under consideration 3 state 1 is taken to be the good state so that mathematical expression omitted it is assumed that an individual s preferences over prospects may be represented by a function of the form 1 mathematical expression omitted the sub utility function u w defined over income satisfies u 0 and mathematical expression omitted the usual interpretation of equation 1 is as an expected utility function where p is taken to be the subjective probability that state 2 occurs however for the purpose of this note it is more useful to view v as a specific additively separable form of a utility function when interpreted in this way it seems natural to examine the properties of v as one would with any utility function used in the analysis of behavior under certainty given the previous assumptions the indifference curves as defined by 1 are downward sloping and strictly convex to the origin in w sub 1 w sub 2 space additional properties of these indifference curves relate to measures of risk aversion as follows first following arrow 1971 and pratt 1964 define in the standard way the coefficient of absolute risk aversion 2 mathematical expression omitted and the coefficient of relative risk aversion 3 mathematical expression omitted next note that the elasticity of substitution of w sub 2 for w sub 1 may be defined in the conventional way as 4 mathematical expression omitted 4 for the function in 1 this can easily be shown to be given by 5 mathematical expression omitted simple algebra then reveals that 6 mathematical expression omitted this immediately implies that 7 mathematical expression omitted in interpreting this condition note that r sub r w may be greater than one for some values of w and less than one for other values the first inequality in 7 must hold in the same direction at both w sub 1 and w sub 2 in order for the condition to be met furthermore if utility is bounded from below then 7 can be used to show that 8 mathematical expression omitted 5 when relative risk aversion is not increasing the elasticity of substitution must be greater than one

risk aversion and wealth evidence from person to person lending portfolios we estimate risk aversion from investors financial decisions in a person to person lending platform we develop a method that obtains a risk aversion parameter from each portfolio choice since the same individuals invest repeatedly we construct a panel data set that we use to disentangle heterogeneity in attitudes toward risk across investors from the elasticity of risk aversion to changes in wealth we find that wealthier investors are more risk averse in the cross section and that investors become more risk averse after a negative housing wealth shock thus investors exhibit preferences consistent with decreasing relative risk aversion and habit formation data as supplemental material are available at http dx doi org 10 1287 mnsc 2015 2317 this paper was accepted by amit seru finance

a tale of two cities and a giffen good a scenario is provided in which a house in eden mills ontario is a giffen good the conditions derived in the example apply to other indivisible goods as well jel classification d11

do multinationals deteriorate developing countries export prices the impact of fdi on net barter terms of trade this paper explores the economic relationship between foreign direct investment fdi to developing countries and the export prices of the latter measured by terms of trade it is rst shown that economic theory suggests such a relationship for various reasons but is inconclusive about the direction of the eect to address this open issue empirically i analyze data on more than 50 developing countries throughout the period 1980 2008 using robust dynamic panel data methods the results show that fdi had an economically relevant and statistically signicant positive impact on developing countries net barter terms of trade a higher level of education in the developing country fosters this eect

protection and the gainful effects of foreign capital abstract an increased foreign capital inflow into a protected sector is generally immiserizing we show that if the protected sector produces an intermediate input positive welfare effects may emerge a striking result is that it might lead to an increased import demand for the intermediate input which is a substitute for the product of the import competing sector

insurance as a giffen good abstract can insurance be a giffen good this can never happen if the coefficient of relative risk aversion is less than or equal to one if this coefficient is greater than one it is possible but not empirically plausible

real interest rates home goods and optimal external borrowing the paper investigates the optimal time path of consumption and external borrowing in the dependent economy model the small country faces given world prices and a given world real interest rate the presence of a home goods sector implies that the relevant real interest rate appropriate to consumption decisions depends on the rate of change of the real price of home goods the paper shows how transitory disturbances in output or in the world real interest rate affect the time profile of consumption and the trade balance in particular it is shown that the presence of a home goods sector dampens the consumption effects of changes in the world interest rate

labor market distortions the structure of protection and direct foreign investment abstract this paper analyzes the welfare effects of direct foreign investment in a general model that allows for labor market distortions trade in both intermediate inputs and final goods export subsidies and protection in the form of either tariffs or quotas it is shown that contrary to the conventional wisdom there is not in general any strong connection between the orientation of the trade regime sectoral capital intensity rankings and the desirability of attracting foreign investment

estimating risk preferences from deductible choice we develop a structural econometric model to estimate risk preferences from data on deductible choices in auto insurance contracts we account for adverse selection by modeling unobserved heterogeneity in both risk claim rate and risk aversion we find large and skewed heterogeneity in risk attitudes in addition women are more risk averse than men risk aversion exhibits a u shape with respect to age and proxies for income and wealth are positively associated with absolute risk aversion finally unobserved heterogeneity in risk aversion is greater than that of risk and as we illustrate has important implications for insurance pricing

factor intensity conditions for welfare improving foreign investment in tariff distorted economies a comment on neary and ruane earlier work in the foreign investment literature shows that the immiserizing effect of capital mobility in the presence of small tariff distortions is immune to capital intensity considerations this is not so in the context of large tariffs a capital intensity reversal is sufficient to rescue tariff ridden economies from the usually damaging effects of capital mobility on the other hand a strengthening of the pre tariff factor intensity pattern ensures that the small tariff immiserizing capital flow results are robust in the large capital movements in the second best optimum are also predicted copyright 1989 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

international capital mobility and commercial policy in an economic region abstract if two small countries are linked by capital movements then at low tariff levels any increase in capital flows induced by the commercial policy of either country will harm that country and benefit the other country while at low levels of international investment a tariff increase always harms the country levying the tariff nevertheless an increase in one country s tariff could benefit both countries by alleviating regional distortions in factor allocation if the countries liberalize factor movements within a customs union then conflicts must arise in choosing the level of the common external tariff

the welfare cost of factor taxation in a perfect foresight model this paper examines the marginal efficiency cost of various factor taxes in a dynamic general equilibrium model the au thor solves for the excess burden of anticipated and unanticipated t emporary and permanent tax policies using a range of estimates for taste and technology parameters he finds excess burdens larger than those indicated by previous studies that use static models these exc ess burdens are sensitive to parameter values and timing however th e rankings of alternative tax policies turn out to be insensitive to structural parameter values copyright 1987 by university of chicago press

trade taxes and international investment this paper demonstrates that international investment disturbs the conventionally understood equivalence between import tariffs and export taxes fundamentally remittances to foreigners introduce an additional pecuniary channel between countries so that two good lerner symmetry generally will not hold moreover because tariffs subsidize investors in the local import competing sector while export taxes can extract rent from foreign investors in the export sector the pattern of international investment will influence government preferences over trade policy instruments as well as levels notably trade tax symmetry is restored by introducing a third policy tool in the form of a direct a tax on international remittances ce memoire montre que l investissement international bouscule l equivalence canonique presumee entre tarifs a l importation et taxe a l exportation fondamentalement des versements aux etrangers ouvrent un canal additionnel entre pays qui fait que la symetrie de lerner ne tient plus de plus parce que les tarifs subventionnent les investisseurs dans le secteur national protege alors que la taxe a l exportation peut extraire une rente des investisseurs etrangers dans le secteur d exportation le pattern d investissement international va influencer les preferences du gouvernement quant a l usage d un instrument de politique commerciale ou un autre et quant a la vigueur avec laquelle il sera utilise la symetrie des taxes sur le commerce international est restauree en introduisant un troisieme intrument de politique sous la forme d une taxe directe sur les versements internationaux

the optimal insurance contract in a competitive market abstract the author reviews some earlier work on optimal insurance contracts by arrow and mossin he then shows that some results in this work carry over to any premium system which satisfies the additivity condition inherent in a competitive market

income risk aversion and the demand for insurance the expected utility hypothesis predicts that when the price of insurance is actuarially fair to the consumer a risk averse consumer will choose to fully insure against a potential loss the only role that income can play in affecting the amount of insurance demanded at the actuarially fair price is to affect the size of the potential loss this result is independent of the consumer s degree of risk aversion or how it varies with income however at a price of insurance above or below the actuarially fair level the consumer s degree of risk aversion and its relation to the consumer s income level must be considered if we are to usefully describe consumer behavior mossin 10 showed for a consumer with declining absolute risk aversion and at a price of insurance above the actuarially fair level but below the price at which no insurance will be purchased the optimal amount of insurance demanded against a loss of a given size is inversely related to the consumer s income chesney and louberge 2 noted that mossin s result does not take into account the empirically plausible situation in which higher income consumers may have greater potential losses to insure against they present results concerning the relationship between risk aversion and the level and composition of income in terms of the proportion of income subject to loss and the maximum premium the consumer would be willing to pay for full insurance coverage since their results are in terms of the maximum willingness to pay for full insurance

the impact of imperfectly categorizing risks on income inequality and social welfare the use of imperfect information to categorize risks is a pervasive and controversial phenomenon in the insurance industry although this activity reduces the average extent of vertical price discrimination it is shown in this paper that both highand low risk types may prefer ex ante to knowing the category to which they will be assigned that such information be suppressed furthermore for the lorenz criterion it is shown that under certain restrictive demand conditions the imperfect categorization of risks leads to an increase in inequality the paper employs the wilson e2 equilibrium concept l impact d une categorisation imparfaite des risques sur l inegalite du revenu et le bien etre social l utilisation de renseignements imparfaits pour categoriser les risques est un probleme important qui porte a controverses dans l industrie de i assurance meme si ce phenomene reduit le degre de discrimination verticale par les prix en moyenne i auteur montre que a la fois les personnes dont le coefficient de risques est faible et elev6 et ce avant de savoir a quelle categorie on va les assigner peuvent fort bien preferer que cette information soit supprimee de plus 1 auteur montre que sous certaines conditions de demande restrictives la categorisation imparfaite des risques conduit a un accroissement du degre d inegalite mesure par le critere de lorenz ce memoire utilise le concept d equilibre dit de wilson e2 if insurance firms are unable to distinguish between the risk types of their clients but consumers know their own probability of loss i e if asymmetric information persists then the complication of adverse selection may arise adverse selection occurs when the class of risks or set of classes that purchases insurance differs adversely from that anticipated by the firm for example if a firm offers a contract to low risk types at their actuarially fair rate then high risk types will also purchase it with the result that the firm will earn expected losses hence the problem of adverse selection restricts the ability of firms to offer efficient insurance contracts to low risk types it has been demonstrated by rothschild and stiglitz 1976 that provided the proportion of high risk types in the population is above some critical level a this paper is a revised version of chapter 3 of the author s phd thesis entitled the economics of risk classification in insurance london school of economics and political science 1982 i am indebted to my supervisor lucien foldes and an anonymous referee for useful comments the author alone is responsible for any errors herein canadian journal of economics revue canadienne d economique xvil no 3 august aotlt 1984 printed in canada imprimd au canada 0008 4085 84 557 568 1 50 c canadian economics association this content downloaded from 157 55 39 215 on wed 31 aug 2016 04 39 57 utc all use subject to http about jstor org terms

reevaluating the role of trade agreements does investment globalization make the wto obsolete abstract international ownership alters the role of multilateral trade institutions by redefining pecuniary externalities among countries regardless of the underlying cause whether foreign direct investment international portfolio diversification cross country mergers or multinational firms international ownership can mitigate incentives that lead large countries to set inefficiently high tariffs at the same time however foreign ownership introduces the potential for expropriation by investment host countries which can extract rent from foreign owners by manipulating local prices the basic principle of reciprocity continues to serve as an important guide to efficiency though its application must account for the pattern of international ownership in addition to traditional measures of market access

an expected profit model for monetizing fishing location choices abstract we develop and analyze the properties of a new type of discrete choice model which jointly estimates the expected value of catch and location choice this model implicitly monetizes location choices and can be used to predict costs and effort redistribution of creating marine protected areas or of implementing other policy changes that either increase travel costs or alter expected revenue we illustrate our approach by considering the closing of the steller sea lion conservation area in the united states bering sea to pollock fishing

exchange rate pass through and the effects of tariffs on economic performance and welfare abstract we develop a stochastic two country general equilibrium model where prices are determined under conditions of monopolistic competition to examine the macroeconomic and welfare effects of tariffs on the world economy under alternative nominal rigidities producer currency pricing pcp and local currency pricing lcp where the exchange rate pass through is absent we find that the significance of export pricing for the effects of tariffs depends critically upon whether tariffs are anticipated or unanticipated in the former case both pcp and lcp yield the same outcome as do perfectly flexible prices although the mechanism whereby this is achieved is different in the latter case the effects of unanticipated permanent tariffs are highly sensitive to the pricing scheme adopted by exporters leading to a wide range of conflicting outcomes involving tradeoffs among key parameters