the allocation of inventory risk in a supply chain push pull and advance purchase discount contracts while every firm in a supply chain bears supply risk the cost of insufficient supply some firms may even with wholesale price contracts completely avoid inventory risk the cost of unsold inventory with a push contract there is a single wholesale price and the retailer by ordering his entire supply before the selling season bears all of the supply chain s inventory risk a pull contract also has a single wholesale price but the supplier bears the supply chain s inventory risk because only the supplier holds inventory while the retailer replenishes as needed during the season examples include vendor managed inventory with consignment and drop shipping an advance purchase discount has two wholesale prices a discounted price for inventory purchased before the season and a regular price for replenishments during the selling season advance purchase discounts allow for intermediate allocations of inventory risk the retailer bears the risk on inventory ordered before the season while the supplier bears the risk on any production in excess of that amount this research studies how the allocation of inventory risk via these three types of wholesale price contracts impacts supply chain efficiency the ratio of the supply chain s profit to its maximum profit it is found that the efficiency of a single wholesale price contract is considerably higher than previously thought as long as firms consider both push and pull contracts in other words the literature has exaggerated the value of implementing coordinating contracts i e contracts that achieve 100 efficiency such as buy backs or revenue sharing because coordinating contracts are compared against an inappropriate benchmark often just a push contract furthermore if firms also consider advance purchase discounts which are also simple to administer then the coordination of the supply chain and the arbitrary allocation of its profit is possible several limitations of advance purchase discounts are discussed

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

small and large stakes risk aversion implications of concavity calibration for decision theory abstract a growing literature reports the conclusions that a expected utility theory does not provide a plausible theory of risk aversion for both small stakes and large stakes gambles and b this decision theory should be replaced with an alternative theory characterized by loss aversion this paper explains that the arguments in previous literature fail to support these conclusions either concavity calibration has no general implication for expected utility theory or it has problematic implications for all decision theories that involve concave transformations utility or value functions of positive money payoffs which makes loss aversion irrelevant to the argument

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

social preferences under risk equality of opportunity versus equality of outcome this paper axiomatizes a utility function for social preferences under risk in the model a single parameter captures a preference for equality of opportunity i e equality of exante expected payoffs relative to equality of outcome i e equality of ex post payoffs in a deterministic environment the model reduces to the model of fehr and schmidt 1999 the model is consistent with recent experiments on probabilistic dictator games

changing risks and optimal effort consider a decision maker who can engage in effort to increase the probability of facing a better risky situation intuition suggests that effort should increase when there is a greater difference between the best risky situation and the worse one we show that this intuition is not necessarily valid and we consider the cases of risk averters and risk lovers

reduction of compound lotteries with objective probabilities theory and evidence abstract the reduction of compound lotteries axiom rocl has assumed a central role in the evaluation of behavior toward risk and uncertainty we present experimental evidence on its validity in the domain of objective probabilities our battery of lottery pairs includes simple one stage lotteries two stages compound lotteries and their actuarially equivalent one stage lotteries we find violations of rocl and that behavior is better characterized by a source dependent version of the rank dependent utility model rather than expected utility theory since we use the popular 1 in k random lottery incentive mechanism payment procedure in our main test our experiment explicitly recognizes the impact that this payment procedure may have on preferences thus we also collect data using the 1 in 1 payment procedure we do not infer any violations of rocl when subjects are only given one decision to make these results are supported by both structural estimation of latent preferences as well as non parametric analysis of choice patterns the random lottery incentive mechanism used as payment protocol itself induces an additional layer of compounding by design that might create confounds in tests of rocl therefore we provide a word of caution for experimenters interested in studying rocl for other purposes such as the relationship between ambiguity attitudes and attitudes toward compound lotteries to carefully think about the design to study rocl payment protocols and their interaction with the preferences being elicited

intervention and sterilisation under floating exchange rates the uk 1973 1983 in this paper a small portfolio balance model in the spirit of obstfeld 1983 is estimated for the sterling pound us dollar exchange rate over the period 1973 quarter 2 to 1983 quarter 4 it is demonstrated inter alia that pure or sterilised foreign exchange market intervention can be effective even when agents form expectations rationally

relationships among exchange rates intervention and interest rates an empirical investigation abstract this study uses herefore unavailable daily data on official intervention to test the joint hypotheses of perfect asset substitutability and exchange market efficiency this joint hypothesis is generally soundly rejected for six exchange rates over various sample periods in contrast to evidence elsewhere from weekly or monthly data lagged intervention is a significant determinant of realized profits in about half the cases this evidence is consistent with existence of a portfolio balance channel at least in the short run other evidence indicates that coordinated intervention sometimes may have an impact significantly different from intervention by one central bank alone

identification of interest rates and international capital flows the conventional paradigm that capital movements respond to differences in interest rates between countries and simultaneously reduce interest rate differentials has been difficult to demonstrate empirically this paper argues that such a demonstrati on may be feasible if a simultaneous model is specified that describe s the dynamics of adjustment and if a data interval is chosen that re veals the dynamics examination of u s and canadian data from the 19 60s supports the argument with monthly observations that paradigm is strongly supported with quarterly observations capital flows and i nterest rates are not significantly related copyright 1988 by mit press

risk aversion and bargaining some preliminary results game theoretic models of bargaining can be thought of as falling into two broad classes a uiomatic and strategic i in all of these models the preferences of the bargainers are represented by their von neumann morgenstern utility functions a series of recent experiments has shown that these models lack descriptive power in a number of important respects in particular very clear focal point effects have been observed of a kind that will be described in somewhat more detail below that cannot be accounted for within the framework of these classical game theoretic models at the same time the success of these classical models in the theoretical economics literature rests on the intuitively appealing qualitative predictions that they make in a variety of circumstances some of these qualitative predictions may prove to have descriptive power even though other aspects of the same model do not since these models are stated in terms of the von neumann morgenstern utilities of the bargainers their qualitative predictions are inevitably involved with the bargainers risk postures

fiscal policy and the exchange rate in the big seven abstract we isolate the aggregate demand effects of u s government spending from its asset supply effects working through increased deficits and examine the former with the help of a two country rational expectations model of the united states versus the rest of the world the simulation results suggest that even in the absence of asset supply effects the consequences of a government spending cut in the united states can be substantial a depreciation of the effective dollar rate of 4 percent and a fall in long term bond rates at home and abroad of 180 basis points in response to a sustained 50 billion cut 1982 dollars provided that the cuts are permanent and are perceived to be so by the public some multi country simulations suggest that u s fiscal shocks are not likely to cause strains within the ems if there is consistency in member countries monetary policies

a portfolio balance rational expectations model of the dollar mark exchange rate abstract a model is developed in which current account imbalances can be financed through transfers of bonds denominated in either currency the reduced form links the current spot rate to the expected future spot rate via a risk premium which depends on the global currency mix of outside assets that governments impose on private portfolios through budget deficits and interventions and on the global distribution of private wealth among regions with different portfolio preferences an iterative procedure generates rational expectations forecasts of the dollar mark rate which perform somewhat better than forward rates in predicting monthly changes in the spot rate

a note on exchange rate expectations and nominal interest differentials a test of the fisher hypothesis this note tests the hypothesis that nominal interest differentials between similar assets denominated in different currencies can be explained entirely by the expected change in the exchange rate over the holding period this proposition often called the fisher open hypothesis or the hypothesis of perfect asset substitutability has been a major component of recent theories of exchange rate determination and has important implications for monetary policy 1 the fisher hypothesis differs from the covered interest parity theorem enunciated by keynes 11 while covered interest parity equates the nominal interest differential between financial centers to a known premium or discount on forward foreign exchange and is thus in principle riskless fisher parity involves risk in an essential way the two conditions are equivalent only when forward exchange rates equal expected future spot rates recent theoretical work for example that of grauer litzenberger and stehle 8 kouri 12 and frankel 6 shows that this need not be the case when market participants are risk averse thus while covered interest parity must always hold exactly in an informationally efficient asset market with no transactions costs fisher parity need not nominal interest differentials may reflect risk premia in addition to expected exchange rate movements 2 it should be emphasized at the outset that the tests conducted in this paper are really joint tests of the fisher hypothesis and a weak form of foreign exchange market informational efficiency levich 14 has argued that tests of market efficiency are always joint tests involving some hypothesized structure of normal equilibrium returns below we assume informational efficiency and instead test fisher s hypothesized arbitrage condition that nominal interest differentials equal expected percentage changes in exchange rates

on the utility premium of friedman and savage we re examine the utility premium of friedman savage friedman milton and savage leonard j the utility analysis of choices involving risk journal of political economy 56 1948 pp 279 304 this measure is useful in understanding risky choices for instance its reaction to an increased wealth equates to a precautionary demand for saving we also analyze its two components c 2009 published by elsevier b v

just luck an experimental study of risk taking and fairness choices involving risk significantly affect the distribution of income and wealth in society this paper reports the results of the first experiment to our knowledge to study fairness views about risk taking specifically whether such views are based chiefly on ex ante opportunities or on ex post outcomes we find that even though many participants focus exclusively on ex ante opportunities most favor some redistribution ex post many participants also make a distinction between ex post inequalities that reflect differences in luck and ex post inequalities that reflect differences in choices these findings apply to both stakeholders and impartial spectators

putting risk in its proper place this paper examines preferences toward particular classes of lottery pairs we show how such concepts as prudence and temperance can be fully characterized by a preference relation over these lotteries if preferences are defined in an expected utility framework with differentiable utility the direction of preference for a particular class of lottery pairs is equivalent to signing the nth derivative of the utility function what makes our characterization appealing is its simplicity which seems particularly amenable to experimentation

covered interest arbitrage in the 1970 s abstract this paper provides an empirical overview on covered interest arbitrage during the flexible exchange rate regime of the 1970 s it estimates the cost of transactions in foreign exchange and security markets and shows that these costs account for most of the deviations from parity

proper prudence standard prudence and precautionary vulnerability abstract adding risks is an important area in decision making under uncertainty as it is rarely the case that people face only one single source of risk in this context pratt and zeckhauser econometrica 55 1987 143 kimball econometrica 61 1993 589 and gollier and pratt econometrica 64 1996 1109 define the concepts of proper risk aversion standard risk aversion and risk vulnerability in this paper we assume that the agent expects two independent risky incomes in the future and focus on his precautionary saving motive or equivalently consumption behavior at time zero this framework allows for a natural extension of the above papers and for the definition of new concepts that we call proper prudence standard prudence and precautionary vulnerability

an experimental study of precautionary bidding auctions often involve goods exhibiting a common knowledge ex post risk in such auctions precautionary bidding predicts that under expected utility dara bidders reduce their bids by more than the appropriate risk premium because the degree of riskiness of an auctioned good and bidders levels of risk aversion are difficult to observe in field settings we conduct experimental auctions that allow us to identify the precautionary premium directly we find strong evidence for precautionary bidding the effect is robust to changes in experimental design features our experiment provides the first empirical demonstration of precautionary motives in a strategic setting

alternative approaches to comparative nth degree risk aversion this paper extends the three main approaches to comparative risk aversion the risk premium approach and the probability premium approach of pratt 1964 risk aversion in the small and in the large

precautionary saving and consumption smoothing across time and possibilities this paper examines how aversion to risk and aversion to intertemporal substitution determine the strength of the precautionary saving motive in a two period model with selden kreps porteus preferences for small risks we derive a measure of the strength of the precautionary saving motive which generalizes the concept of prudence introduced by kimball 1990b for large risks we show that decreasing absolute risk aversion guarantees that the precautionary saving motive is stronger than risk aversion regardless of the elasticity of intertemporal substitution holding risk preferences fixed the extent to which the precautionary saving motive is stronger than risk aversion increases with the elasticity of intertemporal substitution we derive sufficient conditions for a change in risk preferences alone to increase the strength of the precautionary saving motive and for the strength of the precautionary saving motive to decline with wealth within the class of constant elasticity of intertemporal substitution constant relative risk aversion utility functions these conditions are also necessary

negative net foreign asset positions and stability in a world portfolio balance model abstract negative net foreign asset positions have been associated with a troublesome stability problem in flexible exchange rate regimes in this paper a symmetrically specified two country portfolio balance model is employed to provide some perspective on this problem it is concluded that negative net foreign asset positions do not constitute an independent source of instability instability can arise only under nonrational expectations or because of destabilizing speculation

consistency of higher order risk preferences risk aversion a second order risk preference is a time proven concept in economic models of choice under risk more recently the higher order risk preferences of prudence third order and temperance fourth order also have been shown to be quite important while a majority of the population seems to exhibit both risk aversion and these higher order risk preferences a significant minority does not we show how both risk averse and risk loving behaviors might be generated by a simple type of basic lottery preference for either 1 combining good outcomes with bad ones or 2 combining good with good and bad with bad respectively we further show that this dichotomy is fairly robust at explaining higher order risk attitudes in the laboratory in addition to our own experimental evidence we take a second look at the extant laboratory experiments that measure higher order risk preferences and we find a fair amount of support for this dichotomy our own experiment also is the first to look beyond fourth order risk preferences and we examine risk attitudes at even higher orders

risk aversion and expected utility theory a calibration theorem within the expected utility framework the only explanation for risk aversion is that the utility function for wealth is concave a person has lower marginal utility for additional wealth when she is wealthy than when she is poor this paper provides a theorem showing that expected utility theory is an utterly implausible explanation for appreciable risk aversion over modest stakes within expected utility theory for any concave utility function even very little risk aversion over modest stakes implies an absurd degree of risk aversion over large stakes illustrative calibrations are provided

bargaining with a residual claimant an experimental study we conduct an experiment of two player bargaining in which the payo to one player is subject to ex post risk while the other player receives a xed payment eectively making the player exposed to risk a residual claimant contrary to intuition recent theoretical work argues that exposure to risk may actually be benecial to the residual claimant and we test this in a controlled lab experiment our results suggest that asymmetric exposure to risk creates dierent self serving notions of fairness for the two types of players which leads to bargaining conict and even disagreements residual claimants are able to extract a larger share of the pie when bargaining over a risky distribution moreover some residual claimants actually do better in an expected utility sense by being exposed to risk however contrary to the theoretical prediction it is the comparatively less risk averse residual claimants who appear to benet the most through their exposure to risk in a subsequent study where residual claimants are able to choose between a less risky or a more risky distribution over which to bargain few choose the riskier distribution except when the possibility of an ex pose fair split exists consistent with our earlier results the relatively less risk averse residual claimants are more likely to choose the riskier distribution

an examination of the objectives of monetary policy in four developing economies abstract this paper presents a model of monetary policy in developing economies which is estimated for mexico korea india and zambia the model is designed to identify both the goals and patterns of policy in these economies the results demonstrate that the authorities in these economies respond to foreign reserve flows partially sterilizing their impact in three countries they also respond to domestic variables accomodating seasonal variation and growth or price changes

international asset pricing with time varying risk premia abstract recent empirical evidence that forward exchange rates are biased predictors of future spot rates can also be interpreted as evidence against the hypothesis of a constant risk premium consequently reconciliation of this evidence with efficient international capital markets requires the existence of time varying risk premia this paper modifies kouri s 1977 asset pricing model to allow time varying exected returns on assets eliminates the assumption of a risk free real asset and derives the characteristics of the risk premia in the forward market as well as the equilibrium yield relationships among the equities and riskless nominal bonds of all countries

the capitalization of income streams and the effects of open market policy under fixed exchange rates abstract this paper investigates the long and short run neutrality of open market monetary policy in a world of fixed exchange rates and imperfect substitutability between bonds denominated in different currencies using an illustrative portfolio balance model it shows that when the public discounts the future tax liabilities associated with the national debt and the central bank supports the exchange rate by trading non interest bearing foreign assets open market policy has a short run effect but no long run effect on the domestic price level and interest rate when the foreign exchange intervention assets earn interest that is rebated to and capitalized by the public open market policy loses even its short run efficacy the capital account offset to monetary policy is complete

sterilization policies in the ems countries an empirical analysis abstract the paper analyses the extent to which fixed exchange rates within the ems have hindered national monetary policies the results show that the german authorities have relatively more freedom in pursuing domestic monetary objectives the others may notwithstanding foreign exchange controls occasionally encounter severe exchange constraints

testing the portfolio balance model a multi lateral approach abstract this paper estimates outside bond demand equations from the portfolio balance model of exchange rate determination for five currencies the approach used in this paper differs from other structural studies of the portfolio balance model in two fundamental ways first while previous studies limit the portfolio choice to domestic assets relative to a composite foreign asset the model analyzed in this paper decomposes the foreign asset by currency second exploiting the cross equation correlation that arises from this decomposition provides more efficient estimates of the asset market parameters

a theory of anticipated utility abstract a new theory of cardinal utility with an associated set of axioms is presented it is a generalization of the von neumann morgenstern expected utility theory which permits the analysis of phenomena associated with the distortion of subjective probability

even mixed risk lovers are prudent comment abstract crainich eeckhoudt and trannoy 2013 show that mixed risk lovers are prudent i show that common risk loving utility functions may not exhibit mixed risk loving as is typical for risk a

estimation of portfolio balance functions that are mean variance optimizing the mark and the dollar abstract this paper offers a way of efficiently estimating the parameters in demand functions for mark and dollar assets the technique imposes the constraint that the parameters rather than being determined arbitrarily are based on investors optimizing behavior regarding expected returns and variances it dominates some previous empirical applications of finance theory in the respect that the expected returns are allowed to vary from period to period which is a necessary feature of any macro model the constraint that the parameters are based on mean variance optimization is also tested and not rejected

input choices and uncertain demand the theory of the firm under demand uncertainty has to date assumed that the firm s input decisions are unaffected by the stochastic nature of demand this assumption is not usually made explicitly but it is implied by the assumption that the firm s cost function presumably derived by finding the minimum cost combination of inputs for any given level of output is unaffected by the uncertainty however if firms must choose some of their inputs before the uncertainty regarding demand is resolved then different input decisions may involve different levels of risk since firms decisions regarding price and output are affected by demand uncertainty and non linear risk preferences as previous authors have shown it seems reasonable to suspect that their input decisions will also be affected but if input decisions are affected then firms cost functions are not invariant to uncertainty and the results of previous studies must be reexamined three different types of firms are considered in this paper the competitive firm the quantity setting imperfect competitor and the price setting imperfect competitor input decisions of the competitive firm and the quantity setting imperfect competitor are shown to be unaffected by demand uncertainty and hence the assumption of an unchanging cost function is appropriate in these cases for the price setting imperfect competitor however input decisions are influenced by demand uncertainty and an unchanging cost function is therefore not appropriate this case is considered in some detail and conditions under which results can differ from those previously reported in the literature are examined

diversification versus optimality is there really a diversification puzzle abstractin this paper we provide a general valuation of the diversification attitude of investors first we empirically examine the diversification of mean variance optimal choices in the us stock market during the 11 year period 2003 2013 we then analyze the diversification problem from the perspective of risk averse investors and risk seeking investors second we prove that investors optimal choices will be similar if their utility functions are not too distant independent of their tolerance or aversion to risk finally we discuss investors attitude towards diversification when the choices available to investors depend on several parameters

behavior of the firm under regulatory constraint a recent article in this review by averch and johnson 3 on the fair rate of return regulation in public utilities industries or more generally regulated industries attracted the attention of many economists in essence averch johnson argues that the introduction of an active constraint of a fair rate of return type would induce the firm to invest more than the original profit maximizing value of capital and this would create an inefficient allocation of inputs in addition to frequent citations in verbal arguments it has invited some thieoretical extensions by economists such as wvestfield 8 and klevorick 5 all of the writers seem to accept the basic theoretical foundations set by averch and johnson for example klevorick 5 recently proposed that the fair rate of return should be inversely related to the size of the capital of a firm the intuitive basis for this is apparent for it in effect creates a penalty as the amount of capital used by the firm increases however it seems to me that averchjohnson s original arguments are sketchy and contain somewhat ambiguous logic at several important points although their conclusion for which they tried to find empirical support that a firm will tend to increase its investment with the introduction of an active constraint seems to be correct it does not follow from their arguments in particular there seems to be a serious error which arises from confusing movements along a curve and shifts of a curve in section ii we clarify those ambiguities and if necessary correct the mistakes in the third section of this paper we shall provide a new formulation of the problem we shall find that the new formulation will give the same answer as averchjohnson namely that a firm will tend to invest more with the iiltroductioin of an active constraint it should be noted however that while the conclusion happens to be the same this was not the necessity for we needed a completely new formulation to obtain the old conclusion

econometric approaches to empirical models of exchange rate determination abstract this paper identifies four principal econometric approaches to the estimation and testing of asset market models of exchange rate determination the traditional static reduced form approach the error correction and co integration dynamic reduced form approaches the simultaneous equations approach and large scale multi equation macroeconometric simulation models each of these econometric approaches is evaluated with respect to its theoretical validity and the comparative properties of the empirical results obtained this leads to the conclusion that although there may be little to choose between the different theoretical exchange rate models there may be grounds for favouring a multi equation simultaneous estimation procedure for this class of models

higher order risk attitudes a review of experimental evidence abstract this paper reviews the recent but fast growing experimental literature on higher order risk attitudes after introducing the theoretical context we first review the basic evidence and empirical moderators of these risk attitudes we then discuss recent extensions to ambiguity time risk and multi attribute utility in the last part we review indirect evidence from applied economic decision tasks

intervention in the mark dollar market the authorities reaction function abstract this paper investigates the intervention behavior of the deutsche bundesbank in the dollar dm market over the period 1974 to 1981 an intervention reaction model is developed which stresses the conditioning role of perceived exchange rate uncertainty the most important findings from non linear estimates are i an increase in perceived exchange rate risk shifts the bundesbank s trade off between money and exchange rate control in favor of the former aim probably due to risk aversion of the managers of the foreign department ii the bank tries to counter exchange speculation by compressing the expected risk premium and iii the bank does not completely sterilize

prudence in bargaining the effect of uncertainty on bargaining outcomes abstract we investigate the outcome of bargaining when a player s pay off from agreement is risky we find that a risk averse player typically increases his equilibrium receipts when his pay off is made risky this is because the presence of risk makes individuals behave more patiently in bargaining strong analogies are drawn to the precautionary saving literature we show that the effect of risk on receipts can be sufficiently strong that a decreasingly risk averse player may be better off receiving a risky pay off than a certain pay off

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

the forward exchange rate and macroeconomics abstract this paper discusses the conditions under which a risk premium is incorporated in the forward exchange rate a new condition for the existence of a risk premium is proposed we show that earlier models of the risk premium which emphasize either the role of net foreign investment or of the relative supplies of outside assets are not suited for assessing the effects of changes in macroeconomic policy

even mixed risk lovers are prudent abstract the purpose of this note is to analyze properties of the risk lovers utility function beyond the positive sign of its second order derivative we show that contrarily to a priori beliefs

changes in background risk and risk taking behaviour economic decision making under uncertainty often takes place in the presence of multiple risks and in markets that are less than complete as a consequence choices about endogenous risks sometimes must be made while simultaneously facing one or more immutable exogenous background risks that are not under the control of the agent and that are independent of endogenous risks it is somehow natural to assume that an exogenous deterioration in background wealth will cause an individual to take more care elsewhere if we define a deterioration for example as making the individual poorer by removing a fixed amount of initial wealth we know from pratt 1964 that decreasing absolute risk aversion dara of an individual s von neumann morgenstern utility function yields this natural result if on the other hand background wealth becomes riskier due to the addition of a zero mean risk that is also statistically independent of all other risks behavior will be more risk averse if and only if preferences are risk vulnerable as defined by gollier and pratt 1996 risk vulnerability described below in section 4 is a stronger notion than dara and includes proper risk aversion pratt and zeckhauser 1987 and standard risk aversion eeckhoudt and kimball 1992 kimball 1993 as particular cases but a deterioration in background wealth may encompass more complicated distribution changes than the introduction of another statistically independent risk in this paper we examine background wealth deteriorations that take the form of both general firstand second degree stochastic dominance changes in risk fsd and ssd respectively in particular we determine conditions that are both necessary and sufficient for each of these two types of background risk changes to imply more risk averse behavior on the part of the individual for the case of fsd changes this condition turns out to be ross stronger characterization of decreasing absolute risk aversion in the case of general ssd changes in the distribution of background wealth the condition derived is a stronger version in ross sense of the conditions characterizing preferences that are locally risk vulnerable in the sense of gollier and pratt the necessary and sufficient conditions derived are fairly restrictive upon preferences however if we take as positive behavior that individuals act in a more risk averse manner whenever the distribution of background wealth deteriorates these conditions place canonical limits upon appropriate utility representations at the very least they

on the effects of sterilized intervention an analysis of weekly data abstract as the recent empirical studies surveyed here illustrate it is very difficult to demonstrate that the exchange rate risk premium depends through a portfolio balance channel on the currency composition of outside assets the existence of a portfolio balance effect is a necessary condition for sterilized intervention to be a genuinely independent tool of monetary policy this paper studies u s canadian data and attempts to improve on earlier studies by using higher frequency weekly data and by implementing an appropriate instrumental variables technique 2s2sls however we still fail to detect evidence of a portfolio balance effect

measuring multivariate risk preferences in the health domain we investigate univariate and multivariate risk preferences for health longevity and wealth we measure attitudes toward correlation and attitudes toward higher order dependence structures such as cross prudence and cross temperance making use of the risk apportionment technique proposed by eeckhoudt et al 2007 for multivariate gains we find correlation aversion and cross prudence in longevity and wealth for losses we observe correlation seeking and cross imprudence we do not find clear evidence for cross temperance our results indicate that longevity and wealth are considered to be substitutes for gains but not for losses second univariate higher order risk preferences are comparable for longevity and wealth although somewhat closer to linearity for wealth third we find evidence that attitudes toward dependence structures in the health domain are sign dependent

testing for prudence and skewness seeking numerous theoretical predictions such as precautionary saving or preventive behavior have been derived for prudent decision makers further prudence can be characterized as downside risk aversion and plays a key role in preference for skewness we use a simple experimental method to test for prudence and skewness preference in the laboratory and compare the two to this end we introduce a novel graphical representation of compound lotteries that is easily accessible to subjects and test it for robustness using a factorial design prudence is observed on the aggregate and individual level we find that prudence does not boil down to skewness seeking we further provide some theoretical explanations for this result this paper was accepted by peter wakker decision analysis

deal or no deal decision making under risk in a large payoff game show we examine the risky choices of contestants in the popular tv game show deal or no deal and related classroom experiments contrary to the traditional view of expected utility theory the choices can be explained in large part by previous outcomes experienced during the game risk aversion decreases after earlier expectations have been shattered by unfavorable outcomes or surpassed by favorable outcomes our results point to reference dependent choice theories such as prospect theory and suggest that path dependence is relevant even when the choice problems are simple and well defined and when large real monetary amounts are at stake

the influence of income on international capital movements abstract changes in income via their influence on asset demands affect portfolio allocation and potentially international capital movements this hypothesis derives empirical support albeit limited and correspondingly tenuous from the identification of a consistently significant influence of income on non official australian portfolio investment abroad

higher order risk attitudes demographics and financial decisions we conduct an experiment to study the prevalence of the higher order risk attitudes of prudence and temperance in a large demographically representative sample as well as in a sample of undergraduate students participants make pairwise choices between lotteries of the form proposed by eeckhoudt and schlesinger 2006 the choices in these lotteries isolate prudent from imprudent and temperate from intemperate behavior we relate individuals risk aversion prudence and temperance levels to demographics and financial decisions we observe that the majority of individuals decisions are consistent with risk aversion prudence and temperance in both the student and the demographically representative sample an individual s level of prudence is predictive of his wealth saving and borrowing behavior outside of the experiment while temperance predicts the riskiness of portfolio choices our findings suggest that the coefficient of relative prudence for a representative individual is approximately equal to two

fairness risk preferences and independence impossibility theorems the most widely used economic models of social preferences are specified only for certain outcomes there are two obvious methods of extending them to lotteries if we do so by expected utility theory so that the independence axiom is satisfied our results imply that the resulting preferences do not exhibit ex ante fairness if we do so by replacing certain outcomes with their expected utilities for each individual so that individual risk preferences are preserved then ex ante fairness may be preserved but neither the independence axiom nor ex post fairness is satisfied both ex ante and ex post fairness can be satisfied but then the individual does not have well defined preferences over own lotteries

exploring the consistency of higher order risk preferences this study measures higher order risk preferences and their consistency we explore the role of country differences the variation of stakes and the framing of lotteries we observe a robust dichotomous pattern of choice behavior in china in the usa and in germany the majority of choices are consistent with mixed risk aversion or mixed risk loving behavior we also find this pattern after a tenfold increase in the stakes finally our results reveal that this pattern is strengthened if the lotteries are displayed in compound rather than reduced form in a follow up study we explore potential explanations for this framing effect

a note on allowed and realized rates of return of the us electric utility industry most empirical investigations of electric utility behavior use the realized rate of return as a proxy for the allowed rate of return we examine the validity of this assumption and investigate the relationship of the allowed and realized rates to the cost of capital between 1973 and 1982 we use two measures of the cost of capital one based on returns to book equity the other derived from a market price of equity while realized and allowed rates were generally higher than the book measure throughout the period both of the rates of return were less than the market price of capital after 1979 we also find firms did not earn their allowed rate of return after 1974 therefore the use of the realized rate as a proxy for the allowed rate in empirical models will lead to biased parameter estimates to help correct this bias we give data for allowed rates

inflation and monetary policy in selected west and central african countries abstract this paper studies the conduct and performance of monetary policy in five west and central african countries cameroon cote d ivoire gabon ghana and nigeria the first three are members of the cfa zone and maintain a fixed peg vis a vis the french franc the other two have recently opted for a more flexible exchange rate regime no general conclusion can be drawn on the monetary policy exchange rate policy nexus estimates of the offset coefficient are significantly different from negative one but var estimation results on the ability of the monetary authority to pursue an independent inflation target are mixed the monetary authorities of ghana and nigeria sterilize the accumulation of net foreign assets to a limited degree no such evidence exists for cfa zone members

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

changes in risk and the demand for saving abstract how does risk affect saving empirical work typically examines the effects of detectible differences in risk within the data how these differences affect saving in theoretical models depends on the metric one uses for risk for labor income risk second degree increases in risk require prudence to induce increased saving demand however prudence is not necessary for first degree risk increases and not sufficient for higher degree risk increases for increases in interest rate risk a precautionary effect and a substitution effect need to be compared this paper provides necessary and sufficient conditions on preferences for an n th degree change in risk to increase saving

the timing of a rate request by a regulated firm the rate of return review is an integral part of the relationship between a regulated firm and its regulatory agency traditionally the agency has been portrayed as the aggressor demanding a rate review whenever the firm s earned rate of return exceeded the agency s authorized rate of return 2 13 15 although this approach has been widely criticized 7 12 9 11 evans and garber 8 argue that its primary advantage is in the tractability of the regulatory constraint alternative methodologies have been suggested but none has received general acclaim although baily and coleman 3 and bawa and sibley 4 have refined the role of the regulatory agency by modeling the enforcement of the rate of return constraint in a probabilistic sense the agency is still responsible for initiating rate review and the firm is still assumed to maximize expected profits subject to a rate of return constraint although the rate of return constraint has been diluted the roles of the agency and the firm are unchanged in a seminal article joskow 10 questioned whether the regulatory agency was the aggressor in the rate review process he argued that the firm initiates the process triggering a review to raise the level or change the structure of their rates further he suggests that the regulatory agency is concerned with price and not profit or rate of return data throughout the 1970s and 1980s supports joskow s argument that the firm is the aggressor in the rate review process further evidence in support of joskow s hypothesis is provided by burness montgomery and quirk 5 in a study of the electric power industry s acquisition of capital to explain industry actions they contrasted the predictive power of the averch johnson type model to that of a joskow type model and found joskow s model to be a better predictor of industry behavior if it is the firm that initiates the review process what causes the firm to set the process in motion again joskow 10 argued that the firm would file for rate review to keep earned rates