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

semiparametric estimation and consumer demand this paper considers the implementation of semiparametric methods in the empirical analysis of consumer demand the application is to the estimation of the engel curve relationship and uses the british family expenditure survey household composition is modelled using an extended partially linear framework this is shown to provide a useful method for pooling non parametric engel curves across households of different demographic composition c 1998 john wiley sons ltd

the takeover deterrent effect of open market share repurchases this paper examines whether open market share repurchases deter takeovers we model pre repurchase takeover probability as a latent variable and examine its impact on the firm s decision to repurchase shares given specification tests reject the tobit model we turn to the censored quantile regression method of powell 1986 journal of econometrics 32 143 155 we find a significantly positive relation between open market share repurchases and takeover probability and we reconcile empirical findings in previous studies that contradict predictions repurchase activity is inversely related to firm size consistent with smaller firms having greater information asymmetry and is related to temporary but not permanent cash flows

exploratory analysis of prospects for renewable energy private investment in the u s opportunities for private investments in renewable energies were explored using a stated preference investment allocation instrument allocation alternatives included conventional and renewable energy investments among renewable energy investments solar and wind energy were ranked the highest while grass and wood based technologies were at the bottom of the renewable energy list this ranking mirrors the allocation of investments in sustainable energy technologies in global markets results were analyzed using a two limit tobit model which suggests that certainty of investments a diversified portfolio and expectation on financial returns were the primary drivers behind funds allocated to renewable energy investments using cluster analysis twenty three percent of our sample of current and future investors was identified as individuals most willing to invest in renewable energies

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

changes in the u s wage structure 1963 1987 application of quantile regression the 1980 s witnessed rapid changes in the structure of wages in the united states in this study recently developed techniques for quantile regression are applied to every march current population survey since 1964 and changes in the return to schooling and experience at different points of the wage distribution are examined the quantile regression technique parsimoniously describes the entire conditional wage distribution this conditional distribution is used to examine changes in within group wage inequality as measured by the difference between conditional quantiles two linear models are considered a simple one group model and a 16 group model the results suggest that the returns to schooling and experience differ across quantiles of the wage distribution but their patterns of change are similar significant differences in wage inequality are also found across the various skill groups the paper also presents a new imputation method for cps data

precautionary motives and portfolio decisions theory predicts that under certain restrictions on preferences prudent consumers will allocate relatively more funds to riskless assets when there is uninsurable background risk this paper analyzes empirically the relevance of precautionary motives for the structure of household wealth to this end a new and rich data source from the netherlands is exploited the question of primary concern is what impact if any does the presence of income uncertainty have on the structure of dutch households portfolios we employ various semi parametric estimators both for cross sections and for panel data to assess the response of households portfolios to uninsurable background risk we find some but not unanimous support for the view that portfolios become less risky as income uncertainty increases

culture and taxes we propose a difference in differences strategy to identify the existence of interjurisdictional tax competition our strategy rests on differences between desired tax levels determined by culture specific preferences and equilibrium tax levels determined by fiscal externalities and by preferences while preferences differ systematically between french speaking and german speaking swiss municipalities local income tax burdens exhibit smooth spatial gradients to qualify the empirical evidence we develop a theoretical model of strategic tax setting by local governments that anticipate the effects of taxes on the per capita income and the median hedonic income two inextricable consequences of the sorting of heterogeneous individuals

procrastination and obedience in this lecture i shall focus on situations involving repeated decisions with time inconsistent behavior although each choice may be close to maximizing and therefore result in only small losses the cumulative effect of a series of repeated errors may be quite large thus in my examples decision makers are quite close to the intelligent well informed individuals usually assumed in economic analysis but cumulatively they make seriously wrong decisions that do not occur in standard textbook economics this lecture discusses and illustrates several pathological modes of individual and group behavior procrastination in decision making undue obedience to authority membership of seemingly normal individuals in deviant cult groups and escalation of commitment to courses of action that are clearly unwise in each case individuals choose a series of current actions without fully appreciating how those actions will affect future perceptions and behavior the standard assumption of rational forwardlooking utility maximizing is violated the nonindependence of errors in decision making in the series of decisions can be explained with the concept from cognitive psychology of undue salience or vividness for example present benefits and costs may have undue salience relative to future costs

portfolio choices firm shocks and uninsurable wage risk assessing the importance of uninsurable wage risk for individual financial choices faces two challenges first the identification of the marginal effect requires a measure of at least one component of risk that cannot be diversified or avoided moreover measures of uninsurable wage risk must vary over time to eliminate unobserved heterogeneity secondly evaluating the economic significance of risk requires knowledge of the size of all the wage risk actually faced existing estimates are problematic because measures of wage risk fail to satisfy the non avoidability requirement this creates a downward bias which is at the root of the small estimated effect of wage risk on portfolio choices to tackle this problem we match panel data of workers and firms and use the variability in the profitability of the firm that is passed over to workers to obtain a measure of uninsurable risk using this measure to instrument total variability in individual earnings we find that the marginal effect of uninsurable wage risk is much larger than estimates that ignore endogeneity we bound the economic impact of risk and find that its overall effect is contained not because its marginal effect is small but because its size is small and the size of uninsurable wage risk is small because firms provide substantial wage insurance

borrowing costs and the demand for equity over the life cycle abstract we construct a life cycle model that delivers realistic behavior for both equity holdings and borrowing the key model ingredient is a wedge between the cost of borrowing and the risk free investment return borrowing can either raise or lower equity demand depending on the cost of borrowing a borrowing rate equal to the expected return on equity which we show roughly matches the data minimizes the demand for equity alternative models with no borrowing or limited borrowing at the risk free rate cannot simultaneously fit empirical evidence on borrowing and equity holdings

extensive margins and the demand for money at low interest rates we argue that the relevant monetary decision for the majority of u s households is not the fraction of assets to be held in interest bearing form but whether to hold any such assets at all we call this the decision to adopt the financial technology we show that the key variable governing the adoption decision is the product of the interest rate times the total amount of assets this implies that the interest elasticity of household money demand at low interest rates can be estimated from the variation in asset holdings in a cross section of households rather than historical interest rate variations we do so with the 1989 survey of consumer finances we find that a the elasticity of money demand is very small when the interest rate is small b the probability that a household holds any amount of interest bearing assets is positively related to the level of financial assets and c the cost of adopting financial technologies is negatively related to participation in a pension program at intere

income risk borrowing constraints and portfolio choice economic theory suggests that uninsurable income risk and the expectation of future borrowing constraints can reduce the share of risky assets in a household s portfolio if the utility function exhibits decreasing absolute risk aversion and decreasing prudence an individual will reduce his exposure to rate of return risks when confronted with other independent risks if there are transaction costs the expectation of future borrowing constraints should induce individuals to keep a lower proportion of their wealth in the form of illiquid and risky assets the authors find support for these propositions in a cross section of italian households copyright 1996 by american economic association

marginal taxes and the asset portfolios of swedish households this paper focuses on the effects of marginal tax rates wealth income and a set of socioeconomic and demographic variables on the portfolio composition of households using detailed micro data on 2 000 swedish households in particular efforts are made to disentangle the effects of marginal tax rates on the portfolio behavior of households some econometric problems involved when estimating asset demand equations in the presence of incomplete portfolios are briefly discussed a final section examines the overall effect of marginal tax rates on asset demands by applying estimated discrete and continuous portfolio equations to compute different tax elasticities

homeownership and investment in risky assets abstract this paper uses the 1989 survey of consumer finances to show that committed expenditures related to homeownership cause agents to hold their financial assets in a safe form this work follows theoretical results by fratantoni 5 which show that the mortgage commitment leads to reduced risky asset holding and empirical results by guisoet al 7 which show that agents with uncertain labor income hold fewer risky assets i find that doubling the median homeowner s mortgage payment income ratio leads to a 15 decrease in the risky share

heterogeneous background risks and portfolio choice evidence from micro level data we construct a set of household level background risk variables to capture the covariance structure of three nonfinancial assets and two financial assets these risks are in general statistically significant and economically important for a household s stock market participation and stockholdings a one standard deviation increase in background risks reduces the participation probability by 11 and the stockholdings to wealth ratio by 4 the volatilities of labor income housing value and business income reduce a household s participation and stockholdings a household with labor income highly correlated with stock bond returns is less more likely to invest in stock

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

shocks and asset dynamics in ethiopia abstractthis article uses household survey panel data of 416 rural households to study asset dynamics in the northern highlands of ethiopia and the response of assets to shocks the period under examination 1996 2003 was marked by severe environmental shocks including a series of droughts the article empirically studies the nature of household asset paths over time using as the point of departure the theory on precautionary savings behavior results indicate that the response of assets to weather shocks the differential effect of these shocks on liquid and less liquid forms of wealth holdings and the nature of asset dynamics are all consistent with the implications of a precautionary motive for holding wealth

ownership of stocks and mutual funds a panel data analysis this paper analyzes the ownership dynamics of stocks and mutual funds using representative household panel data the dutch center savings survey 1993 1998 a bivariate dynamic binary choice model is introduced allowing for interactions between the two types of assets we find that unobserved heterogeneity and state dependence play a large role for both types of assets the positive relation between ownership of one type in one period and the other type in the next period is explained by correlated unobserved heterogeneity a negative state dependence effect of lagged ownership of stocks on ownership of mutual funds is found which can be explained by the costs of shifting funds across the two forms of stockholding