radicalism versus gradualism an analytical survey of the transition strategy debate academic debate on a transition strategy for former socialist economies continues even a quarter century after the collapse of the communism in central and eastern europe and the former soviet union in this paper through an analytical survey of 137 preceding studies we present an overall picture of the debate and examine the relationship between the debate attitudes and the literature attributes in related studies we found that the radicalists maintain a consistent debate attitude from the viewpoints of time speed and policy sequence of economic transition while the debate attitude of the gradualists is more diversified we also found that there is another group of researchers that stays within the framework of the radicalism versus gradualism debate while at the same time keeping at arm s length from both the radicalists and the gradualists in addition our regression estimation of qualitative selection models provides interesting findings on the relationship between the debate attitudes and the literature attributes

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

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

transaction costs and the robustness of the coase theorem this paper explores the extent to which the presence of ex ante transaction costs may lead to failures of the coase theorem in particular we identify and investigate the basic hold up problem which arises whenever the parties to a coasian negotiation have to pay some ex ante costs for the negotiation to take place we then show that a coasian solution to this hold up problem is not available this is because a coasian solution to the hold up problem typically entails a negotiation about the payment of the costs associated with the future negotiation which in turn is associated with a fresh set of ex ante costs and hence with a new hold up problem

macroeconomic issues of soviet reform the title of this paper is not yet anachronistic for the soviet heritage of domestic and interrepublican economic arrangements sets the initial constraints for economic reform in the republics of the former soviet union a standard approach to economic reform in socialist economies has developed over the last two years on the basis of both experience especially in poland and analysis see e g joint study of the soviet economy 1990 david lipton and jeffrey sachs 1990 fischer and alan gelb 1991 we start by reviewing this new orthodox prescription and then examine the developing russian reform program in its light we turn next to the special aspects of reform in the former soviet republics interrepublican economic relations and reform coordination and conclude with a brief discussion of the role of the west

short horizon regulation for long term investors we study the effects of imposing repeated short horizon regulatory constraints on long term investors we show that value at risk and expected shortfall constraints when imposed dynamically lead to similar optimal portfolios and wealth distributions we also show that in utility terms the costs of imposing these constraints can be sizeable for a 96 funded pension plan both an annual value at risk constraint and an annual expected shortfall constraint can lead to an economic cost of about 2 5 3 8 of initial wealth over a 15 year horizon

mass privatization state capacity and economic growth in post communist countries why did the transition from socialism to capitalism result in improved growth in some countries and significant economic decline in others scholars have advanced three main arguments 1 successful countries rapidly implemented neoliberal policies 2 failures were not due to poli cies but to poor institutional environments and 3 policies were counterproductive because they damaged the state we present a state centered theory and empirically demonstrate for the first time one of several possible mechanisms linking neoliberal policies to poor economic performance mass privatization programs where implemented created a massive fiscal shock for post communist governments thereby undermining the development of private sector gover nance institutions and severely exacerbating the transformational recession we performed cross national panel regressions for a sample of 25 post communist countries between 1990 and 2000 and found that mass privatization programs negatively affected economic growth state capacity and property rights protection we further tested these findings with firm level data from a rep resentative survey of managers in 3 550 companies operating in 24 post communist countries within countries that implemented mass privatized programs newly privatized firms were sub stantially less likely to engage in industrial restructuring but considerably more likely to use bar ter and accumulate tax arrears than their state owned counterparts

the household responsibility system in china s agricultural reform a theoretical and empirical study the emergence and eventual prevalence of the household responsibility system which replaces the production team system as the unit of production and income distribution has brought about dramatic changes in china s rural areas since 1979 this institutional change has resulted in remarkable growth in agricultural productivity however in the literature on collective farms a theory that is capable of explaining the causes and effects of this change is yet to be developed the formal theory about collective economies developed so far by ward domar sen oi and clayton bradley maurice and ferguson cameron bonin chinn israelsen putterman and others suggests that the allocation of resources in a collective farm is efficient at least in

impulse control of pension fund contributions in a regime switching economy abstract in defined benefit pension plans allowances are independent from the financial performance of the fund and the sponsoring firm pays regularly contributions to limit deviations of fund assets from the mathematical reserve necessary for covering the promised liabilities this research paper proposes a method to optimize the timing and size of contributions in a regime switching economy the model takes into consideration important market frictions like transactions costs late payments and illiquidity the problem is solved numerically using dynamic programming and impulse control techniques our approach is based on parallel grids with trinomial links discretizing the asset return in each economic regime

constrained non concave utility maximization an application to life insurance contracts with guarantees abstract we study a problem of non concave utility maximization under a fair pricing constraint the framework finds many applications in for example the optimal design of managerial compensation or equity linked life insurance contracts deriving closed form solutions we observe that the fair pricing constraint will reduce the riskiness of the optimal strategies substantially in an extensive numerical section we analyze innovative retirement products that adapt the investment strategy of the premium pool according to the policyholder s preferences modeled as constant relative risk aversion crra such products are a response to the loss of attractiveness of traditional life insurance contracts with guarantees that are negatively affected by increasing solvency requirements for return guarantees and a general decrease in interest rate levels taking into account that retirement products are usually tax privileged we find that fairly priced guarantee contracts that follow this optimal investment strategy lead to a higher expected utility level than asset investments

decreasing risk aversion and mean variance analysis on formule un ensemble de postulats d aversion pour le risque absolu decroissant et on montre que seules les fonctionnelles d utilite moyenne variance peuvent les satisfaire

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

the effect of pension design on employer costs and employee retirement choices evidence from oregon abstract we use administrative data from oregon s public employees retirement system pers to study the effect of pension design on employer costs and employee retirement timing decisions during our 1990 2003 sample period pers calculates each member s retirement benefit using up to three different formulas defined benefit db defined contribution dc and a combination of db and dc and pers pays the maximum benefit for which the member is eligible we show that this maximum benefit calculation results in average ex post retirement benefits that are 54 higher than if they had been calculated using only the db formula and that employees receiving dc benefits are significantly more likely than employees receiving db benefits to retire before the plan s normal retirement age monte carlo simulations verify that the higher costs could have been predicted at the start of our sample period exploiting exogenous plan changes we show that employees respond to within year variation in their retirement incentives and consistent with peer effects that they respond more strongly to these incentives when more of their coworkers face similar incentives finally consistent with the emerging literature on financial mistakes by households we show that a small but noteworthy fraction of retirees would have benefited from shifting their retirements by as little as one month

the effect of regulation on optimal corporate pension risk abstract we study firms pension prefunding and portfolio allocation choices in a model in which firms trade off the need to compensate workers for the financial risk in their pension benefit against the cost advantage that may be gained by exploiting underpriced pension insurance in the absence of pension insurance the firm minimizes costs by rendering promised benefits free of risk to workers who are assumed to be unable to hedge firm specific risk various forms of government intervention such as benefit guarantees can alter this outcome dramatically by providing the firm with an incentive to shift risk to other parties in this case we find that the firm s decisions depend on among other influences the degree of insurance mispricing the amount of guaranteed benefits the stringency of minimum funding requirements and the costs of financial distress

waiting for change adjustment and reform in cuba abstract buffeted by the collapse of trading relations with the former socialist bloc and the continuing us embargo cuba has attempted to adjust to external crisis via tighter rationing to curtail demand and traditional planning and sectoral strategies to expand the supply of tradables this overall program has failed and cuba has recently begun timid steps toward a more market oriented approach we argue that the centerpiece of a new strategy should be a rapid privatization which can be designed to absorb the monetary overhang widely distribute assets and control and protect the social safety net that has characterized the cuban economy

fair demographic risk sharing in defined contribution pension systems in this article we formulate and solve the optimal design problem of a defined contribution public pension fund in a highly stylized but still rather general non stationary framework we adopt the viewpoint of a benevolent social planner who aims at treating in a fair manner the successive overlapping generations participating to such a long term mandatory system using the approach of el karoui and jeanblanc 1998 for the optimal consumption and portfolio choice problem with random income in a complete market we exhibit a solution to our intertemporal stochastic control problem where each generation receives a fair lumpsum retirement benefit it is proportional to the contributions she has paid during her active worklife and follows a fixed common rule although her pension value itself may depend on variables only observable at her retirement time we next relax the assumption that the collective pension system is mandatory and investigate the performance of individual investment plans in the market comparing the outcomes of both alternatives we derive a condition under which the collective fund can be expected to overperform the individual plan in the special case of a stationary economy such a possibility has been pointed out by gollier 2008 in fact this effect results from the possibility for the collective fund to borrow today against contributions of future generations which allows to implement riskier strategies and may improve its performance

a political economy approach to the neoclassical gradualist model of transition a political economy approach to the neoclassical gradualist model of transition requires the exposition of what i define the primary elements of the model which are economic analysis definition of a good society speed political structure ideological structure and whether the initial conditions were incorporated in the model after the identification of the primary elements of the neoclassical gradualist model the next step is to identify secondary elements the desired changes with respect to price liberalization stabilization privatization institutional structure monetary policy and the financial system fiscal policy international trade and foreign aid and social policy the analytical framework developed makes possible to understand the neoclassical gradualist model from a new and more enlightening perspective we are better able to comprehend the complexities involved and the disagreements about the reform process the adoption of a gradual process of transition did not only involve specifying the required policies of a successful transition but also entailed a process a sequence by which the reforms should be introduced as such a process of transition consistent with the policies recommended by the neoclassical gradualists economists is developed the conclusion reveals the inconsistencies in the model copyright blackwell publishers ltd 2005

continuous time mean variance asset allocation a time consistent strategy abstract we develop a numerical scheme for determining the optimal asset allocation strategy for time consistent continuous time mean variance optimization any type of constraint can be applied to the investment policy the optimal policies for time consistent and pre commitment strategies are compared when realistic constraints are applied the efficient frontiers for the pre commitment and time consistent strategies are similar but the optimal investment strategies are quite different

portfolio choice with puts evidence from variable annuities this study investigated the asset allocation behavior of individuals who select an out of the money long dated longevity put option on their investment funds the asset allocations of these people within their variable annuity subaccounts are 5 30 percent more risky than the allocations of those who do not choose this protection investors who do not choose the longevity put option follow the classic life cycle age phased reduction in equity a rudimentary model of utility maximizing behavior is suggested that justifies the increased allocation to risk as long as the investor understands the payoff structure of the longevity put and is willing and able to exercise the annuity option if and when it matures in the money

dynamic asset allocation when bequests are luxury goods abstract luxury bequests impart systematic effects of age to an investor s optimal allocation the expected percentage allocation to equities rises throughout retirement when bequests are luxuries the marginal utility of bequests declines more slowly than the marginal utility of consumption this is essentially lower risk aversion as a retiree approaches death her expected remaining lifetime utility is increasingly composed of bequest utility and thus generates progressively lower risk aversion a retiree responds by increasingly favoring the higher return risky asset compared to standard preferences luxury bequests elevate a retiree s average exposure to the risky asset but the difference is small in early retirement

patterns of transition from plan to market patterns of transition from plan to market martha de melo cevdet denizer and alan gelb hungary s bankruptcy experience 1992 1993 cheryl w gray sabine schlorke and miklos szanyi why and when do governments initiate public enterprise reform jose edgardo campos and hadi salehi esfahani roads land use and deforestation a spatial model applied to belize kenneth m chomitz and david a gray industrial centralization in indonesia j vernon henderson and ari kuncoro guidlines on searching for a dalton improving tax reform an illustration with data from indonesia shlomo yitzhaki and jeffrey d lewis a new data set measuring income inequality klaus deininger and lyn squire

old debts and new beginnings a policy choice in transitional socialist economies the authors examine the decisions policy makers in transitional socialist economies must make how to define the asset liability structure of state owned enterprises and banks as they are privatized they conclude that the many loans issued by state owned enterprises under socialism are impeding the transition to thriving market economies the heavy stock of debts is slowing the privatization of enterprises and banks hindering the efficient operation of firms and the financial sector encouraging ad hoc government intervention and reducing government credibility the authors argue that governments should often assume enterprise debts to banks on a case by case basis so they can sell enterprises to the private sector application of this policy would improve efficiency by depoliticizing and speeding up the privatization process improving the viability and profitability of newly privatized enterprises increase government credibility and improving the efficiency of the financial sector they also explain that privatizing banks will tend to make financial intermediation more efficient and speed up the economic transition governments should seriously consider assuming enterprise debts to state owned banks as they privatize enterprises because of the ensuing great gains in efficiency and the relatively low fiscal costs

circumstance and choice the role of initial conditions and policies in transition economies the experience of countries in transition from a planned to a market oriented economy has varied greatly the clearest differences are between the east asian countries china and vietnam and the countries of central and eastern europe cee and the former soviet union fsu china and vietnam have contained inflation and benefited from continued high growth in gdp since the beginning of their reforms while all cee and fsu countries have experienced large declines in output and most have experienced hyperinflation but even in cee and the fsu differences are marked some countries have lost over half of their gdp and growth performance in a number of countries is still poor while others are growing strongly some are still suffering from high inflation while others have successfully reduced annual inflation what determines this divergence of outcomes across transition countries no study so far has analyzed the interaction of all factors including initial conditions political change and reforms in a unified framework including cee the fsu china and vietnam the authors examine these broader interactions but focus first on the role of initial conditions such as initial macroeconomic distortions and differences in economic structure and institutions which have been emphasized less in the literature they find that initial conditions and economic policy jointly determine the large differences in economic performance among the 28 transition economies in the sample initial conditions dominate in explaining inflation but economic liberalization is the most important factor determining differences in growth but reform policy choices are not exogenous they depend in turn on both initial conditions and political reform with political reform the most important determinant of the speed and comprehensiveness of economic liberalization other findings provide additional insight into these relationships results show that liberalization has a negative contemporaneous impact but a stronger positive effect on performance over time the results also show that macroeconomic and structural distortions are negatively related to both policy and performance regarding the former unfavorable initial conditions discourage policy reforms but do not diminish their effectiveness once they are implemented the authors find some evidence that the influence of initial conditions diminishes over time this is in part because many of the initial conditions are themselves modified in the course of transition monetary overhangs are dissipated through inflation industrial overhang is eroded as plants shut down and market memory returns through experience

regional institutional development political connections and entrepreneurial performance in china s transition economy while previous research emphasizes the role of political connections in facilitating entrepreneurial performance during china s early reform period 1978 1999 this study argues that regional institutions were increasingly conducive to entrepreneurial activities and thus also played a key role in china s entrepreneurial success during that period the purpose of this study is twofold first it aims to demonstrate how regional institutional development facilitated entrepreneurial performance in china second it aims to understand how formal institutional development among chinese regions affected the role of political connections using a two level hierarchical dataset on chinese private enterprises this study finds that not only legal protection of property rights but also the development of market systems mattered for entrepreneurial performance in addition it shows that political connections played a diminishing role during regional institutional development in china

stochastic lifestyling optimal dynamic asset allocation for defined contribution pension plans this paper considers the asset allocation strategies open to members of deflnedcontribution pension plans we investigate a model that incorporates three sources of risk asset risk and salary or labour income risk in the accumulation phase and interest rate risk at the point of retirement we propose a new form of terminal utility function incorporating habit formation that uses the plan member s flnal salary as a numeraire the paper discusses various properties and characteristics of the optimal stochastic asset allocation strategy which we call stochastic lifestyling both with and without the presence of non hedgeable salary risk we compare the performance of stochastic lifestlying with some popular strategies used by pension providers including deterministic lifestyling which involves a gradual switch from equities to bonds according to preset rules and static strategies that invest in benchmark mixed funds we flnd that the use of stochastic lifestyling signiflcantly enhances the welfare of a wide range of potential plan members relative to these other strategies jel classiflcation e21 g11 g23

a continuous time model to determine the intervention policy for pbgc abstract the pension benefit guaranty corporation pbgc which insures private defined benefit pension plans is facing mounting deficits the main cause of this predicament for pbgc can be traced down to the misuse of the insurance by a few companies we therefore propose an active intervention policy which would result in termination of severely underfunded plans for the pbgc a continuous time model is provided to help determine the point of intervention if necessary using option pricing techniques a clear exposition of the intervention doctrine is thus obtained via this model we also provide a numerical illustration of the working of the model on a hypothetical pension plan

economic performance measurement systems for event planning and investment decision making abstract cities and destinations have assigned a strategic role in tourist and place marketing to events economic impact analyses are one of the tools that policy makers can use to support effective investment decision making in event planning the more precise and accurate these analyses are the more helpful to event planning they will be this paper proposes an innovative methodology to improve the economic impact estimate of events it combines tested action tracking technologies to track the consumer behaviour of visitors to the event radio frequency identification passive rfid with bottom up input output models a case study was carried out on the festival of economics in trento italy a cultural hallmark event aimed at high tourist flows image making and place branding and marketing the paper suggests the inclusion of accurate economic impact analyses of events in the range of instruments used by policy makers to support effective decision making and investment

continuous time methods in finance a review and an assessment i survey and assess the development of continuous time methods in finance during the last 30 years the subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing term structure theory asset pricing and optimal consumption and portfolio choices during the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance this latter subperiod has seen significant progress in econometric theory computational and estimation methods to test and implement continuous time models capital market frictions and bargaining issues are being increasingly incorporated in continuous time theory the roots of modern continuous time methods in finance can be traced back to the seminal contributions of merton 1969 1971 1973b in the late 1960s and early 1970s merton 1969 pioneered the use of continuous time modeling in financial economics by formulating the intertemporal consumption and portfolio choice problem of an investor in a stochastic dynamic programming setting merton 1973b also showed how such a framework can be used to develop equilibrium asset pricing implications thereby significantly extending the asset pricing theory to richer dynamic settings and expanding the scope of applications of continuous time methods to study problems in financial economics 1 within a span of about 30 years from the publication of merton s inf luential papers continuous time methods have become an integral part of financial economics indeed in certain core areas in finance such as e g asset pricing derivatives valuation term structure theory and portfolio selection continuoustime methods have proved to be the most attractive way to conduct research and gain economic intuition the continuous time approach in these areas has produced models with a rich variety of testable implications the econometric theory for testing continuous time models has made rapid strides in the last decade and has thus kept pace with the impressive progress on the theoretical front one hopes that the actual empirical investigations and estimation using the new procedures will follow suit soon

regulation and pension fund risk taking abstract we investigate the extent to which regulations governing investment valuation and funding affect the riskiness of defined benefit pension funds asset allocation we compare the regulatory frameworks of public corporate and industry pension funds in the united states canada and the netherlands over 1992 2011 derived from panel data analysis of a unique set of asset allocation details for close to 600 funds our results highlight that regulatory factors are more economically significant than pension funds characteristics in shaping asset allocation in particular risk based capital requirements and mark to market valuation are both associated with a 7 lower risky asset exposure especially equities regardless of market conditions by contrast the exposure of a pension fund subject to a 100 funding requirement does not differ significantly from that of an unconstrained pension fund during normal times but the constrained pension fund invests 4 less in risky assets during a financial crisis in line with theoretical predictions we find that risk based capital requirements and minimum funding limits have different consequences for pension funds risk taking

the process of socialist economic transformation in this paper we consider the reform process in those central and east european countries that have made the decision to move from a more or a less planned socialist system to a private market economy one in which private ownership predominates and most resources are allocated through markets because the reform process is both complex and intertwined with political factors especially the shift towards representative democracy and because there are substantial differences among the reforming countries no single detailed road map can guide the way to the new systems rather the paper sets out general considerations that provide a framework for reform and relates the choices to some initial conditions of the various reforming countries the framework applies also to the soviet union or in the event of its disintegration to its successor states as they move to market systems

optimal consumption portfolio choices and retirement planning abstract we examine consumption and investment decisions in a life cycle model with habit formation stochastic opportunity set stochastic wages and labor supply flexibility retirement is taken into account by specifying an age at which labor earnings stop but consumption spending continues explicit solutions are obtained for optimal consumption labor supply and the financing portfolio we examine the structure and determinants of the optimal portfolio we also study the effects of the retirement date and of habits on optimal decisions finally we conduct a preliminary analysis to assess the effects of a liquidity constraint on optimal consumption leisure choices

stabilization and growth in transition economies the early experience this paper analyzes the growth and stabilization experience in 26 transition economies in eastern europe the former soviet union and mongolia for the period 1989 1994 inflation rates have declined significantly in most countries following an inflation stabilization program growth resumes after stabilization occurs typically with a lag of about two years reducing inflation thus appears to be a precondition for growth an econometric analysis of the short run determinants of inflation and growth illustrates the key roles of fixed exchange rates improved fiscal balances and structural reforms in spurring growth and lowering inflation and confirms that inflation stabilization programs have been beneficial for growth even after controlling for structural reforms

portfolio choice and mortality contingent claims the general hara case abstract we solve a portfolio choice problem that includes mortality contingent claims and labor income under general hara preferences our contribution beyond existing literature is to i focus on the covariance between shocks to human capital and financial capital to ii model the utility of a family with basic needs and iii include life insurance and pension annuity claims in one unified life cycle model our solution employs a similarity reduction mapping which reduces the two dimensional hjb equation into one dimension this allows for the implementation of a quick numerical scheme and when shocks to human capital and financial capital are perfectly correlated a closed form expression is obtained as a special case

managing adjustment costs political authority and the implementation of adjustment programs with special reference to african countries abstract the degree to which a government implements a program given no disruptive factors depends critically on its legitimate authority to carry out the program and the degree to which management aspects notably management costs of the program were satisfactorily dealt with at the design stage program designers should understand the nature dimensions justification and basis of legitimate authority when the government s legitimate authority is inadequate program designers must advise the government to obtain it a properly designed program should also include measures to speed up entry prevent inefficient exit and minimize unemployment and underutilization of capacity have a framework for ensuring competitive and open markets and arm the program manager with tools to alleviate social tensions arising from certain distributional consequences and to respond to predictable nationalistic preferences

investment risk taking by institutional investors according to theory institutional investors face both risk management and risk shifting incentives this article assesses the relevance of these conflicting incentives for dutch pension funds and insurance firms over the period 1995 to 2009 using a unique and extended data set we observe a significant positive relationship between capital and asset risk for insurers indicating that risk management incentives dominate in the dutch insurance industry risk shifting incentives however also seem relevant as stock insurers take more investment risk than their mutual peers for dutch pension funds we conclude that overall neither risk shifting nor risk management incentives seem to dominate interestingly we find that professional group pension funds take significantly less investment risk than other types of pension funds this finding is in line with expectations as in professional group pension funds potential incentive conflicts between pension fund participants and the employer are effectively in

lifetime consumption and investment retirement and constrained borrowing retirement flexibility and inability to borrow against future labor income can significantly affect optimal consumption and investment with voluntary retirement there exists an optimal wealth to wage ratio threshold for retirement and human capital correlates negatively with the stock market even when wages have zero or slightly positive market risk exposure consequently investors optimally invest more in the stock market than without retirement flexibility both consumption and portfolio choice jump at the endogenous retirement date the inability to borrow limits hedging and reduces the value of labor income the wealth to wage ratio threshold for retirement and the stock investment

lifetime investment and consumption using a defined contribution pension scheme during the accumulation phase of a defined contribution pension scheme a scheme member invests part of their stochastic income in a portfolio of a stock and a bond in order to build up sufficient funds for retirement it is assumed that the remainder of their salary pre retirement is consumed an annuity is purchased at retirement and the stock allocation and consumption pre retirement maximise the total expected lifetime consumption using a cara utility function perfect correlation between the scheme member s income and the stock price leads to analytical expressions for the controls for a general income model if the correlation is imperfect then analytical controls are found for two particular stochastic income models

life cycle asset allocation with annuity markets abstract this paper derives the optimal consumption and portfolio choice pattern over the life cycle for households facing uninsurable labor income risk ruin risk stochastic capital markets and uncertain lifetime our model posits a dynamic utility maximizer with crra and epstein zin preferences who has access to liquid stocks bonds and illiquid life annuities we show that a considerable fraction of wealth is gradually annuitized until retirement and beyond to skim the mortality credit the remaining liquid wealth is mainly invested in stocks to compensate for riskless investment in life annuities the model allows us to assess the economic importance of common explanations for the empirically low annuity demand by analyzing participations rates annuitization fractions and welfare effects

time horizon and the discount rate abstract we consider an economy a la lucas 1978 econometrica46 1429 1446 with a risk averse representative agent the exogenous growth rate of the economy follows a random walk we characterize the set of utility functions for which it is efficient to discount more distant cash flows at a lower rate the benchmark result is that when the growth rate is almost surely nonnegative the yield curve is decreasing if and only if relative risk aversion is decreasing with wealth relaxing the assumption on the absence of recession requires more restrictions on preferences such as increasing relative prudence journal of economic literature classification numbers d81 d91 q25 q28

valuation of mortgage interest deductibility under uncertainty an option pricing approach abstract we propose a dynamic option pricing model to quantify the tax shield value of us mortgage interest deduction mid under uncertainty we identify non linear forms both convex and concave regions in the pay off of mid and discuss the implications for the valuation of mid the model provides insights regarding the relationship between the effective mid and a set of underlying variables including income level house price mortgage size and state and local tax rates we also show how the tax shield value of mortgage loans changes with the volatility of underlying processes we apply the model to the case of the optimal choice of adjustable versus fixed rate mortgages and prove that under a mean preserving interest rate an adjustable mortgage always offers a bigger tax saving we use the framework to study how the tax reforms of 2017 have affected the mid benefits of different households and find that no household is expected to receive a larger mortgage deduction under the new law finally we find that by putting a cap on deductible state and local taxes the 2017 reform has significantly reduced the quantitative impact of income and house price volatility on the expected mid value

strong legacies and weak markets bulgarian state owned enterprises during early transition the authors examine the factors affecting the performance of state owned enterprises soes during early transition to a market economy data come from a longitudinal study of a representative sample of bulgarian soes for the period from 1989 the last year under communism to 1993 three years after major macroeconomic shifts they investigate how changes in authority structure work organization technology marketing strategy and organizational boundaries during these years affected organizational performance in 1993 they also assess the degree of path dependence in performance and the role of competitive industry conditions numerous organizational changes made by soes during early transition had little effect on performance yet organizational performance from 1989 to 1993 was highly path dependent although this dependence was mediated by the competitive conditions stronger markets displayed less path dependence overall the results favor the interpretations derived from selected neo institutional and ecological perspectives of organizational sociology over neoclassical economic interpretations

optimal consumption and portfolio policies when asset prices follow a diffusion process abstract we consider a consumption portfolio problem in continuous time under uncertainty a martingale technique is employed to characterize optimal consumption portfolio policies when there exist nonnegativity constraints on consumption and on final wealth we also provide a way to compute and verify optimal policies our verification theorem for optimal policies involves a linear partial differential equation unlike the nonlinear partial differential equation of dynamic programming the relationship between our approach and dynamic programming is discussed we demonstrate our technique by explicitly computing optimal policies in a series of examples in particular we solve the optimal consumption portfolio problem for hyperbolic absolute risk aversion utility functions when the asset prices follow a geometric brownian motion the optimal policies in this case are no longer linear when nonnegativity constraints on consumption and on final wealth are included by these examples one can see that our approach is much easier than the dynamic programming approach

saving and investing for early retirement a theoretical analysis we study optimal consumption and portfolio choice in a framework where investors adjust their labor supply through an irreversible choice of their retirement time we show that investing for early retirement tends to increase savings and reduce an agent s effective relative risk aversion thus increasing her stock market exposure contrary to common intuition an investor might find it optimal to increase the proportion of financial wealth held in stocks as she ages and accumulates assets even when her income and the investment opportunity set are constant the model predicts a decrease in risk aversion following strong market gains like those observed in the nineties

valuation optimal asset allocation and retirement incentives of pension plans we provide a framework in which we link the valuation and asset allocation policies of defined benefits plans with the lifetime marginal productivity schedule of the worker and the pension plan formula in turn we examine the retirement policies that are implied by the primitives of the model and the value of pension obligations our model provides an explicit valuation formula for a stylized defined benefits plan the optimal asset allocation policies consist of the replicating portfolio of the pension liabilities and the growth optimum portfolio independent of the pension liabilities we show that the worker will retire when the ratio of pension benefits to current wages reaches a critical value which depends on the parameters of the pension plan and the discount rate using numerical techniques we analyze the feedback effect of retirement policies on the valuation of plans and on the asset allocation decisions article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

timing is everything elections and trade liberalization in the postcommunist world in the wake of the soviet bloc s collapse various postcommunist countries rushed to gain greater access to foreign markets many of them have made substantial progress in liberalizing commerce but the movement toward free trade has been by no means universal one prominent view is that the establishment of democratic institutions has stimulated economic reform in thepostcommunist world the authors conduct one of the first studies on this topic and find that democracies are indeed more likely to liberalize trade than nondemocracies they also find that the electoral calendar has a potent influence on the timing of commercial reform in postcommunist democracies controlling for a range of factors politicians are most likely to reduce trade barriers immediately after voters go to the polls trade liberalization is much less likely to occur at other points in a democracy s electoral calendar and elections have no effect on commercial reform in nondemocracies

the political economy of chile s fast economic growth an olsonian interpretation a conceptual framework inspired by mancurolson s contributions to political economyis used to explain chile s recent economicand political performance with particularemphasis on the hidden hand politicalstability rent seeking policy makingquality institutions cultural attitudesand cultural change fortunate historicalaccidents critical masses and virtuouscircles and other positive loops theanalysis combines very long term withshort term perspectives examining the warof arauco basque immigration open economypolicies families educational investment economic technocrats female labour forceparticipation managerial perceptions oflabour and other old myth shattering some future trends are also predicted

interpreting suboptimal business outcomes in light of the coase theorem lessons from sidmouth international festival abstract the management team of the world famous sidmouth festival resigned in 2004 after failing to secure bad weather underwriting worth 200 000 and amidst widespread fears that the festival was doomed while claims of a local economic impact of 5 million are seriously flawed it is highly likely that the local economy did benefit by at least several times the amount of the required insurance failure to capture these net positive benefits is linked to ill defined property rights rising transaction costs incomplete information from unreliable sources and actual or feared free riding these conditions prevented the type of efficient bargaining solution in the face of externalities envisioned by the coase theorem practically all of the problems preventing the ideal coasean solution could have been addressed by granting key stakeholders individual ownership rights hence while the coase solution was not applicable the theorem s predictions or its corollary s predictions were confirmed

hedging in incomplete markets with hara utility in the context of merton s original problem of optimal consumption and portfolio choice in continuous time this paper solves an extension in which the investor is endowed with a stochastic income that cannot be replicated by trading the available securities the problem is treated by demonstrating using analytic and in particular viscosity solutions techniques that the value function of the stochastic control problem is a smooth solution of the associated hamilton jacobi bellman hjb equation the optimal policy is shown to exist and given in a feedback form from the optimality conditions in the hjb equation at zero wealth a fixed fraction of income is consumed for large wealth the original merton policy is approached we also give a sufficient condition for wealth under the optimal policy to remain strictly positive

institutional and individual investors saving for old age this paper brings together the academic literature on individual and institutional investors in order to understand the nature of difficulties faced by them and set the background for the special issue this introductory article and the papers in the special issue contribute to the debate on how to support individuals in their savings commitments and investment decision making and whether and how institutional investors have fulfilled their role in supporting the development of the funded pension industry there are three main conclusions i individual investors are not ready for the role that has been assigned to them in the pension industry ii institutional investors are a long way short of establishing healthy relational contracts and trustworthy relationships with their clients and iii more effective regulation may be needed

simple explicit formula for near optimal stochastic lifestyling abstract in life cycle economics the samuelson paradigm samuelson 1969 states that the optimal investment is in constant proportions out of lifetime wealth composed of current savings and the present value of future income it is well known that in the presence of credit constraints this paradigm no longer applies instead optimal life cycle investment gives rise to so called stochastic lifestyling cairns blake and dowd 2006 whereby for low levels of accumulated capital it is optimal to invest fully in stocks and then gradually switch to safer assets as the level of savings increases in stochastic lifestyling not only does the ratio between risky and safe assets change but also the mix of risky assets varies over time while the existing literature relies on complex numerical algorithms to quantify optimal lifestyling the present paper provides a simple formula that captures the main essence of the lifestyling effect with remarkable accuracy

risk aversion wealth and background risk we use household survey data to construct a direct measure of absolute risk aversion based on the maximum price a consumer is willing to pay for a risky security we relate this measure to consumer s endowments and attributes and to measures of background risk and liquidity constraints we find that risk aversion is a decreasing function of the endowment thus rejecting cara preferences we estimate the elasticity of risk aversion to consumption at about 0 7 below the unitary value predicted by crra utility we also find that households attributes are of little help in predicting their degree of risk aversion which is characterized by massive unexplained heterogeneity we show that the consumer s environment affects risk aversion individuals who are more likely to face income uncertainty or to become liquidity constrained exhibit a higher degree of absolute risk aversion consistent with recent theories of attitudes toward risk in the presence of uninsurable risks jel d1 d8

theory of constant proportion portfolio insurance abstract we study constant proportion portfolio insurance cppi a dynamic strategy that maintains the portfolio s risk exposure a constant multiple of the excess of wealth over a floor up to a borrowing limit we use this simple rule to investigate how transaction costs and borrowing constraints affect portfolio insurance type strategies absent transaction costs cppi is equivalent to investing in perpetual american call options and is optimal for a piecewise hara utility function with a minimum consumption constraint as the multiple increases the payoffs under cppi approach those of a stop loss strategy the expected holding period return is not monotonic in the multiple and a higher expected return can be obtained under cppi than with a stop loss strategy

the political economy of inaction abstract this paper develops a simple model of political inaction in a two party democracy i e it shows the conditions under which both parties will prefer to live with an unsatisfactory and inefficient status quo rather than to raise an issue the risk of raising the issue to either party is the fear of ending up with the other party s policy for example by losing the electron regarded as even worse than the status quo the model shows that the problem is likely to be particularly serious the more evenly matched is political competition the more risk averse the parties the less voters trust the parties the more divided is public opinion and the more important the issue the model is illustrated with a number of examples of real world inaction e g on fiscal deficits abortion the transition to socialism and the fall of the weimar republic in general the analysis also suggests that over a range more representation of political viewpoints implies a smaller likelihood of political action so that democracy implies a tradeoff between representation and the capacity for political action

growth in transition what we know what we don t and what we should abstract this essay surveys macroeconomic issues that marked the transition from planned to market economy in central and eastern european and former soviet union countries we first establish stylized facts of the transition so far we then critically survey the theoretical literature on transition discussing explanations for the initial output fall and mediumterm issues such as optimal speed of transition disorganization institutions and sectoral reallocation as source of output dynamics we review the empirical literature to assess how well it translates the theoretical models and explains the stylized facts we conclude with suggestions for future research

investment flexibility and the acceptance of risk abstract the hypothesis examined in this paper is that the greater the investor s flexibility the easier it is for him to change his portfolio depending on his results the more willing he will be to accept risks when the investor has no control on the size of the risky investment but can choose between one risky and one riskless asset this conjecture is shown to be correct however if there is more than one risky asset each period counterexamples demonstrate that flexibility rarely ensures greater risk taking for the standard portfolio problem in which investors are free to determine the size of their investment in a risky asset flexibility always raises the demand for the risky asset if constant relative risk aversion is less than unity but counterexamples can always be found when the constant relative risk aversion is larger than unity journal of economic literatureclassification numbers g11 d81 d84

information and the coase theorem abstract some economists think the coase theorem implies a lot about the proper scope of government intervention in the economy and about the welfare consequences of laissez faire others see it as a mere tautology that if people negotiate efficiently then every outcome will be efficient the coase theorem is important only if we believe that efficient negotiation is likely of course we can attribute inefficiencies to bargaining imperfection but it may not be useful to do so such attitudes sometimes seem to depend more on ideology than on reason this article gives one economist s reasoned view it discusses the coase theorem as a decentralization result and why decentralization results are interesting it considers mechanism design for revealing private information and describes the problems of centralization should the coase theorem should be viewed as a second best result property rights are more efficient than some reasonable alternative does the coase theorem recommend an institution or make

some stronger measures of risk aversion in the small and the large with applications the arrow pratt measures of risk aversion for von neumann morgenstern utility functions have become workhorses for analyzing problems in the microeconomics of uncertainty they have been used to characterize the qualitative properties of demand in insurance and asset markets to examine the properties of risk taking in taxation models and to study the interaction between risk and life cycle savings problems to name just a few applications equally importantly they have generated the linear risk tolerance class of utility functions which has provided canonical examples in such diverse areas as portfolio theory and the theory of teams despite these successes there have been a number of areas for which the results have been weaker than hoped it is natural to use the risk aversion measures to compare the behavior of individuals in risky choice situations for example consider the individual portfolio choice problem in a two asset world with a riskless asset and a risky asset if individual a has a uniformly higher arrow pratt coefficient of risk aversion than individual b then b will always choose a portfolio combination with more wealth invested in the risky asset but suppose that both assets are risky now there is no obvious sense in which the more risk averse individual can be said to hold a less risky portfolio but it seems strange that such a simple alteration should destroy the analytics which support the basic intuition similarly consider the basic insurance problem if one individual a is more risk averse than another b in the arrow pratt sense it follows that a will pay a larger premium to insure against a random loss than will b typically though an individual evaluates partial rather than total insurance that is only some gambles can be insured against and others must be retained in this case even when the gambles which are retained are independent from those which are insured it is no longer true that the individual whose arrow pratt measure of risk aversion is higher will pay a larger insurance premium the situation is no better when we consider comparative statics exercises for a single individual decreasing absolute risk aversion in the sense of arrow and

optimal asset allocation for aggregated defined benefit pension funds with stochastic interest rates in this paper we study the optimal management of an aggregated pension fund of defined benefit type in the presence of a stochastic interest rate we suppose that the sponsor can invest in a savings account in a risky stock and in a bond with the aim of minimizing deviations of the unfunded actuarial liability from zero along a finite time horizon we solve the problem by means of optimal stochastic control techniques and analyze the influence on the optimal solution of some of the parameters involved in the model

the state led transition to liberal capitalism neoliberal organizational world systems and social structural explanations of poland s economic success neoliberals argue that rapid liberalization and privatization can transform postcommunist economies into western style capitalist systems organizational sociologists argue that these policies produce a unique variety of capitalism while world systems theorists argue that they lead to underdevelopment this article advances a social structural alternative in a crucial case poland s relative economic success resulted from prolonged state ownership and an interventionist state employing various industrial policy tools that facilitated efficiency enhancing market oriented restructuring before ushering in beneficial foreign direct investment the resulting capitalist system closely resembles the typical pattern found in most late industrializers

annuitization and asset allocation this paper examines the optimal annuitization investment and consumption strategies of a utility maximizing retiree facing a stochastic time of death under a variety of institutional restrictions we focus on the impact of aging on the optimal purchase of life annuities which form the basis of most defined benefit pension plans due to adverse selection acquiring a lifetime payout annuity is an irreversible transaction that creates an incentive to delay under the institutional all or nothing arrangement where annuitization must take place at one distinct point in time i e retirement we derive the optimal age at which to annuitize and develop a metric to capture the loss from annuitizing prematurely in contrast under an open market structure where individuals can annuitize any fraction of their wealth at anytime we locate a general optimal annuity purchasing policy in this case we find that an individual will initially annuitize a lump sum and then buy annuities to keep wealth to one side of a separating ray in wealth annuity space we believe our paper is the first to integrate life annuity products into the portfolio choice literature while taking into account realistic institutional restrictions which are unique to the market for mortality contingent claims

us companies in transition economies wealth effects from expansion between 1987 and 1999 this study uses a unique sample to evaluate changes in shareholder wealth from announcements of expansion by us firms into 18 transition economies through four entry modes from 1987 to 1999 on average expansion in transition economies is associated with significant positive wealth effects results show that value creation is most significantly associated with expansion through less risky entry modes into host countries that are in the more advanced stages of market liberalization and structural reform sample firms with lower profitability also experience significantly higher abnormal returns while significant value creation documented for firms entering transition economies in 1989 1990 and 1992 suggests first mover advantages

optimal investment with s shaped utility and trading and value at risk constraints an application to defined contribution pension plan abstract in this paper we investigate an optimal investment problem under loss aversion s shaped utility and with trading and value at risk var constraints faced by a defined contribution dc pension fund manager we apply the concavification and dual control method to solve the problem and derive the closed form representation of the optimal terminal wealth in terms of a controlled dual state variable we propose a simple and effective algorithm for computing the initial dual state value the lagrange multiplier and the optimal terminal wealth theoretical and numerical results show that the var constraint can significantly impact the distribution of the optimal terminal wealth and may greatly reduce the risk of losses in bad economic states due to loss aversion

the coase theorem is tautological incoherent or wrong the coase theorem is commonly understood to mean that costless bargaining ensures efficiency in the economy for any assignment of property rights the standard demonstration of the theorem suggests that costless bargaining ensures efficiency without an assignment of property rights 1998 elsevier science s a all rights reserved

does voluntary participation undermine the coase theorem abstract the coase theorem states that costless enforcement of voluntary agreements yields efficient outcomes we argue that previous treatments fail to recognize the full meaning of voluntary it requires a two stage game a non cooperative participation decision followed by coaseian bargaining only among those who choose to participate we illustrate this in a simple public goods model and find outcomes ranging from extremely inefficient to fully efficient however the efficient equilibrium is not robust to even very small transaction costs thus we cast doubt on coaseian claims of universal efficiency finally we outline a kind of coercion that restores efficiency

circumstance and choice this article takes an integrated approach to evaluating the interaction of initial conditions political change reforms and economic performance in a unified framework covering 28 transition economies in east asia central and eastern europe and the fsu initial conditions and economic policy jointly determine the large differences in economic performance among transition economies initial conditions dominate in explaining inflation but economic liberalization is the most important factor determining differences in growth political reform emerges as the most important determinant of the speed and comprehensiveness of economic liberalization raising the important question of what determines political liberalization results suggest the importance of the level of development in determining the decision to expand political freedoms