cost uncertainty and the rate of investment abstract this paper examines the effect of cost and price uncertainty on the optimal rate of investment by firms within a general equilibrium framework former works which have studied this issue like hartman 1972 and abel 1983 1984 1985 have come to the conclusion that this effect is positive since increased price uncertainty raises expected profitability but these studies assume a fixed discount rate which is equivalent to assuming that consumers are risk neutral this paper shows that if consumers are risk averse the effect of uncertainty may be reversed and investment may be depressed when price or cost uncertainty is increased

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

risk aversion revisited in order to supply additional empirical evidence of the effect of wealth on relative risk aversion this study investigates households demand for risky assets using analysis of covariance techniques applied to the asset holdings of canadian individual households the extent and pattern of life cycle effects are also examined results generally point to decreasing relative risk aversion when housing is either excluded from the definition of wealth or treated as a riskless asset the investor s life cycle plays a prominent role in portfolio selection behavior with risk aversion increasing uniformly with age tax differentials do not seem to be an important element in investment decisions with respect to risk when the sample and wealth definitions are censored in order to approximate those of previous empirical studies their findings on relative risk aversion are generally corroborated this study presents an empirical investigation of the demand for risky assets of individual canadian households using data from the survey of consumer finances the results generally point to decreasing relative risk aversion when housing is either excluldied from the definition of wealth or treated as a riskless asset even when life cycle effects are controlled the investor s life cycle plays a prominent role in portfolio selection behavior with risk aversion increasing uniformly with age cohn lewellen schlarbaum 6 also found evidence of decreasing relative risk aversion using a restricted sample of stockowning investors while friend blume 12 concluded that constant relative risk aversion characterized household behavior the present study also finds that by restricting the sample and the wealth definitions to approximate those of cohn lewellenschlarbaum and those used by friend blume their empirical findings on relative risk aversion are generally corroborated the paper is divided into five sections the first reviews the literature on risk aversion and the second briefly describes the theory underlying the empirical tests the third section describes the data and statistical techniques used the empirical results are presented and discussed in the fourth section where the aggregate demand for risky assets is estimated and where the role of life cycle variables is examined the final section summarizes the main conclusions of the study

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

a new method of estimating risk aversion i show existing evidence on labor supply behavior places an upper bound on risk aversion in the expected utility model i derive a formula for the coefficient of relative risk aversion in terms of the ratio of the income elasticity of labor supply to wage elasticity and degree of complementarity between consumption and labor i bound the degree of complementarity using data on consumption choices when labor supply varies across states using labor supply elasticity estimates i find a mean estimate of 1 then show generating 2 requires that wage increases cause sharper labor supply reductions jel d81 j22

exchange rate volatility and foreign trade evidence from thirteen ldc s this article investigates empirically the impact of real exchange rate volatility on the export flows of 13 less developed countries ldc s over the quarterly period 1973 1996 estimates of the cointegrating relations are obtained using johansen s multivariate procedure estimates of the short run dynamics are obtained for each country using the error correction technique the major results show that increases in the volatility of the real effective exchange rate approximating exchange rate uncertainty exert a significant negative effect on export demand in both the short run and the long run in each of the 13 ldc s these effects may result in significant reallocation of resources by market participants

twin picks disentangling the determinants of risk taking in household portfolios this paper investigates risk taking in the liquid portfolios held by a large panel of swedish twins we document that the portfolio share invested in risky assets is an increasing and concave function of financial wealth leading to different risk sensitivities across investors human capital which we estimate directly from individual labor income also affects risk taking positively while internal habit and expenditure commitments tend to reduce it our microfindings lend strong support to decreasing relative risk aversion and habit formation preferences furthermore heterogeneous risk sensitivities across investors help reconcile individual preferences with representative agent models

crowdfunding and innovation entrepreneurs have started relying on crowdfunding to fund their investments this paper surveys the literature linking crowdfunding with innovation in entrepreneurial firms two distinct areas are discussed first crowdfunding has the potential to foster innovation by offering new sources of capital to innovation driven firms and thereby reduce the funding gap for innovative startups second crowdfunding offers a way for the crowd to participate in the innovation process by providing feedback to the entrepreneur this feedback can take various forms including providing ideas on the development of the product during and after the campaign in the spirit of crowdsourcing and providing valuable information on the future demand for the new product

crowdfunding and innovation crowdfunding and innovation entrepreneurs have started relying on crowdfunding to fund their investments this paper surveys the literature linking crowdfunding with innovation in entrepreneurial firms two distinct areas are discussed first crowdfunding has the potential to foster innovation by offering new sources of capital to innovation driven firms and thereby reduce the funding gap for innovative startups second crowdfunding offers a way for the crowd to participate in the innovation process by providing feedback to the entrepreneur this feedback can take various forms including providing ideas on the development of the product during and after the campaign in the spirit of crowdsourcing and providing valuable information on the future demand for the new product

life cycle portfolio choice with additive habit formation preferences and uninsurable labor income risk this article explores the implications of additive and endogenous habit formation preferences in the context of a life cycle model of an investor who has stochastic uninsurable labor income to solve the model i analytically derive the habit wealth feasibility constraints and show that they depend on the worst possible path of future labor income and on the habit strength but not on the probability of the worst income when there is only a slim chance of a severe income shock the model implies much more conservative portfolios the model also predicts that for some low to moderately wealthy households the portfolio share allocated to stocks increases with wealth because of this feature the model can generate more conservative portfolios for younger than for middle aged households the effects of habits on portfolio choice are robust to income smoothing through borrowing or flexible labor supply one controversial finding is that for high values of the habit strength parameter usually required for the resolution of asset pricing puzzles in general equilibrium the life cycle model predicts counterfactually high wealth accumulation jel g11 g12 copyright 2007 oxford university press

a theory of disappointment aversion an axiomatic model of preferences over lotteries is developed it is shown that this model is consistent with the allais paradox includes expected utility theory as a special case and is only one parameter beta richer than the expected utility model allais paradox type behavior is identified with positive values of beta preferences with positive beta are said to be disappointment averse it is shown that risk aversion implies disappointment aversion and that the arrow pratt measures of risk aversion can be generalized in a straight forward manner to the current framework copyright 1991 by the econometric society

wealth inequality and asset pricing in an arrow debreu exchange economy with identical agents except for their initial endowment we examine how wealth inequality affects the equilibrium level of the equity premium and the risk free rate we first show that wealth inequality raises the equity premium if and only if the inverse of absolute risk aversion is concave in wealth we then show that the equilibrium risk free rate is reduced by wealth inequality if the inverse of the coefficient of absolute prudence is concave we also prove that the combination of a small uninsurable background risk with wealth inequality biases asset pricing towards a larger equity premium and a smaller risk free rate the model of the representative consumer a la lucas 1978 failed to explain observed security prices more specifically as first stated by mehra and prescott 1985 the model predicts an equity premium that is too low and a risk free rate that is too high given the observed low variability of consumption growth a recent strand of the literature with papers by constantinides and duffie 1996 heaton and lucas 1996 and krusell and smith 1997 for example explores whether incomplete asset markets and heterogeneity among consumers can explain these puzzles constantinides and duffie 1996 in particular conclude that it is at least in principle possible to generate larger equity premia when such ingredients are introduced the aim of this paper is not to provide another explanation of the puzzles but rather to better understand the relationship between asset prices the heterogeneity of consumers wealth and the market incompleteness when markets are complete heterogeneous consumers are able to equalize their marginal rates of substitution across states and across time as shown by constantinides 1982 this implies that the equilibrium of the heterogeneous consumer economy can be duplicated by the equilibrium in a lucas economy with a representative agent this means that taking account of the heterogeneity in the population alone cannot explain why the representative agent model is rejected hansen and singleton 1982 this does not mean however that the distribution of wealth in the population for example has no effect on asset prices in general in order to understand this consider the departure from an egalitarian distribution of wealth by introducing a mean preserving transfer of endowment under decreasing absolute risk aversion poorer agents will be more risk averse whereas wealthier people will be less risk averse there is no reason a priori for that the group s attitude towards risk be unaffected by this transfer we first show that if absolute risk tolerance i e the inverse of the arrow pratt coefficient of absolute risk aversion is concave then the risk aversion of the agent with the mean wealth will be smaller than the risk aversion of the representative agent thus if an outside observer overlooks wealth inequality he consequently underestimates the aversion to risk of society this leads to

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

on the investment uncertainty relationship in a real options model abstract it appears to be widely accepted in the real options literature that an increase in uncertainty should have an inhibiting effect on investment our article demonstrates that the notion of a negative uncertainty investment relationship is not always correct we show that in certain situations an increase in uncertainty can actually increase the probability of investing and thereby have a positive impact on investment

individual preferences monetary gambles and stock market participation a case for narrow framing we argue that narrow framing whereby an agent who is offered a new gamble evaluates that gamble in isolation may be a more important feature of decision making than previously realized our starting point is the evidence that people are often averse to a small independent gamble even when the gamble is actuarially favorable we find that a surprisingly wide range of utility functions including many nonexpected utility specifications have trouble explaining this evidence but that this difficulty can be overcome by allowing for narrow framing our analysis makes predictions as to what kinds of preferences can most easily address the stock market participation puzzle

risk averse behavior in generalized matching pennies games in experimental studies of behavior in 2 2 games with unique mixed strategy equilibria observed choice frequencies are systematically different from mixed strategy nash predictions this paper examines experimental results for a variety of such games and shows that a structural econometric model which incorporates risk aversion into a quantal response equilibrium explains the data very well moreover risk aversion estimates are stable across the different games and are close to those obtained from laboratory and field auction data as well as from individual lottery choice experiments

on the sign of the investment uncertainty relationship understanding the effects of uncertainty over any decision variable has fascinated economists for a long time risk aversion and incomplete markets are likely to make the investment uncertainty relationship negative e g roger craine 1989 joseph zeira 1989 what happens in the absence of risk aversion and incomplete markets is however ambiguous richard hartman 1972 and andrew b abel 1983 1984 1985 found that in the presence of symmetric convex costs of adjustment mean preserving increases in price uncertainty raise investment of a competitive firm as long as the profit function is convex in prices on the other hand the recent literature on irreversible investment e g robert s pindyck 1988 giuseppe bertola 1988 has shown that increases in uncertainty lower investment all these results have been derived under either risk neutrality or complete markets intuition suggests that the explanation for such a difference lies with the asymmetric nature of adjustment costs in the irreversible investment case as compared with the symmetry of the adjustment cost mechanisms proposed by abel and hartman although this intuition is confirmed in this paper asymmetric adjustment costs are shown not to be sufficient to explain why the results differ in fact a more hidden but at least as important difference between these two literatures is that the former assumes perfect competition and constant returns to scale whereas the latter assumes either imperfect competition or decreasing returns to scale or both 2 the purpose of this paper is to highlight the role of the decreasing marginal return to capital assumption due to either imperfect competition or decreasing returns to scale or both in determining the effects of adjustment cost asymmetries on the sign of the response of investment to changes in uncertainty under risk neutrality for this the paper develops a simple model with a cost of adjustment mechanism general enough to consider both symmetric convexity and irreversibility as special cases one of the most important findings is the lack of robustness of the negative relationship between investment and uncertainty under asymmetric adjustment costs3 to changes in the degree of competition in fact when firms are nearly competitive the conclusion of hartman and of abel holds no matter how asymmetric adjustment costs are studying adjustment cost mechanisms has a central role in understanding the dynamics of investment and its business cycle implications but conclusive results about the sign of the instantaneous relationship between uncertainty and investment should not be department of economics columbia university new york ny 10027 i am grateful to giuseppe bertola prajit dutta glen hubbard anil kashyap richard lyons and the referees for their useful comments 1the financial literature on investment has considered risk aversion through a premium in the discount rate determined by the capm capital asset pricing model intertemporal capm or consumption capm however often this discount rate is left unchanged when studying the response of investment to uncertainty changes e g pindyck 1988 pp 974 5 thereby omitting the effect of changes in uncertainty on investment due to risk aversion and incomplete markets 2in the typical version of the irreversible investment problem there is no cost of upward adjustments thus imperfect competition and or decreasing returns to scale are required to bound the size of the firm 3in this paper asymmetric adjustment cost refers to the case in which it is more expensive to adjust downward than upward certainly the opposite case is a trivial extension of the case studied in this paper

exchange rate uncertainty and the level of investment in selected south east asian countries the effect of real exchange rate uncertainty on aggregate private investment in indonesia malaysia the philippines and thailand is examined using time series data from 1972 2000 since the use of non stationary time series data may produce spurious results the data series are tested for stationarity using the augmented dickey fuller and phillips perron tests after establishing the stationarity of the data series cointegration tests are performed the cointegration test results reject the hypothesis of no cointegration therefore an error correction model is developed and estimated the estimated results point to an inconclusive empirical relationship between real exchange rate volatility and aggregate private investment

nonlinear behavior in sealed bid first price auctions the extent to which the behavior of people is consistent with game theoretic principles is investigated in a first price sealed bid auction environment three linear rules of thumb with increasing complexity are used as benchmarks to gauge the accuracy of the constant relative risk aversion model crram in addition the crram is tested against the relaxation of the rational expectation hypothesis existing competitive bidding experiments cannot clearly distinguish between game theoretic models and linear markdown rules on an individual level within the parametric environments studied and reported in the experimental literature game theoretic solutions are linear over the range of private values in which bid functions are estimated in this study agents drew values from non uniform distributions as a result the game theoretic bidding behavior is nonlinear due to the nonlinearity special econometric and numerical techniques are applied to solve the model and obtain the estimates the crram exhibits good fit of the data the pseudo r2 is greater than 0 8 in 90 percent of the subjects the crram is more accurate than the markdown model mm and the simple ad hoc model simam but not as accurate as the sophisticated ad hoc model sop am the data also supports the relaxation of the rational expectation hypothesis and suggests that substantial increases in the predictive power of game theoretic models can be gained from improvements in the theory of belief formation

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

real exchange rate uncertainty private investment in ldcs this paper examines empirically the link between real exchange rate uncertainty and private investment in developing countries using a large cross country time series data set the paper builds a garch based measure of real exchange rate volatility and finds that it has a strong negative effect on investment after controlling for other standard investment determinants and taking into account their potential endogeneity the effect of uncertainty is not uniform however there is some evidence of threshold effects so that uncertainty only matters when it exceeds some critical level in addition the negative effect of real exchange rate uncertainty on investment is significantly larger in economies that are highly open and in those with less developed financial systems

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

asset pricing with limited risk sharing and heterogeneous agents we develop a model with incomplete markets and heterogeneous agents that generates a large equity premium while simultaneously matching stock market participation and individual asset holdings the high risk premium is driven by incomplete risk sharing among stockholders which results from the combination of aggregate uncertainty borrowing constraints and a realistically calibrated life cycle earnings profile subject to idiosyncratic shocks we show that it is challenging to simultaneously match asset pricing moments and individual portfolio decisions while limited participation has a negligible impact on the risk premium contrary to the results of models where it is imposed exogenously

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

optimal income taxation when asset taxation is limited several frictions restrict the government s ability to tax assets first it is very costly to monitor trades on international asset markets second agents can resort to nonobservable low return assets such as cash gold or foreign currencies if taxes on observable assets become too high this paper shows that limitations in asset taxation have important consequences for the taxation of labor income we study a simple dynamic moral hazard model of social insurance with observable and nonobservable saving decisions we find that optimal labor income taxes become less progressive when the ability to tax savings is limited

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

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

small business and antitrust the question addressed in this paper is how small business fits into a post chicago antitrust agenda the answer we will see relates not to special privileges for the small but to a vigorous competition policy directed against manifestations of market power

consistency and heterogeneity of individual behavior under uncertainty by using graphical representations of simple portfolio choice problems we generate a very rich dataset to study behavior under uncertainty at the level of the individual subject we test the data for consistency with the maximization hypothesis and we estimate preferences using a two parameter utility function based on faruk gul 1991 this specification provides a good interpretation of the data at the individual level and can account for the highly heterogeneous behaviors observed in the laboratory the parameter estimates jointly describe attitudes toward risk and allow us to characterize the distribution of risk preferences in the population