the optimal taxation of fiat money in search equilibrium this paper investigates the link between welfare and the taxation of money in the context of a general equilibrium search model where decentralized trading motivates the use of fiat money since buyers with money must invest effort or search intensity to contact sellers with goods a natural trading externality arises given a sufficiently productive economy search efforts will be too low relative to social efficiency this provides a welfare improving role for policies which tax money balances the nature of this role is explored and its implications for optimal monetary policy discussed copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

what explains household stock holdings abstract this is an empirical study of the determinants of stock holdings using data from the us survey of consumer finances from 1992 to 2001 there is a great heterogeneity in the way households form their portfolios stock ownership is positively correlated with various measures of wealth age retirement savings and having sought financial advice it is negatively correlated with holdings of alternative risky investments such as investments in private businesses and with the willingness to undertake non financial investments in the future while we can predict reasonably well who holds stocks we have less predictive power about the share of stocks owned by those who hold positive amounts

product and price competition in a duopoly this paper examines the role of consumer preferences costs and price competition in determining the competitive product strategy of a firm in the model studied here there are two identical firms competing on product quality and price they face consumers who prefer a higher quality product to a lower quality product but differ in how much they are willing to pay for quality the consumers can also choose a substitute if they don t like the product price offerings of the two firms for the firms a higher quality product costs more to produce than a lower quality product the paper shows that the equilibrium strategy for each firm should be to differentiate its product from its competitor with the firm choosing the higher quality choosing the higher margin as well this differentiation however is not efficient that is it is possible to choose two other products and offer them at prices that cover their marginal cost and still satisfy consumers needs better in the aggregate a monopolist by contrast would differentiate his product line efficiently this suggests that cannibalization has different effects on product strategy than competition the paper also shows that if one firm enters the market first then it can defend itself from later entrants and gain a first mover advantage by preempting the most desirable product position

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

two part fractional regression model for the demand for risky assets empirical studies of household portfolio choices are often interested in quantifying the effects of various covariates on the fraction of a household s wealth invested in risky assets such as common stocks the preferred econometric specification in these studies is the two limit tobit model which can accommodate the fractional nature of the dependent variable however it is restrictive because it assumes that the same data generating process determines both whether households participate in the stock market and the fraction of wealth invested in stocks this article demonstrates that in this setting a two part version of the fractional response model of papke and wooldridge 1996 constitutes an attractive alternative to tobit by comparing the performance of the two models using data on portfolio choices of australian households we find that 1 the tobit model is rejected by our data in favour of a two part specification and 2 marginal effects of covariates on the share of risky assets conditio

how does background risk affect portfolio choice an analysis based on uncertain mean variance model with background risk abstract this paper explores how background risk affects individual investment decisions under the framework of uncertainty theory we propose an uncertain mean variance model with background risk and give its optimal solution when the returns of stocks and background asset obey normal uncertainty distributions on this basis we study the characteristic of the mean variance efficient frontier of the stock portfolio in the presence of background risk furthermore we compare the proposed model with the uncertain mean variance model without background risk and discuss the efficiency difference between the two models and further give the condition where the two models select the same stocks based on the comparison we analyze how background risk affects individual portfolio choice finally we give some numerical examples as illustrations

debt and financial expectations an individual and household level analysis in this article we show that optimistic financial expectations impact positively on both the quantity of debt and the growth in debt at the individual and household levels our theoretical model shows that this association is predicted under a variety of plausible scenarios in the empirical analysis we explore the determinants of debt and of growth in debt using british data we find convincing support for our theoretical priors and show that it is optimistic financial expectations per se that are important in influencing debt rather than the accuracy of individuals predictions regarding their future financial situation jel d18 d84 d91

marriage and other risky assets a portfolio approach we study the joint impact of gender and marital status on financial decisions first we test the hypothesis that marriage represents in a portfolio framework a sort of safe asset and that this effect is stronger for women controlling for a number of observable characteristics we show that single women have a lower propensity to invest in risky assets than married females and males second we show that the differential behavior of single women evolves over time reflecting the increasing incidence of divorce and the expansion of female labor market participation in particular towards the end of our sample period we observe a reduction in the gap between women with different family status which can be attributed to the gradual erosion of the perception of marriage as a sort of safe asset our results therefore suggest that the differential behavior of single vs married women can be explained by the evolution of gender roles in society even after controlling for differential risk attitudes our empirical investigation is based on a dataset drawn from the 1989 2006 bank of italy survey of household income and wealth

a further look at household portfolio choice and health status abstract this paper investigates the effect of changes in health status on household financial wealth and financial portfolio choice it is shown that the impact of health events on household financial and non financial wealth is asymmetric a diagnosis of a new disease leads to a larger decrease in financial wealth than in non financial wealth moreover we find that the puzzle pertaining to the relationship between health status and portfolio choice discussed in the extant literature generally disappears after controlling for differences in the amount of financial assets held by healthy and sick people the results suggest that the effect of changes in health status on household financial portfolios is indirect a health shock significantly reduces household total financial wealth in turn leading households to restructure the composition of their financial assets

income hedging and portfolio decisions we examine whether the decision to participate in the stock market and other related portfolio decisions are influenced by income hedging motives economic theory predicts that the market participation propensity should increase as the correlation between income growth and stock market returns decreases surprisingly empirical studies find limited support for the income hedging motive using a rich unique dutch data set and the national longitudinal survey of the youth nlsy from the united states we show that when the income return correlation is low individuals exhibit a greater propensity to participate in the market and allocate a larger proportion of their wealth to risky assets even when the income risk is high individuals exhibit a higher propensity to participate in the market when the hedging potential is high these findings suggest that income hedging is an important determinant of stock market participation and asset allocation decisions

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

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

financial literacy and participation in the derivatives markets we set out in this study to determine whether individuals with higher levels of financial literacy are more likely to be active participants in the derivatives markets our empirical results based upon an official national survey undertaken by the financial supervisory commission of taiwan reveal that even after controlling for stock market participation rates financial literacy represents a significant benefit to individuals since it helps them to lower the entry barriers to purchasing complex derivatives products we also find that household wealth gender residential location and diverse sources of information have significant effects on participation rates in the derivatives markets furthermore when taking into consideration issues of accessibility or measurement error the positive effects of financial literacy on derivatives market participation are found to remain largely unchanged

price and order postponement in a decentralized newsvendor model with multiplicative and price dependent demand we analyze the effect of price and order postponement in a decentralized newsvendor model with multiplicative and price dependent demand wherein the manufacturer sets the wholesale price and possibly offers a buyback rate and the retailer determines the order quantity and retail price such postponement strategies can be used by the retailer by delaying his operational decisions order quantity and retail price until after demand uncertainty is observed we show how the equilibrium values of the contract parameters and profits are affected by i vertical competition ii type of contract wholesale price only or buyback iii demand distribution iv form of the expected demand function and v the timing of the retailer s operational decisions although in most cases postponement is quite beneficial for the channel members we show that for some model parameters due to vertical competition the expected value of perfect information about demand for price postponement and order postponement may be negative for the channel and even surprisingly for both members we also show that when a buyback option is offered neither order postponement nor price postponement has an effect on the equilibrium wholesale price profit allocation ratio between the manufacturer and the retailer and channel efficiency and that the equilibrium wholesale price expected retail price profit allocation ratio between the manufacturer and the retailer and channel efficiency in the model with buyback options under either order or price postponement further coincide with their counterparts in the corresponding deterministic model

a search theoretic approach to monetary economics the essential function of money is its role as a medium of exchange the authors formalize this idea using a search theoretic equilibrium model of the exchange process that captures the double coincidence of wants problem with pure barter one advantage of the framework described here is that it is very tractable the authors also show that the model can be used to addre ss some substantive issues in monetary economics including the potenti al welfare enhancing role of money the interaction between specializat ion and monetary exchange and the possibility of equilibria with multip le fiat currencies copyright 1993 by american economic association

asset allocation and location over the life cycle with investment linked survival contingent payouts abstract this paper shows how survival contingent investment linked payouts can enhance investor wellbeing in the context of a portfolio choice model which integrates uninsurable labor income and asymmetric mortality expectations in exchange for illiquidity these products provide the consumer with access to mutual fund style portfolio choice as well as the survival credit generated from pooling mortality risk our model generates optimal asset location patterns indicating how much to hold in liquid versus illiquid survival contingent payouts over the lifetime and also asset allocation paths showing how to invest in stocks versus bonds we show that the investor who moves her money out of liquid saving into survival contingent assets gradually from middle age to retirement and beyond will enhance her welfare by as much as 50 the results are robust to the introduction of uninsurable consumption shocks in housing expenses income flows during the worklife and retirement sudden changes in health status and medical expenses

an analysis of portfolio selection with background risk abstract this paper investigates the impact of background risk on an investor s portfolio choice in a mean variance framework and analyzes the properties of efficient portfolios as well as the investor s hedging behaviour in the presence of background risk our model implies that the efficient portfolio with background risk can be separated into two independent components the traditional mean variance efficient portfolio and a self financing component constructed to hedge against background risk our analysis also shows that the presence of background risk shifts the efficient frontier of financial assets to the right with no changes in its shape moreover both the composition of the hedge portfolio and the location of the efficient frontier are greatly affected by a number of background risk factors including the proportion of background assets in total wealth and the correlation between background risk and financial risk

multiplicative background risk although there has been much attention in recent years on the effects of additive background risks the same is not true for its multiplicative counterpart we consider random wealth of the multiplicative form xy where x and y are statistically independent random variables we assume that x is endogenous to the economic agent but that y is an exogenous and nontradable background risk that represents a type of market incompleteness our main focus is on how the presence of the multiplicative background risk y affects risk taking behavior for decisions on the choice of x we extend the results of gollier and pratt 1996 to characterize conditions on preferences that lead to more cautious behavior

stockholding behavior of u s households evidence from the 1983 1989 survey of consumer finances most households persistently invest in riskless assets but not stocks and may do so because they perceive information required for market participation to be costly relative to expected benefits in a consumption capital asset pricing model ccapm increased risk aversion income risk and lower resources reduce the information expense sufficient to deter stockholding bivariate probit analysis using the 1983 1989 survey of consumer finances shows that households with lower risk aversion higher education and greater wealth who were nonstockholders in 1983 had an increased conditional probability of entering by 1989 whereas 1983 stockholders with lower resources more limited education and greater risk aversion were more likely to be nonstockholders by 1989

using yield management to shift demand when the peak time is unknown traditional peak load and stochastic peak load models assume firms have prior information about when peak demand occurs however price dispersion such as is typically used by firms practicing yield management can achieve some of the same efficient demand shifting even when the peak time is unknown equilibrium price dispersion arises because of stochastic demand and price rigidities but a previously unexplored benefit of price dispersion is its ability to reduce equilibrium capacity costs through demand shifting the model also suggests how yield management now more commonly called revenue management might actually benefit business travellers contrary to the popular prejudice

portfolio choice in the presence of background risk in this paper we focus on how the presence of background risks from sources such as labour and entrepreneurial income influences portfolio allocations this interaction is explored in a theoretical model that is calibrated using cross sectional data from a variety of sources the model is shown to be consistent with some but not all aspects of cross sectional observations of portfolio holdings the paper also provides a survey of the extensive theoretical and empirical literature on portfolio choice

assortative matching and risk sharing abstract this paper explores the sorting patterns in a two sided matching market where agents facing different risks match to share them when preference belongs to the class of harmonic absolute risk aversion hara the risk premium is perfectly transferable within each partnership thus a stable match minimizes the social cost of risk in the systematic risk model where agents are ranked by their holdings of a common risky asset the convexity of the joint risk premium in joint risk size leads to negative assortative matching nam in the idiosyncratic risk model where agents are ranked by their independent riskiness in the sense of second order stochastic dominance ssd nam arises when preference exhibits decreasing absolute risk aversion dara in the sense of ross and riskier background risk leads to more risk averse behavior however nam may fail to arise when riskier background risk leads to more risk tolerant behavior

self directed pensions gender risk and portfolio choices in this paper i investigate gender differences in financial risk taking from a new perspective and i show that gender plays a different role across the risk distribution to evaluate risk taking i exploit portfolio choices following a reform that entitles almost the entire swedish workforce to choose a risk profile for a part of their public pension contributions the novel finding is that portfolio risk does not differ much between the men and women who choose less risky portfolios while the men who choose risky portfolios take on significantly more risk than do the women who choose risky portfolios the findings are robust to investors choosing the default alternative chasing past returns rebalancing and different measures of risk taking

borrowing in foreign currency austrian households as carry traders household borrowing in a foreign currency is a widespread phenomenon in austria thirteen percent of austrian households report their housing loan to be denominated in foreign currency mostly swiss franc yet despite its importance peculiar character and acute policy concerns we know little about the attitudes and characteristics of the households involved in this type of carry trade we analyze a uniquely detailed financial wealth survey of 2556 austrian households to sketch a comprehensive profile of the attitudes and characteristics of the households involved we employ both univariate tests and multivariate multinomial logit models the survey data suggest that risk seeking affluent and married households are more likely to take a housing loan in a foreign currency financially literate or high income households are more likely to take a housing loan in general these findings partially assuage policy concerns about household default risk on foreign currency housing loans or household retirement security

capacity allocation and scheduling in supply chains we consider a multiple product supply chain where a manufacturer receives orders from several distributors if the orders cannot all be met from available production capacity then the manufacturer allocates that capacity and a set of resubmittable orders among the distributors the distributors may share their allocated capacity among themselves before submitting revised orders finally the manufacturer schedules the revised orders to minimize its cost we consider three practical coordination issues first we estimate the benefit to the manufacturer from considering scheduling costs and constraints in making capacity and order allocation decisions second we estimate the additional profit that the distributors achieve when they share their allocated capacity third we estimate the value of coordination between the manufacturer and the distributors our work is among the first to consider all three issues simultaneously we model scheduling costs and constraints within the manufacturer s capacity allocation problem we model the distributors capacity sharing problem as a cooperative game that has properties that are unique within cooperative game theory finally we develop optimal algorithms for all the models defined by the three coordination issues our exact evaluation of decisions about the appropriate coordination level improves managers ability to make those decisions

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

cognitive abilities and portfolio choice we study the relation between cognitive abilities and stockholding using the recent survey of health ageing and retirement in europe share which has detailed data on wealth and portfolio composition of individuals aged 50 in 11 european countries and three indicators of cognitive abilities mathematical verbal fluency and recall skills we find that the propensity to invest in stocks is strongly associated with cognitive abilities for both direct stock market participation and indirect participation through mutual funds and retirement accounts since the decision to invest in less information intensive assets such as bonds is less strongly related to cognitive abilities we conclude that the association between cognitive abilities and stockholding is driven by information constraints rather than by features of preferences or psychological traits

bayes solution to dynamic inventory models under unknown demand distribution this paper considers the periodic review inventory problem for which one or more parameters of the demand distribution are unknown with a known prior distribution chosen from the natural conjugate

saving accounts versus stocks and bonds in household portfolio allocation we study the structure of household portfolios of financial wealth by analyzing both the determinants of total financial wealth and the choice between risky stocks and bonds and riskfree assets saving accounts the econometric specification is a generalized trivariate tobit model estimated on a cross section of 3 077 households in the netherlands in 1988 we account for endogeneity of financial wealth and for selectivity due to nonreporting results show that the level of financial wealth and the marginal tax rate are major determinants of the allocation between riskfree and risky assets

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

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

accurate response by postponement abstract accurate response and postponement are two strategies for a firm to deal with demand uncertainty and better match supply with demand under accurate response reactive capacity could be used for customized make to order mto production according to customer demands on the other hand using postponement a firm could perform the non postponed activities speculatively and use reactive capacity only to customize the final product thereby enhancing the profitability of accurate response surprisingly existing research in the areas of accurate response and postponement does not address this potential in this paper we aim to fill this gap by proposing a stylized model for accurate response by postponement specifically we analyze a situation where a manufacturer is faced with uncertain demand for a product during a short selling season the manufacturer has three supply options first it can manufacture and offer a standardized version of the product second it can use postponement by manufacturing a standard component speculatively and customizing it once demands are revealed at the beginning of the selling season third it can produce customized products in a pure make to order fashion during the selling season this situation is modeled as an extension of a newsvendor problem our main research question is then to analyze specifically under which conditions postponement is part of the optimal supply strategy and more generally what kinds of supply strategies will arise in different model settings

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

a postponement model for demand management in this paper we analyze demand postponement as a strategy to handle potential demand surges under demand postponement a fraction of the demands from the regular period are postponed and satisfied during a postponement period this permits capacity to be procured to satisfy the postponed demands a reimbursement per unit is paid to customers whose demands are postponed the basic idea is that by preempting stockouts through demand postponement we can reduce overall stockout costs we formulate and solve a two stage capacity planning problem under demand postponement we propose a power range class of distributions to capture the nature of demand surges we establish the scalability and conjugate properties of the power range distributions under demand postponement which leads to a tractable analysis of the problem we analytically solve the problem of determining the optimal regular and postponement period capacities and the demand splitting rule to minimize the supplier s expected cost we show that a the value of postponement may be significant depending on cost and demand parameters b a postponement strategy may lead to reduced investment in initial capacity and c it may be optimal to do no demand postponement over a range of demands even after observing a higher demand signal we then relax several model assumptions and provide results for these extensions we conclude with managerial insights

risk management housing and stockholding this article investigates the possible explanations of the stockholding puzzle by focusing on housing and other uninsurable risks associated with income health and business taking the french household wealth survey patrimoine 2004 french national statistical institute we find that the share of financial wealth invested in stocks depends on transaction and information costs risk aversion exposure to real estate risk and to a lesser extent labour market risk these results are obtained by controlling for endogenous home ownership status

equilibrium welfare and government policy with quasi geometric discounting abstract we consider a representative agent equilibrium model where the consumer has quasi geometric discounting and cannot commit to future actions we restrict attention to a parametric class for preferences and technology and solve for time consistent competitive equilibria globally and explicitly we then characterize the welfare properties of competitive equilibria and compare them to that of a planning problem the planner is a consumer representative who without commitment but in a time consistent way maximizes his or her present value utility subject to resource constraints the competitive equilibrium results in strictly higher welfare than the planning problem whenever the discounting is not geometric journal of economic literature classification numbers e21 e61 e91

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

the inverse newsvendor problem choosing an optimal demand portfolio for capacitated resources the classical newsvendor problem is one of optimally choosing a level of capacity to respond to a known demand distribution the inverse newsvendor problem is one of optimally choosing a demand distribution with fixed capacity the applications of the inverse problem include industrial settings where demand management is relatively less costly than capacity adjustments demand distributions are chosen from an opportunity set which reflects the set of market opportunities for the firm we analyze the firm s profit as a function of these demand alternatives provide solution methods and insights and identify inefficient and dominated distributions we provide results when the opportunity set is known or only partially known we extend the results to cases in which there are multiple prioritized customer classes that share the firm s productive capacity this paper was motivated by an industrial application in a firm selling a semicommodity product into three prioritized industrial sectors we review the application of our methods to this setting

a multi country real business cycle model with heterogeneous agents a multicountry real business cycle model is developed capturing two important aspects of heterogeneity found in household survey data only a small fraction of the population holds stock and a significant fraction of nonstockholders are borrowing constrained the model is applied to data for twenty oecd countries it generates cross country consumption correlations consistent with those observed in the data potential welfare gains from international portfolio diversification by stockholders are large leaving the observed home bias as a significant puzzle the model can also account for the finding in u s data that consumption of stockholders is more volatile than that of nonstockholders copyright 1996 by the editors of the scandinavian journal of economics

time inconsistency and the long run effects of inflation recent work by laibson 1997 identifies that individuals time discount factors evolve over time this leads to a time inconsistency problem in which savings are distorted this paper studies the long run effects of inflation in the presence of a time inconsistency problem

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

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

a unified framework for monetary theory and policy analysis search theoretic models of monetary exchange are based on explicit descriptions of the frictions that make money essential however tractable versions of these models typically make strong assumptions that render them ill suited for monetary policy analysis we propose a new framework based on explicit micro foundations within which macro policy can be studied the framework is analytically tractable and easily quantifiable we calibrate the model to standard observations and use it to measure the cost of inflation we find that going from 10 percent to 0 percent inflation is worth between 3 and 5 percent of consumption much higher than previous estimates

financial intermediation in the theory of the risk free rate abstract this paper constructs a general equilibrium model of the interaction between financial intermediaries and financial markets that sheds some light on the short term volatility of real interest rates the main findings of the paper are as follows when financial intermediaries issue contingent non contingent liabilities an increase in the consumers relative risk aversion coefficient decreases increases the interest rate also the interest rate rises when capitalists are less risk averse and financial intermediaries are hit by a liquidity shock

why do so few hold stocks the authors investigate why 75 percent of u s households do not hold stocks despite the equity premium and predictions of expected utility models the question is relevant for privatization asset pricing and tax progressivity issues they show that risk aversion per se heterogeneity of beliefs habit persistence time nonseparability and quantity constraints on borrowing do not account for the phenomenon a wedge between borrowing and lending rates and minimum investment requirements are plausible but empirically weak factors more promising explanations are inertia and departures from expected utility maximization there is also qualified support for nondiversifiable income risk as a contributing factor copyright 1995 by royal economic society

risk aversion and rising wage inequality abstract we propose a model in which as incomes grow workers become less risk averse and move from fixed wage contracts to variable pay this can explain the recent increase in wage dispersion between groups within groups and over the lifecycle

time diversification definitions and some closed form solutions abstract we establish general conditions under which younger investors should invest a larger proportion of their wealth in risky assets than older ones in the finite horizon dynamic setting we show that such phenomenon known as time diversification can occur in the presence of human wealth guaranteed consumption or mean reverting stock returns we formalize two alternative notions of time diversification commonly confounded in the literature analytic solutions are provided for both time series and cross sectional forms of time diversification to our best knowledge this paper is the first to solve in closed form the hedging demand for a cara investor with inter temporal consumption and a finite horizon facing mean reverting expected returns our results indicate that horizon can have a significant effect on the portfolio demand of a cara investor due to inter temporal hedging

income risk and portfolio choice an empirical study this paper investigates the relationship between portfolio choice and labor income risk in the national longitudinal survey of youth 1979 cohort permanent income risk variability of shocks to income that have permanent effect significantly reduces the share of risky assets in the household s portfolio while transitory income risk variability of shocks with no lasting effect does not this result provides strong evidence that households portfolio choices respond to labor income risks in a manner consistent with economic theory theoretical work has shown that uninsurable labor income risk is likely to reduce the share of risky assets in an investor s portfolio pratt and zeckhauser 1987 kimball 1993 bertaut and haliassos 1997 koo 1998 1999 elmendorf and kimball 2000 in a dynamic context when labor in come consists of components of different persistence the magnitude of this effect should depend on the persistence associated with the risk the risk to a persistent component should have a larger effect than the risk to a transi tory component surprisingly however empirical work has not examined this interesting implication of the theory this paper uses the rich information con tained in the national longitudinal survey of youth 1979 cohort nlsy79 to examine this implication we assume that labor income has two components permanent and transitory we then measure the risks of the components for a sample of households in the survey and estimate their effects on the risky asset share previous empirical

owner occupied housing and investment in stocks an empirical test abstract this paper analyzes the empirical link between housing investment and stockholding by testing implications of the model of flavin and yamashita american economic review 92 2002 345 362 their model illustrates how the house to net worth ratio influences a homeowner s portfolio composition regression estimates suggest that there is a strong relationship between housing investment and stockholding and the house to net worth ratio could explain certain heterogeneity in stockholding households with a high house to net worth ratio hold a lower proportion in stocks the results support the hypothesis that overinvestment in housing affects financial portfolio of homeowners

decreasing relative risk aversion and tests of risk sharing the relative risk aversion rra coefficient of a household whose consumption is close to the subsistence level may be very high for example if consumption is exactly at the subsistence level the household may not be willing to bear any risk if this is the case then the rra coefficient must be a decreasing function of wealth for poor households therefore we should allow the possibility of decreasing rra drra in testing the full risk sharing hypothesis however existing tests in the empirical literature are derived using preferences that exhibit either increasing or constant rra even when they are applied to data containing low income households we therefore use a hyperbolic absolute risk aversion hara utility which implies increasing constant and decreasing rra as special cases to test full risk sharing hypothesis using the international food policy research institute ifpri and the international crops research institute of the semi arid tropics icrisat household level data sets we find evidence in support of the drra hypothesis along with evidence favoring full risk sharing hypothesis at the village level and evidence against the hypothesis at the inter village level when rra is restricted to be constant we replicate the previous results in the literature reject the full risk sharing hypothesis at both levels our tests however reject this restriction and favor drra in almost all cases these results suggest that it is important to allow for drra in testing the full risk sharing hypothesis when data containing low income households are investigated this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this this abstract was borrowed from another version of this item

precautionary portfolio behavior from a life cycle perspective abstract the literature on household asset accumulation draws a sharp distinction between short run precautionary motives to buffer consumption from annual income shocks and long run life cycle considerations under income certainty however estimates of shock persistence imply considerable career uncertainty we study long run precautionary motives for life cycle wealth accumulation and portfolios allowing for uncertain returns incomes and lifespan we separate the effects of various factors on mean and median asset holdings including education risk aversion household heterogeneity bequests impatience variance and serial correlation of income shocks numerical solutions are compared with data from the 1992 survey of consumer finances

optimal ordering decisions with uncertain cost and demand forecast updating we determine the optimal ordering policy for a retailer who has two instants to order a seasonal product from a manufacturer prior to a single selling season while the demand is uncertain the retailer can improve the forecast by utilizing the market signals observed between the first and second instants however because of the nature of the manufacturing environment the unit cost at the second instant is uncertain and could be higher or lower than the unit cost at the first instant to determine the profit maximizing ordering strategies at both instants the retailer has to evaluate the trade off between a more accurate forecast and a potentially higher unit cost at the second instant we present a nested newsvendor model for determining the optimal order quantity at each instant and characterize the conditions under which it is optimal for the retailer to delay its order until the second instant

household portfolio choice and retirement this study examines household portfolio choice through the retirement transition i show that couples significantly decrease their stock allocations after retirement whereas singles allocations remain relatively unchanged reallocations are concentrated among couples in which the wife is more risk averse than her husband husbands and wives respective retirement events are followed by opposite signed changes in stock allocations these findings are consistent with a model of collective household decision making in which spouses have heterogeneous risk preferences and suggest that dynamics in the distribution of intrahousehold bargaining power generate time varying household risk aversion

myopic policies for some inventory models with uncertain demand distributions the majority of papers on stochastic inventory theory make the assumption that the distribution of consumer demand in each time period is known with certainty while this assumption is unsupported in many applied contexts it is conventionally held that more realistic models are more difficult to solve and will not yield simple operational policies this paper shows that a simple inventory policy based upon a critical fractile can be optimal or near optimal in some inventory models with parameter adaptive demand processes in these some parameter of the demand distribution is not known with certainty and estimates of the parameter are updated in a statistical fashion as demand is observed through time examples include exponentially smoothed forecasts and bayesian updating of parameter estimates bounds on the value loss relative to optimal cost when using the critical fractile policy can be calculated directly from the problem data some numerical examples illustrate the technique

research note overselling with opportunistic cancellations in many business sectors such as airlines hotels trucking and media advertising customers arrivals and willingness to pay are uncertain managers must decide whether to quote a price low enough to guarantee early sales or to quote a higher price and risk that some units remain unsold in allocating capacity they face a trade off between two types of potential losses 1 yield loss selling at a low price and losing a better price later and 2 spoilage loss waiting in vain to sell at a high price and losing the opportunity of an earlier low price offer yield loss means that consumers who value the product most do not get to use it and spoilage loss means that valuable products are wasted because no consumers get to use them sellers typically hedge against the risk of spoilage loss by selling some units early at low prices and against the risk of yield loss by blocking some units in hope of selling them later at a high price in this paper we show that the use of overselling with opportunistic cancellations can increase expected profits and improve allocation efficiency under this strategy the seller deliberately oversells capacity if high paying consumers show up even when capacity is already fully booked the seller then cancels the sale to some low paying customers while providing them with appropriate compensation we derive a new rule to optimally allocate capacity to consumers when overselling is used and show that overselling helps limit the potential yield and spoilage losses yield loss is reduced because the seller can capture more high paying customers by compensating low paying customers who give up their right to the product spoilage loss is reduced because the compensation decreases the price spread perceived by the seller and as a result the seller is less anxious to speculate and block units overselling with opportunistic cancellations assures that the product will be sold to consumers who value it most this means that everybody wins and resources are allocated more efficiently than in conventional selling

health status and portfolio choice causality or heterogeneity abstract this paper explores the role of unobserved individual characteristics in the health assets and health portfolio correlations we apply various econometrics models to a unique longitudinal dataset with rich information that allows for the exploitation of four different health indices our findings show strong cross sectional correlations between health and both financial and non financial assets but these correlations seem to be mainly driven by heterogeneity as the correlations largely disappear in the fixed effects model adverse health shocks however are found to motivate a safer portfolio choice even after individual fixed effects are controlled for a result consistent with the prediction made by the background risk theory our findings suggest that health shocks shift investment from risky assets toward other financial assets but keep the total financial assets unchanged

taxation and household portfolio composition us evidence from the 1980s and 1990s abstract this paper explores the relationship between household marginal income tax rates the set of financial assets that households own and the portfolio shares accounted for by each of these assets it analyzes data from the 1983 1989 1992 1995 and 1998 surveys of consumer finances and develops a new algorithm for imputing federal marginal tax rates to households in these surveys the empirical findings suggest that marginal tax rates have important effects on asset allocation decisions the probability that a household owns tax advantaged assets such as tax exempt bonds or assets held in tax deferred accounts is positively related to its tax rate on ordinary income in addition the portfolio share invested in corporate stock which is taxed less heavily than interest bearing assets is increasing in the household s ordinary income tax rate holdings of heavily taxed assets such as interest bearing accounts decline as a share of wealth as a household s marginal tax rate increases

consumption smoothing and portfolio rebalancing the effects of adjustment costs abstract a household s response to income and return shocks depends on the costs of portfolio adjustment in particular the extent of portfolio rebalancing and consumption smoothing are influenced by the presence of non convex portfolio adjustment costs suppose bonds can be adjusted costlessly while adjustments to stock accounts entail adjustment costs due to these portfolio adjustment costs the household demands both stocks and bonds a household can buffer some income fluctuations without incurring adjustment costs and engage in costly portfolio rebalancing less frequently using the estimated preference parameters and portfolio adjustment costs the response to income and return shocks is nonlinear and reflects the interaction of portfolio rebalancing and consumption smoothing

demand customer base line and demand response in the electricity market a survey the increasing use of demand side management as a tool to reliably meet electricity demands at peak time has stimulated interest among researchers consumers and producer organiza tions managers regulators and policymakers this research reviews the growing literature on models which are used to study demand customer base line cbl and demand response in the electricity market after characterizing the general demand models the cbl based on which the demand response models are studied is reviewed given the experience gained from the review and existing conditions the study combines an appropriate model for each case for a possible application to the electricity market moreover it discusses the implications of the results in the literature these aspects are studied independently the main contribution of this survey is attributed to the treatment of the three issues as sequentially interdependent the review is expected to enhance the understanding of the demand cbl and demand response in the electricity market and their relationships the objective is conducted through a combination of demand and supply side managements in order to reduce demand through different demand response programs during peak times this enables electricity suppliers to save costly electricity generation and at the same time reduce energy vulnerability