consumption and children abstract consumption by couples rises sharply in the beginning and falls later in life the causes of the early rise are hotly contested among the suggestions are rule of thumb behavior demographics liquidity constraints the precautionary motive and nonseparabilities between consumption and labor supply we develop two tests of the extreme hypothesis that only changes in family structure matter we estimate effects of the numbers and ages of children on consumption these estimates allow us to rationalize all of the increase in consumption without recourse to any of the causal mechanisms our estimates can be interpreted either as giving upper bounds on the effects of children or as evidence that the other causes are not important

is the consumer sector competitive in the u k a test using household level demand elasticities and firm level price equations this article tests the hypothesis of perfect competition in the consumer nondurables sector of the u k economy first it uses household level data to estimate time varying price elasticities of demand for disaggregated commodity groups u s product prices are used as instruments for u k prices in the demand equation then it matches the product definitions to the standard industry classification and uses firm level data combined with the estimated elasticities to estimate a price model of firms operating in different industries household characteristics are used as instruments for the demand effects in the firms supply equation the results reject perfect competition and appear to be consistent with the argument that less competition increases profits through collusion

consumer demand and the life cycle allocation of household expenditures the purpose of this paper is to estimate the parameters of household preferences that determine the allocation of goods within the period and over the life cycle using micro data in doing so the authors are able to identify important effects of demographics labor market status and other household characteristics on the intertemporal allocation of expenditure they test the validity of the life cycle model using excess sensitivity tests and find that controlling for demographics and labor market status variables can largely explain the excess sensitivity of consumption to anticipated changes in income

smooth it like the joneses estimating peer group effects in intertemporal consumption choice recent theoretical contributions have suggested peer group effects as a potential explanation for several puzzles in macroeconomics but their empirical relevance for intertemporal consumption choice is an open question we derive an extension of the standard life cycle model that allows for consumption externalities in this framework we propose a social multiplier approach to distinguish true externalities from merely correlated effects estimating our model using us panel data we find strong predictable co movement of household consumption within peer groups although much of this co movement reflects correlated effects only there is statistically significant evidence for moderate consumption externalities across several plausible peer group specifications

tangible and intangible sunk costs and the entry and exit of firms in a small open economy the case of austria the paper provides evidence on the role of sunk costs as mobility barriers an empirical study of the austrian manufacturing industry explicitly considers sunk costs related to investment in dedicated intangible assets the results confirm the relevance of sunk costs as mobility barriers their symmetry with respect to entry and exit and show that the influence of sunk costs is robust to aggregation

does financial reform raise or reduce saving the effect of financial liberalization on private saving is theoretically ambiguous not only because the link between interest rate levels and saving is itself ambiguous but also because financial liberalization is a multidimensional and phased process sometimes involving reversals using principal components we construct 25 year time series indices of financial liberalization for each of eight developing countries chile ghana indonesia korea malaysia mexico turkey and zimbabwe these are employed in an econometric analysis of private saving in these countries our results cannot offer support for the hypothesis that financial liberalization will increase saving on the contrary the indications are that liberalization overall and in particular those elements that relax liquidity constraints may be associated with a fall in saving

learning and capacity expansion under demand uncertainty a competitive dynamic model of entry into a new industry is set up and both its positive and normative aspects are studied the main assumptions are that entry is sequential that it occurs under imperfect information on the size of the market and that better information becomes available as time goes on the gradual improvement in information is due to the fact that later waves of entrants are able to observe the profitability of earlier entrants the major results reported here under suitable restrictions are that the equilibrium rate of entry is monotonically decreasing over time and that at any given point in time it is smaller than the socially optimal one when a new market opens as a result of a product being newly invented for instance or when an existing market starts to expand uncertainty with respect to its size is likely to prevail as a result of this uncertainty entry of firms into such markets typically will occur in waves some firms will enter initially while others will wait to see the consequences of that initial entry if the experience of early entrants is favourable entry will continue otherwise entry will cease hence with the introduction of a new product two phases are associated the growth phase typified by positive operating profits for existing firms and expansion of productive capacity due to entry of new firms and the mature phase typified by erosion of profits and fixed total productive capacity empiricists estimating the time pattern of investments during the growth phase have found an s shaped diffusion curve see mansfield 1986 and gort and klepper 1982 the purpose of the present paper is to theoretically characterize these time patterns and to investigate their welfare properties any attempt to model the type of entry described above must account for differences in both entry dates and resultant earnings in other words the theory must explain why the realized earnings of different cohorts of firms are not equal often such ex post differences are reconciled by assuming heterogeneity with respect to some latent underlying characteristic managerial ability for instance and attributing differences in earnings to differences in that characteristic in this paper instead earning differentials are attributable to luck only ex ante all firms are technologically identical and equally capable of forecasting market prospects and rationally acting upon those forecasts ex post some firms turn out to have entered at the right time and are for that reason more profitable the model developed in this paper analyzes a parametric example of a sequential entry problem in which the uncertainty over market size is gradually resolved over time in a bayesian setting in an environment of perfect competition and constant returns toscale a free entry equilibrium concept is introduced and the aggregate implications of the time path of investments are derived i then compare this actual time path to the optimum this comparison is interesting because the equilibrium is analysed under the

uniqueness and indeterminacy on the dynamics of endogenous growth abstract in this paper we study the dynamics of endogenous growth both in the model of lucas and in a generalization that incorporates a labor leisure choice we characterize the regions of the parameter space that give rise to unique equilibria as well as the regions that yield a continuum of equilibria with positive growth rates we find that such multiple equilibria exist for empirically very plausible parameters in particular when the lucas model is modified to incorporate endogenous labor journal of economic literature numbers e00 e3 o40

poverty voracity and growth abstract this article investigates economic performance when enforceable property rights are missing and basic needs matter for consumption it suggests a new view of the so called voracity effect according to which windfall gains in productivity induce behavior that leads to lower economic growth taking into account that the rate of intertemporal substitution in consumption depends on the level of consumption it is shown that voracious behavior is situation specific it occurs when an economy is in decline and sufficiently close to stagnation

the uk consumption boom of the late 1980s aggregate implications of microeconomic evidence two competing explanations of the uk consumer boom in the late 1980s are the financial liberalisation imperfect housing market hypothesis of muellbauer and murphy and the expectations hypothesis of king we use 15 years of family expenditure surveys and cohort analysis to investigate to what extent these two hypotheses agree with observed changes in consumption patterns we find that the housing markets explanation accounts for much of the increase by older cohorts but cannot be reconciled with the marked rise in expenditure levels of younger households a simple simulation exercise shows instead that the expectations hypothesis can generate increases of expenditure by young consumers of the magnitude observed in our data

indeterminacy and sunspots with constant returns recently there has been a renewed interest in the possibility of indeterminacy and sunspots or alternatively put in the existence of a continuum of equilibria that arises in dynamic economies with some market imperfections much of the research in this area has been concerned with the empirical plausibility of indeterminacy in markets with external effects or with monopolistic competition and which exhibit some degree of increasing returns while the early results on indeterminacy relied on relatively large increasing returns and high markups more recently benhabib and farmer 1996a showed that indeterminacy can also occur in two sector models with small sector specific external effects and very mild increasing returns

understanding rent dissipation on the use of game theory in industrial organization game theory has had a deep impact on the theory of industrial organization in a similar but less controversial way as the rational expectations revolution in macroeconomics the reason it has been embraced by a majority of researchers in the field is that it imposes some discipline on theoretical thinking it forces economists to clearly specify the strategic variables their timing and the information structure faced by firms as is often the case in economics the researcher learns as much from constructing the model the extensive form as from

precautionary saving motives an assessment from uk time series of cross sections this paper gauges the strength of precautionary saving motives by estimating the coefficient of prudence from the u k family expenditure survey data set a time series of cross sections the instrumental variables estimates reveal that greater uncertainty systematically leads to larger current savings most of these impacts are large enough to be statistically consistent with widely accepted beliefs about attitudes towards risk so that precautionary saving behavior cannot be refuted moreover the households which are less likely to face liquidity constraints or to share risks are more sensitive to uncertainty finally the households for which the head works in the manufacturing industry are more inclined to self insure against uncertainty copyright 1996 by royal economic society

nonlinear strategies in dynamic duopolistic competition with sticky prices abstract we discuss nonlinear strategies in an infinite horizon duopoly game with sticky prices where firms maximize their discounted sum of profit we construct a stationary feedback equilibrium without guessing value functions and feedback strategies that solve the hamilton jacobi equation for this purpose we study the auxiliary equation that is derived from the hamilton jacobi equation we show that the domain of the state space plays an crucial role in characterizing feedback equilibria and discuss several implications of this observation in particular we find that when the upper bound of the state space is not very high previously unknown feedback equilibria emerge

luxuries are easier to postpone a proof we show that marshallian income elasticities are proportional to frisch own price elasticities if all goods are additively separable this implies that luxuries are likely to be easier to postpone it also implies that preferences over consumption are unlikely to display a constant elasticity of substitution

modelling movements in individual consumption a time series analysis of grouped data we characterize the time series properties of group level consumption income and interest rates using microdata we relate the coefficients of moving average representations to structural parameters of theoretical models of consumption behavior using long time series of cross sections to construct synthetic panel data for the united kingdom we find that for high educated individuals the euler equation restrictions are not rejected the elasticity of intertemporal substitution is higher than one and there is evidence of excess smoothness of consumption low educated individuals conversely exhibit excess sensitivity of consumption to past income and the elasticity of intertemporal substitution is not statistically different from zero

new estimates of the elasticity of marginal utility for the uk this paper provides novel empirical evidence on the value of the elasticity of marginal utility eta for the united kingdom eta is a crucial component of the social discount rate sdr which determines the inter temporal trade offs that are acceptable to society using contemporaneous and historical data new estimates are obtained using four revealed preference techniques the equal sacrifice income tax approach the euler equation approach the frisch additive preferences approach and risk aversion in insurance markets a meta analysis indicates parameter homogeneity across approaches and a central estimate of 1 5 for eta the confidence interval excludes unity the value used in official guidance by the uk government the term structure of the sdr is then estimated the result is a short run sdr of 4 5 declining to 4 2 in the very long run this is higher and flatter than the uk official guidance the difference stems from incorrect calibration of social welfare and estimation of the diffusion of growth other things equal the results suggest that current uk guidance might need to be updated

on the distributional effects of reducing capital taxes this article asks whether household heterogeneity and market incompleteness have quantitatively important implications for the welfare effects of tax changes we compare a representative agent economy to an economy in which households face idiosyncratic uninsurable income risk the income process is consistent with empirical estimates and implies a realistic wealth distribution we find that capital tax cuts imply large welfare gains in the representative agent economy however when households are heterogeneous substantial redistribution during transition means that only a minority will support capital tax cuts whereas most households can expect large welfare losses

indeterminacy under constant returns to scale in multisector economies recently there has been a renewed interest in indeterminacy or alternatively put in the existence of a continuum of equilibria in dynamic economies that exhibit some market imperfections one of the primary concerns of this literature has been the empirical plausibility of indeterminacy which arises in markets with external effects or with monopolistic competition often coupled with some degree 10 of increasing returns

household production and the excess sensitivity of consumption to current income empirical research on the permanent income hypothesis pih has found that consumption growth is excessively sensitive to predictable changes in income this finding is interpreted as strong evidence against the pih we propose an explanation for apparent excess sensitivity that is based on a quantitative equilibrium model of household production in which permanent income consumers respond to shifts in sectoral wages and prices by substituting work effort and consumption across home and market sectors although the pih is true this mechanism generates apparent excess sensitivity because market consumption responds to predictable income growth

unemployment risk labour force participation and savings this paper analyses labour force participation and precautionary savings in the presence of risks of being fired or failing to secure a job offer when out of the labour market we use a finite horizon framework with two employment states and a stage utility function which is cara in consumption but non separable in leisure the results are that there is precautionary labour force participation employment risk lowers the reservation wage generally it also reduces consumption however due to the non separability assumption precautionary savings as usually defined may not be positive we characterize the reservation wage and contrast the results with those in which the stage utility is additive in leisure and consumption we extend the analysis to study the effects of cyclical variation in employment risk of stochastic future wage rates and of adding a third employment state of search

the permanent income hypothesis consumption euler relations are estimated with data from the 1986 1991 us consumer expenditure survey without creating a synthetic panel the stochastic implications of the permanent income hypothesis generally are not rejected and there is little evidence of liquidity constrained or rule of thumb behavior the results are robust with respect to consumption category changes in sample and choice of instruments 1999 elsevier science b v all rights reserved

the effects of marital status and children on savings and portfolio choice this paper investigates the impact of demographic shocks on optimal decisions about saving life insurance and most centrally asset allocation we analyze these choices within the framework of a life cycle model that features exogenous changes in family composition heterogeneity in lifetime income and uninsurable fluctuations in earnings and medical costs our analysis indicates that marital status transitions and children can have important effects on optimal household decisions widowhood induces sharp reductions in the portfolio shares in stock and the impact is largest for women and individuals with children divorce causes men and women to reallocate their portfolios in different directions men choose much riskier allocations while women opt for safer ones children play a fundamental role in the optimal portfolio decisions men with children for example increase their shares in response to divorce by less than half as much as men without children comparing our simulation results with panel data evidence on stockholding from the psid and the hrs we conclude that changes in marital status and children matter empirically as well but not always in the ways that the model predicts

is food consumption a good proxy for nondurable consumption abstract this paper examines whether there is a discrepancy in estimating the elasticity of intertemporal substitution using food consumption instead of nondurable consumption data we show that a discrepancy exists and that the discrepancy increases as nondurable consumption increases

is the elasticity of intertemporal substitution constant in all common models of inter temporal allocation the assumption of a constant elasticity of intertemporal substitution eis imposes surprising limitations on within period budget allocations consequently the constant eis assumption can be tested with demand data in fact the eis is pinned down completely by the shape of engel curves if the eis is constant then the eis can be estimated without variation in the interest rate that a price elasticity can be estimated without variation in the relevant price illustrates just how strong the constant eis assumption is the constant eis assumption is rejected by demand data

disaster risk and preference shifts in a new keynesian model in rbc models disaster risk shocks reproduce countercyclical risk premia but generate an increase in consumption along the recession and asset price fall through their effects on agents preferences gourio 2012 this paper offers a solution to this puzzle by developing a new keynesian model with such a small but time varying probability of disaster we show that price stickiness combined with an eis smaller than unity restores procyclical consumption and wages while preserving countercyclical risk premia in response to disaster risk shocks the mechanism then provides a rationale for discount factor first and second moment uncertainty shocks

free entry and social inefficiency our goal is to provide a simple yet general exposition of the conditions under which the number of entrants in a free entry equilibrium is excessive insufficient or optimal our analysis compares the number of firms that enter a market when there is free entry with the number that would be desired by a social planner who is unable to control the behavior of firms once they are in the market that is we consider the second best problem of choosing the welfare maximizing number of firms while we take as given their noncompetitive behavior after entry we demonstrate that the crucial conditions for establishing the presence of an entry bias can be stated quite simply in terms of the outcome of the postentry game played by entrants in contrast to previous work we do not need to model this postentry game explicitly

continuous stochastic games of capital accumulation with convex transitions abstract we consider a discounted stochastic game of common property capital accumulation with nonsymmetric players bounded one period extraction capacities and a transition law satisfying a general strong convexity condition we show that the infinite horizon problem has a markov stationary subgame perfect equilibrium and that every finite horizon truncation has a unique markovian equilibrium both in consumption functions which are continuous and nondecreasing and have all slopes bounded above by 1 unlike previous results in strategic dynamic models these properties are reminiscent of the corresponding optimal growth model journal of economic literature classification codes c73 o41 q20

last in first out oligopoly dynamics this paper extends the static analysis of oligopoly structure into an infinite horizon setting with sunk costs and demand uncertainty the observation that exit rates decline with firm age motivates the assumption of last in first out dynamics an entrant expects to produce no longer than any incumbent this selects an essentially unique markov perfect equilibrium with mild restrictions on the demand shocks sequences of thresholds describe firms equilibrium entry and survival decisions bresnahan and reiss 1993 empirical analysis of oligopolists entry and exit assumes that such thresholds govern the evolution of the number of competitors our analysis provides an infinite horizon game theoretic foundation for that structure

life insurance and household consumption abstract using life insurance holdings by age sex and marital status we infer how individuals value consumption in different demographic stages we estimate equivalence scales and bequest motives simultaneously within a fully specified model where agents face us demographics and save and purchase life insurance our findings indicate that individuals are very caring for dependents that economies of scale are large that children are very costly or yield very high marginal utility that wives with children produce lots of home goods and that females display habits from marriage while men do not these findings contrast sharply with standard equivalence scales

intertemporal consumption durables and liquidity constraints a cohort analysis we provide a theoretical framework to analyse the response of life time maximizing consumers to intertemporal prices of non durable goods and durable goods when the borrowing limit depends on the market value of the stock of durables owned by the consumer we use pseudo panel data on purchases of non durables and durable goods cars and demographic characteristics from the uk family expenditure survey as well as estimates of the durable stock constructed using the uk national travel survey to estimate the equations derived in the first part of the paper we evaluate the shadow prices of these restrictions which were significantly positive for younger consumers in the mid seventies and immediately prior to the 1982 financial liberalisation

cross country heterogeneity in intertemporal substitution abstract we collect 2735 estimates of the elasticity of intertemporal substitution in consumption from 169 published studies that cover 104 countries during different time periods the estimates vary substantially from country to country even after controlling for 30 aspects of study design our results suggest that income and asset market participation are the most effective factors in explaining the heterogeneity households in rich countries and countries with high stock market participation substitute a larger fraction of consumption intertemporally in response to changes in expected asset returns micro level studies that focus on sub samples of rich households or asset holders also find systematically larger values of the elasticity

aggregate efficiency market demand and the sustainability of collusion this paper studies the effects of firms aggregate efficiency and the level of demand on collusion collusion is more difficult in markets where aggregate efficiency i e the ability of firms to profitably produce at prices exceeding the cournot price is large relative to the level of demand

risk pooling precautionary saving and consumption growth in this paper we model the evolution of income risk and consumption growth we decompose the time series innovation of the income process into its common and cohort specific components from these we compute conditional variances which are used as separate risk terms in a consumption growth equation using a long series of british household data we exploit the time series variation to identify precautionary saving effects and find strong evidence of their importance specifically after allowing for demographic and labour market status there is an independent role for income risk in explaining consumption growth rather than the component that is common across cohorts however it is the cohort specific element that is important in determining changes in consumption growth this result points to a failure of between cohort insurance mechanisms

does buffer stock saving explain the smoothness and excess sensitivity of consumption one of the lasting contributions to modernday consumer theory is the idea that consumption is determined by the expected value of lifetime resources or permanent income the modern day specification of this concept is typically presented as a special case of intertemporalchoice theory where felicity functions are quadratic labor income is stochastic there are no restrictions on borrowing consumers have infinite horizons and expectations are formed rationally we refer to this model as the permanentincome hypothesis pih although the pih has considerable intuitive appeal a series of influential papers published after its inception revealed two notable discrepancies between the model s predictions and aggregate data first the model predicts that consumption growth should be more volatile than income growth if aggregate income growth has positive serial correlation as the quarterly data suggest it does yet aggregate consumption growth is in fact much smoother than aggregate income growth angus deaton 1987 john y campbell and deaton 1989 jordi gali 1991 second the pih predicts that consumption changes should be orthogonal to predictable or lagged income changes yet the coffelation between consumption growth and lagged income growth has been found to be one of the most robust features of aggregate data for example marjorie a flavin 1981 alan s blinder and deaton 1985 campbell and n gregory mankiw 1989 orazio p attanasio and guglielmo weber 1993 thus aggregate consumption growth has been described as exhibiting two puzzles it is both excessively smooth relative to current labor income growth and excessively sensitive to lagged labor income growth 2 in response to these and other empirical anomalies researchers have recently sought out modifications of the pih framework chief ludvigson federal reserve bank of new york 33 liberty street new york ny 10045 michaelides university of cyprus p o box 20537 1678 nicosia cyprus a previous version of this paper appeared under the title can we explain the consumption excesses yet aggregate consumption implications of buffer stock saving behavior for many helpful comments we thank orazio attanasio dave backus ben bernanke john y campbell christopher carroll todd clark angus deaton pierreolivier gourinchas bo honore james kahn martin lettau costas meghir christina paxson steve pischke andrew samwick christopher sims mark watson guglielmo weber michael woodford steve zeldes and two anonymous referees conference participants at the national bureau of economic research summer workshop on the aggregate implications of microeconomic consumption behavior july 1998 the tmr workshop on saving and pensions center tilburg university march 1999 and the new york area macroeconomics workshop october 1998 seminar participants at columbia university insead the new york federal reserve university college london london business school city university business school university of cyprus tel aviv university and jeffrey brown for excellent research assistance the views expressed are those of the authors and do not necessarily reflect those of the federal reserve bank of new york or the federal reserve system any errors or omissions are the responsibility of the authors 1 note that the important insight of danny quah 1990 that individuals may be better able than econometricians to distinguish short run from long run innovations to their income cannot resolve the excess smoothness puzzle laid out in campbell and deaton 1989 these authors show that in the context of the pih excess sensitivity and excess smoothness are the same phenomena in addition campbell 1987 demonstrates that superior information of the type emphasized by quah will show up in households saving behavior and using this information allows the econometrician to control for the agent s private information when predicting income since excess sensitivity is well established and controlling for saving does not eliminate it see campbell and deaton 1989 the observed smoothness of consumption cannot be explained by superior information on the part of permanent income consumers see deaton 1992 for further discussion 2 philippe bacchetta and stefan gerlach 1997 and ludvigson 1999 document another kind of excess sensitivity the correlation between consumption growth and predictable changes in consumer credit although we do not explore these findings here ludvigson finds that a bufferstock model with time varying liquidity constraints can replicate such a correlation

revisiting the effect of household size on consumption over the life cycle abstract although the link between household size and consumption has strong empirical support there is no consistent way in which demographics are dealt with in standard life cycle models we study the relationship between the predictions of the single agent model the standard in the literature versus a simple model extension the demographics model where deterministic changes in household size and composition affect optimal consumption decisions we show theoretically that the demographics model is conceptually preferable to the single agent model as it captures economic mechanisms ignored by the latter however our quantitative analysis demonstrates that differences in predictions for consumption are negligible across models when using standard calibration strategies this suggests that it is largely irrelevant which model specification is used

saving among young households evidence from japan and italy the tendency of both young and old households to save or dissave a very small fraction of their total resources is inconsistent with a strict life cycle model we concentrate on young households and document their behavior drawing on italian and japanese data the theoretical structure we propose is broadly consistent with the spirit of the life cycle theory while at the same time capable of accounting for the observed facts without relying on assumptions about credit markets or the degree of consumer foresight

consumption and habits evidence from panel data the purpose of this paper is to test for the presence of habit formation in consumption decisions using household panel data we use the test proposed by meghir and weber 1996 and estimate the within period marginal rate of substitution between commodities which is robust to the presence of liquidity constraints to that end we use a spanish panel data set in which households are observed up to eight consecutive quarters this temporal dimension is crucial since it allows us to take into account time invariant unobserved heterogeneity across households fixed effects and therefore to investigate if the relationship between current and past consumption reflects habits or heterogeneity our results confirm the importance of accounting for fixed effects when analyzing intertemporal consumption decisions allowing for time non separabilities once fixed effects are controlled for and a proper set of instruments is used the results yield supporting evidence of habit formation in the demand system of food at home transport and services

r d induced industry polarization and shake outs abstract we consider the standard two stage game of r d and cournot competition with ex ante identical firms but depart from the literature in assuming that r d is characterized by mildly instead of strongly decreasing returns to scale we establish that only extreme r d levels are possible at equilibrium and that for a broad range of parameters equilibria are asymmetric in r d levels possibly leading one firm to endogenously exit this provides a simple link between returns to scale in r d and industry polarization including shake outs a novelty is that exit may be triggered by positive opportunities in a strategic setting given the original nature of our r d equilibrium a complete welfare analysis is conducted including a possible role for r d subsidies

short term planning and the life cycle consumption puzzle abstract we develop a new life cycle consumption model where the individual has a short planning horizon standard life cycle consumers with perfect foresight and hand to mouth consumers are both special limiting cases of our model where the length of the planning horizon is set to the entire lifetime and zero respectively we derive an analytical solution to the time inconsistent short term planning problem which reveals the inner workings of the model and facilitates its use in other settings we also show that the short term planning mechanism is powerful enough to generate a consumption hump with the right size and location

understanding consumption angus deaton oxford university press oxford 1992 isbn 0 19 828759 3 17 95 hard cover pp 240

entry exit and imperfect competition in the long run an infinite horizon stochastic model of entry and exit with sunk costs and imperfect competition is constructed simple examples provide insights into 1 the relationship between sunk costs and industry concentration 2 entry when current profits are negative and 3 the relationship between entry and the length of the product cycle a subgame perfect nash equilibrium for the general dynamic stochastic game is shown to exist as a limit of finite horizon equilibria this equilibrium has a relatively simple structure characterized by two numbers per finite history under very general conditions it tends to exhibit excessive entry and insufficient exit relative to a social optimum

free entry versus socially optimal entry abstract this paper reconsiders the well known comparison of equilibrium entry levels into a cournot industry under free entry second best control of entry but not production and first best control of entry and production allowing for the possibility of limited increasing returns to scale in production this paper generalizes the conclusion of mankiw and whinston 1986 10 that under business stealing competition free entry yields more firms than the second best solution we also show that under entry always holds under business enhancing competition this confirms the general intuition given by mankiw and whinston which does not rely on the convexity of the cost function the same result is shown to extend at a similar level of generality to the comparison between free entry and the first best socially optimal solution irrespective of business stealing three illustrative examples are provided one showing that the second best and free entry solutions may actually coincide

measuring intertemporal substitution the importance of method choices and selective reporting i examine 2 735 estimates of the elasticity of intertemporal substitution in consumption eis reported in 169 published studies the literature shows strong selective reporting researchers discard negative and insignicant estimates too often which pulls the mean estimate up by about 0 5 the reporting bias dwarfs the effects of methods with the exception of the choice between micro and macro data when i correct the mean for the bias for macro estimates i get zero even though the reported t statistics are on average two the corrected mean of micro estimates of the eis for asset holders is around 0 3 0 4 calibrations greater than 0 8 are inconsistent with the bulk of the empirical evidence jel e21 c83

a theory of time preference grant a taylor this article proposes that people generally prefer present consumption to future consumption because their expected utility from consumption eventually falls as their mental and physical abilities eventually decline with age moreover contrary to the ubiquitous intertemporal formulation with a constant rate of time preference and contrary to three recent theories of time preference that predict decreasing discounting as people age this article asserts that discounting increases over the life cycle this hypothesis is supported by data from the panel study of income dynamics as well as evidence from numerous previous studies jel d91 1 introduction despite the almost universal assumption of time preference in models of intertemporal choice an adequate explanation of why people discount the future has not been provided 1 olsen and bailey 1981 make a convincing case for positive time preference by contradiction i e without time preference models of intertemporal choice do not yield predictions consistent with observed behavior but they do not explain why individuals would rationally discount the future 2 three recent studies have attempted to provide the explanation rogers 1994 argues that societies that discount the future at a rate of about 2 will be the long run survivors in an evolutionary fitness situation 3 posner 1995 argues that discounting occurs because individuals have multiple selves that is people are weighting their present consumption far more heavily than their future consumption because the present self and the future self are in some meaningful sense separate persons 92 becker and mulligan 1997 argue that discounting occurs because of a rational defective recognition of future utilities 730 but as will be shown these three theories are inconsistent with empirical evidence on consumption over the life cycle in at least one important aspect this article constructs and empirically supports a new theory of time preference the hypothesis is that people do not have an intrinsic preference for present consumption relative to future consumption instead the instantaneous utility function also known as the felicity function is expected to vary with age just as people s physical and mental abilities vary with age in other words the ability to enjoy consumption eventually deteriorates over the life cycle along with other abilities this life cycle view of the expected utility function causes people to rationally devalue consumption in periods of low expected felicity that is discount future consumption perhaps this is what is meant by the cliche don t wait until you are too old to enjoy it moreover this causes individuals implicit discount rates to vary systematically with age 4 in fact this provides the testable implication of the theory the standard specification of intertemporal preferences holds the discount rate constant over th e life cycle 5 to be more precise in the early stage of the life cycle the capacity to enjoy consumption may be expected to rise hence a young individual s discount rate may be negative figure 1 illustrates this possibility with a hypothetical adult life cycle marginal felicity function for a given level of consumption u sub c c a c denotes consumption and a denotes age and its corresponding discount rate function rho a the vast majority of wealth is held by older people that is those in the declining stage of their abilities thus the preference for present consumption over future consumption appears to hold in the aggregate this view of intertemporal preferences may at first seem inconsistent with practically all dynamic analyses which are based on the notion of stationary utility on further consideration however the hypothesis is quite consistent with modern consumer theory since becker 1965 it has been widely accepted that households derive utility from commodities that are produced with market goods combined with household time and skills i

informal capital sources and household investment evidence from taiwan abstract the purpose of this paper is to investigate the importance of informal financial channels in capital accumulation by household investors the focus is on the link between borrowing from informal financial institutions and households investment in capital stock the empirical evidence is drawn from micro data from taiwan for the period 1977 1992 during this period taiwan emerged rapidly as an industrialized economy despite of its relatively underdeveloped formal financial sector the data show that informal financial channels were heavily relied on by small business entrepreneurs in taiwan it is found that informal financial institutions as a source of funds are important for small investors capital accumulation

decreasing relative risk aversion risk sharing and the permanent income hypothesis this article develops a method for testing the risk sharing hypothesis rsh against various versions of the permanent income hypothesis pih while allowing for heterogeneity in risk preferences across households using 1 year and longer differences in household total nondurable consumption data from indian villages we find evidence that favors the rsh over the pih at the village level

the effects of male and female labor supply on commodity demands we examine the effects of male and female labor supply on household demands and present a simple and robust test for the separability of commodity demands from labor supply using data on individual households from six years of the uk fes we estimate a demand system for seven goods which includes hours and participation dummies as conditioning variables allowance is made for the possible endogeneity of these conditioning labor supply variables we find that separability is rejected furthermore we present evidence that ignoring the effects of labor supply leads to bias in the parameter estimates

consumption over the life cycle facts from consumer expenditure survey data this paper uses consumer expenditure survey data and a seminonparametric statistical model to estimate life cycle profiles of consumption controlling for demographics cohort and time effects we construct age profiles for total and nondurable consumption as well as expenditure patterns for consumer durables special emphasis is placed on the comparison of different approaches to control for changes in demo graphics over the life cycle we find significant humps over the life cycle for total nondurable and durable expenditures changes in household size account for roughly half of these humps bootstrap simulations suggest that our empirical estimates are tight in that standard errors are small

the sensitivity of consumption to transitory income estimates from panel data on households we investigate the stochastic relation between income and consumption specifically consumption of food within a panel of about 2 000 households our major findings are 1 consumption responds much more strongly to permanent than to transitory movements of income 2 the response to transitory income is nonetheless clearly positive 3 a simple test independent of our model of consumption rejects a central implication of the pure life cycle permanent income hypothesis the observed covariation of income and consumption is compatible with pure life cycle permanent income behavior on the part of80 percent of families and simple proportionality of consumption and income among the remaining 20 percent as a general matter our findings support the view that families respond differently to different sources of income variations in particular temporary income tax policies have smaller effects on consumption than do other more permanent changes in income of the same magnitude this abstract was borrowed from another version of this item

strategic deterrence of sequential entry into an industry industrial entry deterrence is typically studied in a setting where an established firm or firms confront and attempt to deter a single potential competitor during the evolution of most industries however a sequence of firms enters or attempts to enter at distinct points in time consideration of issues arising from sequential entry fundamentally alters the qualitative nature of the deterrence decision undertaken by incumbent firms within a sequential setting counterintuitive behavior may be observed specifically numerous government policies designed to decrease industrial concentration penalties for anticompetitive practices subsidization of entry consent decrees restructuring industries may have the opposite effect

the life cycle model of consumption and saving a central implication of life cycle models is that agents smooth consumption we review the empirical evidence on smoothing at frequencies from within the year up to across a lifetime we find that life cycle models particular those which incorporate realistic features of markets and goods have more empirical successes than failures we also show that some apparent deviations from theoretical predictions imply very small welfare losses for agents finally we emphasize that the coherence of life cycle models imposes an important discipline when incorporating new features into models

the intertemporal elasticity of substitution an analysis based on japanese data this paper investigates whether the intertemporal elasticity of substitution ies for japan possesses similar properties to that found for the united states in the literature as the existing empirical findings are mixed there is no clear consensus this paper uses a model with both production and non separability between nondurables and durables in order to control for possible factors that cause a bias in the ies we present the empirical results demonstrating that the ies is quite similar between the two countries

further evidence of excess sensitivity of consumption nonseparability among goods and heterogeneity across households the standard theoretical framework for analysing households intertemporal decisions is the life cycle permanent income model among its implications testing the model allows to analyse the response of consumption to fiscal policy however the empirical literature with microdata has yielded mixed results this article examines the sensitivity of the results to the assumption of separability among goods and of homogeneity across households for that purpose we test a rational expectations permanent income model with household data drawn from the spanish family expenditure survey this survey contains detailed information on total expenditure and the income presents large exogenous quarterly changes due to an institutional feature the article shows that assuming separability among commodities biases the test against the model when separability is not imposed we show that the rejection of the model depends on heterogeneity across households in terms of their members being unemployed or not for those

strategic entry before demand takes off in developing industries firms have to decide whether and when to enter the market depending on the state of demand existing firms in the industry and the firm s capabilities this paper investigates a model of increasing demand in which firms decide when to enter the market anticipating the strategic behavior of other potential entrants and the effects of entry on future potential entrants this paper shows that the ability of early entry to deter future competitors entry leads firms to enter the market at a rate faster than demand is expanding if there is the potential for many firms to enter the market firms may be less likely to enter because of future competitor entry to correct any market opportunities if firms enter the market depending on their fixed capabilities rather than depending on the firm s circumstances at each moment in time firms end up entering the market at a faster rate in the early periods

lifetime income and housing affordability in singapore most commonly used measures of housing affordability are essentially short run indicators that compare current income with house prices or housing costs despite the emphasis in the literature on t

children and household economic behavior this paper looks at some of the methodological issues that arise in modeling the effects of children on household behavior and presents some estimates for selected areas for our purposes household behavior will be taken to refer to household decisions on labor supply the allocation of expenditure to different periods and the decision as to what to do with the difference between income and expenditure i shall be concerned mainly with the effects of dependent children and i restrict attention largely to western societies excerpt

consumption retirement and social security evaluating the efficiency of reform that encourages longer careers abstract this paper proposes and analyzes a social security reform in which individuals no longer face the oasi payroll tax after say age 54 or a career of 34 years and their subsequent earnings have no bearing on their benefits we first estimate parameters of a life cycle model our specification includes non separable preferences and possible disability it predicts a consumption expenditure change at retirement we use the magnitude of the expenditure change together with households retirement age decisions to identify key structural parameters the estimated magnitude of the change in consumption expenditure depends importantly on the treatment of consumption by adult children of the household simulations indicate that the reform could increase retirement ages one year or more equivalent variations could average more than 4000 per household and income tax revenues per household could increase by more than 14 000

savings behaviour in low income countries the empirical literature on savings in low income countries has exploited some remarkable data sets to shed new light on savings behaviour in the poor agricultural households that make up the majority of the population in such countries a number of conclusions have emerged i the degree of consumption smoothing over seasons within the year and across years in response to very large income fluctuations is higher than was supposed ii the lack of complete insurance and credit markets however is manifested in asset stocks and asset compositions among farmers especially small farmers that are inefficient iii the combination of low and volatile incomes is an important cause of inefficiency and income inequality iv the proximity of formal financial institutions increases financial savings and crowds out informal insurance arrangements thus in principle better facilitating financial intermediation and iv simple life cycle models of savings do not appear to explain long term savings in low income settings copyright 2001 oxford university press

irrationality and monopolistic competition an evolutionary approach this paper shows that a monopolistically competitive equilibrium can evolve without purposive profit maximization specifically this paper formulates a precise evolutionary dynamic model of an industry where there is continuous entry of firms that randomly select their output levels on entry and fix their output levels thereafter firms exit the industry if they fail to pass the survival test of making nonnegative wealth this paper shows that the industry converges in probability to the monopolistically competitive equilibrium as the size of each firm becomes infinitesimally small relative to the market as the entry cost becomes sufficiently small and as time gets sufficiently large consequently in the limit the only surviving firms are those producing at the tangency of the demand curve to the average cost curve and no potential entrant can make a positive profit by entry

preemption and rent equalization in the adoption of new technology we study the adoption of a new technology to illustrate the effects of preemption in games of timing we show that the threat of preemption equalizes rents in a duopoly but that this result does not extend to the general oligopoly game if the gain to preemption is sufficiently small then the optimal symmetric outcome which involves late adoption is an equilibrium this contrasts with reinganum s result that in precommitment equilibria there must be diffusion we develop a new and richer formalism for modeling games of timing which permits a continuoustime representation of the limit of discrete time mixed strategy equilibria

intertemporal market division a case of alternating monopoly abstract in this paper we report on an equilibrium with market dominance that exists in a simple two firm model that features neither entry barriers nor sophisticated punishment strategies this equilibrium induces an intertemporal market division in which the two firms alternate as monopolists despite the fact that the model also sustains a cournot duopoly even when initially both firms are active in the market the alternating monopoly reveals itself rather quickly moreover it pareto dominates the cournot equilibrium as it is close to the cartel outcome several examples of what well may be such alternating monopolies are presented

do stockholders share risk more effectively than nonstockholders abstract this paper analyzes the extent of risk sharing among stockholders and nonstockholders to evaluate the empirical importance of market incompleteness it is essential to determine whether idiosyncratic shocks are important for the wealthy who have access to better insurance opportunities but also face different risks than the average household we study a model where each period households decide whether to participate in the stock market by paying a fixed cost due to this endogenous entry decision the testable implications of perfect risk sharing take the form of a sample selection model which we estimate using a semiparametric gmm estimator proposed by kyriazidou 2001 using data from psid we strongly reject perfect risk sharing among stockholders but perhaps surprisingly do not find evidence against it among nonstockholders this result appears to be robust to several extensions this finding suggests further focus on risk factors that primarily affect the wealthy such as entrepreneu

on the effects of entry in cournot markets in the framework of symmetric cournot oligopoly this paper provides two minimal sets of assumptions on the demand and cost functions that imply respectively that as the number of firms increases the minimal and maximal equilibria lead to i decreasing industry price and increasing or decreasing per firm output and ii increasing industry price and decreasing per firm output in both cases per firm profits are decreasing the analysis relies crucially on lattice theoretic methods and yields general unambiguous and easily interpretable conclusions of a global nature as a byproduct of independent interest new insight into existence of cournot equilibrium is developed

relative concerns for consumption at the top an intertemporal analysis for the uk abstract this paper investigates whether the consumption of rich households provides a reference point in the intertemporal consumption choices of non rich households using uk household data on food consumption we estimate the euler equation implied by a life cycle model incorporating relative concerns for the consumption of rich households according to both our ols and gmm estimates for the population of non rich households as a whole there is no evidence of such relative concerns we also examine an alternative model of relative concerns in which households overconsume when exposed to higher reference group consumption and find correlational evidence that this may be the case for food consumed away from home finally we investigate the presence of heterogeneous relative concerns across county and household characteristics in both models finding evidence of relative concerns for consumption at the top in counties with relatively low income inequality this mechanism seems to operate for food consumed away from home

how important is discount rate heterogeneity for wealth inequality abstract this paper investigates the role of discount rate heterogeneity for wealth inequality the key idea is to infer the distribution of preference parameters from the observed age profile of wealth inequality the contribution of preference heterogeneity to wealth inequality can then be measured using a quantitative life cycle model i find that discount rate heterogeneity increases the gini coefficient of wealth by around 0 07 to levels that are close to the data the share of wealth held by the richest 1 of households rises by around 0 04 but falls short of the data by more than 10 percentage points discount rate heterogeneity also helps to account for the large wealth inequality observed among households with similar lifetime earnings

risk aversion and expected utility of consumption over time the calibration theorem by rabin rabin m 2000a risk aversion and expected utility theory a calibration theorem econometrica 68 1281 1292 rabin m 2000b diminishing marginal utility of wealth cannot explain risk aversion in kahneman d tversky a eds choices values and frames cambridge university press implies that seemingly plausible small stake choices under risk imply implausible large stake risk aversion this theorem is derived based on the expected utility of wealth model however cox and sadiraj cox j c sadiraj v 2006 small and large stakes risk aversion implications of concavity calibration for decision theory games econ behav 56 45 60 show that such implications do not follow from the expected utility of income model one may then wonder about the implications for more applied consumption analysis the present paper therefore expresses utility as a function of consumption in a standard life cycle model and illustrates the implications of this model with experimental small and intermediate stake risk data from holt and laury holt c a laury s k 2002 risk aversion and incentive effects amer econ rev 92 1644 1655 the results suggest implausible risk aversion parameters as well as unreasonable implications for long term risky choices thus the conventional intertemporal consumption model under risk appears to be inconsistent with the data c 2009 elsevier inc all rights reserved less

the great industry gamble market structure dynamics as a survival contest industry dynamics are studied as an endogenous tournament with infinite horizon and stochastic entry in each period firms investments determine their probability of surviving into the next period this generates a survival contest which fuels market structure dynamics while the evolution of market structure constantly redefines the contest more concentrated markets endogenously generate less profit rivals that are more difficult to outlive and more entry the unique steady state distribution exhibits ongoing turbulence correlated exit and entry rates and shakeouts the model s predictions fit empirical findings in markets where firms trade off profits for smaller risk of failure e g banking

preemptive investments under uncertainty credibility and first mover advantages we present a continuous time game in which two firms must decide at each instant of time whether to be in or out of a market that expands up to a random maturity date and declines thereafter firms are initially inactive and they differ only in the opportunity costs of using their assets e g owing to different redeployment or resale values after characterizing the unique markov perfect equilibrium of the entry and exit game under demand uncertainty we challenge the result that the threat of preemption can partially or even totally dissipate a first mover advantage when post entry profits can be negative the preemption threat of a firm may become weaker because its rival may force it out of the market after entering as a result there may be little or no dissipation of the first mover advantage when post investment profits are not assumed to be always positive

testing the cross section implications of friedman s permanent income hypothesis abstract we use modern household data and econometric methods to conduct some of the original tests of the permanent income hypothesis pih suggested and used by friedman 1957 a theory of the consumption function princeton university press princeton the data and methods are superior to those available to friedman allowing us to refine friedman s tests and perform tests he could not do the results provide overall though not universal support for pih

consumption over the life cycle and over the business cycle the main aim of this paper is to assess the validity of the life cycle model of consumption in particular we address an issue that has recently received much attention especially in the macroeconomic literature that of excess sensitivity of consumption growth to income growth we do this using a time series of cross sections and a novel and flexible parameterization of preferences the former allows us to address aggregation issues directly while with the latter we can allow both the discount factor and the elasticity of intertemporal substitution eis to be affected by various observable variables and lifetime wealth the main findings can be summarized as follows i the excess sensitivity of consumption growth to labor income disappears when we control for demographic variables this is true both at life cycle and business cycle frequencies ii estimation of a flexible specification of preferences indicates that the elasticity of intertemporal substitution is a function of several variables including the level of consumption the eis increases with the level of consumption as expected iii the variables that change the eis are also important in explaining why we observe excess sensitivity over the business cycle iv we are able to reconcile our results with those reported both in the macro and micro literature v in our specification the elasticity of intertemporal substitution is not very well determined this result however should be taken with care as we have not made an effort to construct a preferred specification which would probably include additional controls for labor supply behavior the evidence presented shows that the life cycle model cannot be easily dismissed indeed we believe that the model does a good job at representing consumption behavior both over the life cycle and over the business cycle