how general are time preferences eliciting good specific discount rates abstract this paper tests the commonly used assumption that people apply a single discount rate to the utility from different sources of consumption using survey data from uganda with both hypothetical and incentivized choices over different goods we elicit time preferences from about 2400 subjects we reject the null of equal discount rates across goods the average person in our sample is more impatient about sugar meat and starchy plantains than about money and a list of other goods we review the assumptions to recover discount rates from experimental choices for the case of good specific discounting consistently with the theoretical framework we find convergence in discount rates across goods for two groups expected to engage in or think about arbitraging the rewards traders and individuals with large quantities of the good at home as an application we evaluate empirically the conditions under which good specific discounting could predict a low asset poverty trap

the role of offsets in a post kyoto climate agreement the power sector in china abstract this paper considers how an offset scheme specific to the electricity generation sector could incentivize emissions cuts while avoiding the problems encountered by the clean development mechanism cdm it proposes an approach to project evaluation based on measures of additionality economic viability and contribution to sustainable development specific to this sector and re evaluates 460 registered cdm projects in china that generate electricity using wind natural gas or small hydro it concludes that many small hydro schemes would be viable without the cdm subsidy although these projects have zero emissions from operations offsets issued to projects that are viable without subsidy permit increased emissions in developed countries and lead to a net increase in global emissions to provide some indication of the sustainable development benefits that cdm projects bring to their host countries the paper includes estimates of the projects benefit to public health due to the reduced use of coal for generation the paper provides insights into the economics of projects and their value to host countries that are missed by the official cdm methodologies it contributes to the debate over the design of sector specific offset schemes that may be part of a new global agreement on combating climate change

euler equations and money market interest rates a challenge for monetary policy models standard macroeconomic models equate the money market rate targeted by the central bank with the interest rate implied by a consumption euler equation we use u s data to calculate the interest rates implied by euler equations derived from a number of specifications of household preferences correlations between these euler equation rates and the federal funds rate are generally negative regression results and impulse response functions imply that the spreads between the euler equation rates and the federal funds rate are systematically linked to the stance of monetary policy our findings pose a fundamental challenge for models that equate the two

life cycle consumption and hyperbolic discount functions abstract studies of animal and human behavior suggest that discount functions are approximately hyperbolic ainslie picoeconomics 1992 hyperbolic models explain a wide range of empirical anomalies including 1 missing precautionary savings effects 2 incongruence between the elasticity of intertemporal substitution and the inverse of the coefficient of relative risk aversion 3 consumption discontinuities at retirement 4 variation in patience over the life cycle 5 consumer self reports of undersaving 6 disproportionate retirement accumulation in illiquid assets 7 asset specific marginal propensities to consume and 8 declining national savings rates in developed countries hyperbolic models also provide a new framework for analyzing the welfare gains that come from pro saving policies like social security and tax deferred retirement accounts

survival of the gene intergenerational transfers and precautionary saving abstract this paper provides a model of bequest and investment in children s human capital at low incomes it posits that parents and children are linked through their common concern of grandchildren and intergenerational transfers provide a material basis for the perpetuation of the family line the model characterizes intergenerational strategic interactions in a dynamic game theoretical framework moreover it explores intergenerational uncertainty as a source of precautionary saving in contrast with the existing literature the model implies that there are qualitative differences between precautionary saving from one s own income uncertainty and precautionary bequests from children s income uncertainty

wealth distribution in life cycle economies abstract this paper compares the age wealth distribution produced in life cycle economies to the corresponding distribution in the us economy the idea is to calibrate the model economies to match features of the us earnings distribution and then examine the wealth distribution implications of the model economies the findings are that the calibrated model economies with earnings and lifetime uncertainty can replicate measures of both aggregate wealth and transfer wealth in the us furthermore the model economies produce the us wealth gini and a significant fraction of the wealth inequality within age groups however the model economies produce less than half the fraction of wealth held by the top 1 percent of us households

optimal capital income taxation with incomplete markets borrowing constraints and constant discounting for a wide class of infinitely lived agent models chamley has shown that the optimal capital income tax rate is zero in the long run lucas has argued that for the u s economy there is a significant welfare gain from switching to this policy this paper shows that for the bewley class of models with incomplete insurance markets and borrowing constraints the optimal tax rate on capital income is positive even in the long run therefore cutting the capital income tax to zero may well lead to welfare losses

labour supply and saving under uncertainty this article examines how variations in labour supply can be used to self insure against wage uncertainty and the impact of such self insurance on precautionary saving the analytical framework is a two period model with saving and labour supply decisions where preferences are consistent with balanced growth the main findings are that i labour supply flexibility raises precautionary saving when future wages are uncertain and ii uncertainty about future wages raises current labour supply and reduces future labour supply

subjective discounting in an exchange economy this paper describes the equilibrium of a discrete time exchange economy in which consumers with arbitrary subjective discount factors and homothetic period utility functions follow linear markov consumption and portfolio strategies explicit expressions are given for state prices and consumption wealth ratios we provide an analytically convenient continuous time approximation and show how subjective rates of time preference affect risk free rates but not instantaneous risk return trade offs hyperbolic discount factors can be a source of return volatility but they cannot be used to address asset pricing puzzles related to high frequency sharpe ratios

the one sector growth model with idiosyncratic shocks steady states and dynamics abstract this paper investigates the one sector growth model where agents receive idiosyncratic labor endowment shocks and face a borrowing constraint it is shown that any steady state capital stock lies strictly above the steady state in the model without idiosyncratic shocks in addition the capital stock increases monotonically when it is sufficiently far below a steady state however near a steady state there can be non monotonic economic dynamics

a non unitary discount rate model we develop a simple macroeconomic model in which agents discount their utility from consumption and the utility from leisure at different rates under this setting time inconsistency emerges for the preferences of agents moreover the time inconsistency problem generates two types of inefficiencies intratemporal and intertemporal we examine the welfare effects of savings subsidy and consumption tax the effects of taxation in our model are quite different from those in the standard model if the discount rate for consumption is higher lower than that for leisure today s self cares less more about the consumption of the future selves than the leisure of the future selves depressing stimulating the consumption of future selves improves the utility of today s self hence a positive negative consumption tax rate improves the utility level of all selves

household saving micro theories and micro facts in this survey we review the recent theoretical and empirical literature on household saving and consumption the discussion is structured around a list of motives for saving and how well the standard theory captures these motives we show that almost all of the motives for saving that have been suggested in the informal saving literature can be captured in the standard optimizing model particular attention is given to recent work on the precautionary motive and its implications for saving and consumption behavior we also discuss the behavioral or psychological approach that eschews the use of standard optimization techniques and focuses instead on direct consideration on saving we provide a section on facts who save and how much we then discuss informally the recent decline in the u s saving rate and whether the theory is of much use in understanding this and other changes in aggregate saving rates over time we do not find any convincing explanation for the change in saving rates we also discuss some analyses of saving behavior over the life cycle addressing such questions as whether households save enough for retirement and whether the consumption patterns of older households can be rationalized within a simple life cycle model we also review a great number of studies of the consumption euler equations based on our analysis of the studies cited we conclude that there is still mixed evidence that consumption is excessively sensitive to income we also examine in depth the recent empirical literature on the precautionary motive we conclude that although some households do seem to have a significant precautionary motive at some points in their life cycle this motive is not so strong empirically as some investigators suggest

optimal linear and two bracket income taxes with idiosyncratic earnings risk abstract this paper quantitatively characterizes optimal linear and two bracket income taxes we consider a dynamic stochastic general equilibrium model in which tax design involves redistributing income for both equity and social insurance substantive findings include i a significant fraction of agents supply zero labor or hold zero assets at the optimum ii neglecting tax distortion imposed on either of labor leisure and consumption saving decisions will lead to the prescription of tax codes that deviate substantially from the optimum and iii the optimal two bracket tax schedule will turn from regressivity to progressivity in the marginal tax rate once the volatility of idiosyncratic shocks becomes sufficiently large the last finding is consistent with the results in apps et al forthcoming and it also reconciles the contradictory results regarding the optimal two bracket tax schedule between slemrod et al 1994 and strawczynski 1998

self insurance vs self financing a welfare analysis of the persistence of shocks abstract we study the welfare cost of market incompleteness in a generalized bewley model where idiosyncratic risk takes the form of entrepreneurial productivity shocks market incompleteness in our framework has two dimensions first in the bewley tradition only a limited set of instruments for consumption smoothing is available second entrepreneurs capital rental is subject to collateral constraints as is well known it is harder to self insure against more persistent shocks and the welfare cost of missing consumption insurance increases with shock persistence on the other hand with collateral constraints an increase in shock persistence leads to better allocation of production factors through entrepreneurs self financing and the welfare cost of imperfect capital rental markets decreases with shock persistence the overall welfare cost of market incompleteness can be increasing decreasing or even non monotone in shock persistence depending on the relative strengths of its two components the cost of missing insurance and the cost of imperfect capital markets

increasing returns and animal spirits the purpose of this note is to simply point out that the multiplicity intrinsic of course to the presence of non convexities characterizes the models of growth with external increasing returns which have been studied recently and more importantly to show that the many competitive equilibria which often arise in those models can be interpreted as animal spirits equilibria that is equilibria indexed by the consumers optimism or pessimism this multiplicity of competitive equilibrium paths can be viewed as providing a new foundation upon which to build a theory of self fulfilling prophecies one which relies solely on the existence of external effects and does not rest on the overlapping generation structure or on back ward bending offer curves the conclusion that multiple animal spirits competitive equilibria are likely to arise in a model of external increasing returns would survive the generalization of the framework used in this paper to many period environments be they overlapping generation or representative agent infinite horizon structures this abstract was borrowed from another version of this item

risk risk versus standard gamble procedures for measuring health state utilities contingent valuation cv has been widely used to measure the potential benefits derived from different policy decisions however doubt now exists about the validity of the cv method and alternative approaches to benefit valuation have been proposed the paper reports on the results of a study which was designed to test the viability of two of the most prominent of the alternatives the risk risk rr and standard gamble sg approaches if individual preferences are consistent with the axioms of von neumann morgenstern expected utility theory eut then the two methods should generate the same interval scales for any given set of health states however the results show that sg utilities are substantially higher than rr ones thus casting doubt on these axioms the paper discusses alternatives to eut which might better expalin the discrepancies found it also considers whether the results might be explained in terms of status quo bias and or by the relative difficulty of rr questions the results presen

existence of stationary equilibrium in an incomplete market model with endogenous labor supply in this article i first study an income fluctuation problem with endogenous labor supply let be the agent s time discount factor and r 0 be the constant gross rate of return on assets for r 1 i show that the agent s wealth either approaches infinity almost surely or converges to a finite level almost surely for r

equilibrium consumption and precautionary savings in a stochastically growing economy abstract the derivation of a closed form solution for consumption based on the constant elasticity utility function in the presence of stochastic labor income has proved to be intractable this paper derives a closed form equilibrium relationship between consumption and wealth one that holds along a balanced growth path in a stochastic romer endogenous growth model by employing more general recursive preferences we can disentangle the coefficient of relative risk aversion from the intertemporal elasticity of substitution the effects of key structural parameters on equilibrium consumption and its tradeoff with leisure are analyzed a significant aspect of our analysis concerns the extent to which current risk in the economy is shared between labor and capital this plays an important role in determining the impact of risk on the economy in general and on consumption in particular formal analysis is supplemented with extensive numerical simulations

the time trade off a note on the effect of lifetime reallocation of consumption and discounting this paper considers the extent to which responses to time trade off tto questions can provide unbiased estimates of ratios of individual marginal rates of substitution mrs of wealth for risk of various health state impairments relative to the corresponding mrs for risk of death it is shown that if there is reallocation of lifetime consumption and or discounting of future utilities then a tto response that is not adjusted for these effects will unambiguously overestimate the ratios of individual mrs while the effect of reallocation is likely to be very small discounting can lead to significant overestimation the magnitude of which depends in part upon the severity of the health state impairment

random earnings differences lifetime liquidity constraints and altruistic intergenerational transfers abstract this paper develops a model of private savings behavior in which households care about their descendants cannot have negative net worth and have lifetime earnings depending on random draws from an exogenous distribution of abilities the elements interact very lucky parents are likely to leave large estates constrained children are unusually likely to receive intergenerational transfers the paper proves the existence of a stationary cross sectional distribution of wealth endogenously determines where liquidity constraints will bind and shows that the long term interest rate must be such that ricardian neutrality fails its last section generates several illustrative numerical simulations

saving and liquidity constraints this paper is concerned with the theory of saving when consumers are not permitted to borrow and with the ability of such a theory to account for some of the stylized facts of saving behavior the models presented in the paper seem to account for important aspects of reality that are not explained by traditional life cycle models copyright 1991 by the econometric society

measurement of consumer patient preferences using a hybrid contingent valuation method this study introduces a hybrid two stage contingent valuation method applied to asthma treatment respondents are initially offered a choice between hypothetical medications implying a tradeoff between safety and efficacy stage two elicits willingness to pay wtp for an improvement along a single risk dimension estimates of the value of asthma control based on the initial risk tradeoff stage range from approximately us 1400 to us 2100 per year assuming a us 6 million value of life analysis of the second stage wtp responses yield estimates for the value of a statistical life of approximately us 9 million and for asthma control of approximately us 2200 per year

economic valuation of health for environmental policy comparing alternative approaches introduction and overview protecting human health is a primary goal of environmental policy and economic evaluation of health can help policy makers judge the relative worth of alternative actions economists use two distinct approaches in normatively evaluating health whereas environmental economists use benefit cost analysis supported by monetary valuation in terms of willingness to pay health economists evaluate interventions based on cost effectiveness or cost utility analysis cea using quality adjusted life years qaly or similar indexes this paper provides background on the controversy about the relative merits of these approaches and introduces the remaining papers in the special issue these papers with one exception were presented at a conference sponsored by the department of economics at the university of central florida with support from the us environmental protection agency although cea might not lead to substantially different implications for environmental policy than benefit cost analysis and qaly may provide a benefit transfer tool to fill gaps in the morbidity valuation literature the papers in this issue raise serious concerns about the suitability of qaly based cea for environmental regulatory analysis qaly does not in general appropriately represent individual preferences for health and cea is neither independent of income distribution nor adequate to assess efficiency

on the existence and uniqueness of stationary equilibrium in bewley economies with production abstract i prove existence of stationary recursive competitive equilibrium in bewley economies with production under specifications in which i the utility function is allowed to be unbounded and ii the underlying discrete idiosyncratic productivity process can take any form aside from mild restrictions some of the intermediate results provide theoretical basis for assumptions often made in the quantitative macroeconomics literature by providing an example i illustrate that the equilibrium is not necessarily unique even under typical specifications of the model and discuss the underlying reasons for multiplicity

non existence of recursive equilibria on compact state spaces when markets are incomplete abstract this paper analyzes one good exchange economies with two infinitely lived agents and incomplete markets it is shown that there are no recursive markov equilibria for which borrowing debt constraints never bind if the state space of exogenous and endogenous variables is a compact subset of r n moreover for large enough but finite borrowing limits no recursive equilibrium with compact state space exists these non existence results hold for any economy satisfying the following standard assumptions preferences are additively separable across time and states the one period utility function is time and state independent and unbounded from below endowments are bounded and follow a markov chain with stationary transition matrix there is some idiosyncratic risk and no aggregate risk

anti social welfare functions a reply to hansen et al we could reasonably expect society to give at least the same weight to the marginal utility of the poor as to the rich and to the marginal utility of the ill as compared to the healthy whilst hansen et al journal of health economics 2004 may be said to link cea and cba within a welfarist framework the assumptions they require are inconsistent with these types of ethical preferences thus the degree to which they employ a reasonable social welfare function is doubtful this paper argues that any link between cea and cba will occur not within a welfarist framework but instead within a non welfarist one in which it is unlikely that cba results could be easily transformed into cost effectiveness ratios

incomplete markets labor supply and capital accumulation we explore the accumulation of capital in the presence of limited insurance against idiosyncratic shocks borrowing constraints and endogenous labor supply in the exogenous labor supply case e g aiyagari 1994 huggett 1997 the presence of limited insurance increases the demand for savings for precautionary reasons as a consequence capital and output are higher under incomplete markets we show that if labor hours are endogenous labor supply is likely to be lower under incomplete markets because those agents who experience a high shock to productivity are ex post richer and they work fewer hours in some cases this wealth effect can overcome the aggregate precautionary savings and give rise to lower savings and output under incomplete

human capital risk and economic growth this paper develops a tractable incomplete markets model of economic growth in which households invest in risk free physical capital and risky human capital the paper shows that a reduction in uninsurable idiosyncratic labor income risk decreases physical capital investment but increases human capital investment growth and welfare a quantitative analysis based on a calibrated version of the model reveals that these effects are substantial and of the same order of magnitude as the effects of distortionary income taxation the analysis further suggests that government sponsored severance payments to displaced workers increase growth and welfare even if these payments have to be e nanced through distortionary income taxation

wtp and qaly based approaches to valuing health for policy common ground and disputed territory this paper discusses links between two approaches to the value of health the willingness to pay approach of environmental economics and the quality adjusted life year approach of health economics the approaches are used in cost benefit and cost effectiveness analyses of health interventions despite fundamental differences in the decision contexts and conceptual foundations of the two approaches in current practice they are likely to lead to similar policy decisions the paper also shows how research on the quality adjusted life year qaly can be used to fill in gaps in the willingness to pay literature the paper sketches a simple model that shows how to qaly fy the value of a statistical life i e how to combine qaly estimates with estimates of the value of a statistical life to estimate willingness to pay for morbidity risks

optimal consumption policy under uncertain income this paper considers the consumption behavior of a risk averse consumer with a preference for immediate consumption who faces an uncertain income stream and plans for a finite or infinite number of periods the consumer may borrow up to a limit or save where both saving and borrowing are subject to the same positive rate of interest we derive the optimal consumption policies for both finite and infinite planning horizons investigate their characteristics and analyze their economic and behavioral implications

income and wealth heterogeneity in the macroeconomy how do movements in the distribution of income and wealth affect the macroeconomy we analyze this question using a calibrated version of the stochastic growth model with partially uninsurable idiosyncratic risk and movements in aggregate productivity our main finding is that in the stationary stochastic equilibrium the behavior of the macroeconomic aggregates can be almost perfectly described using only the mean of the wealth distribution this result is robust to substantial changes in both parameter values and model specification our benchmark model whose only difference from the representative agent framework is the existence of uninsurable idiosyncratic risk displays far less cross sectional dispersion and skewness in wealth than u s data however an extension that relies on a small amount of heterogeneity in thrift does succeed in replicating the key features of the wealth data furthermore this extension features aggregate time series that depart significantly from permanent income behavior

on the possibility of a bridge between cba and cea comments on a paper by dolan and edlin in a recent work by dolan and edlin it is concluded that no link can be established between cost benefit analysis cba and cost effectiveness analysis cea however the conclusion seems to depend rather heavily on what is understood by a link between cba and cea as well as on the exact meaning of the latter two terms we argue that there is at least one approach to cba and cea in which the two are very intimately linked on the other hand the limitations in the access to preference information has consequences for the kind of questions that can be meaningfully addressed in both cba and cea

cyclical risk aversion precautionary saving and monetary policy this paper analyzes the conduct of monetary policy in an environment in which cyclical swings in risk appetite aect households propensity to save it uses a new keynesian model featuring external habit formation to show that taking note of precautionary saving motives justi es an accommodative policy bias in the face of persistent adverse disturbances equally policy should be more restrictive that is lean against the wind following positive shocks under su ciently persistent habits it is in fact optimal to increase interest rates following a rise

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

on income fluctuations and capital gains abstract we consider the infinite time horizon problem of asymptotically maximizing the expected accumulated discounted utility in a one good production economy the available capital in a given period is given by the production of the previous period plus a random variable the product of the discount and interest factors is either 1 greater than or 2 equal to one under 1 the optimal policy exists under certain conditions and always under 2 the optimal capital sequence almost surely goes to infinity under 1 with conditions on the utility one almost surely reaches a capital level above which the sequence is increasing

qalys versus hyes this paper explores the claim that qalys are liable to misrepresent consumer preferences and hence lead to decision makers choosing options which are not those preferred by the public it also considers the claim that hyes do not suffer from this defect we argue that none of the examples offered to date demonstrate the alleged tendency of qalys to misrepresent preferences we also show that hyes are identical to qaly scores obtained from a time tradeoff experiment and therefore that the assumptions about preferences underlying hyes are just as restrictive as those underlying tto based qalys

optimal monetary policy in an economy with incomplete markets and idiosyncratic risk abstract this study investigates an incomplete markets economy in which the saving behavior of a continuum of infinitely lived agents is influenced by precautionary saving motives and borrowing constraints agents can use two types of assets interest bearing ious and money to smooth consumption money is valued because of a timing friction in the bond market in particular the bond market closes before agents observe their idiosyncratic productivity shock i find that the friedman rule is not optimal for this economy the results indicate that the optimal allocation has a rate of inflation of 10 and a positive amount of private credit held by the government a positive inflation rate transfers resources from agents with big endowments to those holding bonds which improves risk sharing and therefore welfare however for higher rates of inflation agents economize on money holdings offsetting the insurance effects and causing a reduction in welfare furthermore higher rates of inflation discourage agents from borrowing and the endogenous lower bound on bond holdings is higher than the exogenous borrowing limit high rates of inflation therefore exacerbate frictions in the bond market

consumption savings decisions with quasi geometric discounting we study the consumption savings problem of an infinitely lived rational consumer who has time inconsistent preferences in the form of quasi geometric discounting the consumer operates a weakly concave production function and must simply divide current resources into current consumption and savings there is no uncertainty a solution to the consumer s problem is a subgame perfect equilibrium of a dynamic game between the consumer s successive selves we show that this game has a continuum of equilibria in stationary markov strategies not only is the stationary point of the consumer s asset holdings indeterminate but each stationary point has a continuum of dynamic paths converging to it the savings policy rules underlying these dynamic paths are step functions

is it really possible to build a bridge between cost benefit analysis and cost effectiveness analysis cost benefit analysis cba is a recognised as the economic evaluation technique that accords most with the underlying principles of standard welfare economic theory however due to problems associated with the technique economists evaluating resources allocation decisions in health care have most often used cost effective analysis cea in which health benefits are expressed in non monetary units as a result attempts have been made to build a welfare economic bridge between cost benefit analysis cba and cost effectiveness analysis cea in this paper we develops these attempts and finds that while assumptions can be made to facilitate a constant willingness to pay per unit of health outcome these restrictions are highly unrealistic we develop an impossibility theorem that shows it is not possible to link cba and cea if i the axioms of expected utility theory hold ii the quality adjusted life year qaly model is valid in a welfare economic sense and iii illness affects the ability to enjoy consumption we conclude that within a welfare economic framework it would be unwise to rely on a link between cba and cea in economic evaluations

life cycle preferences over consumption and health when is cost effectiveness analysis equivalent to cost benefit analysis this paper studies life cycle preferences over consumption and health status we show that cost effectiveness analysis is consistent with cost benefit analysis if the lifetime utility function is additive over time multiplicative in the utility of consumption and the utility of health status and if the utility of consumption is constant over time we derive the conditions under which the lifetime utility function takes this form both under expected utility theory and under rank dependent utility theory which is currently the most important nonexpected utility theory if cost effectiveness analysis is consistent with cost benefit analysis it is possible to derive tractable expressions for the willingness to pay for quality adjusted life years qalys the willingness to pay for qalys depends on wealth remaining life expectancy health status and the possibilities for intertemporal substitution of consumption

consumption liquidity constraints and asset accumulation in the presence of random income fluctuations recent empirical research flavin 1981 hagashi 1982 has rejected the certainty equivalent formulation of permanent income hypothesis hall 1978 these findings are often attributed to households inability to borrow completely against expected future labor income this paper is a theoretical investigation of optimal consumption behavior under risk aversion random income fluctuations and borrowing restrictions our principle objective is to establish the existence and to investigate the properties of the stationary probability distribution which characterizes the asymptotic behavior of consumption under these conditions this abstract was borrowed from another version of this item

discount rates inferred from decisions an experimental study two hundred and four students of economics and finance participated in an intertemporal choice experiment which manipulated three dimensions in a 4 4 4 factorial design scenario postponing a receipt postponing a payment expediting a receipt expediting a payment time delay 0 5 1 2 and 4 years and size of cashflow 40 200 1000 and 5000 individual discount rates were inferred from the responses and then used to test competitively four hypotheses regarding the behavior of discount rates the classical hypothesis asserting that the discount rate is uniform across scenarios time delays and sums of cashflow was flatly rejected a market segmentation approach was found lacking the results support an implicit risk hypothesis according to which delayed consequences are associated with an implicit risk value and an added compensation hypothesis which asserts that individuals require compensation for a change in their financial position

accounting for future costs in medical cost effectiveness analysis most medical cost effectiveness analyses include future costs only for related illnesses but this approach is controversial this paper demonstrates that cost effectiveness analysis is consistent with lifetime utility maximization only if it includes all future medical and non medical expenditures estimates of the magnitude of these future costs suggest that they may substantially alter both the absolute and relative cost effectiveness of medical interventions particularly when an intervention increases length of life more than quality of life in older populations current methods overstate the cost effectiveness of interventions which extend life compared to interventions which improve the quality of life

rational expectations business cycles in search equilibrium we examine the rational expectations equilibrium paths of the model of search and barter in diamond s aggregate demand management in search equilibrium for some initial positions there are two equilibrium paths converging to different steady states with the high activity path pareto dominating the low activity path with some parameters there is also a continuum of equilibrium paths converging to another steady state moreover there can be cycles that are equilibrium paths even though the environment is stationary

a model of imperfect competition with keynesian features the recent literature on the reappraisal of keynes has viewed keynesian equilibria as arising when prices are fixed and effective demands and supplies are equilibrated through the adjustment of quantities one problem with this approach is that it lacks a theory of price determination in particular of why prices are fixed in the present paper we show that a number of keynesian features arise in a model in which prices are fully flexible but where agents have some monopoly power one advantage of this approach is that it provides a theory of the determination of both prices and quantities

ramsey meets laibson in the neoclassical growth model the neoclassical growth model is modified to include a variable rate of time preference with no commitment ability and log utility the equilibrium features a constant effective rate of time preference and is observationally equivalent to the standard model the extended framework yields testable linkages between the extent of commitment ability and the rates of saving and growth the model also has welfare implications including the optimal design of institutions that facilitate household commitments steady state results are obtained for general concave utility functions and some properties of the transitional dynamics are characterized for isoelastic utility

efficient allocations with hidden income and hidden storage we consider an environment in which individuals receive income shocks that are unobservable to others and can privately store resources we provide a simple characterization of the unique efficient allocation of consumption in cases in which the rate of return on storage is sufficiently high or alternatively in which the worst possible outcome is sufficiently dire we show that unlike in environments without unobservable storage the symmetric efficient allocation of consumption is decentralizable through a competitive asset market in which individuals trade riskfree bonds among themselves in this paper we consider an environment in which individuals have random income and can accumulate assets through a storage technology their income realizations and their asset position are private information given these informational frictions we provide a simple characterization of the unique efficient allocation of consumption in cases in which the rate of return on storage is sufficiently high or alternatively in which the worst possible outcome is sufficiently dire we show that the symmetric efficient allocation of consumption is decentralizable through a competitive asset market in which individuals trade risk free bonds among themselves there is a large prior literature which examines the characteristics of efficient risksharing in dynamic settings in the presence of private information unlike our paper this literature generally finds that efficient allocations do not coincide with the equilibrium allocations of any economy with a competitive bond market see atkeson and lucas 1992 in particular the key difference between our paper and these preceding ones is that the earlier literature assumes either that agents cannot accumulate resources over time or that if they can this accumulation is observable in contrast we assume that both agents incomes and their stored resources are private information it is this combination of assumptions that leads to our result our findings are reminiscent of allen s 1985 he considers a dynamic principalagent relationship in which the agent is risk averse and has hidden stochastic income the

anticipation and the valuation of delayed consumption this paper presents a model of intertemporal choice that incorporates savoring and dread i e utility from anticipat ion of delayed consumption the model explains why an individual with positive time preference may delay desirable outcomes or get unpleas ant outcomes over with quickly contrary to the prediction of convent ional formulations of intertemporal choice implications of savoring and dread for savings behavior empirical estimation of discount rate s and public policy efforts to combat myopic behavior are explored the model provides an explanation for common violations of the indepe ndence axiom as applied to intertemporal choice copyright 1987 by royal economic society

information shocks and precautionary saving abstract skinner s 1988 risky income life cycle consumption and precautionary savings journal of monetary economics 22 237 255 second order approximation to the consumption function under crra utility is generalized to accommodate any structure of uninsurable income risk to second order a future income shock will induce precautionary saving in the present that depends on the variance of the expectation of the income shock at each intervening period however the expected rate of consumption growth depends only on the currently perceived variance of the expected present value of future income in a finite horizon model precautionary saving produces a hump shaped lifecycle profile of mean consumption primarily because the variance of future income decreases with age but the lifecycle dynamics of total wealth also affect the shape of the profile for a markov income process with autocorrelations on the order of 0 9 or less the second order approximation performs surprisingly well for common parameter choices from the literature but it does poorly as the autocorrelation approaches 1

precautionary wealth accumulation this paper provides theoretical foundations for when individual and aggregate wealth accumulation increase as earnings risk increases stated in terms of a simple picture the problem addressed in this paper is to find sufficient conditions such that the pattern in figure 1 holds figure 1 describes a situation in which an individual s expected wealth accumulation profile is weakly greater at each age over the life cycle whenever the individual faces one earnings process that is riskier than another earnings process other things equal two important open questions can be answered by finding sufficient conditions for the pattern in figure 1 to occur first there is the question of when theory predicts that households that face more earnings risk have more expected wealth accumulation at any point in the life cycle than households that face less earnings risk the development of such a theory would be helpful as there is a sizeable empirical literature related to this question which is surveyed by browning and lusardi 1996 second there is the question of when theory predicts that aggregate wealth accumulation increases as earnings risk increases much of the interest in the precautionary savings literature is based on the possibility that an important part of aggregate wealth is due to uninsured earnings risk this question can also be answered with figure 1 the idea is to treat the expected wealth profile of one individual as the realized average wealth profile of a large number of similarly situated individuals the law of large numbers justifies this when shocks are independent across individuals and thus earnings risk is idiosyncratic since aggregate wealth holding is a weighted sum of the average wealth holdings of individuals at different ages an upward shift of the expected wealth profile of all agents then implies that aggregate wealth holding increases with increases in earnings risk other things equal this paper provides the first general answer to when the pattern in figure 1 occurs in the context of a multi period model with independent earnings shocks the answer is given at two levels in terms of properties of the decision rule for savings i e the savings function and in terms of preferences a savings function maps an individual s current state e g current wealth and earnings and age into savings or wealth carried into the next model period given a specific earnings process since economists are familiar with the merits of sufficient conditions stated in terms of preferences i will try to motivate why sufficient conditions stated in terms of the savings function are interesting first they are widely applicable they apply to theories where savings decisions maximize a utility function or are given by a rule of thumb they also apply to models where there is wage risk and there are both consumption saving and labour leisure decisions second in so far as the savings function can be estimated it is useful for an empirical

the dynamic properties of financial market equilibrium with trading fees we incorporate trading fees in a long horizon dynamic general equilibrium model in which traders optimally and endogenously decide when and how much to trade a full characterization of equilibrium is provided which allows us to study the dynamics of equilibrium trades equilibrium asset prices and rates of return in the presence of trading fees we exhibit the effect of trading fees on deviations from the consumption capm and analyze the pricing of endogenous liquidity risk we compare for the same shocks the impulse responses of this model to those of a model in which trading is infrequent because of trader inattention the current version reflects material that was previously in two papers w21421 and w19155

aggregate precautionary savings when is the third derivative irrelevant abstract when are aggregate precautionary savings positive we address this question in the context of a general equilibrium model where infinitely lived agents receive idiosyncratic labor endowment shocks hold a risk free asset to smooth consumption and face a liquidity constraint we prove that 1 the steady state capital stock is always larger in any equilibrium with idiosyncratic shocks and a liquidity constraint than without idiosyncratic shocks i e aggregate precautionary savings are positive as long as consumers are risk averse and 2 aggregate precautionary savings occurs if and only if the liquidity constraint binds for some agents

the risk free rate in heterogeneous agent incomplete insurance economies abstract why has the average real risk free interest rate been less than one percent the question is motivated by the failure of a class of calibrated representative agent economies to explain the average return to equity and risk free debt i construct an economy where agents experience uninsurable idiosyncratic endowment shocks and smooth consumption by holding a risk free asset i calibrate the economy and characterize equilibria computationally with a borrowing constraint of one year s income the resulting risk free rate is more than one percent below the rate in the comparable representative agent economy

waiting time and decision making is time like money time is a resource as such consumers have to make decisions regarding their use of time in the purchase and consumption of goods and services using prospect theory and mental accounting as theoretical frameworks this article investigates whether consumers treat time like money when they make decisions in a series of studies we found that the value of consumers time is not constant but depends on contextual characteristics of the decision situation our results also suggest that in deterministic situations people make decisions involving time losses in a manner consistent with the convex loss function proposed by prospect theory however in decision making under conditions of risk people seem to make risk averse choices with respect to decisions in the domain of time in contrast to the risk seeking behavior often found with respect to decisions involving losses of money we discuss the nonfungibility of time as an explanation for the discrepancy between decisions involving time and those involving money

on income fluctuations and capital gains with a convex production function abstract this work considers a one good economy the production function is random and not necessarily concave the interest factor is variable and the consumer must maximize asymptotically the expected accumulated and discounted utility one proves that the value function is concave and the limit policy is optimal and is the unique one furthermore if the production function is convex there exist two levels of capital with the property that for initial capitals below the first level the optimal sequence of capitals stays bounded with probability one for initial capitals above the second level the optimal sequence of capitals tends monotonically to infinity for initial capitals between the two levels the optimal sequence of capitals leaves the interval with probability one

when do borrowing constraints bind some new results on the income fluctuation problem abstract the empirical failure of the permanent income hypothesis has prompted researchers to investigate models in which consumers are liquidity constrained as shown in deaton econometrica 59 5 1991 1221 liquidity constrained consumers might choose to exhaust their borrowing capacity from time to time yet due to technical limitations the conditions under which this behavior arises have not been investigated the present paper extends the class of solvable models in a way that allows this issue to be dealt with it turns out that under the loosest sustainable borrowing constraint the agent might systematically avoid exhausting his borrowing capacity

international lending and borrowing in a stochastic stationary equilibrium this paper develops a simple general equilibrium model of international borrowing and lending in which national products are subject to random fluctuations international capital flows arise from the efforts of risk averse households in different countries to self insure against random income fluctuations by accumulating foreign claims that can be used to finance a less variable profile of consumption relative to national income in the absence of aggregate uncertainty a stationary rational expectations equilibrium is shown to exist despite the fact that rates of time preference differ among countries a number of results many of which enrich those in the existing literature are obtained copyright 1990 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

valuing environmental health effects an economic perspective this paper provides an overview of some of the issues involved in comparing benefit cost analysis and cost effectiveness analysis based on quality adjusted life years as alternative approaches to assessing environmental policies that affect human health it concludes that i although qalys have the advantage of reflecting policy impacts on both health status and longevity in a single scalar measure they are not consistent with utility theory unless individuals preferences satisfy some restrictive conditions ii they do not capture other important aspects of the valuation of changes in mortality and morbidity iii cost effectiveness analysis based on qalys as a measure of effectiveness omits non health related effects of environmental policy and iv it leaves unanswered the important question of what level of environmental regulation is appropriate

recursive equilibria in an aiyagari style economy with permanent income shocks in this paper we prove the existence of a recursive competitive equilibrium rce for an aiyagari style economy with permanent income shocks and perpetual youth structure we show that there exist equilibria where borrowing constraints are never binding this allows us to establish a non trivial lower bound on the equilibrium interest rate to solve the individual s problem we present a new approach that uses lattices of consumption functions to deal with the non compact state space and the unbounded utility function the approach uses only the first order conditions of the problem euler equations the proof is constructive and it serves as a theoretical foundation for the convergence of a policy function iteration procedure

changes in risk and the demand for saving abstract how does risk affect saving empirical work typically examines the effects of detectible differences in risk within the data how these differences affect saving in theoretical models depends on the metric one uses for risk for labor income risk second degree increases in risk require prudence to induce increased saving demand however prudence is not necessary for first degree risk increases and not sufficient for higher degree risk increases for increases in interest rate risk a precautionary effect and a substitution effect need to be compared this paper provides necessary and sufficient conditions on preferences for an n th degree change in risk to increase saving