temptation and social security in a dynastic framework abstract we investigate welfare and aggregate implications of a pay as you go payg social security system in a dynastic framework in which individuals have self control problems the presence of self control problems induces individuals to save less because of their urge for temptation towards current consumption individuals efforts to balance between the short term urge for temptation and the long term commitment for consumption smoothing result in self control costs in this environment payg social security works as a self control cost reducing device in contrast the presence of altruism induces individuals to save more this in turn mitigates the adverse effects of self control problems and payg social security on savings but magnifies the self control costs we find that in our environment the adverse welfare effects of a payg system are further mitigated relative to the environments that incorporate altruism and self control issues separately however the level of mitigation is quite modest

time inconsistent preferences and the annuitization decision good news can involve difficult decisions for example winning a lottery jackpot can go along with the decision whether to have the jackpot paid out immediately as a lump sum or as periodic annual payments also when entering retirement most people face the decision whether they want their defined contribution account balance paid as a lump sum or to annuitize that amount the fact that people tend to choose the lump sum even if economic reasons suggest that they should choose the annuity is called the annuity paradox in a large online survey we find that people behave time inconsistent older people have a stronger tendency to choose the lump sum than younger people when they are asked to predict today what to choose when they retire this effect is considerably stronger for participants that answer simple time preference questions inconsistently our findings suggest to think about precommitment devices for the annuitization decision in the retirement case already at the time when the defined benefit plan is started

coworker influence on annuitization decisions evidence from defined benefit plans abstract we investigate the role of coworker influence on an individual s annuitization decision using rich data on payout options and decisions in defined benefit plans we find that past payout choices of coworkers significantly affect an employee s decision to annuitize at retirement and that the coworkers payout choices have a larger economic effect on annuitization than recent stock market returns we also find that coworker effects are greater for employees who have a similar level of benefit amounts those who share geographic proximity same zip code and those who retire at a norm modal retirement age of their workplace robustness tests show that estimated coworker effects are unlikely to be driven by unobserved common environments or similar preferences

optimal annuitization uncertain survival probabilities and maxmin preferences we consider a life cycle model with bequest motives and assume that the individual does not know his her survival probability and has maxmin utility preferences we show that it is optimal not to annuitize but to purchase pure life insurance policies instead

a resolution of the equity premium puzzle abstract the introduction of a simple non time additive utility function can explain the equity premium puzzle noted by mehra and prescott with a reasonable value for the relative risk aversion coefficient

cognitive constraints on valuing annuities this paper documents consumers difficulty valuing life annuities using a purpose built experiment in the american life panel we show that the prices at which people are willing to buy annuities are substantially below the prices at which they are willing to sell them we also find that buy values are negatively correlated with sell values and that the sell buy valuation spread is negatively correlated with cognition this spread is larger for those with less education weaker numerical abilities and lower levels of financial literacy our evidence contributes to the emerging literature on heterogeneity in financial decision making abilities particularly regarding retirement payouts jel d14 d91 g11 h55

foreign equity investment restrictions capital flight and shareholder wealth maximization theory and evidence this article provides a theory of foreign equity investment restrictions we consider a model where the demand function for domestic shares differs between domestic and foreign investors because of deadweight costs in holding domestic and foreign securities that depend on the country of residence of investors we show that domestic entrepreneurs maximize firm value by discriminating between domestic and foreign investors the model implies that countries benefitting from capital flight have binding ownership restrictions such that foreign investors pay a higher price for shares than domestic investors the empirical implications of this theory are supported by evidence from switzerland article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

beach nourishment as a dynamic capital accumulation problem abstract beach nourishment is a common coastal management strategy used to combat erosion along sandy coastlines it involves building out a beach with sand dredged from another location this paper develops a positive model of beach nourishment and generates testable hypotheses about how the frequency of nourishment responds to property values project costs erosion rates and discounting by treating the decision to nourish as a dynamic capital accumulation problem the model produces new insights about coupled economic geomorphological systems in particular determining whether the frequency of nourishment increases in response to physical and economic forces depends on whether the decay rate of nourishment sand exceeds the discount rate

the mismatch between life insurance holdings and financial vulnerabilities evidence from the health and retirement study using data on older workers from the 1992 health and retirement survey along with an elaborate life cycle planning model the authors quantify the effect of each individual s death on the financial status of his or her survivors and the degree to which life insurance holdings moderate these consequences the average change in living standard that would result from a spouse s death is small both in absolute terms and relative to the decline that would occur without insurance however this average obscures a startling mismatch between insurance holdings and underlying vulnerabilities for many of the most vulnerable the amounts purchased are surprisingly small and for many of the least vulnerable the amounts are surprisingly large as a result uninsured vulnerabilities are quite widespread the magnitude of these vulnerabilities as well as the proclivity to address any given degree of vulnerability by purchasing life insurance vary systematically with individual and household characteristics

hedonic amenity valuation and functional form specification this paper uses gis data to develop variables representing the physical extent and visibility of surrounding land use cover features in a hedonic model of a rural suburban residential housing market three equations are estimated to determine if views

the individual life cycle annuity market imperfections and economic growth we study the effects of an annuity market imperfection on individual agents life cycle decisions and on the macroeconomic growth rate in an overlapping generations model with single sector endogenous growth our model features both age dependent mortality and labour productivity we model imperfect annuities by introducing a load factor on the annuity rate faced by finitely lived agents our main finding is that annuity market imperfections decrease economic growth because less assets are necessary for consumption late in life in addition we find that both the quantitative and qualitative effects of annuity market imperfections are grossly overestimated in a partial equilibrium analysis because it disregards general equilibrium repercussions

an experimental test of the under annuitization puzzle with smooth ambiguity and charitable giving abstract in a life cycle model with a bequest motive we study the impact of smooth ambiguity aversion to uncertain survival probabilities on the optimal demand for annuities we implement a theory driven laboratory experiment first a subject s ambiguity attitude is elicited in a simple experimental setting able to make the smooth ambiguity model operational then in a two period annuity bequest decision problem the subject s bequest in the second period is presented as a donation to a previously chosen charity contingent to the subject being active after the first period in line with the theoretical predictions we find that ambiguity averse resp loving subjects invest less resp more in annuities than ambiguity neutral ones furthermore subjects contingent donation to the chosen charity increases in their investment in annuities only for sufficiently high levels of warm glow altruism

how strong are bequest motives evidence based on estimates of the demand for life insurance and annuities this paper presents new empirical evidence in support of the view that a significant fraction of total saving is motivated by the desire to leave bequests specifically i find that social security annuity benefits significantly raise life insurance holdings and depress private annuity holdings among elderly individuals these patterns indicate that the typical household would choose to maintain a positive fraction of its resources in bequeathable forms even if insurance markets were perfect evidence on the relationship between insurance purchases and total resources reinforces this conclusion

social security and self control preferences abstract we analyze the welfare effects of an unfunded social security system we do so using an overlapping generations economy wherein agents have self control preferences face mortality risk individual income risk and borrowing constraints given our specification of preferences unfunded social security helps reduce the agents temptation to consume in every period consequently the welfare costs it otherwise entails are substantially mitigated while both social security and self control when considered separately reduce welfare their combination renders this effect considerably less severe moreover if the cost of resisting temptation is very high the introduction of social security might even improve welfare

optimal annuitization with stochastic mortality and correlated medical costs the conventional wisdom since yaari 1965 is that households without a bequest motive should fully annuitize their investments numerous frictions do not break this sharp result we modify the yaari framework by allowing a household s mortality risk itself to be stochastic due to health shocks a lifetime annuity still helps to hedge longevity risk but the annuity s remaining present value is correlated with medical costs such as those for nursing home care thereby reducing annuity demand even without ad hoc liquidity constraints we find that most households should not hold a positive level of annuities and many should hold negative amounts jel d14 d82 g23 i12 j14 j26

the economic effects of social security toward a reconciliation of theory and measurement abstract in this paper we argue that actuarial valuation of social security benefit streams is theoretically inconsistent with the assumption of pure life cycle motives instead we show that the simple discounted value of future benefits ignoring the possibility of death is often a good approximation to the relevant concept of value this observation motivates a re examination of existing empirical evidence concerning the economic effects of social security we focus our attention on studies of distributional equity and personal saving behavior in both cases we argue that the use of simple rather than actuarial discounting of survival contingent income streams produces results that differ dramatically from previous findings specifically estimates based on actuarial valuation may overstate the importance of redistribution between and within generations and may understate the depressive effect of social security on personal wealth accumulation by a factor of three or more

accounting for non annuitization why don t people buy annuities several explanations have been provided by the previous literature large fraction of preannuitized wealth in retirees portfolios adverse selection bequest motives and medical expense uncertainty this paper uses a quantitative model to assess the importance of these impediments to annuitization and also studies three newer explanations government safety net in terms of means tested transfers illiquidity of housing wealth and restrictions on minimum amount of investment in annuities this paper shows that quantitatively four explanations play a big role in reducing annuity demand preannuitized wealth minimum annuity purchase requirement illiquidity of housing wealth and bequest motives the annuity purchase involves big upfront investment especially if there is a minimum purchase restriction this is binding for many especially if housing is illiquid and part of wealth is preannuitized while bequest motives significantly reduce the overall annuity demand the model with a strong bequest motive cannot match the empirical fact that high income people have the highest demand for annuities

social security reform with self control preferences abstract this paper analyzes a fully funded social security system under the assumption that agents face temptation issues agents are required to save through individually managed personal security accounts without and with mandatory annuitization when the analysis is restricted to crra preferences our results are congruent with the literature in indicating that the complete elimination of social security is among the reform scenarios that maximize welfare however when self control preferences are introduced and as the intensity of self control becomes progressively more severe the social security elimination scenario loses ground very rapidly in fact in the case of relatively severe temptation the elimination of social security becomes the least desirable alternative under the light of the above findings any reform proposal regarding the social security system should consider departures from standard preferences to preference specifications suitable for dealing with preference reversals

annuities and individual welfare advancing annuity demand theory we present suffcient conditions for the optimality of full annuitization under market completeness that are substantially less restrictive than those used by yaari 1965 we examine demand with market incompleteness finding that positive annuitization remains optimal widely but complete annuitization does not how uninsured medical expenses affect demand for illiquid annuities depends critically on the timing of the risk a new set of calculations with optimal consumption trajectories very different from available annuity income streams still shows a preference for considerable annuitization suggesting that limited annuity purchases are plausibly due to psychological or behavioral biases

a model of focusing in economic choice we present a generally applicable theory of focusing based on the hypothesis that a person focuses more on and hence overweights attributes in which her options dier more our model predicts that the decisionmaker is too prone to choose options with concentrated advantages relative to alternatives but maximizes utility when the advantages and disadvantages of alternatives are equally concentrated in intertemporal choice because the relative concentrations of an option s costs and benets can be dierent from the perspective of a single period and the perspective of the entire choice problem the decisionmaker often exhibits a form of time inconsistency she is present biased when the costs of current misbehavior are distributed over many future dates such as in harmful consumption but future biased when the benet of many

does the measurement of environmental quality affect implicit prices estimated from hedonic models hedonic property value models are often used to derive point estimates for identifying the relationship between environmental quality and property prices the measurement of the environmental quality variable is often selected based on convenience but variables reflecting different perceptions about environmental quality may result in implicit prices that vary substantially this case study derives implicit prices for nine measures of water clarity using hedonic property value models of lakefront properties in maine results show that water clarity variables based on different perceptions may result in differences in implicit prices large enough to potentially affect policy decisions

environmental amenities as a source of market power site specific environmental amenities can provide a source of product differentiating market power using estimates from hedonic price equations and residual demand models our analysis recovers firm specific estimates of price markups as measures of market power and uses these markups to estimate the implied marginal value for access to coastal beaches the application involves rental price and occupancy data for several thousand beach properties along a portion of the north carolina coastline during the 1987 to 1992 rental seasons

optimal mandates and the welfare cost of asymmetric information evidence from the u k annuity market much of the extensive empirical literature on insurance markets has focused on whether adverse selection can be detected once detected however there has been little attempt to quantify its welfare cost or to assess whether and what potential government interventions may reduce these costs to do so we develop a model of annuity contract choice and estimate it using data from the u k annuity market the model allows for private information about mortality risk as well as heterogeneity in preferences over different contract options we focus on the choice of length of guarantee among individuals who are required to buy annuities the results suggest that asymmetric information along the guarantee margin reduces welfare relative to a first best symmetric information benchmark by about 127 million per year or about 2 percent of annuitized wealth we also find that by requiring that individuals choose the longest guarantee period allowed mandates could achieve the first best allocation however we estimate that other mandated guarantee lengths would have detrimental effects on welfare since determining the optimal mandate is empirically difficult our findings suggest that achieving welfare gains through mandatory social insurance may be harder in practice than simple theory may suggest

the cost of annuities implications for saving behavior and bequests the fact that most elderly u s individuals maintain a flat age wealth profile rather than buy individual life annuities contradicts the standard life cycle consumption model average expected yields on individual life annuities in the united states during 1968 1983 were lower by 4 21 6 13 percent or 2 43 4 35 percent after allowing for adverse selection than yields on plausible alternative investments simulations of a model of saving and portfolio allocation show that during the early retirement years such yield differentials can account for the absence of annuity purchases even without a bequest motive at older ages the combination of such yield differentials and a bequest motive can do so it is common experience that as we grow older and nearer to eternity we become more not less anxious about money derek brewer chaucer and his world p 213

the interaction of public and private insurance medicaid and the long term care insurance market a long tradition in public finance examines how public programs can crowd out private activ ity in areas as diverse as education savings and insurance among others these studies typi cally focus on aggregate economic implications particularly for government expenditures and national savings in this paper we demonstrate that crowd out can also have an important effect on individual welfare specifically we show that the provision of even very incomplete public insurance can crowd out more comprehensive private policies by imposing a large implicit tax on private insurance benefits thus potentially increasing overall risk exposure for individuals we examine the interaction of public and private insurance for one of the largest uninsured financial risks facing the elderly in the united states long term care expenditures at 135 bil lion in 2004 long term care expenditures represented over 8 5 percent of total health expendi tures or all ages or roughly 1 2 percent of gdp moreover real long term care expenditures are projected to triple over the next 35 years due to rising medical costs and the aging of the baby boomers only 10 percent of the elderly however have any private long term care insurance and one third of expenditures are paid for out of pocket congressional budget office cbo 1999 cbo 2004 brown and finkelstein 2007 one potential explanation for the small size of the private market is that the public insurance provided by medicaid may crowd out demand for private insurance medicaid was designed to provide long term care insurance for the poor elderly mark v pauly 1989 1990 has established the qualitative result that as an incomplete but publicly funded source of long term care insur ance medicaid has the potential to reduce substantially demand for private long term care insur ance even among the nonpoor our work builds on this insight by quantifying the magnitude of medicaid s crowd out effect and the incomplete nature of medicaid coverage we also illustrate the mechanism behind medicaid s crowd out effect and are therefore able to assess the likely impact of alternative policies on private insurance demand we develop a utility based model of a 65 year old risk averse individual who chooses an opti mal intertemporal consumption path in the presence of uncertainty about long term care expen ditures we calibrate the model using data on the distribution of long term care expenditure risk common state medicaid rules and the prices and coverage of typical private long term care insurance policies

demand for annuities price sensitivity risk perceptions and knowledge abstract the demand for voluntary individual lifetime annuities is low as merely 10 of soon to be retired canadians care to buy such contracts to assess the reasons why we design a stated preference experiment in which we vary characteristics of annuity contracts to estimate individuals sensitivity to an annuity s money s worth that is the value to cost ratio using different measures of longevity risk and survival expectations we investigate how knowledge of annuity products and mortality risk misperceptions affect the take up and the sensitivity of the demand for annuities we find that annuities are objectively actuarially neutral in general meaning that annuity premiums are equal to their expected payment and can appear to offer great value for the money given an individual s subjective mortality risk we also find that demand is somewhat price inelastic so that lowering the price of annuities could increase demand by at most 2 percentage points for a base of 10 lack of knowledge of annuities explains another 0 8 percentage points we find limited additional interest for deferred annuities compared to immediate annuities although respondents are less sensitive to deferred annuity prices

the opportunity cost of coastal land use controls an empirical analysis for more than a decade demographers have been documenting the migration of the u s population from interior to coastal states a belief that this trend will persist has led to concern about increased housing and commercial development in coastal areas added development brings water pollution and reduces the natural cover of the coastline many states have responded to this trend with land use controls that limit new residential and commercial development on land adjacent to coastal water controls such as these have essentially three economic efficiency effects first on the positive side is the preservation of coastal open space and reduction of water pollutants benefits enjoyed by residents and visitors second and on the negative side is decreased residential and commercial proximity to the coast fewer households and businesses can locate near the

longevity risk retirement savings and financial innovation abstract over the last couple of decades unprecedented increases in life expectancy have raised important concerns for retirement savings we solve a life cycle model with longevity risk which can be hedged through endogenous saving and retirement decisions we investigate the benefits of financial assets designed to hedge the shocks to survival probabilities when longevity risk is calibrated to match forward looking projections those benefits are substantial this lends support to the idea that such hedging should be pursued by defined benefit pension plans on behalf of their beneficiaries finally we draw implications for optimal security design

the choice between an annuity and a lump sum results from swiss pension funds this paper uses unique micro data from swiss employer based pension plans to study the annuitization decision at retirement the administrative nature of our data though limited with respect to individual background characteristics allows us to analyze real choices over large retirement balances rather than subjectively reported intentions to annuitize we find a strong and robust impact of a utility based measure of the annuity s value computed within a life cycle framework on individual annuitization rates low accumulation of retirement assets is strongly associated with the choice of the lump sum presumably due to the availability of means tested social assistance the sponsor s default option in most cases the annuity is also found to be highly influential in the decision to annuitize

new evidence on the money s worth of individual annuities this paper presents new information on the expected present discounted value of payouts on individual life annuities the annuity we examine is the single premium immediate life annuity an insurance product that pays out a nominal level sum as long as the covered person lives in exchange for an initial lump sum premium this annuity offers protection against the risk of someone outliving his saving given uncertainty about longevity for reasonable estimates of behavioral parameters we calculate that individual annuities are currently priced so that retirees without bequest motives should find these policies of substantial value in configuring their portfolios to smooth retirement consumption we also find that the expected present discounted value of payouts relative to the initial cost of the annuity has increased over the last decade these findings bear on the policy debate regarding the role of individual choice and self reliance in retirement planning this abstract was borrowed from another version of this item

opportunity cost estimation of ecosystem services land use changes rank among the most significant drivers of change in ecosystem services worldwide the enhancement of important services such as biodiversity and carbon sequestration requires modifications in land use that can lead to the decline in other ecosystems services targeting the most suitable areas for particular land uses based on comparative advantages requires opportunity cost information across large regions this is a demanding task because the input output relations are ill defined and determined by spatially heterogeneous operational and environmental conditions to address this methodological challenge this paper presents a two stage semiparametric technique that enables multi dimensional production possibility frontiers to be estimated from data provided by biophysical models specific advantages of the proposed frontier approach are its flexibility with regard to assumptions on the convexity of the production possibility set and its freedom from any separability assumptions for the input output space and the space of the heterogeneous background variables the method is illustrated for a case study of 18 central and eastern european countries results show that opportunity costs of changes in ecosystem services provision differ substantially between regions those areas having already relatively high levels of carbon sequestration have a comparative advantage in sequestering carbon opportunity costs of biodiversity are generally positively related with the level of biodiversity up to a turning point after which they are negatively related to illustrate the policy consequences of the observed economies and diseconomies of scope we compare two management regimes to illustrate the potential gains from smart land management