efficient and durable decision rules with incomplete information we compare six concepts of efficiency for economies with incomplete information depending on the stage at which individuals welfare is evaluated and on whether incentive constraints are recognized an example is shown in which an incentive efficient decision rule may be unanimously rejected by the individuals in the economy we define durable decision rules which can resist such unanimous rejection and show that efficient durable decision rules exist

efficient mechanisms for bilateral trading we consider bargaining problems between one buyer and one seller for a single object the seller s valuation and the buyer s valuation for the object are assumed to be independent random variables and each individual s valuation is unknown to the other we characterize the set of allocation mechanisms that are bayesian incentive compatible and individually rational and show the general impossibility of ex post efficient mechanisms without outside subsidies for a wide class of problems we show how to compute mechanisms that maximize expected total gains from trade and mechanisms that can maximize a broker s expected profit journal of economic literature classification number 026

testing for asymmetric information in insurance markets the first goal of this paper is to provide a simple and general test of the presence of asymmetric information in contractual relationships within a competitive context we also argue that insurance data are particularly well suited to such empirical investigations to illustrate this claim we use data on contracts and accidents to investigate the extent of asymmetric information in the french market for automobile insurance using various parametric and nonparametric methods we find no evidence for the presence of asymmetric information in this market

testing for evidence of adverse selection in the automobile insurance market a comment in 1994 puelz and snow presented empirical evidence of adverse selection in the market for automobile collision insurance using data from a private insurer they claimed to have found strong evidence of adverse selection in the insurer s portfolio their test was based on individuals choice of deductible in each risk class from the models of rothschild and stiglitz 1976 and wilson 1977 it is well known that if residual adverse selection is present in some risk classes insurers will offer menus of contracts from which insureds will self select at equilibrium higher risk individuals will choose the smaller deductible and will be charged the higher price per unit of insurance dionne doherty and fombaron 2000 an empirical test of the theory is to verify in each risk class whether lower deductibles are chosen by insureds with higher accident proba

co2 emissions and income dynamics what does the global evidence tell us this paper analyzes the co evolution of two major determinants of social welfare namely income and carbon emissions in particular by using a distribution dynamics approach based on markov chains we investigate the shape and behavior of the joint distribution of per capita income and carbon dioxide emissions we arrive at several interesting conclusions especially in the context of international negotiations on climate change first evidence does not support theoretical models predicting the existence of a poverty environment trap specifically in the long run two main groups of countries will emerge poor versus polluting countries second the typical development path leads initially to high emission levels and subsequently to high income third the convergence process towards the stationary distribution is very slow finally for carbon emissions whenever it is observed the environmental kuznets curve seems to be only a transitory phenomenon

risk aversion in contests in a contest participants spend money or effort to increase their chances of winning a prize the authors examine primarily the following question could the timid the more risk averse have a better chance of winning in contests under limited liability the answer is always positive in the absence of limited liability there is no single answer whereas when the prize is shared as a function of effort the outcome is independent of the contestants risk aversion the authors also relate their results to self protection and examine some other implications of risk aversion copyright 1995 by royal economic society

some macroeconomics for the 21st century this note describes a numerical simulation of a model of economic growth a simplified version of robert tamura s 1996 model of world income dynamics based on technology diffusion the model makes predictions for trends in average world income growth and about the evolution of the relative income distribution that accord well with observation the model is used to forecast the course of world income growth and income inequality over the century to come

wind insurance and mitigation in the coastal zone this paper presents the only study analyzing the decision to purchase wind coverage for individuals whose standard homeowner s policy excludes wind and one of very few analyses of the decision to undertake wind mitigation measures because these two decisions are closely related a simultaneous mixed process approach is used that allows for correlated disturbances across probit insurance and tobit mitigation equations results indicate a positive correlation between errors of the insurance and mitigation models conditioning on covariates households that hold wind insurance tend to engage in greater levels of wind mitigation

measuring values for environmental resources under uncertainty abstract the relationship between conventional hicksian measures of the benefits from changes in environmental amenities under certainty and corresponding measures of valuation when the conditions of access to an uncertain environmental resource are changed is considered the analysis utilizes a contingent commodity framework with the assumption of state dependent preferences the findings suggest that the valuation of these changes will depend upon the availability of fair markets for diversifying risk moreover conventional measures of compensating or equivalent surplus will not necessarily bound the individual s valuation of a change in access to an uncertain environmental resource

individual risk attitudes measurement determinants and behavioral consequences this paper studies risk attitudes using a large representative survey and a complementary experiment conducted with a representative subject pool in subjects homes using a question asking people about their willingness to take risks in general we find that gender age height and parental background have an economically significant impact on willingness to take risks the experiment confirms the behavioral validity of this measure using paid lottery choices turning to other questions about risk attitudes in specific contexts we find similar results on the determinants of risk attitudes and also shed light on the deeper question of stability of risk attitudes across contexts we conduct a horse race of the ability of different measures to explain risky behaviors such as holdings stocks occupational choice and smoking the question about risk taking in general generates the best all round predictor of risky behavior

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

the recovery of risk preferences from actual choices since its introduction the expected utility hypothesis has been widely used in the construction of economic models more recently attention has focused on the conditions under which it is possible in principle to recover individual investors risk preferences from their demand for assets dybvig and polemarchakis 2 this paper represents a first attempt to recover preferences operationally from data on the actual demand for assets numerous difficulties are encountered in attempting to measure preferences toward risk in a real world setting preferences are revealed through the choices of an individual but in an uncertain world these choices also depend on his expectations of future events hence an immediate problem arises in separating the influences of each on such decisions problems can also arise in measuring other variables such as wealth which influence choices because of these difficulties efforts to classify and measure an individual s risk preferences have been confined to direct assessments in hypothetical environments e g kahneman and tversky 4 and keeney and raiffa 5 pp 203 212 2 in these studies the authors assumed that stated preferences are accurate indicators of actual behavior the question remains however whether individuals actually behave in the way their assessments predict the purpose of this note is to make some progress in answering this question in it an experiment is described which infers an individual s risk preferences from his actual choices in a real world environment specifically the risk aversion of a dealer in u s government securities is assessed directly and then estimated statistically from his actual demand for bills in the weekly treasury auctions the distribution of returns used in the analysis are calculated from the forecasts made by the dealer himself in addition to introducing new procedures for measuring preferences this study provides insights into the reliability of direct assessments in predicting the actual behavior

optimal self protection in two periods on the role of endogenous saving self protection is a costly investment to reduce the probability of loss this paper studies optimal self protection in a two period model with endogenous saving in a setting with a binary loss we show that prudence is negatively associated with the optimal level of self protection consistent with results obtained in single period models we provide intuition for this finding with the help of a recent approach based on stochastic dominance furthermore we determine the effect of interest rate risk on optimal self protection and study a model in which a decision maker engages in advance effort to increase the probability of facing a better risky situation all our results suggest that the understanding of advance self protection crucially hinges on whether the decision maker also uses saving to optimize intertemporal consumption utility if so the fact that self protection expenditures are upfront turns out to be irrelevant

adverse selection and moral hazard in insurance can dynamic data help to distinguish a standard problem of applied contracts theory is to empirically distinguish between adverse selection and moral hazard we show that dynamic insurance data allow to distinguish moral hazard from dynamic selection on unobservables in the presence of moral hazard experience rating implies negative occurrence dependence individual claim intensities decrease with the number of past claims we discuss econometric tests for the various types of data that are typically available finally we argue that dynamic data also allow to test for adverse selection even if it is based on asymmetric learning jel d82 g22 c41 c14

changing risks and optimal effort consider a decision maker who can engage in effort to increase the probability of facing a better risky situation intuition suggests that effort should increase when there is a greater difference between the best risky situation and the worse one we show that this intuition is not necessarily valid and we consider the cases of risk averters and risk lovers

higher order generalizations of arrow pratt and ross risk aversion a comparative statics approach abstract we analyze comparative risk aversion in a new way through a comparative statics problem in which for a cost agents can shift from an initial probability distribution toward a preferred distribution the ross characterization arises when the original distribution is riskier than the preferred distribution and the cost is monetary and the arrow pratt characterization arises when the original distribution differs from the preferred distribution by a simple mean preserving spread and the cost is a utility cost higher order increases in risk lead to higher order generalizations and the comparative statics method yields a unified approach to the problem of comparative risk attitudes

the demand for life insurance an application of the economics of uncertainty a comment objective function in this comment the demand for insurance equations are derived once again but this time the derivation will be direct without use of the taylor approximation it is demonstrated that campbell s approximate functions do not converge in the limit to the exact solutions for logarithmic utility functions for this class of utility functions campbell s approximate solution dictates nonoptimal holdings of life insurance for virtually all policies whose load factors are greater than zero the reason for this is that campbell s approximations contain utility derivatives only up to the second order as will be shown for the logarithmic utility function third and higher derivatives are significant the organization of this note is as follows first the optimal amount of insurance coverage i will be derived and compared with campbell s alternative ins second it is demonstrated that ins does not approximate i as the time horizon at becomes infinitely small i e as at 0 lim 1 ins third it is shown that at one point where the bequest and utility functions are identical and where insurance is sold with no load a 0 ins and i coincide fourth the optimal i and approximate ins life insurance coverage and their difference are calculated for some realistic parameter values finally a general result on approximations is given at the outset it is useful to reintroduce the problem notation and assumptions of campbell a wage earner of age x and retirement age r has present value of wage income from x to r rhx h and current marketable assets of w2 w at instant x he faces a lottery with probability 1 qat he survives at time x at and has wealth w h and utility function v and with probability qat he dies has wealth w and bequest utility function b the assumption is made that both the utility and the bequest functions are increasing and concave i e v 0

optimal coverage for incompletely reliable insurance abstract optimal actuarially fair coverage of insurance subject to default risk can be less or more than full depending upon the relation between the recovery rate under default and a positive trigger level that is independent of the insured s risk preference

moral hazard and dynamic insurance data this paper exploits dynamic features of insurance contracts in the empirical analysis of moral hazard we first show that experience rating implies negative occurrence dependence under moral hazard individual claim intensities decrease with the number of past claims we then show that dynamic insurance data allow to distinguish this moral hazard effect from dynamic selection on unobservables we develop nonparametric tests and estimate a flexible parametric model we find no evidence of moral hazard in french car insurance our analysis contributes to a recent literature based on static data that has problems distinguishing between moral hazard and selection and dealing with dynamic features of actual insurance contracts methodologically this paper builds on and extends the literature on state dependence and heterogeneity in event history data jel d82 g22 c41 c14

can group incentives alleviate moral hazard the role of pro social preferences abstract incentivizing unobservable effort in risky environments such as in insurance credit and labor markets is vital as moral hazard may otherwise cause significant welfare losses including the outright failure of markets ensuring incentive compatibility through state contingent contracts between principal and agent however is undesirable for risk averse agents we provide a theoretical intuition on how pro social preferences between agents in a joint liability group contract can ensure incentive compatibility two independent large scale behavioral experiments framed in an insurance context support the hypotheses derived from our theory in particular effort decreases when making agents payoff less state dependent but this effect is mitigated with joint liability in a group scheme where agents are additionally motivated by pro social concerns activating strategic motives slightly increases effort further particularly in non anonymous groups with high network strength the results support existing evidence on joint liability groups and further suggest that even if peer pressure to ensure effort provision is absent such group policies can improve efficiency when agents are pro social

incomplete contracts and excludable public goods abstract we study whether a firm that produces and sells access to an excludable public good should face a self financing requirement or alternatively receive subsidies that help to cover the cost of public goods provision the main result is that the desirability of a self financing requirement is shaped by an equity efficiency trade off while first best efficiency is out of reach with such a requirement its imposition limits the firm s ability of rent extraction hence consumer surplus may be higher if the firm has no access to public funds

skewness preference risk aversion and the precedence relations on stochastic changes this paper provides a general choice theoretic characterization of the trade off between risk and skewness whose importance in understanding risk taking behavior is well documented in empirical studies the condition under which the prudence measure kimball 1990 characterizes the strength of an individual s downside risk aversion against his own risk aversion is identified and interpreted in a unifying framework based on the concept of one stochastic dominant change preceding another and that of the desirability of a stochastic change the framework is also shown to be useful for a better understanding of the arrow pratt measure the stronger ross measure and the coincidence of the characterizations of downside risk aversion and prudence as well as the relationship between stochastic dominances of different degrees

looking for a guide to protect the environment the development of the precautionary principle abstract if the precautionary principle is to become the guide of the international community for environmental protection policies an economic interpretation of the principle is in order the analysis of case studies and a survey of the recent decision theoretic literature show the lack of a fully satisfactory economic model more generally various theoretical and empirical results show that the principle cannot be assumed to apply a priori though it has been proposed by international treaties as a rule of thumb for situations of scientific uncertainty the precautionary principle could actually be inefficient

on the correspondence between multivariate risk aversion and risk aversion with state dependent preferences abstract this paper establishes the correspondence between multivariate risk aversion and risk aversion with state dependent preferences it shows that the prerequisite for comparability of risk aversion in the multivariate case namely identical ordinal preferences on the commodity space corresponds to identical properly defined reference sets in the case of state dependent preferences for comparable decision makers the condition that the utility function of one is a concave transformation of that of the other on the commodity space corresponds to the condition that the expected utility of one is a concave transformation of that of the other on the reference set

an incomplete contract perspective on public good provision abstract this paper surveys what can be learned from recent advances in the incomplete contract literature to understand how public goods are or should be provided the paper starts with a section on the full information case that presents and discusses the classical samuelson condition on the optimal provision of public goods the rest of the paper presents results under asymmetric information it is constituted of two main parts in the first one the social planner has complete contracting ability we discuss the basic setting and assumptions of this comprehensive contracting approach and study the trade offs it generates the second part of the paper is devoted to the study of contracting incompleteness such incompleteness can emerge from various sources which we present and discuss we then study the case of a politically chosen decision maker and the consequences of its inability to commit for more than one period and of the ability for individuals to form groups finally we address the problem of the choice between public and private forms of public good provision the concluding section summarizes the main policy lessons

nonlinear economic growth some theory and cross country evidence abstract this paper aims to test the existence of different growth regimes that is of different relationships between growth rate and income level we propose a simple nonlinear growth model and test its empirical implications by estimating markov transition matrices and stochastic kernels we show that growth is indeed nonlinear a first phase of slow or zero growth is followed by a take off and finally by a phase of deceleration we discuss the relevance of these results with respect to the issue of convergence and reversibility of development in the light of models of structural change and technological diffusion

local risk aversion in the rank dependent expected utility model first order versus second order effects abstract we evaluate locally the risk premium of a lottery in the framework of the rdeu model as the sum of two terms the first is a measure of risk aversion while the second is a measure of spreading aversion

who buys and who sells options the role of options in an economy with background risk abstract in this paper we derive an equilibrium in which some investors buy call put options on the market portfolio while others sell them since investors are assumed to have similar risk averse preferences the demand for these contracts is not explained by differences in the shape of utility functions rather it is the degree to which agents face other non hedgeable background risks that determines their risk taking behavior in the model we show that investors with low or no background risk have a concave sharing rule i e they sell options on the market portfolio whereas investors with high background risk have a convex sharing rule and buy these options journal of economic literature classification numbers d52 d81 g11 g13

how general are risk preferences choices under uncertainty in different domains we analyze the extent to which individuals choices over five employer provided insurance coverage decisions and one 401 k investment decision exhibit systematic patterns as would be implied by a general utility component of risk preferences we provide evidence consistent with an important domain general component that operates across all insurance choices we find a considerably weaker relationship between one s insurance decisions and 401 k asset allocation although this relationship appears larger for more financially sophisticated individuals estimates from a stylized coverage choice model suggest that up to thirty percent of our sample makes choices that may be consistent across all six domains

a generalization of pratt arrow measure to nonexpected utility preferences and inseparable probability and utility the pratt arrow measure of local risk aversion is generalized for then dimensional state preference model of choice under uncertainty in which the decision maker may have inseparable subjective probabilities and utilities unobservable stochastic prior wealth and or smooth nonexpected utility preferences local risk aversion is measured by the matrix of derivatives of the decision maker s risk neutral probabilities without reference to true subjective probabilities or riskless wealth positions and comparative risk aversion is measured without requiring agreement on true probabilities risk neutral probabilities and their derivatives are shown to be sufficient statistics for approximately optimal investment and financing decisions in complete markets for contingent claims

a schur concave characterization of risk aversion for non expected utility preferences abstract this paper extends machina s econometrica 50 1982 277 323 characterization of risk aversion for frechet differentiable non expected utility preferences to the class of continuous non expected utility preferences without imposing any differentiability requirement the necessary and sufficient condition for risk aversion is derived in terms of the schur concavity of the preference functional when evaluated on finite lotteries with equal probabilities the latter is characterized by its marginal rate of substitution between a high income state and a low income state being not less than unity correspondingly the more risk averse the preference ordering the greater is its marginal rate of substitution between a high income state and a low income state finally we apply our results to characterize individual as well as comparative risk aversion for the class of g teaux differentiable preferences in terms of the concavity of the g teaux derivative or local utility function this extends machina s frechet based local expected utility analysis to the larger class of g teaux differentiable preferences journal of economic literature classification number d81

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

automobile insurance ratemaking in the presence of asymmetrical information automobile insurance is an example of a market where multi period contracts are observed this form of contract can be justified by asymmetrical information between the insurer and the insured insurers use risk classification together with bonus malus systems in this paper we show that the actual methodology for the integration of these two approaches can lead to inconsistencies we develop a statistical model that adequately integrates risk classification and experience rating for this purpose we present poisson and negative binomial models with regression component in order to use all available information in the estimation of accident distribution a bonus malus system which integrates a priori and a posteriori information on an individual basis is proposed and insurance premium tables are derived as a function of time past accidents and the significant variables in the regression statistical results were obtained from a sample of 19 013 drivers

asymmetric information in insurance general testable implications several recent articles on empirical contract theory and insurance have tested for a positive correlation between coverage and ex post risk as predicted by standard models of pure adverse selection or pure moral hazard we show here that the positive correlationproperty can be extended to general setups competitive insurance markets and cases where risk aversion is public we test our results on a french dataset our tests confirm that the estimated correlation is positive they also suggest the presence of market power

the value of a statistical life under ambiguity aversion abstract the paper shows that ambiguity aversion increases the value of a statistical life if the marginal utility of an increase in wealth is larger if one is alive rather than dead intuitively ambiguity aversion has a similar effect as an increase in the perceived baseline mortality risk and thus operates as the dead anyway effect a numerical example suggests however that ambiguity aversion cannot justify the substantial ambiguity premium apparently embodied in environmental policy making the paper also shows that ambiguity aversion decreases the marginal cost of individual self protection effort but may well decrease its marginal benefit so that the total effect of ambiguity aversion on self protection is unclear

background risk and self protection abstract the presence of background risk increases self protection effort or caution as long as an agent is prudent in addition the result extends to monetary self protection investment if wealth and consumption are complements

a continuous state space approach to convergence by parts abstract using a continuous state space approach this note extends feyrer s feyrer j 2003 convergence by parts manuscript dartmouth college available at http www dartmouth edu jfeyrer parts pdf study of the proximate determinants of the shape of the long run distribution of income per capita contrary to feyrer s finding of the primacy of total factor productivity tfp the results here imply that traps in both tfp growth and capital accumulation may matter

a rostovian model of endogenous growth and underdevelopment traps the paper presents a model which combines self sustained growth and underdevelopment traps into a common analytical framework we provide an analytical interpretations to rostow s observation that there is a decisive interval in the history of a society when growth becomes its normal condition and to the empirical evidence that some countries seem not to have achieved this stage yet the model exhibits aggregate non convexities and thresholds which separate a region where growth is solow type with convergence to a stationary steady state from a region where growth is romer type with endogenous self sustained growth in some critical stages of development there exist multiple equilibrium trajectories consistent with alternative sets of self fulfilling beliefs

endogenous private safety investment and the willingness to pay for mortality risk reductions when individuals cannot undertake safety improving expenditures the effect of an increase in the initial risk on the willingness to pay wtp for mortality risk reduction is positive because of the dead anyway effect when they can undertake safety improving expenditures the effect of an increase in the initial risk is governed by two effects the dead anyway effect which is positive and the high payment effect which is negative we treat the two types of risk reducing expenditures endogenous and exogenous as inputs in a safety improving technology function and find conditions that guarantee that the high payment effect dominates

r d implementation and stagnation a schumpeterian theory of convergence clubs we use schumpeterian growth theory to account for the divergence in per capita income that has taken place between countries since the mid 19th century as well as for the convergence that took place amongst the richest countries during the second half of the 20th century the argument is based on the premise that technological change underwent a fundamental transformation in the 19th century associated with new scientific ideas and the increasingly scientific content of new technologies countries then sorted themselves into three convergence groups r d implementation and stagnation a country s group membership depends on initial conditions as well as on fundamentals

firm s hedging behavior without the expected utility hypothesis abstract in this note we analyze the behavior of a competitive firm under price uncertainty and in the presence of a futures market we show that the separation property i e the independence of the firm s production level of the stochastic price s distribution holds even if the firm maximizes non expected utility functional and is not risk averse secondly we show that its behavior in the futures market is the same as in the classical environment even if one asks for a weaker notion of risk averseness finally we briefly analyze the state dependent case

disappearing defendants versus judgment proof injurers in this paper we analyse two ways in which liability can be reduced caps the judgment proof problem and proportional reductions the disappearing defendant problem we show that these two problems have different incentive effects and hence yield dissimilar levels of social welfare moreover when they occur simultaneously they may have offsetting effects we also show that the negligence rule with cause in fact may yield lower rather than higher levels of social welfare than strict liability finally we analyse the optimal setting of the negligence standard our model encompasses different precaution technologies as well as monetary v non monetary precautions

third degree stochastic dominance here f x and g x are less than cumulative probability distributionis where x is a continuous or discrete random variable representing the outcome of a prospect the closed interval a b is the sample space of both prospects the integral shown in rule 2 and those shown throughout the paper are stieltjes integrals recall that the stieltjes integral fb f x dg x exists if one of the functions f and g is continuous and the other has finite variation in a b let d1 d2 and d3 be three sets of utility functions x d1 is the set containing all utility functions with 4 x and 1 x continuous and 41 x 0 for all xe a b d2 is the set with x 1 x 2 x continuous and q j x 0 02 x o for all xc a b d3 is the set with x 1 x 2 x 3 x continuous and 1 x 04 2 x o o for all xc a b here 1 x denotes the ith derivative of x hadar and russell proved that rule 1 is valid for all cd1 and rutle 2 is valid for all ed2 the authors point out that the set of probability distributions that can be ordered by means of second degree stochastic dominance is in general larger than that which can be ordered by means of first degree stochastic dominance note that in rule 2 they assume that x is not only an increasing function of x but also exhibits weak global risk aversion a condition guaranteed by requiring the second derivative of x to be nonpositive in this paper a condition which will be called third degree stochastic dominance is considered it is based on the following assumption about the form of the utility function x from a normative point of view one expects the risk premium associated with an uncertain prospect to become smaller the greater is the individual s wealth the plausibility and implications of this assumption h ave been explored by john pratt as well as others the risk premium of an uncertain prospect is that amount by which the certainty equivalent of the prospect differs from its expected value in mathematical terms given the prospect f x with expected value a the corresponding risk premium t is obtained by solving the following equation rb

incorporating a stochastic element into decision theories abstract recent papers by harless and camerer 1994 and hey and orme 1994 have employed two rather different models of errors in decision making under uncertainty the present paper develops a third approach and shows how different stochastic specifications of the same deterministic core theory may generate very different and sometimes surprising hypotheses

risk aversion and the propensities for self insurance and self protection for a risk averse individual the methods for reducing the expected financial impact of a loss include reducing the severity of any loss that occurs self insurance and reducing the probability of the occurrence of a loss self protection the literature on this topic has pointed to several anomalies whereby the use of self protection and self insurance yield quite unsimilar results for example ehrlich and becker 5 show that self insurance is always a substitute for market insurance an insurance company s indemnifying a loss whereas self protection and market insurance might be complements dionne and eeckhoudt 4 show that a more risk averse consumer would always invest more in self insurance activities but not necessarily more in self protection activities they argue 4 42 that this result is counterintuitive and provides an exception to the widely accepted result that increased risk aversion reduces risky activities ehrlich and becker 5 639 argue that the incentive to self protect is not so dependent on attitude towards risk both of the above papers seem to take for granted that self protection activities reduce the riskiness of the final wealth distribution however as we argue below this is not the case if riskiness is defined as in rothschild and stiglitz 14 even if we use the variance as our risk measure we do not always reduce risk via self protection dionne and eeckhoudt suggest that these results might not be robust enough to extend to models that incorporate random initial wealth risk and state dependent preferences we show that the model seems to be very robust we also explain why self protection is not at all an exception to the long standing result of arrow 1 whereby more risk averse individuals undertake a lower

contract renegotiation and coasian dynamics consider a long term relationship between a seller and a buyer whose valuation for a per period service or a durable good is private as trade progresses the valuation will be partially revealed and it may be impossible for the parties to commit ex ante not to take advantage of this we analyse this situation first by supposing that the parties can sign a sequence of short term contracts and secondly by supposing that they can sign a long term contract but cannot commit not to renegotiate it later we find a close relationship in the second case between the optimal long term contract and the non commitment outcome in the standard coasian durable good model our results also have implications for hidden information principal agent models

evidence on adverse selection equilibrium signaling and cross subsidization in the insurance market the configuration of equilibrium in the market for automobile collision insurance is examined empirically by representing the premium deductible menu and the demand function as a standard hedonic system using contractual data from a representative insurer we estimate a reduced form hedonic premium equation and the inverse of the marginal bid equation for insurance coverage the data reveal an equilibrium with adverse selection and market signaling but lead us to reject the hypothesis that high risks receive contracts subsidized by low risks

valuing risky projects option pricing theory and decision analysis in the academic literature and professional practice there are a number of alternative and apparently competing methods for valuing risky projects in this paper we compare and contrast three different approaches risk adjusted discount rate analysis option pricing analysis and decision analysis focusing on the last two we show that in contrast to some of the claims made in the real options literature when both option pricing and decision analysis methods are correctly applied they must give consistent results we also explore ways in which option pricing and decision analysis methods can be profitably integrated in particular we show how option pricing techniques can be used to simplify decision analysis when some risks can be hedged by trading and conversely how decision analysis techniques can be used to extend option pricing techniques to problems with incomplete securities markets

risk preferences in the psid individual imputations and family covariation unobserved heterogeneity greatly complicates empirical analysis in economics unobserved heterogeneity in preferences is particularly troublesome because there are so few theoretical restrictions on the distribution of preference parameters in the population therefore despite potential pitfalls we have developed direct survey measures of preference parameters based on hypothetical choices and appropriate econometric techniques for dealing with the inevitable measurement error in any such measures our work on survey measures of preference parameters focuses on risk tolerance robert b barsky f thomas juster kimball and shapiro 1997 bjks hereafter and kimball claudia r sahm and shapiro 2008 kss hereafter time preference and the elasticity of intertemporal substitution bjks and labor supply elasticities kimball and shapiro 2008

the impact of prudence on optimal prevention revisited this paper re examines the link between absolute prudence and self protection activities we show that the level of efiort chosen by an agent with positive and decreasing absolute prudence is larger than the optimal efiort chosen by a risk neutral agent if the degree of absolute prudence is less than a threshold that is utility independent and empirically veriflable we explain this threshold by a trade ofi between the variation of the variance and the level of the third moment of the loss distribution we also discuss our result in terms of skewness our contribution extends the model of eeckhoudt and gollier 2005

a more robust definition of subjective probability the goal of choice theoretic derivations of subjective probability is to separate a decisionmaker s underlying beliefs subjective probabilities of events from their preferences attitudes toward risk classical derivations have all relied upon some form of the marschak samuelson independence axiom or the savage sure thing principle which imply that preferences over lotteries conform to the expected utility hypothesis this paper presents a choice theoretic derivation of subjective probability in a savage type setting of purely subjective uncertainty which neither assumes nor implies that the decisionmaker s preferences over lotteries necessarily conform to the expected utility hypothesis copyright 1992 by the econometric society

asset returns and state dependent risk preferences we propose a consumption based capital asset pricing model with state dependent risk aversion the corresponding risk premium includes consumption risk and the risk associated with variations in preferences our model can be estimated without specifying the functional form linking risk aversion with state variables the estimates are based on markov chain monte carlo estimation of exact discrete time parameterizations for linear diffusion processes we find estimates for relative risk aversion that are reasonable by usual standards correlated with both consumption and returns and indicative of an additional preference risk of holding the assets

risk aversion in the theory of expected utility with rank dependent probabilities expected utility with rank dependent probability theory is a model of decision making under risk where the preference relations on the set of probability distributions is represented by the mathematical expectation of a utility function with respect to a transformation of the probability distributions on the set of outcomes this paper defines based on g teaux differentiability measures of risk aversion for such preferences which characterize the relation more risk averse and applies these measures to the analysis of unconditional and conditional portfolio choice problems

the invention of the independence condition for preferences this paper discusses the history and interrelations of three central ideas in preference theory the independence condition in decision under risk the sure thing principle in decision under uncertainty and conjoint independence for multiattribute decisions and consumer theory independence was recognized as an important component of decision under risk in the late 1940s by jacob marschak john nash herman rubin and norman dalkey and first appeared in publication in marschak marschak j 1950 rational behavior uncertain prospects and measurable utility econometrica18 111 141 and nash nash j f 1950 the bargaining problem econometrica18 155 162 the sure thing principle can be credited to savage savage l j 1953 une axiomatisation du comportement raisonnable face i l incertitude colloq internal centre national rech sci 40 econometrie 29 40 savage l j 1954 the foundations of statistics wiley new york 2nd edn dover new york 1972 conjoint independence for consumer theory was introduced by sono sono m 1943 the effect of price changes on the demand and supply of separable goods in japanese kokumin keisai zasshi74 1 51 and leontief leontief w w 1947a a note on the interrelation of subsets of independent variables of a continuous function with continuous first derivatives bull amer math soc 53 343 350 leontief w w 1947b introduction to a theory of the internal structure of functional relationships econometrica51 361 373 a form of it can also be recognized in samuelson samuelson p a 1947 foundations of economic analysis harvard university press cambridge ma presented earlier in samuelson samuelson p a 1940 foundations of analytical economics the observational significance of economic theory ph d dissertation harvard university boston ma independence and the sure thing principle are equivalent for decision under risk but in a less elementary way than has sometimes been thought the sure thing principle for decision under uncertainty and conjoint independence are identical in a mathematical sense the mathematics underlying our three preference conditions has an older history the independence condition for decision under risk can be recognized in the characterization of associative means and conjoint independence for multiattribute decisions in solutions to the generalized associativity functional equation

estimation of state dependent utility functions using survey data surveys of individual s risk dollar trade offs illuminate not only the local trade off rates but also can be used to address more fundamental questions about the structure of utility functions this largely unexplored empirical area is investigated by developing an econometric technique to estimate utility functions based on survey data on risk dollar trade offs for minor health effects the empirical tests indicate that for all but one of the temporary health effects considered consumers treat injuries as tantamount to a drop in income implying that the health impact does not alter the structure of the utility function in a fundamental way copyright 1991 by mit press

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

changes in background risk and risk taking behaviour economic decision making under uncertainty often takes place in the presence of multiple risks and in markets that are less than complete as a consequence choices about endogenous risks sometimes must be made while simultaneously facing one or more immutable exogenous background risks that are not under the control of the agent and that are independent of endogenous risks it is somehow natural to assume that an exogenous deterioration in background wealth will cause an individual to take more care elsewhere if we define a deterioration for example as making the individual poorer by removing a fixed amount of initial wealth we know from pratt 1964 that decreasing absolute risk aversion dara of an individual s von neumann morgenstern utility function yields this natural result if on the other hand background wealth becomes riskier due to the addition of a zero mean risk that is also statistically independent of all other risks behavior will be more risk averse if and only if preferences are risk vulnerable as defined by gollier and pratt 1996 risk vulnerability described below in section 4 is a stronger notion than dara and includes proper risk aversion pratt and zeckhauser 1987 and standard risk aversion eeckhoudt and kimball 1992 kimball 1993 as particular cases but a deterioration in background wealth may encompass more complicated distribution changes than the introduction of another statistically independent risk in this paper we examine background wealth deteriorations that take the form of both general firstand second degree stochastic dominance changes in risk fsd and ssd respectively in particular we determine conditions that are both necessary and sufficient for each of these two types of background risk changes to imply more risk averse behavior on the part of the individual for the case of fsd changes this condition turns out to be ross stronger characterization of decreasing absolute risk aversion in the case of general ssd changes in the distribution of background wealth the condition derived is a stronger version in ross sense of the conditions characterizing preferences that are locally risk vulnerable in the sense of gollier and pratt the necessary and sufficient conditions derived are fairly restrictive upon preferences however if we take as positive behavior that individuals act in a more risk averse manner whenever the distribution of background wealth deteriorates these conditions place canonical limits upon appropriate utility representations at the very least they

on the evolution of the world income distribution the post world war ii period has seen substantial changes in the distribution of gdp per worker around the world in the upper half of the distribution a number of countries have exhibited large increases in income relative to the richest countries in the bottom half several countries have seen incomes fall relative to the richest countries the net result of these changes is a movement in the shape of the world income distribution from something that looks like a normal distribution in 1960 to a bi modal twin peaks distribution in 1988 projecting these changes into the future suggests a number of interesting ndings first it seems likely that the united states will lose its position as the country with the highest level of gdp per worker second growth miracles have been more common in recent decades than growth disasters if these dynamics continue the future income distribution will involve far more rich countries and far fewer poor countries than currently observed

some stronger measures of risk aversion in the small and the large with applications the arrow pratt measures of risk aversion for von neumann morgenstern utility functions have become workhorses for analyzing problems in the microeconomics of uncertainty they have been used to characterize the qualitative properties of demand in insurance and asset markets to examine the properties of risk taking in taxation models and to study the interaction between risk and life cycle savings problems to name just a few applications equally importantly they have generated the linear risk tolerance class of utility functions which has provided canonical examples in such diverse areas as portfolio theory and the theory of teams despite these successes there have been a number of areas for which the results have been weaker than hoped it is natural to use the risk aversion measures to compare the behavior of individuals in risky choice situations for example consider the individual portfolio choice problem in a two asset world with a riskless asset and a risky asset if individual a has a uniformly higher arrow pratt coefficient of risk aversion than individual b then b will always choose a portfolio combination with more wealth invested in the risky asset but suppose that both assets are risky now there is no obvious sense in which the more risk averse individual can be said to hold a less risky portfolio but it seems strange that such a simple alteration should destroy the analytics which support the basic intuition similarly consider the basic insurance problem if one individual a is more risk averse than another b in the arrow pratt sense it follows that a will pay a larger premium to insure against a random loss than will b typically though an individual evaluates partial rather than total insurance that is only some gambles can be insured against and others must be retained in this case even when the gambles which are retained are independent from those which are insured it is no longer true that the individual whose arrow pratt measure of risk aversion is higher will pay a larger insurance premium the situation is no better when we consider comparative statics exercises for a single individual decreasing absolute risk aversion in the sense of arrow and

population technology and growth from malthusian stagnation to the demographic transition and beyond this paper develops a unied growth model that captures the historical evolution of population technology and output it encompasses theendogenous transitionbetween three regimes that have characterized economic development the economy evolves from amalthusianregime wheretechnologicalprogressis slow andpopulationgrowthprevents anysustainedriseinincomepercapita intoapost malthusianregime wheretechnological progress rises and population growth absorbs only part of output growth ultimately a demographic transition reverses the positive relationship between income and population growth andtheeconomyentersamoderngrowthregimewithreducedpopulationgrowth

efficient mechanisms for public goods with use exclusions constrained efficient provision of an excludable public good is studied in a model where preferences are private information the provision level is asymptotically deterministic making it possible to approximate the optimal mechanism with a mechanism that provides a fixed quantity of the good and charges fixed user fees for access in general the fixed fees involve third degree price discrimination but if names are uninformative about preferences the analysis provides a justification for average cost pricing copyright 2004 wiley blackwell

do risk lovers invest in self protection we show that there is a class of risk lovers who optimally choose a positive level of self protection investment in most cases a risk lover increases his self protection investment as he becomes less downside risk averse

examining risk preferences under high monetary incentives experimental evidence from the people s republic of china several experimental sessions were conducted to elicit certainty equivalents for a sequence of lotteries involving real monetary outcomes the opportunity to conduct sessions in the people s republic of china afforded the ability to offer very large monetary incentives relative to subjects living costs in the highest payoff condition subjects earned three times their normal monthly revenue in the course of a two hour experiment results indicate a statistically significant impact of the level of monetary incentives on revealed risk preferences however even under extreme monetary incentives subjects demanded amounts well in excess of expected value for low probability gain prospects copyright 1992 by american economic association

asymmetric information bargaining problems with many agents a yes or no decision must be made about some issue all agents must agree the coase theorem asserts that the efficient outcome will always result suppose the value positive or negative that an individual attaches to an affirmative decision is privately known to that individual it is proved under very mild conditions that with independent types as the number of agents increases the probability of an affirmative efficient decision goes to zero an example in which it is common knowledge that an affirmative decision is efficient and yet the probability of such a decision goes to zero is given

economic integration and political accountability abstract this paper studies to what extent economic integration or globalization influences the accountability of politicians assuming that politicians are controlled by the voters through reelection rules we analyze to what extent economic integration affects the form of those rules and the efforts made by politicians we define economic integration by the existence of policies and shocks interdependences between countries then from a political point of view this integration is shown to be a two sided phenomenon shock interdependence allows yardstick comparison increases political accountability and therefore efforts while policy interdependence induces a lack of responsibility and harms the extent to which politicians can be controlled

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

risk aversion in rent seeking and rent augmenting games the effects of risk aversion are examined for two types of expenditures in rent seeking contests a rent seeking expenditures which improve the probability that the rent is obtained and b rent augmenting expenditures which increase the size of the rent to be awarded risk aversion is shown to reduce expenditures of type b unambiguously while having an indeterminate effect on those of type a these two contrasting results are shown to derive from the very different effects rent seeking and rent augmenting expenditures have on the riskiness of a player s position

a definition of uncertainty aversion a definition of uncertainty or ambiguity aversion is proposed it is argued that the definition is well suited to modelling within the savage as opposed to anscombe and aumann domain of acts the defined property of uncertainty aversion has intuitive empirical content behaves well in specific models of preference multiple priors and choquet expected utility and is tractable tractability is established through use of a novel notion of differentiability for utility functions called eventwise differentiability

exploring the consistency of higher order risk preferences this study measures higher order risk preferences and their consistency we explore the role of country differences the variation of stakes and the framing of lotteries we observe a robust dichotomous pattern of choice behavior in china in the usa and in germany the majority of choices are consistent with mixed risk aversion or mixed risk loving behavior we also find this pattern after a tenfold increase in the stakes finally our results reveal that this pattern is strengthened if the lotteries are displayed in compound rather than reduced form in a follow up study we explore potential explanations for this framing effect

regulating a monopolist with unknown costs we consider the problem of how to regulate a monopolistic firm whose costs are unknown to the regulator the regulator s objective is to maximize a linear social welfare function of the consumers surplus and the firm s profit in the optimal regulatory policy prices and subsidies are designed as functions of the firm s cost report so that expected social welfare is maximized subject to the constraints that the firm has nonnegative profit and has no incentive to misrepresent its costs we explicitly derive the optimal policy and analyze its properties in their classic papers dupuit 2 and hotelling 5 considered pricing policies for a bridge that had a fixed cost of construction and zero marginal cost they demonstrated that the pricing policy that maximizes consumer well being is to set price equal to marginal cost and to provide a subsidy to the supplier equal to the fixed cost so that a firm would be willing to provide the bridge this first best solution is based on a number of informational assumptions first the demand function is assumed to be known to both the regulator and to the firm while the assumption of complete information may be too strong the assumption that information about demand is as available to the regulator as it is to the firm does not seem unnatural a second informational assumption is that the regulator has complete information about the cost of the firm or at least has the same information about cost as does the firm this assumption is unlikely to be met in reality since the firm would be expected to have better information about costs than would the regulator as weitzman has stated an essential feature of the regulatory environment i am trying to describe is uncertainty about the exact specification of each firm s cost function in most cases even the managers and engineers most closely associated with production will be unable to precisely specify beforehand the cheapest way to generate various hypothetical output levels because they are yet removed from the production process the regulators are likely to be vaguer still about a firm s cost function 12 p 684 as this observation suggests it is natural to expect that a firm would have better information regarding its costs than would a regulator the purpose of this paper is to develop an optimal regulatory policy for the case in which the regulator does not know the costs of the firm one strategy that a regulator could use in the absence of full information about costs is to give the firm the title to the total social surplus and to delegate the pricing decision to the firm in pursuing its own interests which would then be to maximize the total social surplus the firm would adopt the same marginal cost pricing strategy that the regulator would have imposed if the regulator had

precautionary saving in the small and in the large the theory of precautionary saving is shown to be isomorphic to the arrow pratt theory of risk aversion making possible the application of a large body of knowledge about risk aversion to precautionary saving and more generally to the theory of optimal choice under risk in particular a measure of the strength of the precautionary saving motive analogous to the arrow pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving and to give a new interpretation of the dreze modigliani substitution effect copyright 1990 by the econometric society

public good provision with many participants for a nonexcludable public good with benefit and cost functions independent of the number of participants this paper studies second best allocations under bayesian interim incentive compatibility and interim individual rationality as the number of participants becomes large second best provision levels converge in distribution to first best levels if the latter are bounded second best provision levels become large in absolute terms but small relative to first best levels if benefit and cost functions are isoelastic in contrast for an excludable public good the ratio of second best to first best levels is bounded away from zero