the market value of reducing cancer risk hedonic housing prices with changing information 1 introduction market evidence on the value of a statistical life invariably consists of cross sectional evidence on risks and prices or wages at a point in time if information about the level of risk changes over time and people incorporate this information in a rational manner there will be a corresponding price response on the basis of these temporal changes one can estimate the market price risk tradeoff eliminating many confounding time invariant effects that cannot be controlled for using cross sectional data this paper examines the market response to the release of government information about the level of risk at hazardous waste sites and provides insight into the rationality of this response studies based on experimental evidence and survey data often find that individual beliefs may deviate from objective risk levels 1 people often overestimate highly publicized risks and mortality risks in the case of hazardous waste risks bias in risk beliefs often leads to considerable public reaction and pressure for site cleanups which may be an inefficient outcome by using market data one can examine whether this intense public reaction carries over to contexts in which private money is at stake government agencies frequently use information provision as a regulatory device particularly since the advent of the right to know movement of the 1980s examples of information provision efforts include the food and drug administration s requirement that many prescription drugs indude information inserts the department of housing and urban development s requirement that sellers of houses built before 1950 inform buyers about the presence of lead based paints and the environmental protection agency s epa requirement that manufacturing facilities report their annual releases of chemicals above a threshold amount for a list of over 600 substances such regulations imply a belief that citizens can learn from information about risk and rationally adjust their prior beliefs towards the objective risk level in light of the information this article provides market evidence to bolster the results of some survey studies of information transfer that suggest that individuals revise their risk beliefs in response to new information 2 the u s federal policy dealing with hazardous waste sites is known as the superfund program the most hazardous sites are targeted for cleanup and placed on a government priority roster called the national priorities list npl extension of the classic theory of compensating differentials to the housing market implies that environmental disamenities such as hazardous waste sites will reduce housing prices rosen 1974 the negative impact of hazardous waste sites on the housing prices of nearby residences is well documented for example in a previous study gayer hamilton and viscusi 2000 we used an analysis that focused on the sale of 16 928 houses from 1988 to 1993 that surround superfund sites in greater grand rapids michigan we found that before the epa released its risk report a reduction in the cancer risk from neighborhood superfund sites by the mean level of risk would increase the average value of a house by 238 in 1996 dollars 3 to estimate this willingness of residents to pay to avoid cancer risks before the release of the epa s risk report we assumed that residents prior beliefs were equal to the objectively measured risks suggested by the report thus this analysis was based on the very strong informational assumption that residents could in effect predict the results of the epa s site specific risk assessments before the release of the report the price risk tradeoff implied a value of a statistical cancer case of 51 million once the epa released its risk information the implied value of a statistical cancer case was 4 million these results suggest that after the release of the epa s risk report revealed preferences for avoiding superfund risks were consistent with surveys of the value of a statistical life in the labor market

willingness to pay for stochastic improvements of future risk under different risk aversion abstract within a general intertemporal decision making framework this work shows one individual with more k th degree k 2 n ross risk aversion always chooses more current paying to improve his future payoff distribution when such stochastic improvement satisfies the n th degree mean preserving stochastic dominance moreover when stochastic improvement of the future payoff distribution is not mean preserving the notions of linearly quadratically restricted more ross risk aversion proposed by eeckhoudt liu and meyer 2017 can help provide a clear cut comparative statics analysis

precautionary saving and the notion of ambiguity prudence this letter develops a set of simple conditions under which an individual is willing to save an extra amount of money due to the presence of ambiguity concerning his second period wealth this extra precautionary saving motive is naturally associated with the notion of ambiguity prudence

on the simple economics of advertising marketing and product design we propose a framework for analyzing transformations of demand such transformations frequently stem from changes in the dispersion of consumers valuations which lead to rotations of the demand curve in many settings profits are a u shaped function of dispersion high dispersion is complemented by niche production and low dispersion is complemented by mass market supply we investigate numerous applications including product design advertising marketing and sales advice and the construction of quality differentiated product lines we also suggest a new taxonomy of advertising distinguishing between hype which shifts demand and real information which rotates demand

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

prudence with respect to ambiguity under expected utility prudence is equivalent to a positive third derivative of utility and plays a crucial role in precautionary saving behaviour eeckhoudt and schlesinger 2006 proposed behavioural definitions of prudence and of higher order risk preferences the present paper proposes a similar definition for prudence with respect to ambiguity i e situations in which objective probabilities are not available implications for several ambiguity models are derived ambiguity prudence is implied by hansen and sargent s 2001 multiplier preferences empirically correlates with financial behaviour and plays a key role in prevention behaviour this article is protected by copyright all rights reserved

tests for the role of risk aversion on input use for risk averting agents risks alter production decisions while the existence of institutions to insure against adverse states of nature will likely restore decisions toward levels under risk neutrality in this article conditions are identified on a stochastic technology to test h that risk averters choose smaller input levels than risk neutral agents and h that an increase in risk aversion reduces input use a robust statistical method to test for dominance is adapted to stochastic production relations it is found that h is likely true for nitrogen application on iowa corn weaker evidence is found in favor of h

nontraded assets and the capm abstract asset pricing models that rely on the presence of non tradable assets such as human wealth to solve the equity premium puzzle have to confront the effect of decreasing absolute risk aversion rich investors who according to micro data hold the stock market and whose behavior is the one that matters at the margin for the determination of equilibrium asset prices are less risk averse ceteris paribus than the average consumer this paper highlights a channel through which the effect of decreasing absolute risk aversion can be overcome the existence of a positive correlation between the rates of return on traded assets and on the human capital of marginal investors

an analytical approximate solution to the problem of precautionary savings abstract this paper considers the problem of precautionary savings for an expected utility specification with finite horizon the exact solution is known for only a few cases numerical methods have limited applications because of bellman s curse of dimensionality this paper derives a simple analytical approximate solution for a general specification of the felicity function which is linear in the variance of the innovations on human wealth numerically the approximation is very accurate for realistic values of the parameters of the problem

house values incomes and industrial pollution abstract this paper analyzes the effect of polluting manufacturing facilities on the economic characteristics of nearby neighborhoods it tests the hypothesis that communities exposed to high levels of pollution will have lower house prices and poorer residents than cleaner locations the econometric model treats pollution and income as simultaneously determined variables the multiple equation fixed effects model attempts to account for cross section and time varying biases it uses toxics release inventory tri and census data from the 1980s for the six new england states i employ a new measure of the change in exposure to pollution over the 1980s for census tracts the estimates suggest that being a mile closer to a polluting manufacturing plant reduces house values by 1 9 which is smaller than estimates from existing studies however the equivalent single equation estimate suggests misleadingly that pollution has a positive effect on house values

the ex ante impact of conflict over infrastructure settings on residential property values the case of paris s suburban zones the presence of nearby public facilities has an impact on real estate values for this reason the market may reasonably anticipate that public infrastructure projects will affect house prices but undesirable and semi desirable facility location choices may be contested by nearby residents as they are a source of negative externalities or expectations in paris s suburban zones opposition to these infrastructures is frequent and the official announcement of a project does not automatically mean it will be implemented through three case studies we explore the way in which the expectation mechanism is affected by legal conflicts driven by nearby residents we suppose that expectations depend on the probability that a given project will be realised the variation is captured by a hedonic model as conflicts amplify or reduce the certainty of the new facility s arrival market perceptions of the infrastructure vary

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

devaluation fiscal deficits and the real exchange rate this article examines the use of fiscal policies to sustain the effects of a nominal devaluation on the real exchange rate it is shown that the magnitude of the change in the real exchange rate depends not only on the size of the devaluation and the degree of fiscal adjustment but also on the means by which the fiscal deficit is reduced the change in the nominal exchange rate necessary to maintain the depreciation of the real exchange rate will depend on whether the fiscal deficit is eliminated by increasing taxes or by reducing government expenditures on traded and nontraded goods the required depreciation of the domestic currency will be larger if the fiscal deficit is reduced by increasing taxes than it will be if the deficit is cut by lowering government expenditures further the depreciation would be smaller if the cuts in expenditure fell on traded rather than nontraded goods this result implies that the authorities must ensure consistency between exchange rate action and policies to reduce fiscal imbalances in order to achieve a desired level of the real exchange rate necessary to attain balance of payments equilibrium the real exchange rate represents a key relative price in the economy and policies to change it are often the centerpiece of adjustment programs designed to improve international competitiveness and shift resources toward the production of tradable goods consequently it is critical for policymakers to have some idea of the magnitude and time path of the likely response of the real exchange rate to nominal exchange rate action it is a well accepted proposition however that a nominal devaluation will only have a transitory effect on the real exchange rate in the long run domestic wages and prices will rise by the full amount of the devaluation and the real exchange rate will return to its original level to alter the real exchange rate on a permanent basis therefore devaluation has to be supplemented by policies that restrain the increase in domestic factor costs that results from a devaluation generally speaking the effects of a devaluation on the real exchange rate can

what do property values really tell us a hedonic study of underground storage tanks hedonic property value models are widely used but are susceptible to potentially invalid conjectures based on the assumed measure of environmental quality this paper focuses on an application where this is of particular concern leaking underground storage tanks i estimate a hedonic model using quasi experimental and spatial econometric techniques similar to previous studies i examine how house prices vary with distance to the disamenity this approach yields little evidence that prices are adversely impacted however to better measure risks i utilize home specific data on groundwater well tests and correspondence from regulators and find an 11 depreciation when households are well informed

precaution and liquidity in the demand for housing we exploit cross sectional mortgage data to investigate the importance of liquidity constraints and a precautionary motive in the demand for housing households that are not liquidity constrained consume housing services essentially as the life cycle hypothesis suggests but with a significant precautionary component households that are liquidity constrained in terms of not meeting standard loan to value or payments to income constraints are similar to unconstrained households in most respects including the precautionary motive but they respond somewhat less to fluctuations in their lifetime income suggesting some influence of bank induced liquidity constraints we additionally find however that banks enforce liquidity constraints only weakly jel d91 d12 r21 i introduction the benchmark theory in the economics of consumption is the life cycle or permanent income hypothesis lcpi based on the work of modigliani and brumberg 1954 and friedman 1957 its empirical validity is sometimes questionable especially when compared against alternatives that incorporate liquidity constraints or the precautionary motive for saving see for instance deaton 1992 for a survey rejection of the lcpi may however be just a manifestation of the poor quality of consumption data at the micro level these data are typically subject to the reporting biases and omissions inherent in consumer surveys there are further difficulties in measuring a desired stream of consumption services nondurable consumption goods are a small fraction of total consumption and in the case of food essentials hardly a consumer choice variable durable consumption goods have the feature that they are lumpy and that the consumption services at any point in time are hard to measure we propose to test the lcpi at the micro level with a quite different type of data the data are obtained from the residential mortgage finance database collected by the national association of realtors they are based on actual home purchases and the associated mortgage transactions reported by realtors and thus avoid some of the reporting biases of the consumer surveys more important they allow us to accurately identify households that in principle have instantaneous access to additional liquidity by lowering the down payment for the house purchase or increasing the size of the loan further the purchase of a house provides an accurate measure of a relatively large fraction of consumption services obtained for a medium to long horizon and measured at the time of the consumption decision although our data also have some serious shortcomings they allow a look at the lcpi from an unconventional vantage point perhaps the most influential study employing the standard consumer survey in testing the lcpi at the micro level is that of hall and mishkin 1982 it examines food expenditure from the panel study of income dynamics one of their key results is that consumption tracks income more closely than would be expected under the lcpi they demonstrate that this result could be explained by assuming a group of liquidity constrained consumers consuming their income at each point in time of 20 of the total sample some of the drawbacks of this study are the use of food expenditures to represent consumption the underreporting of income and absence of proper wealth data inherent in the consumer survey and the associated inability to individually separate liquidity constrained consumers from the rest of the sample several previous studies have attempted to improve on this way of testing the lcpi by examining other data sets bernanke 1984 used data on durable consumption goods automobiles to overcome the drawbacks of using food consumption in the hall and mishkin study his results support the lcpi but are still suspect because of possible reporting biases and the lack of good wealth and savings observations

nimby or not exploring the relevance of location and the politics of voiced opinions in renewable energy siting controversies local protests against renewable energy facilities have added fuel to the debate about the so called nimby not in my back yard effect this paper identifies six variables that can hamper the comparison between different public perception studies and offers two broad conclusions on aggregate proximity does have strong influence on public attitudes to proposed projects but the nature strength and spatial scale of this effect may vary according to local context and value of the land residents of stigmatised places are more likely to welcome facilities that are relatively green while people who derive a more positive sense of identity from particular rural landscapes are likely to resist such potential developments especially if they also live there secondly the fear of being branded a nimby and the positive ethics associated with the notion of renewable are both likely to colour the responses of many interviewees these aspects need to be clarified and accounted for in analyses of elicited responses both quantitative and qualitative if we are to improve our understanding of the social construction of individual attitudes in siting conflicts

directional heterogeneity in distance profiles in hedonic property value models abstract in environmental economics hedonic property value hpv models have often employed distance from a localized environmental disamenity as a proxy for perceived risk the magnitude of a distance effect on housing prices however may depend upon the direction in which it is being measured we generalize conventional distance models to allow for continuously varying directional effects by converting from cartesian to polar coordinates a simple empirical example for housing prices around woburn massachusetts between 1988 and 1996 illustrates how failure to allow for directional heterogeneity can obscure otherwise statistically significant distance effects in hpv

a consumption based theory of the environmental kuznets curve abstract most theories about the inverted u relationship between pollution and income termed the environmental kuznets curve ekc are production side theories emphasizing pollution and abatement technologies production side theories are implicitly based on the assumption of low factor mobility and the absence of pollution as a variable in the utility function both assumptions are called into question by the empirical evidence of ekcs for i pollutants that are long lived and not easily shiftable and ii regional cross sections with free labor mobility hazardous waste sites are a prime example this paper develops a stylized model of the ekc based on perfect mobility of households and labor it represents the first attempt at developing a consumption side model of the ekc

inflation expectations and behavior do survey respondents act on their beliefs we compare the inflation expectations reported by consumers in a survey with their behavior in a financially incentivized investment experiment the survey is found to be informative in the sense that the beliefs reported by the respondents are correlated with their choices in the experiment more importantly we find evidence that most respondents act on their inflation expectations showing patterns consistent with economic theory respondents whose behavior cannot be rationalized tend to have lower education and lower numeracy and financial literacy these findings help confirm the relevance of inflation expectations surveys and provide support to the microfoundations of modern macroeconomic models

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

do you trust your insurer ambiguity about contract nonperformance and optimal insurance demand abstract we study optimal insurance demand for a risk and ambiguity averse consumer under ambiguity about contract nonperformance ambiguity aversion lowers optimal insurance demand and the consumer s degree of ambiguity aversion is negatively associated with the optimal level of coverage a more pessimistic belief and greater ambiguity may increase or decrease the optimal demand for insurance and we determine sufficient conditions for a negative effect we also discuss wealth effects and evaluate the robustness of our results by considering several alternative models of ambiguity aversion our findings show how ambiguity about contract nonperformance can undermine the functioning of insurance markets making it a concern for regulators caution is required though because demand reactions are only imperfectly informative about the welfare effects of ambiguity about contract nonperformance

revenues and welfare in auctions with information release abstract this paper studies information release in symmetric independent private value auctions with multiple objects and unit demand we compare effects on welfare to those on the seller s revenue applying the dispersive order the previous literature could only identify settings in which welfare provides the stronger incentives for information release we generalize the dispersive order to k and k m dispersion these new criteria allow us to systematically characterize situations in which revenue provides stronger incentives than welfare and vice versa k m dispersion leads to a complete classification if signal spaces are finite and sufficiently many bidders take part

environmental justice in the oil refinery industry a panel analysis across united states counties abstract environmental injustice due to economic inequality and its correlates and consequences has been a focus for researchers and policy makers alike over many years with much of that research focusing on race as the major determinant of inequality in this paper we extend this literature by focussing on emissions from the oil refinery industry at the community level in particular based on the use of panel data we analyse econometrically how the environmental performance of individual petroleum refineries emissions of benzene and toluene to the atmosphere associates with determinants of economic inequality at the micro level in terms of average per capita income at the level of united states counties as well as average county level unemployment rates the paper finds evidence of environmental injustice as a result of unemployment levels in areas around refineries and to a slightly lesser extent as a result of income inequality it discusses these results in a wider context referring amongst other things to the role of county level community characteristics and the potential for private firms to substitute for the intervention of public institutions if these are lacking

the comparative statics on asset prices based on bull and bear market measure abstract for single period complete financial asset markets with representative investors we introduce a bull market measure for uncertain state occurrence and its associated ordering between representative investors in markets based on their marginal rate of substitution between equilibrium consumption allocations among possible states these concepts combine and generalize the likelihood ratio dominance relation between probability prospects of state occurrence and the arrow pratt ordering of risk aversion in expected utility settings by analyzing the comparative statics for bull market effects on equilibrium asset prices we derive some monotone properties of the risk free rate and discounted prices of dividend monotone assets

house prices during siting decision stages the case of an incinerator from rumor through operation abstract the impact of an undesirable land use on house prices is not constant over time previous proximity studies which employed only discrete changes in information such as an epa superfund site announcement ignored potentially important phases of the adjustment process this study explicitly measures how the effects of an undesirable land use evolve over the siting process and life of the disamenity some price response to rumors of a facility is indicated and the evidence that prices respond at groundbreaking before operation is strong the distance premium persists at least 7 years after the facility begins operations

the ghost of financing gap testing the growth model used in the international financial institutions abstract the harrod domar growth model supposedly died long ago still today economists in the international financial institutions ifis apply the harrod domar model to calculate short run investment requirements for a target growth rate they then calculate a financing gap between the required investment and available resources and often fill the financing gap with foreign aid the financing gap model has two simple predictions 1 aid will go into investment one for one and 2 there will be a fixed linear relationship between growth and investment in the short run the data soundly reject these two predictions of the financing gap model

an interregional hedonic analysis of noxious facility impacts on local wages and property values abstract since the early work of rosen roback and more recently blomquist berger and hoehn economists have recognized that local environmental amenities influence wage rates and property values jointly moreover local differentials in these prices can be used to implicitly value local amenities unfortunately much of the empirical work on noxious facilities has focused on a narrow range of facility types often within a single city generally distance from the facility is used to proxy exposure to the disamenity although it is possible that the mere existence of a noxious facility in a region has an impact on local residents we employ an intercity hedonic model to measure the joint property value and wage effects of a broad range of noxious facilities using public use microdata from the 1980 united states census we show that property values and or wages are significantly influenced by the existence of noxious facilities calculated implicit prices reveal that local residents are most averse to the presence of petrochemical refineries and nuclear power plants

the interruption of productivity growth in the united states cessation or near cessation of productivity growth in the united states started in i974 and has continued until now the change from the previous steady advance was abrupt and its timing unmistakable although retardation earlier in the postwar period can be identified it was small readily explained and not particularly worrisome this paper will therefore focus on comparisons of changes from i973 to i98i with changes from i948 to i973

time horizon and the discount rate abstract we consider an economy a la lucas 1978 econometrica46 1429 1446 with a risk averse representative agent the exogenous growth rate of the economy follows a random walk we characterize the set of utility functions for which it is efficient to discount more distant cash flows at a lower rate the benchmark result is that when the growth rate is almost surely nonnegative the yield curve is decreasing if and only if relative risk aversion is decreasing with wealth relaxing the assumption on the absence of recession requires more restrictions on preferences such as increasing relative prudence journal of economic literature classification numbers d81 d91 q25 q28

ordering ambiguous acts we investigate what it means for one act to be more ambiguous than another the question is evidently analogous to asking what makes one prospect riskier than another but beliefs are neither objective nor representable by a unique probability our starting point is an abstract class of preferences constructed to be strictly partially ordered by a more ambiguity averse relation we define two notions of more ambiguous with respect to such a class a more ambiguous i act makes an ambiguity averse decision maker dm worse off but does not affect the welfare of an ambiguity neutral dm a more ambiguous ii act adversely affects a more ambiguity averse dm more as measured by the compensation they require to switch acts unlike more ambiguous i more ambiguous ii does not require indifference of ambiguity neutral elements to the acts being compared second we implement the abstract definitions to characterize more ambiguous i and ii for two explicit preference families maxmin expected utility and smooth ambiguity our characterizations show that the outcome of a more ambiguous act is less robust to a perturbation in probability distribution governing the states third the characterizations also establish important connections between more ambiguous and more informative as defined on statistical experiments by blackwell 1953 and others fourthly we give applications to defining ambiguity in the small and to the comparative statics of more ambiguous in a standard portfolio problem and a consumption saving problem

hazardous waste sites and property values in the state of new jersey the polluter pays principal is justified as a deterrent to future pollution however the us experience suggests that it has considerably reduced the clean up rate of existing hazardous waste sites coaseapos s theorem is used as basis to propose that a partnership between the polluters and property owners near these sites will not only ease financial burden but will also speed up the pace of cleanup a hedonic price model is used to empirically estimate the impact of siting of hazardous waste sites on property values and determine the economic feasibility of the proposed partnership the empirical estimates are based on municipality level data from the state of new jersey the benefis from speedy clean up of hazardous waste sites to new jersey property owners are observed to exceed the cleanup cost of these sites

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

overconfidence ceo selection and corporate governance we develop a model that shows that an overconfident manager who sometimes makes value destroying investments has a higher likelihood than a rational manager of being deliberately promoted to ceo under value maximizing corporate governance moreover a risk averse ceo s overconfidence enhances firm value up to a point but the effect is nonmonotonic and differs from that of lower risk aversion overconfident ceos also underinvest in information production the board fires both excessively diffident and excessively overconfident ceos finally sarbanes oxley is predicted to improve the precision of information provided to investors but to reduce project investment

portfolio choice under noisy asset returns abstract the lack of a clear effect of increases in risk upon the demand for risky assets has led to many restrictions on the types of risk increases and or on consumer preferences in order to obtain unambiguous comparative statics this paper examines the particularly simple yet overlooked case of white noise added to the return distribution it is shown that kimball s standard risk aversion is sufficient for noise to lead to reduced demand for risky assets

managing catastrophic climate risks under model uncertainty aversion we propose a robust risk management approach to deal with the problem of catastrophic climate change that incorporates both risk and model uncertainty using an analytical model of abatement we show how aversion to model uncertainty influences the optimal level of mitigation we disentangle the role of preferences from the structure of model uncertainty which we define by means of a simple measure of disagreement across models with data from an expert elicitation about climate change catastrophes we quantify the relative importance of these two effects and calibrate a numerical integrated assessment model of climate change the results indicate that the structure of model uncertainty and specifically how model disagreement varies in abatement is the key driver of optimal abatement and that model uncertainty warrants a higher level of climate change mitigation this paper was accepted by manel baucells decision analysis

mean gini portfolio theory and the pricing of risky assets this paper presents the mean gini mg approach to analyze risky prospects and construct optimum portfolios the proposed method has the simplicity of a mean variance model and the main features of stochastic dominance efficiency since mean gini is consistent with investor behavior under uncertainty for a wide class of probability distributions gini s mean difference is shown to be more adequate than the variance for evaluating the variability of a prospect the mg approach is then applied to capital markets and the security valuation theorem is derived as a general relationship between average return and risk this is further extended to include a degree of risk aversion that can be estimated from capital market data the analysis is concluded with the concentration ratio to allow for the classification of different securities with respect to their relative riskiness

estimating the demand for the characteristics of housing a hstract estimates of the demand for the characteristics contained in a differentiated product such as housing can be based on hedonic regressions however previous studies have not dealt with several potential problems in such estimation a more appropriate framework for the estimation is provided in this paper also data from a number of cities are used to eliminate the identification problem and the endogeneity of the marginal prices derived from non linear hedonic equations is considered in the estimation the results on own and cross price elasticities expenditure elasticities and the effects of socio economic vafiables accord well with expectations

risk lovers and the rent over investment puzzle in this paper we prove existence and uniqueness of equilibrium in a rent seeking contest given a class of heterogeneous risk loving players we explore the role third order risk attitude plays in equilibrium and find that imprudence is sufficient for risk lovers to increase rent seeking investment above the risk neutral outcome moreover we show that rent can be fully dissipated in a standard tullock contest played by a large number of risk lovers

investment in risky r d programs in the face of climate uncertainty we analyze how the socially optimal technology rd and that uncertainty in damages interacts with uncertainty in the returns to rd and r d that reduces the emissions to output ratio and argue that this is a good representation of r d into fossil fuel technologies for r d programs into non carbon technologies optimal investment is higher in riskier programs our empirical model indicates that the optimal investment in a risky program is about 3 1 2 times larger than in a program with certain returns for r d programs aimed at reducing emissions in fossil fuel based technologies our results show that qualitatively investment is higher in less risky programs under most uncertain damage scenarios our empirical model shows however that the risk profile of fossil fuel based r d programs generally has little quantitative impact on optimal investment the exception is that when the probability of a catastrophe inducing full abatement is very high investment is about twice as high in risky programs compared to programs with certain returns

valuing public goods a comparison of survey and hedonic approaches although the theory of public goods has progressed rapidly since paul samuelson s seminal article the empirical measurement of the value of demand for public goods only recently has received increased attention perhaps the best known and most widely accepted empirical approach has been the use of hedonic prices wherein for example it is assumed that either wages or housing values reflect spatial variation in public good characteristics of different communities this indirect approach based on theoretical work of charles tiebout kelvin lancaster sherwin rosen and others has proven quite successful among public goods or bads which have been valued using the hedonic approach are climate i hoch air pollution robert anderson and thomas crocker d harrison and d rubinfeld social infrastructure r cummings et al and other community characteristics such as noise level j nelson and ethnic composition ann schnare an alternative approach is to directly ask households or individuals to state their willingness to pay for public goods using survey techniques despite arguments that strategic bias will invalidate survey results there exists the need for an alternative to the hedonic approach as an example consider the case of a remote and unique scenic vista valuable to recreators which is threatened by air pollution from a proposed coal fired plant a typical situation in the western united states although it is possible in principle to impute the value of clean air and visibility from the relative decline in local visitation which might follow construction of a power plant information on the value of visibility at the site is needed prior to construction for socially optimal decision making on plant location and pollution control equipment the hedonic approach is unavailable both because the scarcity of local population as opposed to recreators makes use of wage or property value data impossible and because scenic vistas may themselves be unique for these reasons a randall et al first applied survey methods for valuing visibility and other environmental effects of large coal fired power plants in the four corners region of new mexico since this initial application the survey approach has been widely used to value environmental commodities where market data for hedonic analysis is difficult to acquire see for example brookshire ives and schulze rowe et al brookshire et al other early attempts to value public goods using the survey approach include r davis peter bohm and j hammack and g brown although results of using the survey approach for estimating the value of public goods appear to be internally consistent replicable and consistent with demand theory see schulze et al little work on external validation has been reported thus the purpose of this paper is to report on an experiment designed to validate the survey approach by direct comparison to a hedonic property value study the los angeles metropolitan area was chosen for the experiment because of the well defined air pollution problem and be assistant professor university of wyoming assistant professor university of missouri rolla associate professor university of wyoming and professor university of wyoming respectively the research reported here was funded under a grant methods development for assessing air pollution control benefits from the u s environmental protection agency we would like to give special thanks to alan carlin and shelby gerking for their helpful suggestions and contributions additional helpful comments were received from a myrick freeman iii john tschirhart and james murdoch all conclusions are of course our sole responsibility

decreasing aversion under ambiguity abstract under which condition does the set of desirable uncertain prospects expand when wealth increases we show that the decreasing concavity dc of the utility function u is necessary and sufficient in the maxmin expected utility model in the smooth ambiguity aversion model with the ambiguity valuation function the dc of u and of u is necessary and sufficient an alternative classical definition of decreasing aversion is based on the hypothesis that the investment in a risky asset is increasing in wealth we show that this hypothesis does not hold in general under ambiguity aversion and that one needs to constrain the structure of ambiguity to obtain unambiguous results

theories of institutions and economic reform in africa abstract the paper presents and critically examines the theories of institutions that can be used as a guide to economic reform in africa three approaches to institutions are initially discussed the model of structural adjustment new institutional economics and the old institutionalist tradition five institutions related to the development of markets in africa are examined from the three perspectives the institutions include property rights including their role in agriculture money and financial institutions prices and markets firms and industrial organization and markets and states the main conclusion of the paper is that structural adjustment due to its neoclassical roots is basically ainstitutional and therefore ill equipped to promote the development of markets in africa while new institutionalism provides interesting insights it is also limited by its neoclassical economic foundations thus if african governments desire to promote market reform they would be best advised to consult the old institutionalist literature particularly the very interesting recent work of proponents of this tradition

internal migration and the environmental kuznets curve for us hazardous waste sites abstract in the recent special issue of ecological economics devoted to the environmental kuznets curve ekc hypothesis rothman speculates that what appear to be improvements in environmental quality may in reality be indicators of increased ability of consumers in wealthy nations to distance themselves from the environmental degradation associated with their consumption rothman d 1998 environmental kuznets curves real progress or passing the buck a case for consumption based approaches ecol econ 25 178 consistent with rothman s general hypothesis of distancing as a possible source of ekc results this empirical study advances and tests a line of argument in which internal migration plays a central explanatory role for an observed ekc for us hazardous waste sites two specific hypotheses tested are i proximity to hazardous waste site build up emerges as a factor in the migration decisions of individuals as per capita income increases beyond a threshold level and ii the level of income at which the ekc turns downwards is equal to the threshold level of income in i results provide evidence that migration is a contributing factor to the observed ekc

stigmatized asset value is it temporary or long term stigma is a negative attribute of real estate acquired by environmental contamination and reflected in its value elliot jones 1996 using a model of neighborhood turnover with external economies we show that both temporary stigma and long term stigma are possible equilibrium outcomes after the discovery and cleanup of a hazardous waste site the existence and duration of stigma are examined using hedonic price techniques with data from housing sales prices in dallas county texas we find that results depend critically on distance from the hazardous waste site neighborhood turnover due to changes in the level of poverty also appears likely

stabilization the political economy of overkill abstract this paper considers whether national and international aspects of the imf s stabilization programmes during the 1970s and early 1980s have resulted in a process of overkill or in other words a process of economic retrenchment which went much further than was strictly necessary in terms of what could have been regarded as reasonable objectives in the international context the author describes how the attack on inflation has become an end in itself at the expense of other stated objectives of the imf thus creating a distortion of its priorities the paper discusses errors of diagnosis which have led to this disorientation and explains why deflationary policies should not be regarded as a panacea the paper then considers the nead for equity and efficiency in the distribution of the political and economic costs of adjustment the next section of this paper discusses the assumptions underlying the imf s treatment of fund members and to what extent even handedness in the application of stabilization measures may result in inequality of burden sharing among borrowers problems related to monetarist theories and the consequent policies are examined followed by a consideration of the dangers involved in devising straightforward performance criteria in the form of precise monetary targets that can readily be monitored by the imf this means of evaluating the national adjustment policies success is seen to be unsatisfactory viz the frequency of stand by arrangement breakdowns and mistakes in forecasting the paper concludes that the concept of unilateral adjustment is not an acceptable basis for imf supervision of the international monetary system in addition care should be taken to avoid overkill in determining the degree and character of adjustment needed in stabilization programmes one possible solution to the extra burden imposed on the ldcs might be a liberalization of the compensatory financing facility with the objective of applying the same kind of regime to imports as to exports

misperceiving interactions among complements and substitutes organizational consequences systems composed of activity choices that interact in nonsimple ways can allow firms to create and sustain a competitive advantage however in complex systems decision makers may not always have a precise understanding of the exact strength of the interaction between activities likewise incentive and accounting systems may lead decision makers to ignore or misperceive interactions this paper studies formally the consequences of misperceiving interaction effects between activity choices our results suggest that misperceptions with respect to complements are more costly than with respect to substitutes as a result firms should optimally invest more to gather information about interactions among complementary activities e g concerning network effects than about interactions among substitute activities similarly the use of division based incentive schemes appears to be more advisable for divisions whose products are substitutes than for divisions that produce complements it is further shown that system fragility is not necessarily positively correlated with the strength ofthe interaction between choices while systems of complements become increasingly fragile as the strength of interaction increases systems of substitutes can become increasingly stable

the pareto principle of optimal inequality the pareto principle is often viewed as a mild requirement compatible with a variety of value judgements in particular it is generally thought that it can accommodate different views on the desirable degree of equality we show that this is generally not true in intertemporal models where some uncertainty prevails to do so we formalize the concept of inequality aversion we show that different degrees of inequality aversion are not possible in typical models of time consistent dynamic decision under uncertainty

higher order risk attitudes a review of experimental evidence abstract this paper reviews the recent but fast growing experimental literature on higher order risk attitudes after introducing the theoretical context we first review the basic evidence and empirical moderators of these risk attitudes we then discuss recent extensions to ambiguity time risk and multi attribute utility in the last part we review indirect evidence from applied economic decision tasks

ambiguity aversion decreases the impact of partial insurance evidence from african farmers indemnifying smallholder farmers against crop loss is thought to play an important role in encouraging the adoption of new technologies and facilitating productivity growth but to be infeasible due to information problems consequently there is interest in developing alternative partial insurance products examples include rainfall insurance and the limited liability inherent in credit contracts i argue that although these products may reduce information asymmetry ambiguity averse farmers struggle to assess whether the contracts reduce risk this problem is most pronounced when the production technology is ambiguous as is likely the case for new technologies i formalize this argument and test the theory using data from two rcts conducted in malawi and kenya comparative statics from the theory are consistent with both sets of data and i argue that income losses from ambiguity aversion may be substantial

risk aversion and the choice between risky prospects the preservation of comparative statics results most results in what can be termed the comparative statics of risk aversion are obtained when there is only one source of uncertainty the primary example which originally motivated the definition of risk aversion is that more risk averse people are willing to pay a higher premium for insuring against risk it is known that the results do not generally carry over when there is another source of uncertainty the paper develops conditions under which comparative statics results are robust against the introduction of additional sources of uncertainty

designing optimal crop revenue insurance when the indemnity schedule is contingent on the farmer s price and individual yield an optimal crop revenue insurance contract depends only on the farmer s gross revenue however this design is not efficient if as is the case with available contracts the coverage function is based on imperfect estimators of individual yield and or price the producer s degree of prudence and the extent of basis risks have important influences on the optimal indemnity schedule in this broader context optimal protection is not provided by available u s crop insurance contracts and may include combinations of revenue insurance yield insurance futures and options contracts

revisiting precautionary saving under ambiguity abstract i study the two period consumption saving problem with non separable utility under ambiguity under smooth ambiguity aversion ambiguity and greater ambiguity aversion raise optimal saving when relative prudence in ambiguity preferences does not exceed 2 agents who perceive greater ambiguity have a higher demand for saving while a convex marginal ambiguity function is not sufficient for precautionary saving in time separable models berger 2014 i show that it is not even necessary in a time non separable setting

on a political solution to the nimby conflict scale economy in the construction and operation of public facilities such as landfills calls for cooperation among communities to build a common facility arthur o sullivan 1993 such a facility is a mixture of a public good and a private bad and hence leads to strong opposition by communities to locate it in their vicinity bruno s frey et al 1996 this is one of the most serious environmental concerns of recent years and is known as nimby not in my backyard in this paper we study the hypothesis that a democratic political process creates an adequate mechanism for the resolution of the nimby conflict the intuitive explanation is simple a nimby conflict is likely to induce lobbying and symmetric pressures by all threatened communities in the relevant region as is well known gene m grossman and elhanan helpman 1994 when subject to symmetric pressures politicians stick firmly to principles and function most efficiently the existing literature on the siting of noxious facilities focuses mainly on normative issues such as welfare maximizing siting via decentralized community based mechanisms e g howard kunreuther and paul r kleindorfer 1986 robert c mitchell and richard t carson 1986 and deborah minehart and zvika neeman 2002 evidently however such mechanisms have seldom been practiced e g stephen k swallow et al 1992 the current study adopts a positive approach integrating a political economic framework with a model of a competitive real estate market in the theoretical section a government of a linear two city economy determines the location of a noxious facility which affects the equilibrium in the real estate market and induces the spatial distributions of price and population the government is subject to political pressures by city level lobbies of landowners both landlords and home owners in general the political equilibrium and the socially optimal siting differ however the more equitable the distribution of landownership in the region the smaller the difference at the limit when property distribution is perfectly equitable and all cities participate in the political arena the government locates the facility at the socially optimal site the analysis proceeds by identifying additional conditions under which the political equilibrium siting coincides with the socially optimal location and with an empirical analysis in the empirical section the theoretical framework is extended to account for a multiple city region and is calibrated to assess the prospects of the political system for resolving the nimby conflict in the context of landfill siting in israel it is shown that if all cities in the region form political lobbies and the politicians are not extremely corrupt the political siting is close geographically to the socially optimal location and the difference entails a less than 0 1 percent reduction in social welfare moreover even if the formation of lobbying in the region is incomplete as long as the weight the politicians assign to social welfare is larger than 0 7 the proximity of the politically and socially optimal locations is preserved we interpret the above results as supportive of the hypothesis of an effective political solution to the nimby conflict

intertemporal choice and consumption mobility the theory of intertemporal consumption choice makes sharp predictions about the evolution of the entire distribution of household consumption not just about its conditional mean in the paper we study the empirical transition matrix of consumption using a panel drawn from the bank of italy survey of household income and wealth we estimate the parameters that minimize the distance between the empirical and the theoretical transition matrix of the consumption distribution the transition matrix generated by our estimates matches remarkably well the empirical matrix both in the aggregate and in samples stratified by education our estimates strongly reject the consumption insurance model and suggest that households smooth income shocks to a lesser extent than implied by the permanent income hypothesis jel d52 d91 i30

environmental hazards and residential property values evidence from a major pipeline event this study uses a hedonic price model to estimate the effect of proximity to a major fuel pipeline on housing prices both before and after a high profile accident using data for bellingham washington the site of a 1999 rupture and explosion we find no significant effect of proximity to the pipeline prior to the accident following the accident we find a substantial price effect however the effect decays rapidly with distance from the pipeline and also diminishes over time results suggest that for this type of environmental hazard an adverse event leads to an increase in perceived risk

does risk sharing increase with risk aversion and risk when commitment is limited i consider a risk sharing game with limited commitment and study how the discount factor above which perfect risk sharing is self enforcing in the long run depends on agents risk aversion and the riskiness of their endowment when agents face no aggregate risk a mean preserving spread may destroy the sustainability of perfect risk sharing if each agent s endowment may take more than three values with aggregate risk the same can happen with only two possible endowment realizations with respect to risk aversion the intuitive comparative statics result holds without aggregate risk but it holds only under strong assumptions in the presence of aggregate risk in simple settings with two endowment values i also show that the threshold discount factor co moves with popular measures of risk sharing

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

the monetarist experiment in chile a critical survey abstract chile constitutes the most outstanding case of implementation of an extreme market economy model during nine years between 1973 and 1982 a model was implemented that for its pureness deepness and extension induced a drastic transformation of the chilean economy the main features of the model are examined focusing on the anti inflationary policy the reform of the financial system and the external opening then the global results concerning output income distribution and saving investment are studied the paper shows that the balance of the results was clearly negative during the 1973 1981 period output stagnated the concentration of wealth was spectacular and saving and investment rates fell significantly the characteristics themselves of the model and the weakening of the productive apparatus that they originated additionally explain that the international recession was multiplied during 1982 within the domestic economy the paper concludes with an attempt to interpret the main causes of the failure of this experiment

adjustment with growth abstract this paper describes and examines simple versions of the analytical approaches employed by the international monetary fund and the world bank in designing adjustment programs that support their lending activities in the case of the bank this means essentially a variant of the two gap growth model and for the fund a model derived from the monetary approach to the balance of payments an attempt is also made to merge the fund and bank approaches within a consistent framework to demonstrate their complementarity

monotone comparative statics under uncertainty this paper analyzes monotone comparative statics predictions in several classes of stochastic optimization problems the main results characterize necessary and sufficient conditions for comparative statics predictions to hold based on properties of primitive functions that is utility functions and probability distributions the results apply when the primitives satisfy one of the following two properties i a single crossing property which arises in applications such as portfolio investment problems and auctions or ii log supermodularity which arises in the analysis of demand functions affiliated random variables stochastic orders and orders over risk aversion

choosing between risky prospects the characterization of comparative statics results and location independent risk we consider expected utility maximizers choosing from a family of risky prospects and examine how choice is influenced by the decision makers attitude to risk if the family of risky prospects can be ordered so that as decision makers are more risk tolerant they choose a gamble higher in the ordering then it is natural to say that the family of risky prospects admit a comparative static result the paper characterizes when comparative static results of this sort exist an application is to propose a criterion of location independent riskiness

stochastic dominance analysis without the independence axiom we characterize the consistency of a large class of nonexpected utility preferences including mean variance preferences and prospect theory preferences with stochastic orders for example stochastic dominances of different degrees our characterization rests on a novel decision theoretic result that provides a behavioral interpretation of the set of all derivatives of the functional representing the decision maker s preferences as an illustration we consider in some detail prospect theory and choice acclimating preferences two popular models of reference dependence under risk and we show the incompatibility of loss aversion with prudence this paper was accepted by james smith decision analysis

hazardous waste hits hollywood superfund and housing prices in los angeles this paper contributes to the ongoing debate concerning the effect of various actions taken by the u s environmental protection agency under cercla commonly known as the superfund program on housing prices this study uses a housing transaction panel dataset encompassing the five major counties of the los angeles combined statistical area to estimate the program s influence on the local housing market using house and time varying census tract fixed effects i am able to avoid many of the endogeneity problems seen in previous research attempting to measure the superfund treatment effect an estimate of the effect on housing prices is given for each of the major events that occur under a typical superfund remediation after controlling for confounding correlated unobservables i find a 7 3 increase in sales price for houses within 3 km of a site that moves through the complete superfund program the analysis gives evidence of positive price appreciation for housing markets and serves as a lower bound for measuring remediation benefits

uncertainty and consumer durables adjustment we characterize infrequent durables stock adjustment by consumers who also derive utility from non durable consumption flows in the presence of idiosyncratic income uncertainty the data we analyse include subjective future income uncertainty measures which we use as instruments in the estimation of relevant parameters of heterogeneous consumers dynamic adjustment problems the data feature two conceptually distinct sources of variation cross sectional heterogeneity of the sampled households dynamic problems and history dependent heterogeneity in their situation during the observation period we note that the latter should affect the likelihood but not the size of stock adjustment decisions and find broad support for theoretical predictions in formal selection controlled regressions based on this insight

undesirable facilities and property values a summary of empirical studies abstract undesirable land uses are expected to impose health or amenity risks on surrounding communities these risks are expected to be translated economically into negative effects on adjacent property values these negative effects may be present even when such uses possess offsetting advantages of proximity such as employment opportunities the purpose of this study is to summarize empirical studies completed to date that test whether undesirable land uses have observable negative effects on adjacent property values this information may be useful in assessing minimum valuations of terminating undesirable land uses such as clean up of hazardous sites or compensation necessary to ameliorate the economic impacts of new undesirable uses

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