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

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

large economies with trading uncertainty a correction gerd weinrich of mannheim university has brought to my attention an error in my paper large economies with trading uncertainty the example of an allocation mechanism described on pp 329 332 does not satisfy the condition of relative continuity as claimed on p 332 the reason is that the definition as given in the paper is a rather gross misstatement of what i had in mind and makes some of the accompanying analysis nonsensical fortunately the matter is not hard to put right two passages in the text must be rewritten as follows

firm performance corporate governance and executive compensation in pakistan abstractthis study examines the effects of firm performance and corporate governance on chief executive officer ceo compensation in an emerging market pakistan using a more robust generalized m

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

complex business cycles and recurrent unemployment in a non walrasian macroeconomic model abstract in a dynamic non t tonnement macroeconomic model trades take place in each period even when prices are not walrasian prices are adjusted between trading periods according to the intensity of disequilibrium a reliable measure of which is obtained by means of stochastic rationing the degree of downward nominal wage stickiness as well as government policy parameters are decisive for the dynamics that emerge in particular it is possible for the economy to converge to quasi stationary states involving permanent unemployment and decreasing nominal wages or to produce complex business cycles with structural features recurrent over time but varying and unpredictable shape and size

sticky prices as coordination failure this paper links the coordination failure and menu cost approaches to the microeconomic foundations of keynesian macroeconomics if a firm s desired price is increasing in others prices then the gain from price adjustment after a nominal shock is greater if others adjust this strategic complementarity leads to multiple equilibria in the degree of rigidity welfare may be much higher in the equilibria with less rigidity thus nominal rigidity arises from a failure to coordinate price changes jel e12 e30 keynesian macroeconomics waned in the 1970 s because economists grew disenchanted with its weak microeconomic foundations the central difficulty was that keynesian models were based on ad hoc rigidities in nominal wages and prices the 1980 s produced two approaches to reviving keynesian theory the menu cost literature n gregory mankiw 1985 george akerlof and janet yellen 1985 seeks to provide rigorous explanations for nominal rigidities these papers argue that small frictions in price setting are enough to produce large nominal rigidities in contrast the coordination failure literature russell cooper and andrew john 1988 abandons nominal rigidities and seeks alternative foundations for keynesian models the central idea is that many economic activities such as production e g john bryant 1983 trade e g peter diamond 1982 and investment e g nobuhiro kiyotaki 1988 exhibit synergism or strategic complementarity one agent s optimal level of activity depends positively on others activity strategic complementarity can lead to multiple equilibria with high activity equilibria superior to low activity equilibria thus an economy may be stuck in an underemployment equilibrium even though a superior equilibrium exists models with nominal rigidities and models with coordination failures are often presented as competing paradigms 1 this paper shows that this view is incorrect we take a step toward unifying the foundations of keynesian economics by showing that the two sets of ideas are highly complementary nominal rigidity arises from a failure to coordinate price changes this failure has the essential features of coordination failures in previous models flexibility in one firm s price increases the incentives for other firms to make their prices flexible this strategic complementarity leads to multiple equilibria in the degree of nominal rigidity equilibria with less rigidity more active price adjustment are often pareto superior to equilibria with more rigidity these results contribute to our understanding both of coordination failure and of nominal rigidity the range of keynesian phenomena explained by coordination failures is greatly expanded previous coordination failure models contain only real variables and thus ascribe no role to monetary policy or other determinants of nominal spending our results suggest that coordination failure is at the root of inefficient nonneutralities of money theories of nominal rigidities gain new empirical and policy im

on the theory of effective demand under stochastic rationing abstract the concept of effective demand under stochastic manipulable quantity rationing is shown to be compatible with the existence of nontrivial equilibrium it is argued that stochastic rationing is unavoidable for any satisfactory definition of effective demand moreover manipulability of the rationing mechanism is necessary for reasons of logical consistency at least if the distribution over realisations for each agent depends on his own action and on the aggregate values of demand and supply only in that case anonymous stochastic rationing schemes reduce to those random functions the mean value function of which is the uniform proportional rationing mechanism

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

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

a near rational model of the business cycle with wage and price inertia this paper presents a model in which insignificantly suboptimal behavior causes aggregate demand shocks to have significant real effects the individual loss to agents with inertial price wage behavior is second order in terms of the parameter describing the shock while the effect on real economic variables is first order thus significant changes in business activity can be generated by anticipated money supply changes provided that some agents are willing to engage in nonmaximizing behavior which results in small losses

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

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

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

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

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

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

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

on macroeconomic equilibrium with stochastic rationing the purpose of this paper is to apply the ideas of stochastic rationing mechanisms to a simple disequilibrium macroeconomic model it has been shown that effective demands with stochastic rationing as opposed to those derived from deterministic constraints the clower benassy or dreze effective demand are consistent with the maximization of expected utility and are also capable of producing unsatisfied demand and supply in a quantity constrained equilibrium the well known regime classification of quantity constrained equilibria i e keynesian unemployment classical unemployment repressed inflation and underconsumption is shown to be relevant in a macroeconomic framework with stochastic rationing comparative statics of quantity constrained equilibria are worked out for different regimes

executive compensation and tournament theory empirical tests on danish data this article adds to the empirical literature on tournament theory as a theory of executive compensation i test several propositions of tournament models on a rich data set containing information about 2 600 executives in 210 danish firms during a 4 year period i ask are pay differentials between job levels consistent with relative compensation is pay dispersion between levels higher in noisy environments is the dispersion affected by the number of tournament participants is average pay lower in firms with more compressed pay structures does wider pay dispersion enhance firm performance most of the predictions gain support in the data

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

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

same or different the ceo labour market in china s public listed companies using linked employer employee data for all china s public listed firms over the period 2001 10 we find top executive compensation exhibits many of the traits familiar in the western literature although sometimes in a more muted way and with some clear exceptions we also find a role for managerial power in executive pay setting which may reflect the recency of the stock market and regulations underpinning corporate governance nevertheless there appear to be some elements of executive compensation which transcend national economic political and cultural differences the implication is that the western model is not as idiosyncratic as critics suggest

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

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