the effect of ambiguity aversion on insurance and self protection in this article we derive a set of simple conditions such that ambiguity aversion always raises the demand for self insurance and the insurance coverage but decreases the demand for self protection we also characterise the optimal insurance design under ambiguity aversion and exhibit a case in which the straight deductible contract is optimal as in the expected utility model

better than pre commitment mean variance portfolio allocation strategies a semi self financing hamilton jacobi bellman equation approach we generalize the idea of semi self financing strategies originally discussed in ehrbar 1990 and later formalized in cui et al 2012 for the pre commitment mean variance mv optimal portfolio allocation problem the proposed semi self financing strategies are built upon a numerical solution framework for hamilton jacobi bellman equations and can be readily employed in a very general setting namely continuous or discrete re balancing jump diffusions with finite activity and realistic portfolio constraints we show that if the portfolio wealth exceeds a threshold an mv optimal strategy is to withdraw cash these semi self financing strategies are generally non unique numerical results confirming the superiority of the efficient frontiers produced by the strategies with positive cash withdrawals are presented tests based on estimation of parameters from historical time series show that the semi self financing strategy is robust to estimation ambiguities

pricing and hedging in incomplete markets with model uncertainty abstract we search for a trading strategy and the associated robust price of unhedgeable assets in incomplete markets under the acknowledgement of model uncertainty our set up is that we postulate the management of a firm that wants to maximise the expected surplus by choosing an optimal investment strategy furthermore we assume that the firm is concerned about model misspecification this robust optimal control problem under model uncertainty leads to i risk neutral pricing for the traded risky assets and ii adjusting the drift of the nontraded risk drivers in a conservative direction the direction depends on the firm s long or short position and the adjustment that ensures a robust strategy leads to what is known as actuarial or prudential pricing our results extend to a multivariate setting we prove existence and uniqueness of the robust price in an incomplete market via the link between the semilinear partial differential equation and backward stochastic differential equations for viscosity and classical solutions

non zero sum stochastic differential reinsurance and investment games with default risk this paper investigates the implications of strategic interaction i e competition between two cara insurers on their reinsurance investment policies the two insurers are concerned about their terminal wealth and the relative performance measured by the difference in their terminal wealth the problem of finding optimal policies for both insurers is modelled as a non zero sum stochastic differential game the reinsurance premium is calculated using the variance premium principle and the insurers can invest in a risk free asset a risky asset with heston s stochastic volatility and a defaultable corporate bond we derive the nash equilibrium reinsurance policy and investment policy explicitly for the game and prove the corresponding verification theorem the equilibrium strategy indicates that the best response of each insurer to the competition is to mimic the strategy of its opponent consequently either the reinsurance strategy or the investment strategy of an insurer with the relative performance concern is riskier than that without the concern numerical examples are provided to demonstrate the findings of this study

clarifying the foreign aid puzzle a comparison of american japanese french and swedish aid flows this study explores the donor side of debates revolving around the proper role of foreign assistance as a foreign policy tool by empirically testing for the aid determinants of four industrial democracies france japan sweden and the united states a pooled cross sectional time series design is employed to assess the impacts of six sets of variables on aid flows to thirty six african states during the 1980s three sets of these variables humanitarian need strategic importance and economic potential are constructed using data traditionally employed in empirical foreign aid studies three additional sets of variables cultural similarity ideological stance and region are constructed from data that regional specialists consider to be important in the foreign aid equation although no two cases are alike one can nevertheless draw some tentative conclusions about the nature of the foreign aid regime of the final cold war decade of the 1980s on the basis of several cross national patterns in short the results 1 contradict rhetorical statements of northern policymakers who claim that foreign aid serves as an altruistic foreign policy tool designed to relieve humanitarian suffering 2 confirm the expected importance of strategic and ideological factors in a foreign aid regime heavily influenced by the cold war and 3 underscore the importance of economic particularly trade interests in northern aid calculations

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

foreign aid an instrument for fighting communism abstract in this paper we test the argument that the sizeable reduction in aggregate aid levels in the 1990s was due to the end of the cold war we test two different models using a dynamic econometric specification on a panel of 17 donor countries spanning the years 1970 97 we find aid to be positively related to military expenditures in the former eastern bloc during the cold war but not in the 1990s suggesting that the reductions in aid disbursements are driven by the disappearance of an important motive for aid we also study the effect on aid allocation but here we do not find any robust effects of the end of the cold war

motivations for aid to developing countries abstract this paper attempts to identify the underlying principles of aid allocation and particularly the balance of motivations as between the needs of recipient countries and the interests of donor countries two alternative models are fitted by cross country regressions to bilateral and multilateral aid flows to some 80 developing countries in 1969 1970 and 1978 1980 the first recipient need model assumes that all aid is given to compensate for shortfalls in domestic resources this model provides a reasonable explanation for the distribution of multilateral aid but it is clearly not applicable for bilateral aid flows the second donor interest model assumes that all aid serves only donor interests defined to cover political security investment and trade interests this model gives generally good explanations of bilateral aid but is a poor fit for multilateral aid the relative importance of the various donor interests differs sharply among donors the paper ends with an analysis of the shift in the balance of aid over the 1970s towards the recipient need element and with a reference to the sharp change in policy in the 1980s towards increasing emphasis on donor interest aid

optimal reinsurance and asset allocation under regime switching abstract we investigate optimal reinsurance and asset allocation strategies for an insurer who is concerned about changes in economic conditions numerical examples with carefully estimated parameters show that optimal reinsurance and asset allocation strategies for an insurer could be non myopic meaning that they could be affected by future market conditions and change drastically according to current economic conditions however an insurer with poor financial prudence might be myopic so that the optimal strategies are similar to those of the single regime model we also show that drastic changes of the correlation between stock prices and insurance claims investment opportunity and loading factors might significantly affect optimal reinsurance strategy asset allocation strategy or both of insurance companies

optimal investment under ambiguous technology shocks abstract this paper analyzes the behavior of a firm facing an ambiguous technology shock and the effects of the attitude toward ambiguity on optimal capital investment using the smooth ambiguity model of klibanoff et al 2005 although it seems intuitive that an increase in ambiguity aversion always reduces the optimal capital investment this is not necessarily true because the shape of the production function plays a key role in determining the effect under some conditions we show that the optimal amount of capital investment increases decreases in ambiguity aversion if the production function is substitute complement and that this result is counterintuitive when the production function is substitute furthermore our main results hold if we assume the maxmin preferences in ghirardato et al 2004

uncertain dynamics correlation effects and robust investment decisions abstract we analyze a firm s investment problem when the dynamics of project value and investment cost are uncertain we provide an explicit solution using a robust method for an ambiguity averse firm taking this into account ambiguity aversion regarding a common risk factor impacts differently than ambiguity aversion regarding investment cost residual risk correlation between project value and investment cost matters ambiguity aversion regarding common risk can decrease the investment probability only if correlation is positive ambiguity aversion regarding residual risk always increases the investment probability when only project value is risky volatility can monotonically decrease the investment threshold this does not hold with the multiple prior method

environmental efficiency with multiple environmentally detrimental variables estimated with sfa and dea abstract the objective of this paper is to estimate comprehensive environmental efficiency measures for dutch dairy farms the environmental efficiency scores are based on the nitrogen surplus phosphate surplus and the total direct and indirect energy use of an unbalanced panel of dairy farms we define environmental efficiency as the ratio of minimum feasible to observed use of multiple environmentally detrimental inputs conditional on observed levels of output and the conventional inputs we compare two methods for the calculation of efficiency namely stochastic frontier analysis sfa and data envelopment analysis dea this paper reveals the strengths and weaknesses for estimating environmental efficiency of the methods applied both sfa and dea can estimate environmental efficiency scores the mean technical efficiency scores output oriented sfa 89 dea 78 and the mean comprehensive environmental efficiency scores sfa 80 dea 52 differ between the two methods sfa allows hypothesis testing and the monotonicity hypothesis is rejected for the specification including phosphate surplus dea can calculate environmental efficiency scores for all specifications because regularity is imposed in this method

relative wealth concerns and financial bubbles we present a rational general equilibrium model that highlights the fact that relative wealth concerns can play a role in explaining financial bubbles we consider a finite horizon overlapping generations model in which agents care only about their consumption though the horizon is finite competition over future investment opportunities makes agents utilities dependent on the wealth of their cohort and induces relative wealth concerns agents herd into risky securities and drive down their expected return even though the bubble is likely to burst and lead to a substantial loss agents relative wealth concerns make them afraid to trade against the crowd

does aid availability affect effectiveness in reducing poverty a review article this paper addresses the impact of aid supply on aid effectiveness first we review theoretical literature that deals with the problem of governance in donor recipient relationships and are susceptible of highlighting effects of aggregate aid availability second we provide a conceptual framework that explicitly incorporates a trade off between considerations of needs and governance we examine the impact of aid supply on the manner in which a donor agency allocates the available money between countries differing in terms of both needs and domestic governance the central conclusion is that a donor s utility function that embodies the need governance trade off and the associated optimization mechanism yield a meaningful rule to guide inter country allocation of aid resources

fairness in the international allocation of development aid this paper assesses the allocative performance of foreign aid donors it does so by identifying the consistency of the share of donor aid allocated to each developing country with these their shares of global poverty a given donor s allocative performance is maximised if the share of its aid to each developing country exactly equals its share of global poverty this is equated with fairness in the international allocation of aid the allocative performance of all donors all bilateral donors all multilateral agencies all non dac donor countries the eu france germany japan the united kingdom and the united states for the years 2010 15 is assessed the best performance is exhibited by all bilateral donors while that for an individual donor is exhibited by the united kingdom non dac donors exhibit the worst performance the paper also identifies which developing countries receive the most and least aid relative to their shares of global poverty

looking ahead optimally in allocating aid summary the collier dollar approach to aid allocation among countries has been less than fully embraced by donors even those focused on poverty reduction partly because it conflicts with the approach to aid allocation implied by the millennium development goals these two approaches are shown to be special cases of a more general model of aid allocation in which donors care about future as well as current poverty this model is illustratively applied to data for developing regions adding a poverty decline adjustment to the allocation formulae used by donors could resolve the conflict between the two approaches

rare disasters and exchange rates we propose a new model of exchange rates which yields a theory of the forward premium puzzle our explanation combines two ingredients the possibility of rare economic disasters and an asset view of the exchange rate our model is frictionless has complete markets and works for an arbitrary number of countries in the model rare worldwide disasters can occur and affect each country s productivity each country s exposure to disaster risk varies over time according to a mean reverting process ri sky countries command high risk premia they feature a depreciated exchange rate and a high interest rate as their risk premium mean reverts their exchange rate appreciates therefore currencies of high interest rate countries appreciate on average to make the notion of disaster risk more implementable we show how options prices might in principle uncover latent disaster risk and help forecast exchange rate movements we then extend the framework to incorporate two factors a disaster risk factor and a business cycle factor we calibrate the model and obtain quantitatively realistic values for the volatility of the exchange rate the forward premium puzzle regression coefficients and near random walk exchange rate dynamics finally we solve a model of stock markets across countries which yields a series of predictions about the joint behavior of exchange rates bonds options and stocks across countries the evidence from the options market appears to be supportive of the model jel e43 e44 f31 g12 g15

agriculture s environmental externalities dea evidence for french agriculture the existence of persistent technical inefficiency offers the opportunity for a free lunch not typically implied by the neoclassical theory of the firm when external effects are related to the use of particular inputs reduction of persistent technically inefficient levels of input use represents a means of reducing external impacts an important example is found in agriculture where substantial environmental impacts are generated by particular inputs within this context this paper considers the usefulness of data envelopment analysis dea for estimation of potential input reductions and assessment of potential reductions of environmental impacts of agricultural inputs an application for french cereal production provides estimates that indicate that substantial potential exists for reduction of input use and environmental impacts

contract nonperformance risk and uncertainty in insurance markets insurance contracts may fail to perform leading to a default on valid claims we relax the standard assumption of known probabilities for such defaults by allowing for uncertainty within a large behavioral experiment we show that introducing risk and uncertainty each leads to significant reductions in insurance demand and that the effects are comparable in magnitude 17 1 and 14 5 percentage points furthermore risk and ambiguity averse participants are affected most these findings are in line with models incorporating ambiguity attitudes or alternatively pessimistic beliefs an analysis of the belief and decision dynamics suggests persistent pessimistic priors and disregard of peer experiences leading to a stable uncertainty effect

the allocation of aid among developing countries a comment on mcgillivray s performance index abstract mcgillivray s paper in this journal proposed an index which he claimed ranks donors by the progressiveness with which they allocate their development aid among recipients it is shown here that his index contains a small country bias so that a donor may improve its performance by taking aid from a poor large country and giving it to a small richer one

a kuznets curve in environmental efficiency an application on oecd countries the role of the environment is an important issue in policy making andthe accurate assessment of the environmental conditions is vital inthis paper using nonparametric techniques an environmental efficiencyindex is developed for each of the oecd countries these indexes allowone both to do cross section comparisons on the state of each country sproduction process in its treatment of undesirable outputs and also totrace each country s modification of their production processesovertime furthermore in this study we investigate the factorsunderlying societies environmental concerns that eventually lead tochanges in the environmental efficiency the results provide furtherempirical evidence for the environmental kuznets curve hypothesis

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

saving growth and investment a macroeconomic analysis using a panel of countries this paper provides a descriptive analysis of the long and short run correlations among saving investment and growth rates for 123 countries over the period 1961 94 three results are robust across data sets and estimation methods i lagges saving rates are positively related to investment rates ii investment rates granger cause growth rates with a negative sign iii growth rates granger cause investment with a positive sign

risk averse decision making under catastrophic risk abstract a nonstandard probabilistic setting for modeling of the risk of catastrophic events is presented it allows random variables to take on infinitely large negative values with non zero probability which correspond to catastrophic consequences unmeasurable in monetary terms e g loss of human lives thanks to this extension the safety first principle is proved to be consistent with traditional axioms on a preference relation such as monotonicity continuity and risk aversion also a robust preference relation is introduced and an example of a monotone robust preference relation sensitive to catastrophic events in the sense of chichilnisky 2002 is provided the suggested setting is demonstrated in evaluating nuclear power plant projects when the probability of a catastrophe is itself a random variable

disasters and the welfare cost of uncertainty the combination of power utility and i i d lognormal consumption growth makes for a benchmark model in which asset prices and expected returns can be found in closed form introducing the consumption based model john h cochrane 2005 12 writes the combination of lognormal distributions and power utility is one of the basic tricks to getting analytical solutions in this kind of model a message of this paper is that the lognormality assumption can be relaxed without sacrificing tractability working under two assumptions that there is a representative agent with power utility and that consumption growth is i i d i introduce in section i a mathematical object the cumulantgenerating function or cgf in terms of which four fundamental quantities that are at the heart of consumption based asset pricing can be simply expressed those quantities are the equity premium riskless rate consumption wealth ratio and mean consumption growth the expressions derived relate the fundamentals directly to the cumulants equivalently moments of consumption growth the lognormal assumption is equivalent to the assumption that all cumulants above the second are zero if one is in the business of making up stochastic processes many suggest themselves most naturally in continuous time although there is an obvious discrete time analogue of brownian motion a random walk with normally distributed increments it is less natural to map poisson processes say into discrete time and therefore harder to deal with the possibility of jumps in consumption in section ii i show that these results carry over to the continuous time setting the i i d growth assumption is replaced by its continuous time analogue log consumption is a levy process disasters and the welfare cost of uncertainty

the allocation of aid among developing countries a multi donor analysis using a per capita aid index abstract this paper seeks to measure the relative aid giving performance of aid donors in terms of the inter recipient distribution of their aid performance is taken to be the extent to which a donor bases its aid allocation on the relative needs of recipient countries donor performance is measured by an income weighted per capita aid index formulated in this paper this index was calculated using the per capita allocations to a sample of 85 recipient countries in the years 1969 84 the performance of 17 dac members plus that of a number of multilateral agencies and that of the dac and these agencies combined is identified results indicate that the performance of four countries belgium finland denmark and norway was generally superior to that of other donors

aid supplies over time addressing heterogeneity trends and dynamics summary what determines how much foreign aid donors provide existing answers to this question point to a complex range of influences however the tasks of distinguishing between long and short run factors as well as differences between donors have not been adequately addressed taking advantage of data spanning nearly 50 years this paper uses panel cointegration techniques to consider these issues the analysis provides clear evidence for heterogeneity both between donors and over time bandwagon effects and a growing influence of security considerations in aid provision domestic macroeconomic shocks have a moderate but delayed effect on aid disbursements

ambiguity aversion is not universal assuming universal ambiguity aversion an extensive theoretical literature studies how ambiguity can account for market anomalies from the perspective of expected utility based theories we provide a systematic experimental assessment of ambiguity attitudes in different likelihood ranges and in the gain domain the loss domain and with mixed outcomes we draw on a unified framework to elicit preferences across these domains we replicate the usual finding of ambiguity aversion for moderate likelihood gains however when introducing losses or lower likelihoods we observe predominantly ambiguity neutrality or seeking rejecting universal ambiguity aversion

multilateral productivity comparisons when some outputs are undesirable a nonparametric approach multilateral productivity comparisons of firms producing multiple outputs some of which are undesirable are obtained by making two modifications to the standard farrell approach to efficiency measurement the restriction that production technology satisfy strong disposability of outputs is relaxed to allow for the fact that undesirable outputs may be freely disposable and the efficiency measures are modified to allow for an asymmetric treatment of desirable and undesirable outputs performance measures that satisfy these requirements are calculated as solutions to programming problems the methodology is applied to a sample of mills producing paper and pollutants

do performance measures of donors aid allocation underperform indices of donor performance abound their recent popularity has occurred within the context of pessimism over aid s impact and optimism over the effect of changes in donor behaviour rankings of donor allocative performance aim to change donor behaviour either through direct pressure on governments or indirectly through public engagement the indices themselves rely on descriptive measures and typically claim methodological superiority over positive alternatives due to their simplicity however there are two problems first measures do not seem robust to simple variations in methodology second correlation amongst competing indices is low leading to a host of contradictory judgements this offers neither clear technical guidance nor consistent political pressure the advantages and disadvantages of the approach are discussed building upon the more general critique of aggregate indices i suggest a graphical solution that embraces the advantages of the descriptive approach including ease of public communication while avoiding some of its major weaknesses which typically stem from aggregation

on relative wealth effects and the optimality of growth abstract we present a model of endogenous growth in which a desire for social status lead individuals to care about their relative wealth the growth rate of the economy is socially optimal if the status motive is sufficiently important but the presence of status seeking may also lead to excessive growth

chance constrained optimization for pension fund portfolios in the presence of default risk abstract in this paper we consider the portfolio optimization problem for a pension fund consisting of various government and corporate bonds the aim of the problem is to maximize the fund s cash position at the end of the time horizon while allowing for the possibility of bond defaults we model this problem as a stochastic discrete time optimal control problem with a chance constraint that ensures all future outgoing commitments can be met with sufficiently high probability we then introduce a corresponding deterministic formulation that is a conservative approximation of the original stochastic optimal control problem this approximate problem can be solved using gradient based optimization techniques we conclude the paper with a simulation study

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

aid selectivity according to augmented criteria a dominant trend in the literature maintains that donor assistance should be targeted to poor countries with sound institutions and policies in this context donor selectivity refers to what extent aid is allocated according to the principles of this canonical model this paper shows that it is legitimate for donors to simultaneously use other selectivity criteria corresponding either to expected factors of aid effectiveness or to handicaps to development it is notably argued that vulnerability to exogenous shocks and low level of human capital should be considered as selectivity criteria taking these other criteria into account dramatically changes the assessment of donor selectivity

measuring efficiency with a linear economic model this paper modifies and interprets data envelopment analysis dea using a linear economic model this approach is similar to the cone input output and assurance region approaches to dea but it is implemented so that the multipliers are measured in the same units across all linear optimization problems this approach allows one to interpret alternatives as profit maximizing organizations and the dea multipliers as prices that are comparable across the alternatives this is a useful extension of the assurance region concept but more important is that our approach enhances communication with decision makers the improved communication is illustrated by applying the model to the siting of a long term health care facility this application is interesting because the multiplier bounds make practical sense and because the problem has dimensions that sometimes lead to interpretation problems with the traditional dea model for example the site characteristics do not result from coordinated decisions some s

can the world cut poverty in half how policy reform and effective aid can meet international development goals abstract poverty in the developing world will decline by about one half by 2015 if the trends of the 1990s persist most of this poverty reduction will occur in asia however while poverty will decline only slightly in africa effective aid could make a contribution to greater poverty reduction in lagging regions even more potent would be significant policy reform in these countries we develop a model of efficient aid in which flows respond to policy improvements that create a better environment for poverty reduction and effective aid we investigate scenarios of policy reform and efficient aid that point the way to how the world can cut poverty in half in every major region

aid policies and growth the authors of this paper use a new database on foreign aid to examine the relationships among foreign aid economic policies and growth of per capita gdp in panel growth regressions for 56 developing countries and 6 four year periods 1970 93 they find that the policies that have a great effect on growth are those related to fiscal surplus inflation and trade openness they construct an index for those three policies and have that index interact with foreign aid they have instruments for both aid and aid interacting with policies they find that aid has a positive impact on growth in developing countries with good fiscal monetary and trade policies in the presence of poor policies aid has no positive effect on growth this result is robust in a variety of specifications which include or exclude middle income countries include or exclude outliers and treat policies as exogenous or endogenous they examine the determinants of policy and find no evidence that aid has systematically affected policies either for good or for ill they estimate an aid allocation equation and show that any tendency for aid to reward good policies has been overwhelmed by donors pursuit of their own strategic interests in a counterfactual they reallocate aid reduce the role of donor interests and increasing the importance of policy such a reallocation would have a large positive effect on developing countries growth rates

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

international regulations and environmental performance this article employs the data envelopment analysis dea approach to compute the environmental performance of all but two organisation for economic co operation and development oecd countries it is found that although the environmental performance of countries differs over time poland and hungary are the two best performers for all periods while italy japan austria and switzerland are ranked among the worst the effect of international regulations and some observed characteristics of countries on environmental performance are also investigated international regulations are reported to have a positive effect on environmental performance

optimal consumption and portfolio policies when asset prices follow a diffusion process abstract we consider a consumption portfolio problem in continuous time under uncertainty a martingale technique is employed to characterize optimal consumption portfolio policies when there exist nonnegativity constraints on consumption and on final wealth we also provide a way to compute and verify optimal policies our verification theorem for optimal policies involves a linear partial differential equation unlike the nonlinear partial differential equation of dynamic programming the relationship between our approach and dynamic programming is discussed we demonstrate our technique by explicitly computing optimal policies in a series of examples in particular we solve the optimal consumption portfolio problem for hyperbolic absolute risk aversion utility functions when the asset prices follow a geometric brownian motion the optimal policies in this case are no longer linear when nonnegativity constraints on consumption and on final wealth are included by these examples one can see that our approach is much easier than the dynamic programming approach

econometric estimation of technical and environmental efficiency an application to dutch dairy farms in this article we estimate the technical and environmental efficiency of a panel of dutch dairy farms nitrogen surplus arising from the application of excessive amounts of manure and chemical fertilizer is treated as an environmentally detrimental input a stochastic translog production frontier is specified to estimate the output oriented technical efficiency environmental efficiency is estimated as the input oriented technical efficiency of a single input the nitrogen surplus of each farm the mean output oriented technical efficiency is rather high 0 894 but the mean input oriented environmental efficiency is only 0 441 intensive dairy farms are both technically and environmentally more efficient than extensive farms

the political economy of foreign aid a model of the market for a public good what determines the type and quantity of overseas aid given by individual donor countries answers to this question in the existing literature are polarized into two groups one of them offers a theoretical treatment based on the theory of public goods which is not consistent with the available data and the other offers empirical correlations without any explanatory theory the first group for example pincus and olson and zeckhauser treats aid like defense as an international public good small countries on this approach are free riders spending relatively little themselves while deriving benefits from the expenditures of larger countries but this approach is not consistent with even a casual scrutiny of the oecd aid community in which broadly speaking the smallest countries are the most generous donors 2 the second group for example hoadley and beenstockdiscover correlations between a country s ratio of aid to gnp and certain independent variables which may be expected to influence it e g that country s gnp its dependence on foreign trade its government s position in the ideological spectrum and the state of the domestic economy 3 however these findings are not fitted into any theoretical framework so that it is difficult to work out what they really mean 4 the approach of this paper is to treat foreign aid as a public good for which there is a market albeit a highly imperfect one because the consumers donor country taxpayers are ignorant about the very nature let alone the price of the commodity they are buying on this view factors on the demand side i e taxpayers response to their country s aid program will help to determine the quantity of aid disbursed as well as factors on the supply side such as the donor government s desire to obtain strategic or trading benefits from aid this view

mean variance asset liability management cointegrated assets and insurance liability abstract the cointegration of major financial markets around the globe is well evidenced with strong empirical support this paper considers the continuous time mean variance mv asset liability management alm problem for an insurer investing in an incomplete financial market with cointegrated assets the number of trading assets is allowed to be less than the number of brownian motions spanning the market the insurer also faces the risk of paying uncertain insurance claims during the investment period we assume that the cointegration market follows the diffusion limit of the error correction model for cointegrated time series using the markowitz 1952 mv portfolio criterion we consider the insurer s problem of minimizing variance in the terminal wealth given an expected terminal wealth subject to interim random liability payments following a compound poisson process we generalize the technique developed by lim 2005 to tackle this problem the particular structure of cointegration enables us to solve the alm problem completely in the sense that the solutions of the continuous time portfolio policy and efficient frontier are obtained as explicit and closed form formulas

judging givers equity and scale in aid allocation abstract the paper proposes a ranking index to judge both the quality and quantity of aid given by donor nations the quality of aid is restricted to a single dimension viz how well an aid giver s allocation conforms to the revealed need of aid recipients departing from previous work by mcgillivray and white aid is assumed to be additive to recipient incomes the index satisfies the twin canons of horizontal and vertical equity and provides unbiased comparisons across all allocations it also obviates the need to have separate and very likely conflicting rankings of donors by equity and scale of aid allocation

determinants of canadian bilateral aid allocations humanitarian commercial or political in this paper we examine the determinants of the allocation of canadian bilateral aid over the period 1984 2000 we draw on models of donor behaviour that allow us to incorporate humanitarian commercial and political considerations the trinity of mixed motives that affect canadian aid we find that allocations are moderately altruistic recipient country human rights and membership in the commonwealth and la francophonie also affect aid flows most strikingly our results suggest that canadian aid flows became less altruistic over this period and commercial motives became increasingly important jel classification h50 o10 les determinants des allocations de l aide humanitaire canadienne humanitaires commerciaux ou politiques ce memoire etudie les determinants de l allocation de l aide bilaterale canadienne dans la periode 1984 2000 on utilise des modeles de comportement de donateur qui permettent de prendre en considerations les motivations humanitaires commerciales et politiques la trinite de motifs mixtes qui affectent l aide canadienne on decouvre que les allocations sont moderement altruistes le fait pour un pays de defendre bien les droits de la personne et d etre membre du commonwealth et de la francophonie affecte les flux d aide plus important peut etre les resultats suggerent qu au cours de cette periode les flux d aide canadienne deviennent moins altruistes et les motifs commerciaux de plus en plus importants

from domestic to international justice the welfare state and foreign aid foreign aid often is interpreted as an international projection of domestic income redistribution mechanisms and many authors suggest that differences between welfare states account for variations in donor behavior a new understanding of the welfare state can improve traditional explanations of this linkage existing studies of the welfare aid relationship use two welfare state indicators domestic spending and partisan politics we propose a third type of indicator the institutional attributes of the welfare state and demonstrate its relevance the level of foreign aid provided by a country varies with social spending but even more so with the degree to which its welfare state embodies socialist attributes this finding helps explain how domestic political institutions influence the evolution of international cooperation and specifically how welfare principles institutionalized at the domestic level shape the participation of developed countries in the international aid regime

the equilibrium allocation of diffusive and jump risks with heterogeneous agents abstract we study a two agent pure exchange equilibrium subject to both nondiversifiable diffusive and jump risks agents can trade in a financial market consisting of a stock market a money market and an insurance market for jump risk heterogeneity is introduced through different levels of relative risk aversion in the framework of standard expected utility we find the surprising result that the less risk averse agent purchases insurance contracts against jump risk from the more risk averse agent this equilibrium allocation is linked to the non linear wealth sharing rule in such an economy and preserves the wealth effects studied by dumas rev financ stud 2 1989 157 in the case of pure diffusive risk since the benchmark economy with homogeneous agents generates no excess uncertainty in the stock market we study the effect on excess volatility and excess jump size solely due to different levels of relative risk aversion we observe 3 excess uncertainty in jump sizes for a reasonable specification of economic fundamentals

democracy development and the international system as noted by seymour m lipset over 50 years ago development and democracy have been strongly correlated in the contemporary world today even after the prolonged democratization wave that started in the 1970s and accelerated in the 1990s the distribution of democracies remains highly skewed by level of per capita income whereas 94 of the countries with a per capita income above 10 000 in constant of 1996 held free and competitive elections in 1999 only 18 with a per capita income below 2 000 did so this empirical relationship between income and democracy was even tighter earlier in history just looking at per capita income we can successfully predict 76 of the annual observations of political regimes in sovereign countries after world war two the proportion of cases that are predicted correctly is 85 for the interwar period and 91 before world war one 1

the property liability insurance cycle a comparison of alternative models the objective of this paper is to compare alternative models of insurance pricing as theories of the property liability underwriting cycle the existing literature has focused on comparing two models the financial pricing and capacity constraint models however these are not the only relevant models we show that six alternative models imply the same general form of the pricing equation we apply the model to data on stock property liability insurers for the period 1935 1997 we find that the actuarial model and the capacity constraint hypothesis are the only theoretical models that are consistent with the data

targeting aid to the needy and deserving nothing but promises by reallocating aid to where it is needed most and where a productive use is most likely donors could help alleviate poverty in developing countries the rhetoric of donors suggests that this insight has increasingly shaped the allocation of aid we assess the poverty and policy orientation of bilateral and multilateral aid in different ways in addition to presenting stylised facts based on bivariate correlations we apply a tobit model that captures both altruistic and selfish donor motives we find little evidence supporting the view that the targeting of aid has improved significantly most donors provide higher aid to relatively poor countries but so far the fight against poverty has not resulted in a stronger focus on needy recipients with favourable local conditions the estimation results reveal that the policy orientation of aid critically depends on how local conditions are measured in general however donors appear to be less policy oriented than poverty oriented the response of donors to changing institutional and policy conditions in recipient countries turns out to be fairly weak we reject the proposition that multilateral aid is clearly superior to bilateral aid in terms of rewarding poor countries with better policies and institutions

rare disasters asset prices and welfare costs a representative consumer model with epstein zin weil preferences and i i d shocks including rare disasters accords with observed equity premia and risk free rates if the coefficient of relative risk aversion equals 3 4 if the intertemporal elasticity of substitution exceeds one an increase in uncertainty lowers the price dividend ratio for equity and a rise in the expected growth rate raises this ratio calibrations indicate that society would willingly reduce gdp by around 20 percent each year to eliminate rare disasters the welfare cost from usual economic fluctuations is much smaller though still important corresponding to lowering gdp by about 1 5 percent each year

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

an exploration of the effects of pessimism and doubt on asset returns the subjective distribution of growth rates of aggregate consumption is characterized by pessimism if it is first order stochastically dominated by the objective distribution uniform pessimism is a leftward translation of the objective distribution of the logarithm of the growth rate the subjective distribution is characterized by doubt if it is mean preserving spread of the objective distribution pessimism and doubt both reduce the riskfree rate and thus can help resolve the riskfree rate puzzle uniform pessimism and doubt both increase the average equity premium and thus can help resolve the equity premium puzzle

rewarding trading skills without inducing gambling this paper develops a model of active portfolio management in which fund managers may secretly gamble in order to manipulate their reputation and attract more funds we show that such trading strategies may expose investors to severe losses and are more likely to occur when fund managers are impatient their trading skills are scalable and generate higher prot per unit of risk we study investment management contracts that deter this behavior if investors are short lived then the manager must leave rents to investors in order to credibly commit not to gamble if investors are long lived contracts that increase but defer expected bonuses after an outstanding performance implement the rstbest our model can explain a number of observed dierences

searching for a kuznets curve in environmental efficiency using kernel estimation abstract the paper constructs environmental efficiency indexes for a sample consisting of high and low income countries using nonparametric production frontier techniques and then establishes an environmental kuznets relationship for environmental efficiency by nadaraya watson kernel estimation methodology

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

is environmental efficiency trade inducing or trade hindering abstract global efforts to identify strategies for sustainable economic growth and development underline the need for understanding important links between environmental policies and international trade in this paper by constructing an environmental efficiency index for 111 countries from 1980 to 2009 we are able to empirically test for one such link an improvement in the environmental efficiency index in terms of carbon dioxide emissions reflects a decrease in the cost of efforts to mitigate the environmental costs associated with growth countries that improve their environmental efficiency are found to experience strong international trade effects both through increased exports and increased imports while the positive link between efficiency improvements and exports is supportive of the porter hypothesis the positive link between efficiency improvements and imports is supportive of strong positive income effects on account of environmental efforts these results which are robust to alternative estimation strategies lend strong support to global efforts to improve countries environmental efficiencies

the comparative statics of changes in risk revisited abstract in this paper we consider the problem of determining the conditions under which a change in risk increases the optimal value of a decision variable for all risk averse agents for a large class of payoff functions we obtain the least constraining necessary and sufficient condition on the change in risk for signing its effect without any additional restriction on the utility function than risk aversion it entails all existing sufficient conditions as particular cases our results are applied to the linear model which describes the standard portfolio problem the necessary and sufficient condition for unambiguous comparative statics in this class of problems is termed greater central riskiness cr it is shown that cr dominance is neither stronger nor weaker than second degree stochastic dominance journal of economic literature classification number d81

economics of efficiency measurement by the dea approach three aspects of efficiency measurement by data envelopment analysis are discussed here analytically these aspects comprise output specific input allocations by each firm flexibility in the production process and the role of learning by doing in efficiency improvement

ranking foreign donors an index combining the scale and equity of aid giving abstract the generosity of aid given and the fairness with which it is distributed among recipients are among the most important criteria for judging and comparing the aid effort of donor countries the present paper builds on a recent theoretical proposal for a complete consistent and combined index combining both these criteria to rank donor countries the index may be used not only to compare donors but also to gauge the progress of individual donors in respect to their aid effort an annual timeseries of donor rankings based on this formula is constructed employing aid data published by the oecd for 1970 1993

affine disagreement and asset pricing models of heterogeneous beliefs can generate rich implications for trading and asset pricing see suleyman basak 2005 for a recent survey when studying such models aggregation often leads to difficulty in computing equilibrium outcomes in this paper we introduce a flexible framework to model heterogeneous beliefs in the economy which we refer to as affine disagreement about fundamentals affine processes see darrel duffie jun pan and kenneth singleton 2000 are appealing as they provide a large degree of flexibility in modeling the conditional means volatilities and jumps for various quantities of interest while remaining analytically tractable our affine heterogeneous beliefs framework allows further for stochastic disagreement among agents about growth rates volatility dynamics as well as the likelihood of jumps and the distribution of jump sizes disagreement about rare disasters provides an interesting case study for our framework research by thomas a rietz 1988 francis longstaff and monika piazzesi 2004 robert j barro 2006 and others show that the possible occurrence of rare disasters that result in severe losses in consumption can have large impact on asset prices however the relatively short sample period and lack of historical precedents of disaster events at least in the united states make it difficult to precisely measure the frequencies of disasters or the size of their asset pricing new risk channels

an activity analysis model of the environmental performance of firms application to fossil fuel fired electric utilities the productivity of firms when some outputs pollution are undesirable has been studied in the literature for some time in this paper we introduce an environmental performance indicator based on the decomposition of overall factor productivity into a pollution index and an input output efficiency index this indicator is compared to the more conventional jaggi and freedman 1992 model results are given for illustrative purposes using data from u s fossil fuel fired electric utilities the rankings of the utilities obtained with the two models show significant divergence which is due to the different ways in which the undesirable outputs are dealt with as well as due to the different possible tradeoffs between the pollutants released into the atmosphere and the resources used as inputs

decision theory under ambiguity we review recent advances in the field of decision making under uncertainty or ambiguity we start with a presentation of the general approach to a decision problem under uncertainty as well as the standard bayesian treatment and issues with this treatment we present more general approaches choquet expected utility maximin expected utility smooth ambiguity and so forth that have been developed in the literature under the name of models of ambiguity sensitive preferences we draw a distinction between fully subjective models and models incorporating explicitly some information we review definitions and characterizations of ambiguity aversion in these models we mention the challenges posed by some of the models presented we end with a review of part of the experimental literature and applications of these models to economic settings

aid allocation and poverty reduction the authors derive a poverty efficient allocation of aid and compare it with actual aid allocations they build the poverty efficient allocation in two stages first they use new world bank ratings of 20 different aspects of national policy to establish the current relationship between aid policies and growth onto that they add a mapping from growth to poverty reduction which reflects the level and distribution of income they compare the effects of using headcount and poverty gap measures of poverty they find the actual allocation of aid to be radically different from the poverty efficient allocation in the efficient allocation for a given of poverty aid tapers in with policy reform in the actual allocation aid tapers out with reform in the efficient allocation aid is targeted disproportionately to countries with severe poverty and adequate polices the type of country where 74 percent of the world s poor live in the actual allocation such countries receive a much smaller share of aid 56 percent than their share of the world s poor with the present allocation aid is effective in sustainably lifting about 30 million people a year out of absolute poverty with a poverty efficient allocation this would increase to about 80 million people even with political constraints introduced to keep allocations for india and china constant poverty reduction would increase to about 60 million reallocating aid is politically difficult but it may be considerably less difficult than quadrupling aid budgets which is what the authors estimate would be necessary to achieve the same impact on poverty reduction with existing aid allocations

alpha robust mean variance reinsurance investment strategy abstract inspired by the maxmin expected utility we propose a new class of mean variance criterion called maxmin mean variance criterion and apply it to the reinsurance investment problem our model allows the insurer to have different levels of ambiguity aversion rather than only consider the extremely ambiguity averse attitude as in the literature the insurer can purchase proportional reinsurance and also invest the surplus in a financial market consisting of a risk free asset and a risky asset whose dynamics is correlated with the insurance surplus closed form equilibrium reinsurance investment strategy is derived by solving the extended hamilton jacobi bellman equation our results show that the equilibrium reinsurance strategy is always more conservative if the insurer is more ambiguity averse when the dependence between insurance and financial risks are weak the equilibrium investment strategy is also more conservative if the insurer is more ambiguity averse however in order to diversify the portfolio a more ambiguity averse insurer may adopt a more aggressive investment strategy if the insurance market is very ambiguous for an ambiguity neutral insurer the investment strategy is identical to the non robust investment strategy

biases in the allocation of foreign aid some new evidence abstract the purpose of the paper is to examine the pattern of bilateral and multilateral foreign aid allocations during the 1970s cross section and pooled regressions for a set of roughly 90 countries where aid allocations have been relatively free of gross political overtones confirm the well known bias in per capita aid flows against populous countries butdo not provide evidence of a middle income bias instead regressions on 1976 1978 aid flows and per capita incomes of recipient countries seem to suggest a low income bias i e low income countries received more aid per capita than middle income countries yet there was asample of extremely poor countries which remained neglected in foreign aid allocations

robust reinsurance contracts with uncertainty about jump risk abstract we investigate robust reinsurance contracts in two reinsurance modes namely proportional reinsurance and excess loss reinsurance in a continuous time principal agent framework insurance claims follow the classic cramer lundberg process the reinsurer principal is concerned about potential ambiguity in the claim intensity but the insurer agent is not the reinsurer designs a robust reinsurance contract that maximizes the penalty based multiple priors utility of terminal wealth subject to the insurer s incentive compatibility constraint we derive the analytical expressions of the robust reinsurance contacts our results show that the reinsurer dynamically decreases the reinsurance price which makes the demand for reinsurance increase over time however the reinsurer s ambiguity aversion increases the price of reinsurance which decreases demand moreover the price of excess loss reinsurance is greater than that of proportional reinsurance finally when the insurer s risk aversion is low or the reinsurer s risk aversion is high both the insurer and the reinsurer prefer the proportional reinsurance contract

rare disasters and risk sharing with heterogeneous beliefs risks of rare economic disasters can have a large impact on asset prices at the same time difficulties in inference regarding both the likelihood and severity of disasters as well as agency problems can lead to significant disagreements among investors about disaster risk we show that such disagreements generate strong risk sharing motives such that just a small number of optimists in the economy will significantly reduce the disaster risk premium our model highlights the latent nature of disaster risk the disaster risk premium will likely be low and smooth during normal times but increases dramatically when the risk sharing capacity of the optimists is reduced e g following a disaster the model also helps reconcile the difference in the amount of disaster risk implied by financial markets and international macroeconomic data and provides caution to the approach of extracting disaster probabilities from asset prices which will disproportionately reflect the beliefs of a small group of optimists finally our model predicts an inverse u shaped relation between the equity premium and the size of the disaster insurance market the author 2012 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

portfolio choices and asset prices the comparative statics of ambiguity aversion we investigate the comparative statics of more ambiguity aversion as defined by klibanoff marinacci and mukerji 2005 in the context of the static two asset portfolio problem it is not true in general that more ambiguity aversion reduces the demand for the uncertain asset we exhibit some sufficient conditions to guarantee that ceteris paribus an increase in ambiguity aversion reduces the demand for the ambiguous asset and raises the equity premium for example this is the case when the set of plausible distributions of returns can be ranked according to the monotone likelihood ratio order we also show how ambiguity aversion distorts the price kernel in the alternative portfolio problem with complete markets for contingent claims

on the strategic behavior of large investors a mean variance portfolio approach abstract one key assumption of markowitz s model is that all traders act as price takers in this paper we extend this mean variance approach in a setting where large investors can move prices instead of having an individual optimization problem we find the investors nash equilibrium and redefine the efficient frontier in this new framework we also develop a simplified application of the general model with two assets and two investors to shed light on the potential strategic behavior of large and atomic investors our findings validate the claim that large investors enhance their portfolio performance in relation to perfect market conditions besides we show under which conditions atomic investors can benefit in relation to the standard setting even if they have not total influence on their eventual performance the two investors two assets setting allows us to quantify performance and do sensitivity analysis regarding investors market power risk tolerance and price elasticity of demand finally for a group of well known etfs we empirically show how price variations change depending on the volume traded we also explain how to set up and use our model with real market data

do corrupt governments receive less foreign aid critics of foreign aid programs argue that these funds often support corrupt governments and inefficient bureaucracies supporters argue that foreign aid can be used to reward good governments this paper documents that there is no evidence that less corrupt governments receive more foreign aid on the contrary according to some measures of corruption more corrupt governments receive more aid also we could not find any evidence that an increase in foreign aid reduces corruption in summary the answer to the question posed in the title is no

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

inequality among world citizens 1820 1992 this paper investigates the distribution of well being among world citizens during the last two centuries the estimates show that inequality of world distribution of income worsened from the beginning of the 19th century to world war ii and after that seems to have stabilized or to have grown more slowly in the early 19th century most inequality was due to differences within countries later it was due to differences between countries inequality in longevity also increased during the 19th century but then was reversed in the second half of the 20th century perhaps mitigating the failure of income inequality to improve in the last decades jel d31 f0 n0 o0

climate change and index insurance demand evidence from a framed field experiment in tanzania abstract index insurance has been touted as part of an adaptation strategy to mitigate climate risks among smallholder farmers however in the face of increasing drought probabilities demand for index insurance may decrease compared to a scenario with no climate change if farmers learn slowly or place considerable weight on prior beliefs using data from a framed field experiment in tanzania we estimate a structural learning model based on a bayesian change point inference method and separately identify the effect of learning expectations recency bias and ambiguity on insurance demand furthermore by simulating the supply side of the insurance market under a set of plausible assumptions we show that climate change results in reduced uptake rates in most cases although demand may increase if the severity of climate change is sufficiently low overall our results provide an alternative explanation for the puzzle of low index insurance demand