moral hazard in lending and labor market volatility when the economy experiences a sharp economic downturn credit spreads widen and project financing costs for firms rise as funding sources begin to dry up the economy experiences a lengthy recovery with unemployment rates slow to return to full employment levels we develop a model that displays these features it relies on an interaction between labor search frictions and firm level moral hazard that is accentuated during recessions the model is capable of addressing the shimer puzzle with labor market variables exhibiting significantly more volatility on average as a result of the heightened moral hazard concerns during these episodes that significantly deepen and prolong periods of high unemployment as vacancy postings fall dramatically and the job finding rate declines our mechanism is also found to induce internal shock propagation causing the peak response of output unemployment and wages to occur with a several quarter delay relative to a model without such frictions many other labor market variables also show slower recovery their return to preshock level occurs at a slower pace for a number of periods after the peak response

valuing option existence and bequest demands for wilderness to assess the relative importance of current costs and future benefits of nuclear waste storage we develop a simple model of bequest value the basic model of nonparternalistic altruism is extended to account for the uncertain nature of the externality

valuing non market goods using contingent valuation abstract contingent valuation is a technique being developed by economists for the valuation of environmental commodities not traded in markets this paper discusses the major problem areas associated with this method of value estimation these comprise bias strategic hypothetical and design biases the discrepancy between willingness to pay and compensation demanded the aggregation procedure the choice of question format and non use values some evidence from comparative studies is reported and comments made on the accuracy of contingent valuation answers finally the conditions under which contingent valuation seems to operate best are set out

precautionary principle and the optimal timing of environmental policy under ambiguity i consider a problem in environmental policy design in which i focus on stock pollutants in particular i consider stock pollutants that cause severe damage on the environment and do not depreciate at all once they are released into the atmosphere and the ocean the purposes of this paper are 1 to provide an economic foundation for environmental policies based on the precautionary principle and the 1992 rio declaration on environment and development and 2 to show that this optimal timing rule has a reservation property furthermore i analyze the effect of an increase in ambiguity on the optimal timing of adopting some environmental policy and show that an increase in ambiguity decreases the optimal timing of adopting the environmental policy

on the valuation of uncertainty in welfare analysis thisarticle developsa general model of private and public choice under temporal uncertainty the model incorporatesthe effectsof ris k preferencesand the pros pect of future learning into both the individual and aggregate valuationsof public projects the analys isprovidesnew ins ightson individual valuation itsimplicationsfor benefit cos t analys isand the characterization of paretoefficiency under uncertainty it also resolves some of the confusion in the option value and quasioption value literature private and public decisions typically involve many sources of uncertainty including uncertainty about prices income technology environmental quality health etc temporal uncertainty is also common where some of the risk 1 getsresolved over time due to learning additionally private and public decisions often exhibit some form of irreversibility implying that current choicescan affect the ability of decision makers to be flexible and to adjust their future choices in response to forthcoming information when uncertainty and irreversibility are both present welfare analys isgainscomplexity and importance although considerable progress has been made since weisbrod s seminal article a better understanding of the roles of uncertainty and irreversibility in welfare analys improve our ability aseconomis ts to communicate the importance of risk in project evaluation to public decision makers

the economics of the greenhouse effect the recognition that economic activity is contributing to climatic change with attendant costs that may be of large magnitudes has set in motion a substantial research effort this paper seeks to review the contribution of economics to analysis of the greenhouse effect and to the policies and instruments suggested as means of mitigating its damage a brief overview of the causes and consequences of global warming is given and a number of energy economy forecasting models are examined as the costs of global warming depend upon the extent to which preventative and adaptive measures are undertaken the techniques available to evaluate these costs are surveyed we examine extant targets for greenhouse gas emissions reduction and explore the frameworks within which optimal policy targets can be designed the paper also considers the narrower question of minimized abatement costs and surveys the types of models used to estimate them the merits of alternative policy instruments are examined paying particular attention to the role that risk and uncertainty and the costs of monitoring and implementation of policy under conditions of imperfect information may play in the choice of instruments problems of international co operation in the development of abatement policy are examined and we consider the compensations across both nations and generations that are likely to be necessary conditions for effective action

the sign and size of option value we adapt the theoretical state preference model to value nonmarket public goods under individual uncertainty about use illustrating with an assessment of willingness to pay to prevent acid rain lake damage in the northeast united states individual

a satisfactory benefit cost indicator from contingent valuation abstract standard economic concepts are used to develop a model of individual behavior when subject to the constraints of the contingent valuation choice context the model yields refutable consequences that are consistent with previously reported empirical findings including some that have been thought to be anomalous the model is used to show that different contingent valuation formats have predictably different performance characteristics notably the hicksian compensating measures are satisfactory benefit cost indicators when elicited using any one of several formats identified in the text of the formats examined one form of a policy referendum appears to have the most satisfactory characteristics overall we conclude that contingent valuation is a progressing research program

costly monitoring financial intermediation and equilibrium credit rationing abstract this paper establishes a link between equilibrium credit rationing and financial intermediation in a model with asymmetrically informed lenders and borrowers costly monitoring and investment project indivisibilities intermediation is shown to dominate borrowing and lending between individuals and these financial intermediaries exhibit several of the important features of intermediaries as we know them equilibrium interest rates and the aggregate quantity of loans respond quite differently to changes in taste and technology parameters depending on whether or not there is rationing in equilibrium

errors in the numerical assessment of the benefits of price stabilization this paper presents a simple computational procedure for determining a consumer s willingness to pay to have a price stabilization policy implemented numerical simulations are then provided which demonstrate that the commonly used expected surplus measures whether hicksian or marshallian can in fact seriously misstate the true benefits of price stabilization these simulations also illustrate the extent to which the results may be dependent upon the assumptions made implicitly or explicitly regarding the consumer s attitudes toward risk thereby underscoring the need to conduct sensitivity analyses to determine the robustness of cost benefit assessments with respect to these assumptions

equilibrium shirking access to credit and endogenous tfp fluctuations this paper develops a model in which idea rich cash poor entrepreneurs undertake risky investment projects that are subject to future liquidity needs and shirking due to moral hazard the model suggests that the strength of the entrepreneur s incentive to shirk is countercyclical and that endogenous shirking adds volatility to the economy by increasing the persistence and volatility of tfp this increase in persistence and volatility is driven by the variation in the number of successfully completed projects compounded by the effect of the incentive to shirk on access to credit changes in factor employment play only a minor role

valuing family household production a contingent evaluation approach the time of family members is often refgarded as an important input used in family household production unlike existing methods used in the valuation of the time spent in home production namely the opportunity cost of time and the replacement cost method a contingent evaluation approach is proposed here consistent with the way non market goods an services are valued the method essentially elicits people s willingness to pay for household production whilst taking into account opportunity costs particular attention is also paid to the objective of valuation whether it is for gnp accounting matrimonial property settlements or for welfare and compensation issues and the appropriate measures to be used marginal total and net valuation using a model of home production these different meaures of economic value are distinguished both conceptually and in their uses the results from a modest study of household production using the methods described here are presented these results are then compare

the advantages of contingent valuation methods for benefit cost analysis the preceding is a taxonomic discussion of some reasons why contingent market methods may often be a superior means of generating data with which to value non market commodities we have argued that economists have erred in viewing the situations these methods posit as necessarily fictional that the data generated by the methods may for non marketed goods and the activities with which they are associated accord more closely with the conditions of received economic theory that the methods can make it easier to remove the difficulties of estimation and interpretation introduced by confounding variables and that they often permit one to deal more readily with phenomena that have not been in the range of historical experience nevertheless whatever the advantages a major disadvantage remains until detailed analytical knowledge is acquired of the manner in which expectations are formed there exists no way to refute empirical propositions established from contingent markets nevertheless the previously mentioned south coast air basin experiment where the bids obtained for clean air conformed fairly closely to the values implied in a residential property value study suggest that contingent valuations have a basis in the real decision processes of consumers

valuing amenity resources under uncertainty does the existence of fair contingent claims markets matter abstract alternative welfare measures are evaluated as measures of the value of change in access conditions for environmental resources and it is shown that traditional hicksian surplus estimates systematically underestimate benefits it is further argued that the existence of fair contingent claims markets is a peripheral consideration in benefit estimation that state dependent payments present no significant collection obstacles not already encountered in state independent payment schemes and that risk neutral social decision making requires state dependent benefit measures for situations involving individual risk these findings imply that future research should focus on developing theoretical bounds between the expected value of state dependent benefit measures and conventional measures and that contingent valuations techniques need to be extended to measure contingent payment possibilities for changes in uncertain access conditions to environmental resources

supply uncertainty option price and option value this article develops a general model of private and public choice under temporal uncertainty the model incorporates the effects of risk preferences and the prospect of future learning into both the individual and aggregate valuations of public projects

2002 lawrence r klein lecture liquidity and asset prices we broadly define liquid assets or monetary assets as any asset that can be readily sold in the market and can be held by a number of people in succession before maturity we ask in what environment is the circulation of liquid assets essential for the smooth running of the economy by developing a canonical model of a monetary economy i e where the circulation of liquid assets is essential we are able to examine the interaction between liquidity asset prices and aggregate economic activity

environmental issues and economic decisions in developing countries abstract this paper explains the key role of environmental economics in incorporating environmental concerns into decision making and in facilitating the more efficient management of natural resources as a step toward sustainable development it reviews concepts and techniques for valuation of environmental impacts for use in conventional cost benefits analysis as well as key related aspects including environmental impacts of economywide policies multicriteria analysis risk and uncertainty and discount rate issues several developing country case studies are summarized which cover a range of practical valuation methods the evidence presented suggests that the valuation techniques for determining use values may be applied successfully in appropriate cases but examples involving nonuse values are rare the use of multiobjective desicion methods also needs to be explored where economic valuation is not feasible

financial intermediation business failures and real business cycles in this paper a general equilibrium business cycle model is construct ed that when subjected to real disturbances mimics observed qualita tive comovements among real output money business failures risk pr emia intermediary loans and prices in contrast monetary disturban ces generate cycles that have several inconsistencies with empirical evidence thus providing support for real business cycle theory at th e expense of monetary theories of the business cycle financial inter mediation arises endogenously in the model and intermediation matters for business cycle behavior a credit supply mechanism acts in tande m with an intertemporal substitution effect in propagating stochastic disturbances copyright 1987 by university of chicago press

the application of laboratory experimental economics to the contingent valuation of public goods we have implicitly argued in the last section that a dynamic iterative survey mechanism may well need to be employed in the design of contingent valuation survey instruments in order to improve the accuracy of responses furthermore due to the current inaccuracy of hedonic and travel cost approaches for valuing public goods the least cost method in our view for establishing anchor or true individual values for testing alternative survey instruments is to use laboratory experiments the objective of these experiments should be the development of the most simple survey design which gives accurate responses subject to the budget of the investigator is a complex iterative voting procedure required how fast will such a procedure converge to true values what is the effect on incentives of relaxing the unanimity voting feature for large groups all of these operational questions can at least qualitatively be answered in an experimental laboratory setting

market simulation and the provision of public goods a non paternalistic response to anomalies in environmental evaluation most normative economics assumes that individuals have coherent preferences this paper responds to growing evidence of failures of this assumption particularly in the context of stated preference methods widely used in environmental policy analysis it proposes a non paternalistic concept of consumer sovereignty that does not assume preference coherence is satisfied by competitive markets and can be applied to the provision of public goods a key implication is that decisions should reflect valuations revealed at the point of consumption such valuations which can be inferred from hedonic prices may be less susceptible to willingness to accept wta willingness to pay wtp disparities than those elicited by stated preference methods

learning asymmetries in real business cycles when a boom ends the downturn is generally sharp and short when growth resumes the boom is more gradual our explanation rests on learning about productivity when agents believe productivity is high they work invest and produce more more production generates higher precision information when the boom ends precise estimates of the slowdown prompt decisive reactions investment and labor fall sharply when growth resumes low production yields noisy estimates of recovery noise impedes learning slows recovery and makes booms more gradual than downturns a calibrated model generates growth rate asymmetry similar to macroeconomic aggregates fluctuations in agents forecast precision match observed countercyclical errors of forecasters

understanding liquidity shortages during severe economic downturns abstract one feature of economic recessions is the appearance of aggregate liquidity shortages that can exacerbate the economic downturn we develop a model in which the demand for liquidity arises suddenly in response to continued funding needs of partially completed investment projects whose outcomes are subject to idiosyncratic shocks and moral hazard when the economy experiences an adverse aggregate productivity shock incentive constraints that underlie equity contracts may bind provided the shock is severe enough in this case credit rationing appears and the heightened demand for liquidity coincides with a greater reluctance to take on equity positions or deepen investments in on going investment projects the consequence is a reduction in new investment and termination of on going projects due to a lack of liquidity thereby worsening the economic slowdown

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

an assessment of the empirical magnitude of option values for environment goods this paper provides an empirical assessment of the magnitude of option values relative to expected surplus using a model presented by larson and flacco 1992 option values and option prices are computed for both simulated data sets and actual estimates of recreation demands results indicate that option values engendered by price and income uncertainty are generally quite a small percent of expected surplus

expected consumer s surplus and the welfare effects of price stabilization suppose a consumer faces a price which is uncertain ex ante a question which often arises is whether the consumer would benefit from a stabilization policy under which the price would then be fixed and known with certainty many authors have addressed this question by calculating the expected compensating variation of the price change others have used expected marshallian consumer s surplus often with the explanation that it is a good approximation to expected compensating variation 2 an important unresolved issue however is whether expected compensating variation does in fact provide a valid ranking of stochastic prices against stabilized prices i e a ranking in agreement with that given by expected utility in section 2 we demonstrate that expected compensating variation is not in general a valid utility indicator in essence while utility comparisons under uncertainty require the use of the cardinal properties of von neumannmorgenstern utility functions the expected surplus measures depend only on ordinal preference rankings expected compensating variation then is completely insensitive to and cannot reflect the precise factor of interest in suchstudies the consumer s attitudes toward risk we then derive a set of restrictions on the utility function which are necessary in order for expected compensating variation to be a valid measure we see that price stabilization policies can only be evaluated with compensating variation if consumer preferences are assumed to satisfy quite stringent requirements this is in constrast to the familiar certainty case in which compensating variation always provides correct rankings

option prices for groundwater protection abstract this paper reports results from a contingent valuation study of households willingness to pay pay to prevent uncertain future nitrate contamination of a potable supply of groundwater the functional form of the corresponding logit model is derived from utility maximization theory probability of future demand change in the probability of future supply and an attitudinal score for interests in the well being of future generations are significant positive determinants of option prices several implications of these results for aquifer management policy are highlighted

adaptation and the option value of uncertain environmental resources abstract just as ecology has benefited from the economic theory of optimization economics can benefit from the ecological theory of adaptation we examine the impact of short term non genetic adaptive self protection on the values individuals attach to uncertain prospective environmental resources we demonstrate that collective provision of reductions in supply uncertainty does not necessitate a positive option value given that uncertainty is influenced by the individual s ability to adapt through self protection we conclude that the total value of reducing the supply uncertainty of a natural resource is reflected in both the individual s option price payments for collective provision and in his willingness to pay for adaptation through self protection by ignoring adaptive self protection traditional benefit cost analysis has systematically underestimated the total value of environmental resources that are characterized by uncertain supplies

the role of ex ante and ex post decisions in the valuation of life abstract this paper examines the use of ex ante and ex post criteria in the evaluation of projects involving the risk of death one issue concerns the appropriate welfare function and it is argued that this should reflect both ex post and ex ante considerations but not in the form of restrictions on the welfare function the second issue concerns the form of compensation the argument in favour of ex post compensation as a means of reducing the cost of risk bearing needs to be modified when risks involve more than a single dimension as they do in projects involving the risk of death

cost benefit analysis under uncertainty reply robert mendelsohn and william strang raise a number of issues which require clarification their misrepresentations of my results in several cases are easily corrected the analytical flaws in their own arguments are more difficult turning first to the issue of misrepresentations they incorrectly assert that i recommended the use of the maximum expected value of alternative contingent payment schemes as the measure of project benefits even a cursory reading of my introduction reveals that option price which does not maximize the expected value of revenue is the appropriate measure of benefit in situations involving similar individuals collective risk and certain costs despite their claims to the contrary i have not suggested that option price is an underestimate of the true value of project benefits option price is precisely the true value of project benefits in this case contradicting themselves in their first footnote they assert that i recommend the use of option price for cases involving certain costs and collective risks thus ignoring the crucial role of similar preferences other examples could be mentioned but it is perhaps sufficient to suggest that any reader wishing to know what i actually said would do well to review my paper the appropriate measure of benefits is the subject of the third section of my paper no mention is made in this general argument of expected value calculations similar preferences certain costs or any of the other special cases that are considered in the fourth section of my paper these special cases are exactly that situations in which the general answer because of the special circumstances takes a relatively simple form it is of course crucial not to forget the special circumstances when considering these results although mendelsohn and strang do not mention the distinction between collective and individual risks save for a passing reference in their first footnote this issue is central to the consideration of the appropriate measure of project benefits while the general procedure developed in my third section is compatible with any joint distribution of individual states option price measures the benefit to similar individuals of a project involving a collective risk when cost is certain expected value calculations on the other hand are only appropriate in situations involving individual risks these issues were examined in detail in my fourth section in dealing with the special case involving individual risks i argued that the magnitude of aggregate payments would be equal to the sum of the expected values of the individual payments with virtual certainty this was hardly a profound observation but it led to the result that if contingent payments are to be collected in such circumstances one should consider those payments that have the largest expected value since all contingent payment schemes including that associated with expected surplus involve the same difficulties of adverse selection moral hazard and so forth mendelsohn and strang in expressing the view that for the government to collect more revenue than the sum generated by the expected value of surplus the government must provide an additional service p 1098 fail to recognize that collecting the wrong contingent payments those associated with the surplus point involve the same difficulties as collecting the right contingent payments those associated with the fair bet point this mistake is not eliminated by their argument that when fair insurance is available the individual s willingness to pay locus becomes linear the presence of such a market makes it possible for an individual to trade a given payment liability in the market for contingent claims for another professor of economics duke university durham nc 27706

cost benefit analysis under uncertainty comment decision makers performing cost benefit analysis must often deal with the problem of how to aggregate the benefits across states of nature accruing from an uncertain public investment project option price and the expected value of consumer s surplus are two potential measures of these aggregate benefits 2 the expected value of surplus has been proposed because it is readily measured and because risk pooling paul samuelson william vickrey 1964 and risk spreading kenneth arrow and robert lind 1970 tend to encourage risk neutral behavior option price has been favored on the vague notion that people would be willing to pay something extra above expected surplus to preserve the opportunity to purchase a good burton weisbrod 1964 as daniel graham cogently argues in this review 1981 however option price is but one of an infinite number of contingent payment schemes the literature has provided no justification for focusing upon it as an ideal measure of benefits under individual risk graham further argues that policymakers ought to adopt the compensating contingent payment plan which maximizes expected revenue this maximum payment plan by definition is never less and will often exceed any other contingent payment scheme consequently graham argues that both the expected value of surplus and option price are underestimates of the true value of project benefits our purpose in this comment is twofold first we show the role of project and nonproject insurance in a model of individual risk and second we argue that option price not the maximum payment plan is the optimal rule when no fair insurance is available in section ii we show that if fair insurance is available against all risks all contingent payment plans yield identical revenue a similar result holds if insurance is available for nonproject risks and the effect of the project to an individual is small the arrow lind model in section iii we explore the case where either the project has a large uninsurable effect on the individual or there is no insurance against even nonproject risks we argue that the very phenomena moral hazard adverse selection and complexity that eliminate the market for private insurance also prevent the government from making otherwise desirable contingent payments if contingent payments are too costly the government s only remaining choice is to collect payments that are constant across states which makes option price the relevant measure of benefits

uncertainty benefit cost analysis and the treatment of option value abstract this paper proposes a new conceptual framework for defining welfare measures under uncertainty the planned expenditure function this function describes the locus of expenditures on contingent claims that are required to realize a given level of expected utility to illustrate the convenience of the framework it is used to consider the definition of the option price the appropriate treatment of option value the valuation of risk changes and the definition of non use benefits under uncertainty

option value under income and price uncertainty abstract we present a rigorous examination of the sign of option value under income and price uncertainty we state and prove three theorems on the sign of option value when preferences are state independent if income is uncertain the sign of option value is opposite the sign of the income elasticity of the good in question the analysis of price uncertainty is in two parts one covers the case of own price uncertainty and the other the case where the price of some other good is uncertain in both cases the sign of option value is generally ambiguous

revealed preference for public goods the most serious problem for the modern theory of optimal public expenditure is that although it has to be based on some social welfare function individual preferences for public goods which constitute the elements of any individualistic social welfare function are hard to assess it is argued that since every individual can freely participate in the consumption of a public good there is an incentive for him to either underreport or overreport his preferences depending on how the reported preferences are used in the financing process of the public good i this argument will be correct if an individual s preferences for public goods can be expressed only directly in many cases however the consumption of a public good has some technical or objective relationship with the consumption of some private goods thus the benefit an individual derives from free highways depends on how much he spends on a car and gasoline even the benefit an individual derives from the judicial system depends on how much he spends to hire the services of lawyers also an individual can enjoy the same security police provide by hiring private guards and installing locks and so on in these cases if we know the technical relationships between the consumption of private goods and the consumption of public goods then from the market data relating the amounts of private goods bought to prices and the data on the existing amounts of public goods we might be able to infer i the amounts of final goods consumed say the number of trips from one point to another the degree of justice the security from robbery etc and ii their opportunity costs which the individual was willing to pay but if we succeed in this inference then all that remains to be done in order to find the individual s utility function will be to integrate back the relationship between the amounts of final goods consumed and their opportunity costs a trivial example can be provided by assuming that each public good is perfectly substitutable with a private good let yi be the quantity of the ith public good and xi be the quantity of a private good which is a perfect substitute for the ith public good then the benefit derived from the ith public good and its perfect substitute can be measured by xi yi suppose we have ascertained an individual consumer s demand functions for private good when all the yi are zero we know from the revealed preference theory that if these demand functions satisfy a certain condition namely the symmetry of the slutsky matrix then there exists a utility function unique up to a monotone transformation

willingness to pay for publicly provided goods a possible measure of benefit abstract the results presented in this paper arise from a u k based study aimed at determining people willingness to pay for two publicly provided goods namely continuing care for elderly people in either hospital or national health service nhs nursing homes seventy one per cent of respondents provided valuations which could contribute to the analysis which showed that the group which preferred nhs nursing home care could potentially compensate the group which preferred hospital care and still remain better off thus rendering nhs nursing home care the efficient option to undertake no variable could be found which discriminated between those who could place a value on both types of care and those who could not the willingness to pay methodology is very experimental in this context and should be investigated thoroughly before its widespread adoption in the evaluation of health care techniques

valuing changes in health risks a comparison of alternative measures essential to efficient provision of health safety and the environment is correct valuation of risks to human health in a world of scarcity difficult decisions concerning tradeoffs between health and other desirables are unavoidable in this paper we develop a model of health investment under uncertainty which yields a general expression for values of changes in risks to human health the preference based values of morbidity risks and mortality risks are ex ante dollar equivalents of changes in expected utility associated with risk changes the preference based values are related to two alternative measures costs of illness and preventive expenditures which are thought to be lower bounds on the value of risk reductions we demonstrate that these alternative measures are not even special cases of the more general measure and that the size relationships among the three measures are complex also we derive the relationship between the willingness to pay for risk changes and the consumer surpluses associated with health changes which occur with certainty the next section contains a brief review of the approaches to valuing changes in health

measuring option prices from market behavior abstract option prices can be calculated from empirical demand models given knowledge of the utility theoretic structure implied by the demand specifications and the joint density of the random variables consumers face formulas for option price are given for three common weakly complementary demand specifications because it can be difficult to assess behavioral uncertainty and calculate option prices in practice knowledge of the sign of option value is important since it is a guide to the bias from ignoring this type of uncertainty the sign of option value is determined for sources of uncertainty that have proved elusive in previous treatments

lapm a liquidity based asset pricing model the intertemporal capm predicts that an asset s price is equal to the expectation of the product of the asset s payoff and a representative consumer s intertemporal marginal rate of substitution this paper develops an alternative approach to asset pricing based on corporations desire to hoard liquidity our corporate finance approach suggests new determinants of asset prices such as the distribution of wealth within the corporate sector and between the corporate sector and the consumers also leverage ratios capital adequacy requirements and the composition of savings affect the corporate demand for liquid assets and thereby interest rates starting with the capital asset pricing model capm derived by sharpe 1964 lintner 1965 and mossin 1966 market finance has emphasized the role of consumers time preference and risk aversion in determining asset prices the intertemporal consumption based asset pricing model e g rubinstein 1976 lucas 1978 breeden 1979 harrison and kreps 1979 cox ingersoll and ross 1985 hansen and jagannathan 1991 predicts that an asset s current price is equal to the expectation conditioned on current information of the product of the asset s payoff and a representative consumer s intertemporal marginal rate of substitution imrs while fundamental this dominant paradigm for pricing assets has some wellrecognized shortcomings see below and there is clearly scope for alternative and complementary approaches this paper begins developing one such approach based on aggregate liquidity considerations 1 our starting point is that the productive and financial spheres of the economy have autonomous demands for financial assets and that their valuations for these assets are often disconnected from the representative consumer s corporate demand for financial assets is driven by the desire to hoard liquidity in order to fulfill future cash needs in contrast with the