international consumption risk sharing this paper formally examines the implications of international consumption risk sharing for a panel of industrialized countries we theoretically derive the international consumption insurance proposition in a simple setup and show how to modify it in more complicated models we analyze the implications of the theory for pairs of countries and find that aggregate domestic consumption is almost completely insured against idiosyncratic real demographic fiscal and monetary shocks over short cycles but that it covaries with these variables over medium and long cycles the cross equation restrictions imposed by the theory are rejected the policy implications are discussed

effects of piracy on quality of information goods it is commonly believed that piracy of information goods leads to lower profits which translate to lower incentives to invest in innovation and eventually to lower quality products manufacturers policy makers and researchers all claim that inadequate piracy enforcement efforts translate to lower investments in product development however we find many practical examples that contradict this claim therefore to examine this claim more carefully we develop a rigorous economic model of the manufacturer s quality decision problem in the presence of piracy we consider a monopolist who does not have any marginal costs but has a product development cost quadratic in the quality level produced the monopolist faces a consumer market heterogeneous in its preference for quality and offers a quality level that maximizes its profit we also allow for the possibility that the manufacturer may use versioning to counter piracy we unexpectedly find that in certain situations lower piracy enforcement increases the monopolist s incentive to invest in quality we explain the reasons and welfare implications of our findings this paper was accepted by lorin hitt information systems

optimal timing of sequential distribution the impact of congestion externalities and day and date strategies the window between a film s theatrical and video releases has been steadily declining with some studios now testing day and date strategies i e when a film is released across multiple channels at once we present a model of consumer choice that examines trade offs between substitutable products theatrical and video forms the possibility of purchasing both alternatives a congestion externality affecting consumption at theaters with heterogeneous consumer groups and a decay in the quality of the content over time our model permits a normative study of the impact of shorter release windows zero three months for which there is a scarcity of relevant data we characterize the market conditions under which a studio makes video release time and price selections indicative of direct to video day and date and delayed video release tactics during seasons of peak congestion we establish that day and date strategies are optimal for high quality films with high content durability i e films whose content tends to lead consumers to purchase both alternatives whereas prices are set to perfectly segment the consumer market for films with low content durability we find that lower congestion effects provide studios with incentives to delay release and price the video to induce multiple purchasing behavior for films with higher content durability however an increase in congestion effects can in certain cases actually lead to higher studio profitability we also show that at the lower range of quality an increase in movie quality should often be accompanied by a later video release time surprisingly however we observe the opposite result at the upper range of movie quality an increase in quality can justify an earlier release of the video

tastes and technology in a two country model of the business cycle explaining international trade on international financial markets allows people to insure country specific risk and smooth consumption intertemporally equilibrium models of business cycles with trade on global financial markets typically yield international consumption correlations near one and excessive volatility of investment the authors incorporate nontraded goods in the model and find that the implications for aggregate consumption investment and the trade balance are consistent with business cycle properties of industrialized countries however the model driven by technology shocks alone yields counterfactual implications for comovements between consumption and prices at the sectoral level taste shocks produce price quantity relationships more consistent with the data copyright 1995 by american economic association

can nontradables generate substantial home bias the past decade has witnessed an increase in the fraction of equity portfolios invested abroad as barriers to international asset trade have significantly declined what are the long run implications of this process in this paper we investigate to what extent nontradables consumption and leisure can affect the portfolio allocation decision in otherwise integrated capital markets we find that hedging against nontradables shocks can account for only a small portfolio bias toward domestic assets these results suggest that in the near future we can expect to observe sizable additional international diversification

trying to explain home bias in equities and consumption investors hold a substantially larger proportion of their wealth portfolios in domestic assets than standard portfolio theory would suggest a phenomenon called equity home bias in the absence of this bias investors would optimally diversify domestic output risk using foreign equities therefore consumption growth rates would tend to co move across countries even when output growth rates do not empirically however consumption growth rates tend to have a lower correlation across countries than do output growth rates a phenomenon i call consumption home bias in this paper i discuss these two biases and their potential relationship as suggested by the literature

economic and policy implications of restricted patch distribution in this paper we study how restricting the availability of patches to legal users impacts the vendor s profits market share software maintenance decisions and welfare outcomes prior work on this topic assumes that the hacker s effort is independent of the vendor s decision to release the patch freely or not clearly if the patch is not available to everyone the hacker finds it easier to exploit the vulnerability in the product and as a result is likely to alter his effort to understand the role of a strategic hacker we build a game theoretic model where the hacker s decision is endogenous with this model we find that the hacker s effort may on the one hand decrease the utility that the vendor can extract from the consumers but on the other hand may help differentiate the legal version of the product from the pirated version a vendor can strategically exploit the hacker s behavior in its pricing and software maintenance decisions the endogeneity of the hacker s actions drives several of

home bias in equity portfolios inflation hedging and international capital market equilibrium we test whether the home bias in equity portfolios is caused by investors trying to hedge inflation risk the empirical evidence is consistent with this motive only if investors have very high levels of risk tolerance and equity returns are negatively correlated with domestic inflation we then develop a model of international portfolio choice and equity market equilibrium that integrates inflation risk and deadweight costs using this model we estimate the levels of costs required to generate the observed home bias in portfolios consistent with different levels of risk aversion for a level of risk aversion consistent with standard estimates of the domestic equity market risk premium these costs are about a few percent per annum greater than observable costs such as withholding taxes thus the home bias cannot be explained by either inflation hedging or direct observable costs of international investment unless investors have very low levels of risk aversion article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

integrating behavioral choice into epidemiological models of aids increased hiv risk creates incentives for people with low sexual activity to reduce their activity but may make high activity people fatalistic leading them to reduce their activity only slightly or actually increase it if high activity people reduce their activity by a smaller proportion than low activity people the composition of the pool of available partners will worsen creating positive feedbacks and possibly multiple steady states early public health efforts may allow societies to reach more favorable steady states excerpt

determinants of dynamics in the world city network 2000 2004 this article presents an analysis of the determinants of connectivity change in the world city network wcn drawing on the theoretical research of saskia sassen and the subsequent empirical research of the globalization and world cities gawc group connectivity in the wcn is measured through the networked location strategies of globalised service firms based on a calculation of the total connectivity of 220 cities across the world for 2000 and 2004 a measurement of connectivity change is produced for this time period this measure of connectivity change is then used as the dependent variable in a linear regression model through which are tested a number of hypotheses concerning the determinants of connectivity change the study analyses wcn change both in general and in sectoral terms and also examines how the prior presence of service firms impacts connectivity change

channels of interstate risk sharing united states 1963 1990 we develop a framework for quantifying the amount of risk sharing among states in the united states and construct data that allow us to decompose the cross sectional variance in gross state product into several components which we refer to as levels of smoothing we find that 39 percent of shocks to gross state product are smoothed by capital markets 13 percent are smoothed by the federal government and 23 percent are smoothed by credit markets the remaining 25 percent are not smoothed we also decompose the federal government smoothing into subcategories taxes transfers and grants to states

the determinants of cross border equity flows abstract we explore a new panel data set on bilateral gross cross border equity flows between 14 countries 1989 1996 we show that a gravity model explains international transactions in financial assets at least as well as goods trade transactions gross transaction flows depend on market size in source and destination country as well as trading costs in which both information and the transaction technology play a role distance proxies some information costs and other variables explicitly represent information transmission an information asymmetry between domestic and foreign investors and the efficiency of transactions the geography of information is the main determinant of the pattern of international transactions while there is weak support in our data for the diversification motive once we control for the informational friction we broaden the scope of our results by presenting some evidence linking the results on equity transactions to equity holdings

explaining saving investment correlations national saving and investment rates are highly positively correlated in virtually all countries this is puzzling as it apparently implies a low degree of international capital mobility this paper shows that the observed positive correlation between national saving and investment rates arises naturally within a quantitatively restricted equilibrium model with perfect mobility of financial and physical capital the model is consistent with the fact that saving investment correlations are larger for larger countries but are still substantial for small countries further the model is consistent with the finding that current account deficits tend to be associated with investment booms copyright 1993 by american economic association

international risk sharing and european monetary unification abstract we explore income and consumption smoothing patterns among european community ec countries and among oecd countries during the period 1966 90 we find that for oecd as well as for ec countries about 40 percent of shocks to gdp are smoothed at the one year frequency with about half the smoothing achieved through national government budget deficits and half by corporate saving at the three year differencing frequency only 25 percent of shocks to gdp are smoothed mainly via government lending and borrowing in the absence of alternative income and consumption smoothing mechanisms the restrictions on budget deficits imposed by the maastricht treaty should be relaxed to allow governments to run large temporary deficits in response to output shocks

tax subsidy policies toward vector borne infectious diseases abstract vector borne diseases especially rife in poor countries pose sectoral tax subsidy issues preventions and therapies mitigate these diseases in a numerical optimization model combining dynamic epidemiology and economics the medical distinction between prevention and therapy does not distinguish economic properties of preventions and therapies some interventions increase and others decrease moving to the steady state depending on the utility function the targeting of interventions and the disease process interventions display negative own price but indeterminate cross price effects juxtaposing the social planner s with decentralized choices quantifies externalities and shows how subsidies implement the first best one prevention and the therapy are equally subsidized

what can explain the apparent lack of international consumption risk sharing recent research in international business cycles finds that international consumption comovements do not match the risk sharing predictions of standard complete markets models in this paper i ask whether two different types of explanations can help explain this result 1 nonseparabilities between tradables and nontradable leisure or goods and 2 the effects of capital market restrictions on consumption risk sharing i find that risk sharing cannot be resolved by either explanation alone however when i allow for both nonseparabilities and certain market restrictions risk sharing among unrestricted countries cannot be rejected this evidence suggests that a combination of these two effects may be necessary to explain consumption risk sharing across countries

evaluating risky consumption paths the role of intertemporal substitutability abstract in dynamic stochastic welfare comparisons a failure clearly to distinguish between risk aversion and intertemporal substitutability can result in misleading assessments of the impact of risk aversion on the welfare costs of consumption risk changes the problem arises in any setting in which uncertainty is propagated over time notably but not exclusively in economies with stochastic consumption trends regardless of the preference setup adopted an increase in risk aversion amplifies the per period costs of risks the weights consumers use to cumulate the per period costs of risks with persistent effects should however depend on intertemporal substitutability as well as on risk aversion under time separable expected utility preferences an increase in the period utility function s curvature therefore alters the welfare effect of risk for reasons that are in part unrelated to risk aversion to illustrate these points i reconsider lucas s estimate of the cost of consumption instability for the postwar united states

who should be responsible for software security a comparative analysis of liability policies in network environments in recent years vendor liability for software security vulnerabilities has been the center of an important debate in the software community and a topic gaining government attention in legislative committees and hearings the importance of this question surrounding vendor security liability is amplified when one considers the increasing emergence of zero day attacks where hackers take advantage of vulnerabilities before the software vendor has a chance to release protective patches in this paper we compare the effectiveness of three software liability policies vendor liability for damages vendor liability for patching costs and government imposed security standards we find that vendor liability for losses is not effective in improving social welfare in the short run while liability for patching costs can be effective if either patching costs are large and the likelihood of a zero day attack is low or patching costs are small and zero day likelihood is high in the long run when the vendor can invest in reducing the likelihood of security vulnerabilities loss liability is still ineffective when the zero day attack probability is high but can increase both vendor investment in security and social welfare when zero day attack likelihood is sufficiently low when the zero day attack probability is high patch liability is ineffective if user patching costs are large but partial patch liability can boost vendor investment and improve welfare when patching costs are small in contrast in an environment with low zero day attack probability full vendor patch liability can be optimal finally comparing the effectiveness of the three liability policies under study we find that government imposed standards on software security investment can be preferable to both patching and loss liability on the vendor if zero day attack likelihood is sufficiently low however if zero day attacks are a common occurrence and patching costs are not too high partial patch liability is the most effective policy this paper was accepted by sandra slaughter information systems

network software security and user incentives we study the effect of user incentives on software security in a network of individual users under costly patching and negative network security externalities for proprietary software or freeware we compare four alternative policies to manage network security i consumer self patching where no external incentives are provided for patching or purchasing ii mandatory patching iii patching rebate and iv usage tax we show that for proprietary software when the software security risk and the patching costs are high for both a welfare maximizing social planner and a profit maximizing vendor a patching rebate dominates the other policies however when the patching cost or the security risk is low self patching is best we also show that when a rebate is effective the profit maximizing rebate is decreasing in the security risk and increasing in patching costs the welfare maximizing rebates are also increasing in patching costs but can be increasing in the effective security risk when patching costs are high for freeware a usage tax is the most effective policy except when both patching costs and security risk are low in which case a patching rebate prevails optimal patching rebates and taxes tend to increase with increased security risk and patching costs but can decrease in the security risk for high risk levels our results suggest that both the value generated from software and vendor profits can be significantly improved by mechanisms that target user incentives to maintain software security

full insurance in the presence of aggregate uncertainty this paper tests implications of full consumption insurance the object is to determine how much mileage can be obtained from a model with complete markets with such features as private information or liquidity constraints omitted the implication exploited is that individual consumption responds to aggregate risk but not to idiosyncratic risk the test involves regressing the change in household consumption onto the change in aggregate consumption and other right hand side variables such as the change in household income and change in employment status all variables other than the change in aggregate consumption are predicted to be insignificant in explaining the change in household consumption with observations on consumption and income for 10 695 households from the consumer expenditure survey the results are mixed the results for one specification exponential utility are mostly consistent with full consumption insurance the results for the other specification power utility are not

externalities and compulsary vaccinations abstract this paper challenges the conventional wisdom that because of the free rider problem a case can be made for compulsary vaccination against infectious disease for a very general class of models requiring that all individuals be vaccinated is strictly dominated by free choice the market allocation is not optimum and in the full information optimum some individuals would be compelled to be vaccinated this allocation can be achieved by taxes and subsidies however the government can exploit the revelation properties of vaccination and achieve an even better allocation than the full information optimum

dynamic epidemiology and the market for vaccinations abstract the intent of this paper is to raise the question of how and when externalities can arise in the market for vaccinations static and dynamic models of such markets are developed and compared a special case in a continuous time dynamic framework is examined and is found to be efficient i e there is no externality this is in contrast to the results from the static formulation raising doubts about the suitability of a static approach these results indicate that the question of whether there are externalities in individual immunization decisions is more involved than is generally supposed

home bias and international risk sharing twin puzzles separated at birth abstract we document that international home bias in debt and equity holdings declined during the period 1993 2003 at the same time as international risk sharing increased using panel data regressions for oecd countries we demonstrate that less home bias is associated with more international risk sharing more generally we show that more financial integration is associated with more risk sharing when we measure financial integration as the ratio of foreign assets to gross domestic product our results indicate that risk sharing and international financial integration are closely related empirical phenomena