proper risk aversion on introduit et on etudie une condition comportementale significative sur les fonctions d utilite pour les richesses qui signifie qu une loterie indesirable ne peut jamais etre rendue desirable par la presence d une loterie indesirable independante

a simple asset pricing model with heterogeneous agents uninsurable labor income and limited stock market participation abstract in this paper we study a simple two period asset pricing model to understand the implications of uninsurable labor income risk and or borrowing constraints limited stock market participation heterogeneous labor income volatilities and heterogeneous preferences we appraise the performance of each of these in matching moments of asset returns to the data and show that limited stock market participation generates a significantly large equity premium we also show that the distribution of wealth between stock market participants and non participants plays an important role in asset pricing and that the effect of borrowing constraints on asset returns are similar to that of limited participation finally we discuss the practical implications of our investigation providing an appraisal of ongoing changes in asset returns

income taxes and urban spatial structure abstract this paper examines the impact of an income tax in a monocentric city where households equilibriate their allocation of time between work commuting and leisure an increase in the income tax rate lowers the implicit value of time and hence transportation costs compensated equilibrium comparative statics analysis shows that under certain conditions this results in a larger more dispersed urban area with lower land rents at the city center and less population within any given distance from the center the welfare effect of an income tax rate change is also studied and an expression for the marginal excess burden is derived the income tax produces welfare losses both because it induces substitution in favor of leisure and in favor of travel the latter accompanied by excessive spatial dispersion and consumption of space the marginal excess burden depends not only on the compensated demand elasticity for leisure but also on that for space finally the problem of benefit measurement for transportation projects in this tax distorted spatial economy is examined benefit measures should be deflated to adjust for the fact that further transportation improvements lead to reduction of land use intensity exacerbating the problem of spatial resource misallocation in an already excessively dispersed urban area

spatial variation of the marginal utility of income and unequal treatment of equals in one of the most famous contributions to the new urban economics literature mirrlees 6 showed that a utilitarian planner able to control the distribution of income or endowments across households the consumption of land or housing and the distribution of population over space would treat households with identical tastes unequally in the sense that utility levels would vary among them at the planner s optimum similar results were obtained by dixit 2 who showed that even more inequality averse social welfare functions than the utilitarian one would result in unequal treatment he concluded that only the rawlsian maximin welfare function would produce the equal treatment outcome 2 this result has generated considerable attention see e g mills and mackinnon 5 because of its apparently paradoxical nature the purpose of this note is to present a new way of thinking about and making plausible the unequal treatment result 3 to develop the intuition recall that in monocentric city models where equals are treated equally that is where households have equal endowments a market equilibrium with free mobility is characterized by equal utilities for all assuming identical preferences as is well known in the absence of congestion or other market failures this market equilibrium is pareto efficient producing the maximum feasible common level of utility imagine now a mirrlees planner coming across such an equal utility equilibrium under what conditions would the planner not want to disturb the market equilibrium clearly a necessary condition for equal treatment to be utilitarian optimal is that the marginal utility of income be the same for all households in the market equilibrium otherwise freezing the allocation of resources in every other respect social

unforeseen contingencies and incomplete contracts we scrutinize the conceptual framework commonly used in the incomplete contract literature this literature usually assumes that contractual incompleteness is due to the transaction costs of describing or of even foreseeing the possible states of nature in advance we argue however that such transaction costs need not interfere with optimal contracting i e transaction costs need not be relevant provided that agents can probabilistically forecast their possible future payoffs even if other aspects of the state of the nature cannot be forecast in other words all that is required for optimality is that agents be able to perform dynamic programming an assumption always invoked by the incomplete contract literature the foregoing optimality result holds very generally provided that parties can commit themselves not to renegotiate moreover we point out that renegotiation may be hard to reconcile with a framework that otherwise presumes perfect rationality however even if renegotiation is allowed the result still remains valid provided that parties are risk averse

labor income and risky assets under market incompleteness evidence from italian data abstract theory suggests that uninsurable income risk induces individuals to accumulate assets as a precautionary reserve of value most assets however bear rate of return risk that can be diversified only if every asset is traded by a large number of individuals and arbitrage is frictionless using italian micro data we find evidence of income and asset risks that affect consumption italian households are particularly well insured against illness but not against job losses moreover we detect a positive yet weak effect of asset holding on the variability of consumption streams across households

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

interest rates and currency prices in a two country world abstract this paper is a theoretical study of the determination of prices interest rates and currency exchange rates set in an infinitely lived two country world which is subject both to stochastic endowment shocks and to monetary instability formulas are obtained for pricing all equity claims nominally denominated bonds and currencies and these formulas are related to earlier closely related results in the theories of money finance international trade

household behavior in a monocentric urban area with a public sector abstract this paper has examined how a public sector alters the model of urban household behavior and its predictions the qualitative housing price and demand location characteristics remain unchanged by the introduction of either an exogenous or endogenous public sector in addition the household s response to tax rate and public service changes depend solely upon the nonlocational demand relationships the major impact of location per se on the household s demand vector is through an additional hicksian price term whether locational effects reinforce or vitiate nonlocational demand changes depends upon the compensated relationship between the good in question and housing this paper also investigated the design of neutral public budgets government budgets using property income or comprehensive sales taxes to finance public services cannot be neutral with respect to housing demand and location of the four types of taxes considered only a narrow based sales tax can finance public services neutrally

the effect of labor supply and tax rates on intraurban location exist only one paper wales 1978 in killingsworth s 1983 review of labor supply studies explicitly controlled for commuting the key variable in standard models of urban location more recently kohlhase 1986 developed a model of housing demand with endogenous labor supply and alperovich 1985 included income in estimates of distance functions no published empirical paper treats household intraurban location and labor supply as jointly endog

dynamic equilibrium with liquidity constraints this article studies an intertemporal economy with liquidity constrained and unconstrained individuals we use a stopping time approach to solve the finite horizonconstrained consumption portfolio problem with constant relative risk aversion and to examine the structure of equilibrium the impact of the constraint on the optimal consumption and the financing portfolio is assessed the equilibrium state price density is related to the exercise boundary of an american style contingent claim with nonlinear payoff this stopping time characterization enables us to prove the existence of an equilibrium and can be implemented numerically properties of equilibrium bond and stock returns are examined copyright 2003 oxford university press

on welfare measurement in cities this paper extends project evaluation in a spatial urban economy to consider the more general case of distortionary public finances if a local public improvement is financed at least in part by a distortionary property tax we show that residential land prices do not accurately measure the value of land improvements even when households are identical and the improvement is infinitesimally small the magnitude and direction of the measurement error will depend on the second order effects on aggregate demand via changes in population density at each location and on overall city size

investor heterogeneity market segmentation leverage and the equity premium puzzle abstract financial economists for the past two decades have attempted to explain why the equity premium is so high now known as the equity premium puzzle epp we model investor heterogeneity market segmentation and optimal leverage using the time separable standard power utility market completeness and ignoring transaction costs to explain the epp we explain both the epp and the related risk free rate puzzle without resorting to preference modification furthermore we show a unique interior equilibrium for the debt ratio contrary to the work by f modigliani m h miller the cost of capital corporation finance and the theory of investment american economic review 48 1958 261 297 corporate income taxes and the cost of capital american economic review 53 1963 433 443 and s c myers presidential address the capital structure puzzle journal of finance 39 1984 575 592 our simulations show the relevance of our models

representative consumer s risk aversion and efficient risk sharing rules abstract we study the representative consumer s risk attitude and efficient risk sharing rules in a single period single good economy in which consumers have homogeneous probabilistic beliefs but heterogeneous risk attitudes we prove that if all consumers have convex absolute risk tolerance so must the representative consumer we also identify a relationship between the curvature of an individual consumer s individual risk sharing rule and his absolute cautiousness the first derivative of absolute risk tolerance furthermore we discuss some consequences of these results and refinements of these results for the class of hara utility functions

wealth inequality and asset pricing in an arrow debreu exchange economy with identical agents except for their initial endowment we examine how wealth inequality affects the equilibrium level of the equity premium and the risk free rate we first show that wealth inequality raises the equity premium if and only if the inverse of absolute risk aversion is concave in wealth we then show that the equilibrium risk free rate is reduced by wealth inequality if the inverse of the coefficient of absolute prudence is concave we also prove that the combination of a small uninsurable background risk with wealth inequality biases asset pricing towards a larger equity premium and a smaller risk free rate the model of the representative consumer a la lucas 1978 failed to explain observed security prices more specifically as first stated by mehra and prescott 1985 the model predicts an equity premium that is too low and a risk free rate that is too high given the observed low variability of consumption growth a recent strand of the literature with papers by constantinides and duffie 1996 heaton and lucas 1996 and krusell and smith 1997 for example explores whether incomplete asset markets and heterogeneity among consumers can explain these puzzles constantinides and duffie 1996 in particular conclude that it is at least in principle possible to generate larger equity premia when such ingredients are introduced the aim of this paper is not to provide another explanation of the puzzles but rather to better understand the relationship between asset prices the heterogeneity of consumers wealth and the market incompleteness when markets are complete heterogeneous consumers are able to equalize their marginal rates of substitution across states and across time as shown by constantinides 1982 this implies that the equilibrium of the heterogeneous consumer economy can be duplicated by the equilibrium in a lucas economy with a representative agent this means that taking account of the heterogeneity in the population alone cannot explain why the representative agent model is rejected hansen and singleton 1982 this does not mean however that the distribution of wealth in the population for example has no effect on asset prices in general in order to understand this consider the departure from an egalitarian distribution of wealth by introducing a mean preserving transfer of endowment under decreasing absolute risk aversion poorer agents will be more risk averse whereas wealthier people will be less risk averse there is no reason a priori for that the group s attitude towards risk be unaffected by this transfer we first show that if absolute risk tolerance i e the inverse of the arrow pratt coefficient of absolute risk aversion is concave then the risk aversion of the agent with the mean wealth will be smaller than the risk aversion of the representative agent thus if an outside observer overlooks wealth inequality he consequently underestimates the aversion to risk of society this leads to

cooperative investments and the value of contracting recent articles have shown that contracts can support the efficient outcome for bilateral trade even in the face of specific investments and incomplete contracting these studies typically considered selfish investments that benefit the investor e g the seller s investment reduces her production costs the authors find very different results for cooperative investments that directly benefit the investor s partner e g the seller s investment improves the buyer s value of the good most importantly if committing not to renegotiate the contract is impossible then contracting has no value i e the parties cannot do better than to abandon contracting altogether in favor of ex post negotiation

an intertemporal general equilibrium model of asset prices this paper develops a continuous time general equilibrium model of a simple but complete economy and uses it to examine the behavior of asset prices in this model asset prices and their stochastic properties are determined endogenously one principal result is a partial differential equation which asset prices must satisfy the solution of this equation gives the equilibrium price of any asset in terms of the underlying real variables in the economy in this paper we develop a general equilibrium asset pricing model for use in applied research an important feature of the model is its integration of real and financial markets among other things the model endogenously determines the stochastic process followed by the equilibrium price of any financial asset and shows how this process depends on the underlying real variables the model is fully consistent with rational expectations and maximizing behavior on the part of all agents our framework is general enough to include many of the fundamental forces affecting asset markets yet it is tractable enough to be specialized easily to produce specific testable results furthermore the model can be extended in a number of straightforward ways consequently it is well suited to a wide variety of applications for example in a companion paper cox ingersoll and ross 7 we use the model to develop a theory of the term structure of interest rates many studies have been concerned with various aspects of asset pricing under uncertainty the most relevant to our work are the important papers on intertemporal asset pricing by merton 19 and lucas 16 working in a continuous time framework merton derives a relationship among the equilibrium expected rates of return on assets he shows that when investment opportunities are changing randomly over time this relationship will include effects which have no analogue in a static one period model lucas considers an economy with homogeneous individuals and a single consumption good which is produced by a number of processes the random output of these processes is exogenously determined and perishable assets are defined as claims to all or a part of the output of a process and the equilibrium determines the asset prices our theory draws on some elements of both of these papers like merton we formulate our model in continuous time and make full use of the analytical tractability that this affords the economic structure of our model is somewhat similar to that of lucas however we include both endogenous production and

portfolio choice in the presence of personal illiquid projects personal projects such as a private business or the purchase of a home influence individuals portfolio choice we conduct a theoretical analysis of this influence when financial assets are required to provide liquidity to personal projects due to this liquidity consideration individuals behave in a more risk averse fashion when there is a large penalty for discontinuing or underinvesting in the final stages of the projects in addition using data from the 1995 survey of consumer finances we find that households that are saving to invest in their own businesses or in their own homes indeed have significantly safer financial portfolios a large portion of private assets are invested in personal illiquid projects these are projects that must be partly self financed and are costly to sell according to the 1995 survey of consumer finances scf residential housing and capital invested in unincorporated businesses account for 41 2 percent and 19 1 percent respectively of household wealth in this paper we study the impact of these personal illiquid projects on individuals portfolios of financial assets personal projects influence portfolio choice in two ways first financial assets can be used to provide diversification against bad outcomes of personal projects this interaction is well recognized in the literature as it emanates from standard portfolio theory second financial assets can be used to provide liquidity to personal projects when the timing of investment in these projects is important this latter interaction is the focus of our paper we show that it helps explain why individuals particularly young investors and entrepreneurs have larger than expected holdings of safe financial assets in the financial planning literature young investors are advised to hold a larger share of risky assets in their financial portfolios in order to capture the superior expected return of these assets as investors grow older they are advised to gradually reduce their holdings of risky assets jagannathan and kocherlakota 1996 show that this advice is economically sound as long as the investor s human wealth is relatively uncorrelated with stock returns

ex ante efficient mechanism with private entry costs this paper studies ex ante efficient resource allocation mechanism in an environment where agents endowed with their private values must incur private entry costs to participate due to the nature of this bidimensional screening problem and the difficulty in fully characterizing all implementable endogenous entries the domain of the related social planner s problem that is essential for establishing the existence of efficient mechanism needs to be carefully designed we find that a second price auction among the entrants with a reserve price equal to the seller s valuation is ex ante efficient and any ex ante efficient mechanism must be ex post efficient jel d44 d61 d82

on revenue recycling and the welfare effects of second best congestion pricing in a monocentric city abstract this paper examines congestion taxes in a monocentric city with pre existing labor taxation when road toll revenue is used to finance labor tax cuts 35 of the optimal road tax in our numerical model does not reflect marginal external congestion costs but rather functions as a ramsey mirrlees tax i e an efficiency enhancing mechanism allowing for an indirect spatial differentiation of the labor tax this adds a quite different motivation to road pricing since welfare gains can be produced even in absence of congestion we find that the optimal road tax is non monotonic across space reflecting the different impacts of labor supply elasticity and marginal utility of income which both vary over space the relative efficiencies of some archetype second best pricing schemes cordon toll flat kilometer tax are high 84 and 70 respectively when road toll revenue is recycled lump sum the optimal toll lies below its pigouvian level extensions in a bimodal framework show that the optimality of using road toll revenue to subsidize public transport depends on the initial inefficiency in public transport pricing

preserving preference rankings under background risk abstract for any random vector of wealth payoffs x 1 x 2 let the random variable z be mutually independent of x 1 and x 2 with e z 0 the basic question we address in this paper is the following when can we say that x 1 z is preferred by an expected utility maximizer to x 2 z whenever x 1 is preferred to x 2 in other words when can we guarantee that the addition of an arbitrary independent background noise z will not affect the preference ranking between other risks

the effects of moral hazard on asset prices when financial markets are complete abstract this paper discusses the implications for prices and quantities of an alternative trading arrangement in kahn s 1990 economic environment with moral hazard unlike kahn s model of asset trade my model does not impose any unmotivated restrictions on short sales instead it features complete markets and publicly observable asset transactions like kahn s model my model implies that allocations are constrained pareto optimal however the implications of my model for asset prices are considerably different in particular when all agents have log utility asset prices satisfy an aggregation theorem also unlike kahn s model the model in this paper does worse than the standard representative agent model in terms of explaining the equity premium

ex post renegotiation proof mechanism design we study what kind of equilibria of which mechanisms are ex post renegotiation proof eprp i e robust against the possibility of ex post renegotiation under a variety of renegotiation procedures and which social choice functions are eprp implementable in complete information environments with two agents only budget balanced groves allocations are eprp implementable while with three or more agents all ex post efficient allocations are in environments with independent private values essentially only the budget balanced groves in expectations allocations are eprp implementable while with three or more agents and correlated beliefs all ex post efficient allocations are

a simple model of incomplete insurance the case of permanent shocks this paper constructs a simple model of incomplete insurance by introducing permanent idiosyncratic shocks into an ak type endogenous growth model as in the exchange economy of constantinides and duffie 1996 we define a no trading equilibrium using this model exploiting a simple closed form solution the paper examines several important implications including the effect of precautionary savings caused by uninsured shocks on consumption growth and asset pricing in particular on risk free rates of return the relation with representative agent models and the cross sectional consumption distribution

asset pricing in open economies with incomplete markets implications for foreign currency returns abstract this paper extends the incomplete markets model in constantinides and duffie 1991 asset pricing with heterogenous consumers good news and bad news manuscript university of chicago to a two country two goods framework adding another dimension to heterogeneity viz cross country heterogeneity the paper combines the heterogenous agent economy specified in constantinides and duffie with cobb douglas preferences as in cole and obstfeld 1991 commodity trade and international risk sharing how much do financial markets matter journal of monetary economics the combination of iso elastic preferences with an income process that incorporates permanent shocks that are heteroscedastic results in an equilibrium where agents do not trade both within and across countries the results on asset prices are similar to the one country one good model as in constantinides and duffie 1991 despite heterogeneity asset prices depend on aggregate endowments prices differ from those in the representative agent case on account of differences in the effective risk aversion and time preference rates effective risk aversion could be higher and the effective time preference lower compared to the complete markets case the results on portfolio choice are similar to cole and obstfeld 1991 in that agents do not trade assets across countries

local income taxation in an urban area abstract this paper indicates the response of a metropolitan area to the levying of a local income tax the analysis is focused on a central city and its surrounding suburbs but allows for migration to and from the metropolitan area of primary interest are the spatial effects of local income taxation and the associated welfare costs derived from additional transportation expenditures the analysis indicates the forms of compensation to central city high income households for the fiscal deficit they bear changes in wage rates and land rentals are derived and the question of full capitalization is considered

complexity and renegotiation a foundation for incomplete contracts the paper considers a hold up model where only one of n future trading opportunities will prove to be efficient and where ex post renegotiation of the ex ante contract cannot be prevented as the environment becomes more complex n the outcome under any message contingent long term contract converges to that of the incomplete contracting model where trade is contractible ex post but not ex ante when trades are costly to describe both ex ante and ex post the incomplete contracting result is extended to a broader class of environments

asset returns with transactions costs and uninsured individual risk abstract we explore whether incorporating an explicit motive for holding liquid assets within an equilibrium asset pricing model helps explain the following features of asset returns and turnover in the post war u s economy i the low risk free real interest rate ii the large spread between returns on liquid assets and stocks and iii the greater transaction velocity of liquid assets relative to stocks we introduce a demand for liquid assets by adding uninsured individual risk together with differential costs of trading securities numerical simulations attempting to match the return data generate a ratio of liquid assets to income considerably below observed levels

incomplete markets and volatility abstract this paper shows that the precautionary motive combined with asset incompleteness is a major source of volatility and indeterminacy in financial markets price fluctuations originate from agents efforts to insure themselves through time by borrowing and lending instead of shifting income across states of nature by trading risky assets a high interest rate at a future date reduces the potential for future consumption smoothing via borrowing which leads to a strong precautionary motive and a low interest rate in the current period the negative feedback between future and current rates generates fluctuations this logic is developed in spec a cara normal exchange economy with many periods and endogenous interest rates when there is an intermediate level of market incompleteness and sufficient investor impatience fluctuations in the real interest rate can be large even though the aggregate endowment is constant spec has a unique equilibrium under a finite horizon on the other hand with a finite number of infinitely lived agents there exists a robust continuum of equilibria that are neither bubbles nor sunspots journal of economic literature classification numbers c61 d52 d58 g11 g12

are people risk vulnerable we report on a within subject experiment with substantial monetary incentives designed to test whether or not people are risk vulnerable in the experiment subjects face the standard portfolio choice problem in which the investor has to allocate part of his wealth between one safe asset and one risky asset we elicit risk vulnerability by observing each subject s portfolio choice in two different contexts that differ only by the presence or absence of an actuarially neutral background risk our main result is that most of the subjects are risk vulnerable 81 chose a less risky portfolio when exposed to background risk more precisely 47 invested a strictly smaller amount in the risky asset whereas 34 were indifferent furthermore contrasting the predictions provided by competing decision theoretic models we conclude that expected utility theory best fits our experimental data this paper was accepted by uri gneezy behavioral economics

heterogeneity aggregate uncertainty and the short term interest rate this article analyzes the relationship between the short term interest rate and diversity i e the number of types in models with heterogeneous agents and incomplete markets the number of types needed to approximate a continuum varies across examples in all cases however the number of types has little effect on the average interest rate and consumption variability in these models the set of state variables is large because the equilibrium law of motion depends on the cross sectional wealth distribution the article shows how to solve these models numerically by approximating the distribution using moments or percentiles

landscape preferences and patterns of residential development abstract i analyze a model of residential location choice where people derive utility from their proximity to open space when people have such landscape preferences then 1 equilibrium residential development is mixed with undeveloped land 2 equilibrium land price gradients depend sensitively on how land markets are organized are not generally monotonic and may or may not reflect the value of open space and 3 dynamic equilibria generally have the property that more remote areas are developed before more central areas finally when compared to optimal development equilibrium development houses too many residents too close together and remote areas are developed too soon these results imply that equilibrium development may not be sprawling enough and that policies to encourage infill development are not welfare improving

equilibrium asset prices with undiversifiable labor income risk abstract in a two period lucas tree economy in which ex ante identical but ex post dissimilar agents face undiversifiable labor income risk calibrating a wrong representative agent model results in overstating the equilibrium riskfree rate and in understating the equilibrium equity premium if the utility function exhibits decreasing absolute risk aversion and decreasing absolute prudence these behavioral assumptions provide as a consequence a theoretical rationale for the often advanced conjecture that nontraded risk contributes to the solution of the riskfree rate and equity premium puzzles

risk aversion wealth and background risk we use household survey data to construct a direct measure of absolute risk aversion based on the maximum price a consumer is willing to pay for a risky security we relate this measure to consumer s endowments and attributes and to measures of background risk and liquidity constraints we find that risk aversion is a decreasing function of the endowment thus rejecting cara preferences we estimate the elasticity of risk aversion to consumption at about 0 7 below the unitary value predicted by crra utility we also find that households attributes are of little help in predicting their degree of risk aversion which is characterized by massive unexplained heterogeneity we show that the consumer s environment affects risk aversion individuals who are more likely to face income uncertainty or to become liquidity constrained exhibit a higher degree of absolute risk aversion consistent with recent theories of attitudes toward risk in the presence of uninsurable risks jel d1 d8

consumption liquidity constraints and asset accumulation in the presence of random income fluctuations recent empirical research flavin 1981 hagashi 1982 has rejected the certainty equivalent formulation of permanent income hypothesis hall 1978 these findings are often attributed to households inability to borrow completely against expected future labor income this paper is a theoretical investigation of optimal consumption behavior under risk aversion random income fluctuations and borrowing restrictions our principle objective is to establish the existence and to investigate the properties of the stationary probability distribution which characterizes the asymptotic behavior of consumption under these conditions this abstract was borrowed from another version of this item

renegotiation proof implementation and time preferences this paper explores how the requirement that the implementation of contracts be renegotiation proof affects the set of contracts that can be implemented in a seller buyer scenario in which the information regarding the agents valuations is nonverifiable this paper explicitly adds a time dimension to an implementa tion problem and introduces a natural criterion of renegotiation proofness for the case of time consuming renegotiation the main insight gained is that the addition of the time dimension enlarges significantly the set of contracts that can be implemented in a renegotiation proof manner jel c70 d23 this paper explores how the requirement that the implementation of contracts be renegotiation proof affects the set of con tracts that can be implemented in a seller buyer scenario in which the informa tion regarding the agents valuations is non verifiable the paper s main contributions are that first it explicitly adds a time di mension to an implementation problem and second it introduces a natural criterion of renegotiation proofness for the case of time consuming renegotiation for concreteness the discussion will be conducted in the context of the following example there are two agents a seller and a buyer who sign a contract for the sale of one unit in the future their valuations for the unit denoted by s and b respectively are not known when they sign the contract they become known to both parties after the contract is signed and before it is imple mented thus when it comes to implement ing the contract the parties information is complete but it is assumed to be nonverifi able i e not observable to third parties such as a court 1 when they sign the con tract the parties want to specify for any possible realization of the valuations s b whether or not there will be trade and the price p s b at which it will take place the contract describes the procedure that will be followed after the valuations are real ized the purpose of this procedure is to make sure that the original intentions of the parties are indeed carried out the idea is that the steps laid out in the contract are independent of s b and hence are en forceable by a third party or by a social convention in game theoretic terms a contract specifies a game form that imple ments the function p in the sense that for all s and b p s b is the resulting game s unique subgame perfect equilibrium out come in the context of this scenario we shall investigate the set of price functions p s b that can be so implemented by a contract and examine how this set is affected by the requirement that the contract be renegotia

equilibrium and the core in alonso s discrete population model of land use conventional wisdom tells us that with no market failure and local non satiation of preferences the core is at least as large as the collection of competitive equilibrium allocations we con rm this for a standard model featuring land next we consider the public land ownership version of the model if the role of land ownership and rent distribution is assumed by a government that ploughs back rent at least in excess of its agricultural value to its citizens the equilibrium remains efficient but no longer need be in the core

asset pricing with jump diffusion permanent income shocks abstract by assuming that all uninsurable risk is permanent a closed form multi period multiple agent and multiple asset incomplete market asset pricing model is presented that allows for jump as well as diffusion risk to personal income

incomplete markets liquidation risk and the term structure of interest rates we analyse the term structure of interest rates in a general equilibrium model with incomplete markets borrowing constraint and positive net supply of government bonds uninsured idiosyncratic shocks generate bond trades while aggregate shocks cause uctuations in the trading price of bonds long bonds command a liquidation risk premium over short bonds because they may have to be liquidated before maturity following a bad idiosyncratic shock precisely when their resale value is low due to the simultaneous occurrence of a bad aggregate shock our framework endogenously generates limited cross sectional wealth heterogeneity among the agents despite the presence of uninsured idiosyncratic shocks which allows us to characterise analytically the shape of the entire yield curve including the yields on bonds of arbitrarily long maturities agents desire to hedge the idiosyncratic risk together with their fear of having to liquidate long bonds at unfavourable terms imply that a greater bond supply raises the level of the yield curve while an increase in the relative supply of long bonds raises its slope

partially verifiable information and mechanism design in a principal agent model with adverse selection we study the implementation of social choice functions when the agent s message space is a correspondence which depends on this true characteristic we characterize such correspondence for which the revelation principle is valid returns must not contradict easily observable elements of the taxpayer s lifestyle in this paper we present a model of two person organizations in which these considerations are important we ask whether the restrictions on fallacious statements inherent in the system are sufficient to achieve the goals of the organization we show that the optimal way of eliciting the agent s response may not be to establish incentives for truthtelling in all instances in our model there is one player the agent who observes the state of the economic system another player the principal takes an action based on the information presented to him by the agent this class of models is often referred to as the principal agent problem in the extensive and growing literature on this problem it has always been assumed that the agent could lie to the principal and therefore that he had to be properly motivated to act at least partially in the principal s interest our formal way of modelling the partial verifiability of information is to introduce the restriction that the agent s responses must lie in a set m o that varies with the true state 0 it is assumed that this set always admits the possibility of responding with the true state the way in which the allowable response set varies with the true state is known to the principal in other respects we retain the usual principal agent formalization in particular the principal is the stackelberg leader in this game he can commit himself to choose a collective action as a function of the message transmitted by the agent whether the variation of the message space with the true observation is purely technological or whether it is induced by the severity of potential actions of the principal

the interaction between the equity premium and the risk free rate abstract the equity premium arises from the interaction between the atemporal risk premium for equity the risk free rate of intertemporal substitution and the impact of risk on the precautionary motive for saving depending on parameter values the equity premium may either be increased or reduced by the presence of undiversifiable background risk

the risk premium for equity implications for the proposed diversification of the social security fund any meaningful reform of the us social security system must deal with the system s current outstanding accumulated unfunded liabilities we model these as a once off financial liability payble tomorrow we show that if the equity premium puzzle arises from adverse selection problems which prevent risk spreading through market transactions then the government can improve the welfare of the young today by acquiring equity today to assist in financing its obligations to meet social security payments to the old tomorrow

the mirrlees approach to mechanism design with renegotiation with applications to hold up and risk sharing the paper studies the implementation problem first analyzed by maskin and moore 1999 in which two agents observe an unverifiable state of nature and may renegotiate inefficient outcomes following play of the mechanism we develop a first order approach to characterizing the set of implementable utility mappings in this problem paralleling mirrlees s 1971 first order analysis of standard mechanism design problems we use this characterization to study optimal contracting in hold up and risk sharing models in particular we examine when the contracting parties can optimally restrict attention to simple contracts such as noncontingent contracts and option contracts where only one agent sends a message

when can expected utility handle first order risk aversion abstract expected utility functions are limited to second order conditional risk aversion while non expected utility functions can exhibit either first order or second order conditional risk aversion we extend the concept of orders of conditional risk aversion to orders of conditional dependent risk aversion we show that first order conditional dependent risk aversion is consistent with the framework of the expected utility hypothesis our theoretical result proposes new insights into economic and financial applications such as the equity premium puzzle the cost of business cycles and stock market participation our model is compared to the rank dependent expected utility model

quantitative asset pricing implications of endogenous solvency constraints we study the asset pricing implications of an economy where solvency constraints are endogenously determined to deter agents from defaulting while allowing as much risk sharing as possible we solve analytically for efficient allocations and for the corresponding asset prices portfolio holdings and solvency constraints for a simple example then we calibrate a more general model to u s aggregate as well as idiosyncratic income processes we find equity premia risk premia for long term bonds and sharpe ratios of magnitudes similar to the u s data for low risk aversion and a low time discount factor article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

loss aversion and the term structure of interest rates this article studies how the loss averse behaviour affects the term structure of real interest rates since the pro cyclical conditional expected marginal rate of substitution implied from the us consumption data is consistent with the proposition of loss aversion we incorporate the loss averse behaviour of prospect theory into the consumption based asset pricing model motivated by the similarity between habit formation and the prospect theory utility habit formation is exploited to determine endogenously the reference point of this behavioural finance utility the highly curved characteristic of the term structure of real interest rates can thus be captured by the additional consideration of loss aversion this model also fits the downward sloping volatility of the real yield curve in the data of us treasury inflation protection securities tips moreover depending on the effective risk attitude of the representative agent with the loss averse behaviour of prospect theory our model is capable of

the importance of the number of different agents in a heterogeneous asset pricing model abstract models with heterogeneous agents and incomplete markets often only have two types of agents to limit the computational complexity the question arises whether equilibrium models with a realistic number of types have the same implications as models with a small number of types in the asset pricing model considered in this paper several properties depend crucially on the number of types for example in the economy with only two types interest rates respond to idiosyncratic income shocks which makes it easier to smooth consumption moreover these effects can be so strong that it is possible that a relaxation of the borrowing constraint reduces an agent s utility average interest rates on the other hand are not very sensitive to the number of types

idiosyncratic production risk growth and the business cycle we introduce a neoclassical growth economy with idiosyncratic production risk and incomplete markets each agent is an entrepreneur operating her own technology with her own capital stock the general equilibrium is characterized by a closed form recursion in the cara normal case incomplete markets introduce a risk premium on private equity which reduces the demand for investment as compared to complete markets the steady state can thus have both a lower capital stock due to investment risk and a lower interest rate due to precautionary savings furthermore the anticipation of high real interest rates in the future feeds back into high risk premia and low investment in the present thus slowing down convergence to the steady state our results highlight the importance of private risk premia for capital accumulation and business cycles

a note on an interpretation to consumption based capm abstract the consumption based capm pricing rule is sometimes interpreted as implying that the price of an asset with a random payoff falls short of its expected payoff if and only if the random payoff positively correlates with consumption this note demonstrates that this interpretation to c capm is not generally correct more importantly it investigates under what qualifications this intuitive interpretation still holds

utilitarianism and horizontal equity the case for random taxation this paper establishes that far from being able to derive the principle of horizontal equity from utilitarianism the principle is actually in consistent with utilitarianism in a variety of circumstances we derive conditions under which a it is optimal to impose random tax schedules ex post randomization and b it is optimal to randomize the tax schedules imposed on a set of otherwise identical individuals ex ante randomization the implications for optimal tax theory are discussed more generally it is shown that there are a number of potentially important economic situations with which the principle of horizontal equity may be inconsistent not only with utilitarianism but even with pareto optimality this abstract was borrowed from another version of this item

information and the equity premium we determine how better information aects the average equity premium in a standard representative agent exchange economy perfect information obviously eliminates the equity premium and we show that a particular kind of information about the level of future consumption always lowers the average equity premium surprisingly information must sometimes raise the average equity premium no matter what the preferences of the representative agent information purely about the volatility either of consumption or the marginal utility of consumption raises the equity premium for a wide class of preferences moreover information can raise the average equity premium by an arbitrarily large percentage while still matching important magnitudes such as average growth and the risk free rate we consider two dierent economies a two period economy with arbitrary preferences for the representative agent and an infinite horizon economy with standard additive separable ces utility with independent growth rates through time

commuting and taxes theory empirics and welfare implications we examine the effect of interstate differences in income taxes on commuting times our theoretical model introduces a border into a model of an urban area and shows that differences in average tax rates distort commuting patterns but the sign of the effect depends on whether taxes are residence based or employment based empirically tax differentials have a large effect on commuting times for affluent households and mobile households we show that commuting times are a sufficient statistic to measure the spatial welfare effects of tax policy the model and empirical design can be used by economists to study other policy differences this article is protected by copyright all rights reserved

mechanism design with renegotiation and costly messages in one interpretation of the mechanism design problem the agents in volved are designing a mechanism for themselves rather than having it im posed on them by an outside planner the mechanism may for example be a contract or a constitution in that case they will presumably choose a mecha nism that will deliver a pareto efficient outcome in equilibrium suppose how ever that play of the mechanism results in an out of equilibrium outcome and that this outcome is pareto inefficient then unless they have been able some how to commit to this mechanism the agents can be expected to tear up the contract and negotiate a new pareto efficient outcome in the two agent case this possibility of renegotiation limits the set of social choice rules that can

hedging derivative securities and incomplete markets an e arbitrage approach given a european derivative security with an arbitrary payoff function and a corresponding set of underlying securities on which the derivative security is based we solve the optimal replication problem find a self financing dynamic portfolio strategy involving only the underlying securities that most closely approximates the payoff function at maturity by applying stochastic dynamic programming to the minimization of a mean squared error loss function under markov state dynamics we derive recursive expressions for the optimal replication strategy that are readily implemented in practice the approximation error or e of the optimal replication strategy is also given recursively and may be used to quantify the degree of market incompleteness to investigate the practical significance of these e arbitrage strategies we consider several numerical examples including path dependent options and options on assets with stochastic volatility and jumps