Risk Preferences,Production Risk and Firm Heterogeneity*

A new technique is proposed for deriving the risk preference function under production risk and expected utility of profit maximization. The derivation depends on neither a specific parametric form of the utility function nor any distribution of the error term representing production risk. The proposed risk preference function is flexible enough to test different types of risk behavior and symmetry of the output distribution. Furthermore, our production risk specification allows for inputs with positive and negative marginal risk. The econometric model accommodates production risk, risk preferences and firm heterogeneity simultaneously. Norwegian salmon farming data are used as an application.     

Precautionary retirement and precautionary saving

The paper analyzes the lifetime utility maximization problem of an agent who chooses her saving and timing of retirement in the presence of labor income risk in a simple setting where a pure redistributive pension scheme is in place. In this context, a precautionary motive for retirement, which pushes old workers to replace an uncertain labor income with certain pension payments, and to retire early is identified. The conditions for precautionary retirement and saving to arise are then characterized and interpreted in two settings. In the first setting, utility only depends on income, and a sufficiently low level of absolute prudence is necessary for precautionary retirement. A sufficiently high level is necessary however for precautionary saving, which can coexist with precautionary retirement only for intermediate values of absolute prudence. In the second setting, agent utility also depends on leisure, and three conditions allow the precautionary motive for retirement and saving to jointly operate: prudence, an index of absolute prudence sufficiently low and cross-prudence in leisure.     

Nest-monotonic two-stage acts and exponential probability capacities

This paper examines conditions for Choquet expected utility (CEU) to satisfy both the reduction of two-stage acts and the recursion axioms, which are taken for granted in economics. A key idea of this paper is to consider nest-monotonic two-stage acts, which share their rankings of states with those of their reduced one-stage acts. Our main theorem shows that the axioms, one of which is restricted to nest-monotonic two-stage acts, and consequentialism are satisfied if and only if the preference is exponential CEU, which is such that the probability capacity is an exponential transformation of a probability measure. This result indicates that within a specified range of decision problems, exponential CEU is the only form of CEU that derives indifference to the timing of information resolution. Furthermore, the relation between first- and second-stage exponential CEU is characterized both by the f*-Bayesian updating rule and by comonotonic dynamic consistency. Conditions to establish the law of iterated expectation for CEU are also discussed.     

ENDOGENOUS TIME PREFERENCE,INTEREST‐RATE RULES,AND INDETERMINACY*

This paper extends the Benhabib et al. flexible‐price, money‐in‐the‐utility‐function model by considering endogenous time preference and re‐examines equilibrium indeterminacy in response to alternative interest‐rate rules. We show that either an active or a passive interest‐rate feedback rule can generate local indeterminacy even if consumption and real money balances are Edgeworth independent. This result is in sharp contrast to that in the related literature. We also find that in the presence of endogenous time preference, local indeterminacy may occur regardless of whether the monetary policy is based on the interest‐rate feedback rule or money growth‐rate targeting.     

Risk aversion,impatience, and optimal timing decisions

In this paper, a theory measuring a decision maker's aversion to temporal risks is developed in the context of a simple choice framework that admits the interpretation “time varying utility of wealth.” A relation “more temporally risk averse” is defined and characterized in terms of instantaneous risk aversion (the usual single variable case) and impatience. A further characterization of this relation is obtained in the context of a class of action timing problems known as optimal stopping problems and is applied to preference based investigations of information production, incentives to innovate, and job search.     

A simple explanation of some key time preference anomalies

Abstract Individual time discounting behaviour experimentally exhibits important anomalies that are inconsistent with the standard discounted utility model. These include the time preference reversal characteristic of hyperbolic discounting, the magnitude effect and the extreme sign effect. I propose a simple explanation of discounting that accounts for these three anomalies simultaneously, within the context of the expected utility model with uncertainty, risk aversion, and preference for precautionary saving.     

LOVE,TOIL, AND HEALTH INSURANCE: WHY AMERICAN HUSBANDS RETIRE WHEN THEY DO

The provision of health insurance has previously been shown to be an important determinant of retirement timing among older Americans, but the existing literature has largely ignored some aspects of the interspousal dependence of health insurance benefits. Specifically, the literature examines only how retirement may affect the health insurance available to the potential retiree but not how it might affect a spouse's options. Using data from the Health and Retirement Study, I find that the impact a husband's retirement might have on a wife's health insurance options has a statistically significant impact on a husband's rate of retirement that is independent of considerations of his own health insurance options. In households where the wife is the only one at risk of losing affordable health insurance if the husband retires, the husband is 30% less likely to retire than if neither spouse is at risk (a 5 percentage point decrease in the retirement rate). Based on these findings, prior research is missing one avenue that changes to the Medicare eligibility age and health insurance policy changes through the Affordable Care Act might impact the labor supply of older workers. (JEL I13, J26, J32)     

Do retirement planning strategies alter the effect of time preference on retirement wealth?

An individual’s willingness to accumulate retirement wealth is influenced by their preference for intertemporal consumption. People with a strong preference for current consumption (high personal discount rate) may choose to save less and face the risk of decreased retirement preparedness. A negative relation between a high personal discount rate and retirement wealth may be reduced when individuals engage in some form of retirement planning. Using the National Longitudinal Survey of Youth, we provide evidence that respondents with a high personal discount rate accumulated 37% less retirement wealth, on average, between 2004 and 2008, when compared with respondents with a low personal discount rate. However, when retirement planning strategies were included in the model, there was no statistical difference in retirement wealth between people with high and low personal discount rates. The retirement planning strategies included calculating a retirement income need, hiring a financial planner for retirement or engaging in both of these activities.     

The Effect of Benefit Reductions on the Retirement Age: The Heterogeneous Response of Manual and Non‐Manual Workers

I estimate the effect of benefit reductions on the timing of retirement. The introduction of actuarial adjustments in the German public pension system serves as a source of exogenous variation to estimate discrete time transition rates into retirement for individuals of age 60–66. Responses to benefit reductions are elaborated separately for manual and non‐manual workers. On average, individuals postpone retirement by 13.2 months if pension benefits are reduced by 3.6 percent for each year of early retirement. This result is in line with the previous quasi‐experimental literature and suggests that people respond to the incentive of reducing the implicit tax on further periods of work. However, among men the response is about 50 percent lower for manual workers compared to non‐manual workers. Surprisingly, this does not necessarily indicate that retirement incomes of manual workers deteriorate. The explanation is that disability pensions are available at age 63—without benefit reductions.     

INTERTEMPORAL UTILITY SMOOTHING: THEORY AND APPLICATIONS

This paper reviews models of intertemporal choice designed to be consistent with a phenomenon called a preference for spread; that is, where a decision‐maker prefers to spread good and bad consumption evenly over time. We closely examine the notion of utility smoothing adopted in these models as a source of the preference for spread. The paper also reviews extensions of these models where a strong aversion to volatility involved in a utility sequence causes preferences to be nonmonotone. Furthermore, to gain a better understanding of the behaviour implied by these models, we apply them to the Diamond growth model.     

A note on lindahl taxes when public goods are inputs to household production

This note explores the incidence of benefit taxation when public goods yield utility only indirectly, as inputs to household production. It provides a condition for tax progression in terms of measurable parameters. The result is contrasted with the usually considered case of public goods being ordinary consumption goods, in which the parameters that indicate whether benefit taxation would be progressive are inestimable because of the preference revelation problem.I am grateful to two referees for insisting on clarifications and for providing useful suggestions.     

Attribute Causality in Environmental Choice Modelling

When selecting attributes in environmentalChoice Modelling studies, preference should begiven to those attributes that aredemand-relevant, policy-relevant, andmeasurable. The use of these criteria willoften result in a short list of environmentalattributes of which some are causally related. The inclusion of attributes that have a``cause-effect' relationship may stimulate somerespondents to seek to understand the causalrelations among attributes in order to assigngreater meaning to the alternatives, andpotentially, simplify the decision makingprocess. This may have implications for theweights they assign to each of the attributeswhen identifying the preferred alternatives,and subsequently for the implicit prices and/orwelfare estimates. A test of the impact ofincluding an attribute that causesimpacts on ecosystem health as well as anattribute relating to ecosystem health effectson parameter estimates, implicitprices and welfare estimates is conducted. Twoquestionnaires are developed, one with the`causal' attribute included and one without. Acomparison of results indicates that when the`causal' attribute is included in the vector ofchoice attributes, the implicit value of asingle endangered species falls by 34 per centwhilst no significant difference is detected inthe parameter estimates. Importantly, however,estimates of compensating surplus for a givenpolicy package do not differsignificantly across the two treatments. Thisimplies that to the extent that the inclusionof a `causal' attribute reduces the implicitprices for one or more of the `effect'attributes, the associated loss in utility isapproximately offset by the utility nowassociated with the new attribute.     

多因素影响下的最优年金化时间决策

长寿风险是退休计划中易被低估的风险因素,这类风险因人类寿命的不断延长而快速增大。养老年金具有规避长寿风险和提高消费者效用的双重价值,在养老保障中具有重要的作用。本文系统考虑退休计划中消费者的寿命风险和遗赠需求,讨论年金投资中的最优年金化时间决策,通过构建单周期的最优年金化时间选择模型,分析了消费者在整个退休计划中如何进行年金投资这一多期决策问题。本文最后展示了不同参数设置下的计算结果,以说明消费者的遗赠需求强度与风险厌恶特征、年金管理费率、年金收益与风险水平等因素对最优年金化时间的影响。     

Non-parametric test of time consistency: Present bias and future bias

This paper reports the elicited time preference of human subjects in a laboratory setting. The model allows for non-linear utility functions, non-separability between delay and reward, and time inconsistency including future bias in addition to present bias. In particular, the experiment (1) runs a non-parametric test of time consistency and (2) estimates the form of time discount function independently of instantaneous utility functions, and then (3) the result suggests that many subjects exhibiting future bias, indicating an inverse S-curve time discount function.     

Phasing out: Routine tasks and retirement

This paper studies the link between task content of jobs and exits to retirement by older workers. This research provides a comparative analysis of retirement timing in Germany and Great Britain. In Germany, workers in more routine jobs had between one and two percentage points higher probability leaving the labor market faster when compared to workers in less routine occupations. The relationship is robust and relatively constant over time. In Great Britain, by contrast, workers from routine and non-routine jobs appear to leave the labor market with a similar timing. I contend that institutional characteristics can explain the differences across countries.     

Policy Effects in Hyperbolic vs. Exponential Models of Consumption and Retirement

This paper constructs a structural retirement model with hyperbolic preferences and uses it to estimate the effect of several potential Social Security policy changes. Estimated effects of policies are compared using two models, one with hyperbolic preferences and one with standard exponential preferences. Sophisticated hyperbolic discounters may accumulate substantial amounts of wealth for retirement. We find it is frequently difficult to distinguish empirically between models with the two types of preferences on the basis of asset accumulation paths or consumption paths around the period of retirement. Simulations suggest that, despite the much higher initial time preference rate, individuals with hyperbolic preferences may actually value a real annuity more than individuals with exponential preferences who have accumulated roughly equal amounts of assets. This appears to be especially true for individuals with relatively high time preference rates or who have low assets for whatever reason. This affects the tradeoff between current benefits and future benefits on which many of the retirement incentives of the Social Security system rest.Simulations involving increasing the early entitlement age and increasing the delayed retirement credit do not show a great deal of difference whether exponential or hyperbolic preferences are used, but simulations for eliminating the earnings test show a non-trivially greater effect when exponential preferences are used.     

Capital Income Taxes and Growth in a Stochastic Economy: A Numerical Analysis of the Role of Risk Aversion and Intertemporal Substitution

This paper undertakes a numerical analysis of the effects of changes in the tax rates on domestic and foreign capital income in a stochastically growing open economy under recursive preferences, in which the rate of time preference, ?, and the coefficient of risk aversion, R, can be set independently. The responses of the equilibrium growth rate, its volatility, and welfare to changes in the tax changes considered are highly sensitive to the independent variations in both ? and R. Consequently, the errors committed by using the conventional constant elasticity utility function, even for small violations of the compatibility condition (R= 1/?) can be significant, suggesting that this functional form should be employed with caution.     

Public Pension Benefits Claiming Behaviour: new Evidence from the Japanese Study on Ageing and Retirement

The present study explores public pension claiming behaviour among the Japanese elderly. First, we perform financial simulations, estimate expected utility and depict the typical patterns of pension benefits over a lifecycle. We show that a beneficiary's optimal retirement age depends on that beneficiary's mortality risk, discount rate, initial wealth and risk attitude. Second, we use individual‐level data from the Japanese Study on Aging and Retirement (JSTAR) to empirically examine the determinants of claim timing. We find evidence that most of the factors examined in the simulation are, indeed, significantly associated with early claiming among wage earners of pension benefits.     

Consumer Expenditures and Home Production at Retirement – New Evidence from Germany

Abstract. This paper investigates consumer expenditures of German households pre‐ and post‐retirement. The widely observed distinct drop in spending upon retirement entry poses an empirical puzzle since life cycle theory predicts smoothing of the marginal utility of consumption over time. As one explanation, I explore the role of home production as a substitute for consumer expenses. Taking a combined look at consumer expenditures and time use pre‐ and post‐retirement, I find a significant drop of about 17% of pre‐retirement expenses at retirement which coincides with an increase in time spent on home production of an additional 89 minutes per day, accounting for 21% of average home production.     

Choice, preference and rationalizability in pareto’s theory of economic behavior

Pareto initiated the shift of economic theory from utility/preference to choice in order to fill a gap between theoretical and empirical economics. His suggestions for an empirically-oriented theory of choice were to be developed decades later in the literature on revealed preference and on the conditions of equivalence between preference-based and choice-based axiomatic structures. In the process, however, substantial departures from Pareto’s implicit design of the situation of choice were introduced. In this paper, the conditions for the rationalizability of choice are re-defined so that they fit the type of situation that Pareto had in mind. The result is that the main consistency axioms of standard choice theory have to give way to a different combination of axioms that concern decisiveness as well as consistency. (JEL:B13, D01, D11).