Macro-expectations,aggregate uncertainty,and expected term premia

Based on expectations data from the Survey of Professional Forecasters (SPF), we construct a real-time proxy for expected term premium changes of US long-term Treasury bonds. We then investigate the economic drivers of these subjective term premium expectations at the level of individual forecasters. Our results indicate that forecasters' term premium expectations are driven by expected macroeconomic conditions as well as the uncertainty of market participants about future output and inflation. An aggregate measure of forecasters' term premium expectations has predictive power for actual bond excess returns over horizons of up to one year.     

Subjective well‐being and aggregate unemployment: further evidence

According to the literature, individual well‐being is negatively related to aggregate unemployment. This study examines whether the distribution of aggregate unemployment by duration affects well‐being, in addition to the level of unemployment. Different explanations are provided to indicate how the shares of short‐term (up to 3 months) and long‐term (more than 1 year) unemployed people could affect the well‐being of the employed and unemployed. Using data from almost 300,000 individuals from 11 EU countries, we find significant effects of both shares on life satisfaction. Among the unemployed, for example, we find a U‐shaped effect of the distribution of aggregate unemployment by duration on subjective well‐being, which compensates to some extent for the negative effect of the unemployment rate.     

ARE LONG‐TERM INFLATION EXPECTATIONS WELL‐ANCHORED? EVIDENCE FROM THE EURO AREA AND THE UNITED STATES

This paper analyses the stability of long‐term inflation expectations and uncertainty, based on their sensitivity to innovations to observed inflation, short‐ and medium‐term forecast news. News is defined in a subjective sense and derived from revisions to shorter‐term fixed‐target forecasts. The assessment tests for presence of non‐linear effects, including regime changes during disinflation in the USA in the 1990s and the recent financial crisis. Stability is also investigated in terms of level evolution, based on a structural non‐linear and non‐Gaussian learning model to uncover the presence of a common trend underlying the long‐term dynamics of inflation, individual expectations, and uncertainty.     

The extended linear expenditure system

The purpose of this paper is to derive the aggregate consumption function associated with the linear expenditure system (LES) from simple utility maximization procedures. The parameter set (β, γ) of LES plus an added parameter (μ: the ratio of the subjective rate of discount to the market rate of interest) characterize the consumption-savings and the expenditure allocation decisions under the Klein-Rubin utility function. The term p′y appears in the aggregate consumption function.The distinction between subjective, planning time and historical time (a continuum of initial points of optimal plans) is basic here: thus the focus on solutions at t = 0.     

Willingness-to-pay for urban ecosystem services provision under objective and subjective uncertainty

There is growing concern that failure to acknowledge the risk and uncertainty surrounding ecosystem services (ES) delivery could have adverse effects on support for ES policy intervention in the long run. However, acknowledging risk may reduce support for policy interventions in the short term. In this paper, we sought to determine whether willingness-to-pay (WTP) for urban forest ES in Southampton, UK is affected by objective and subjective uncertainty surrounding ES delivery. We conducted a discrete choice experiment with a split sample design: one with a scenario specifying risky ES outcomes and one where zero risk was implied. Respondents’ subjective certainty surrounding the provision of ES was determined before and after the choice questions. Despite respondents’ risk aversion, introducing an objective likelihood attribute did not reduce WTP compared to the scenario with implied certain ES outcomes. Furthermore, whilst WTP for the overall scheme was found to be adversely affected by the presence of risk around ES outcomes, subjective uncertainty seemed to reduce WTP more than objective probabilities. Our results therefore support the idea that both objective probabilities and subjective uncertainty should be explicitly incorporated in the design of stated preference studies for ES valuation.     

Measuring National Well‐Being: A UK Perspective

The Measuring National Well‐being program began in the UK in November 2010. Traditional measures of progress such as GDP have long been recognized as an incomplete picture of the state of the nation. Following a six‐month National Debate that elicited 34,000 responses, ONS developed a framework for measuring national well‐being consisting of 10 domains and 40 headline indicators. The indicators include a mixture of both subjective and objective measures. Through supplementing existing economic measures, such as GDP, with measures that reflect social and environmental well‐being, national well‐being looks at the state of the nation through a broader lens. The paper will describe the development of the framework of indicators, including developing subjective well‐being measures, and the dissemination of this information using a range of interactive tools developed for this purpose. This is a long term development program and is still in its early days of measurement. How these data are used to improve policy design, delivery, and evaluation will be important to assess the success of the program. In particular, having a more complete picture of national well‐being will lead to a better understanding of policy impacts on well‐being; better allocation of resources; more informed decisions; assessment of government performance; and international comparisons.     

DO-IT-YOURSELF AND GDP*

Do-it-yourself activities are, by definition, those for which a choice must exist between doing it oneself or hiring someone else. This means they typically involve the own account production of services, but whereas it is customary to include most goods produced on own account in GDP services are conventionally excluded. In principle, however, it is possible to envisage a comprehensive and unique measure of the total final output of all the goods and services produced within an economy whether for sale or own use. Such a measure would be better than GDP as an indicator of long term changes in economic welfare, being independent of any shifts in the ratio of market to non-market production. Moreover, it would be a homogeneous measure with clearly defined limits in contrast to improvised indices of welfare which mix economic and non-economic variables in arbitrary and subjective ways. However, the need for a measure of market output, or something very close to it such as GDP, is still as strong as ever as soon as attention is switched from measurement of long term growth to problems associated with market disequilibria, such as unemployment and inflation.     

Income inequality,corruption and subjective well-being

ABSTRACT

Based on the data of CGSS2013, we analyse the relationship between income inequality, corruption and subjective well being using an Ordered Probit model. Our results indicate that income inequality and corruption significantly reduces the subjective well-being of our country’s residents. Furthermore, corruption is an important channel for the negative effect of income inequality on subjective well-being, the impact of income inequality on subjective well-being is mainly achieved by the role of corruption. Specifically, the impacts vary according to hukou. Higher degree of income inequality indeed reduces the subjective well-being of urban residents, while it has a positive effect on subjective well-being of rural residents. Corruption has a significant negative impact on the subjective well-being of urban and rural residents. There is heterogeneity in the influence of different income levels in rural areas. The study in this paper shows that anti-corruption and narrowing the income gap are the two major grippers to improve the well-being of the residents.     

Natural capital, subjective well-being, and the new welfare economics of sustainability: Some evidence from cross-country regressions

The measurement of natural capital and its management during the economic development process are important aspects of the capital approach to sustainable development. However, the assessment of social welfare in terms of genuine savings (or changes in total wealth per capita) is arguably too limited. This paper tries to make a case for the incorporation of subjective well-being measures in debates about sustainable development by exploring the macro-level relationship between subjective well-being and natural capital in a cross-country setting. It is tested whether natural capital per capita is correlated with subjective well-being in a sample of fifty-eight developed and developing countries, using natural capital data from the World Bank's Millennium Capital Assessment. Bivariate regressions indicate that it is. When multiple regression models are estimated that include (a) major country-level determinants of subjective well-being (GNI per capita, social capital, income distribution, unemployment, inflation), and (b) regional dummy variables for ex-Soviet Union and Latin American countries, the positive correlation remains. The role of data outliers is carefully explored, and the sensitivity of the results to the use of alternative subjective well-being measures (i.e. life satisfaction, happiness, and a combined life satisfaction and happiness index) is investigated. This does not change the nature of the results. The findings arguably strengthen the case for a ‘new welfare economics of sustainability’ that takes subjective well-being measures into account.     

Subjective probability over a subjective decision tree

A state space has been assumed as a primitive for modeling uncertainty, which presumes that the analyst knows all the uncertainties a decision maker (DM) perceives. This is problematic because states are private information of the DM, and hence are not directly observable to the analyst. Dekel et al. [Representing preferences with a unique subjective state space, Econometrica 69 (2001) 891-934] derive, rather than assume, the subjective state space from preference over suitable choice objects.In a dynamic setting, a decision tree, that is, a pair consisting of a state space and a filtration, has been taken as a primitive. This assumption is also problematic—a decision tree should be derived rather than assumed as a primitive. We formulate a three-stage extension of the above literature in order to model a DM who anticipates subjective uncertainty to be resolved gradually over time. We identify also subjective beliefs on the subjective state space.     

The impossibility of compromise: some uniqueness properties of expected utility preferences

Summary. We focus on the following uniqueness property of expected utility preferences: Agreement of two preferences on one interior indifference class implies their equality. We show that, besides expected utility preferences under (objective) risk, this uniqueness property holds for subjective expected utility preferences in Anscombe-Aumann's (partially subjective) and Savage's (fully subjective) settings, while it does not hold for subjective expected utility preferences in settings without rich state spaces. Indeed, when it holds the uniqueness property is even stronger than described above, as it needs only agreement on binary acts. The extension of the uniqueness property to the subjective case is possible because beliefs in the mentioned settings are shown to satisfy an analogous property: If two decision makers agree on a likelihood indifference class, they must have identical beliefs. Received: November 15, 1999; revised version: December 29, 1999     

Subjective probabilities on “small” domains

The Savagian choice-theoretic construction of subjective probability does not apply to preferences, like those in the Ellsberg Paradox, that reflect a distinction between risk and ambiguity. We formulate two representation results—one for expected utility, the other for probabilistic sophistication—that derive subjective probabilities but only on a “small” domain of risky events. Risky events can be either specified exogenously or in terms of choice behavior; in the latter case, both the values and the domain of probability are subjective. The analysis identifies a mathematical structure—called a mosaic—that is intuitive for both exogenous and behavioral specifications of risky events. This structure is weaker than an algebra or even a λ-system.     

Asset return dynamics and the FX risk premium in a decentralized dealer market

The paper proposes a continuous time model of an FX market organized as a multiple dealership. The dealers have costly access to best available quotes. They interpret signals from the joint dealer-customer order flow and decide upon their own quotes and trades in the inter-dealer market. Each dealer uses the observed order flow to improve the subjective estimates of relevant aggregate variables, which are the sources of uncertainty. The risk factors are returns on domestic and foreign assets and the size of the cross-border dealer transactions in the FX market. These uncertainties have diffusion form and are dealt with according to the principles of portfolio optimization in continuous time. The model is used to explain the country, or risk, premium in the uncovered national return parity equation for the exchange rate. The two country premium terms that I identify in excess of the usual covariance term (consequence of the “Jensen inequality effect”) are: the dealer heterogeneity-induced inter-dealer market order flow component and the dealer Bayesian learning component. As a result, an “order flow-adjusted total return parity” formula links the excess FX return to both the “fundamental” factors represented by the differential of the national asset returns, and the microstructural factors represented by heterogeneous dealer knowledge of the aggregate order flow and the fundamentals.     

The uncertain foundations of the welfare state

The welfare state is often portrayed as provider of insurance against ‘uncertainties’, in Knight's (1921) sense of the term, which would be refused or underinsured on private markets. This image conflicts with the standard economic model of risk exchange founded on the subjective interpretation of probability, which predicts that all individual uncertainties will be insured by private markets. Our aim in this paper is to explain why this prediction fails and, building on contributions to decision theory that take seriously the idea of Knightian uncertainty, to show why social insurance may be justified.     

Measuring Economic Insecurity Using a Counting Approach. An Application to Three EU Countries

In this paper, we propose the use of a multidimensional approach to the measurement of economic insecurity in three European countries. We combine six different unidimensional indicators proxying the subjective and objective determinants of economic insecurity into a single index based on a counting approach method, which allows us to measure the incidence and the intensity of the phenomenon. Using longitudinal data from the European Union Statistics on Income and Living Conditions (EU-SILC) from 2008 to 2016, we find that the incidence of insecurity falls as income grows, being significantly present in middle-income households both in Spain and France but not in Sweden. Interestingly, in all three countries, the contribution of different dimensions to insecurity changes as household income grows, while for all income levels a higher education and being employed in a non-fixed term contract are strongly related to a lower probability of being economically insecure.     

Estimating worldwide life satisfaction

Whilst studies of life satisfaction are becoming more common-place, their global coverage is far from complete. This paper develops a new database of life satisfaction scores for 178 countries, bringing together subjective well-being data from four surveys and using stepwise regression to estimate scores for nations where no subjective data are available. In doing so, we explore various factors that predict between-nation variation in subjective life satisfaction, building on Vemuri and Costanza's (Vemuri, A.W., & Costanza, R., 2006. The role of human, social, built, and natural capital in explaining life satisfaction at the country level: toward a National Well-Being Index (NWI). Ecological Economics, 58:119-133.) four capitals model. The main regression model explains 76% of variation in existing subjective scores; importantly, this includes poorer nations that had proven problematic in Vemuri and Costanza's (Vemuri, A.W., & Costanza, R., 2006. The role of human, social, built, and natural capital in explaining life satisfaction at the country level: toward a National Well-Being Index (NWI). Ecological Economics, 58:119-133.) study. Natural, human and socio-political capitals are all found to be strong predictors of life satisfaction. Built capital, operationalised as GDP, did not enter our regression model, being overshadowed by the human capital and socio-political capital factors that it inter-correlates with. The final database presents a stop-gap resource that, until robust surveys are carried out worldwide, allows comparisons of subjective life satisfaction between nations to be made with reasonable confidence.     

The predictive value of subjective labour supply data: A partial-adjustment model with measurement error

This paper tests the predictive value of subjective labour supply data for adjustments in working hours over time. The idea is that if subjective labour supply data help to predict working hours, the subjective data must contain at least some information on individual labour supply preferences. In this paper, I formulate a partial-adjustment model that allows for measurement error in the observed variables. Applying estimation methods that are developed for dynamic panel data models, I find evidence for a predictive power of subjective labour supply data concerning desired working hours in the German Socio-Economic Panel 1988–1995.I wish to thank John Haisken-DeNew, Astrid Kunze, Markus Pannenberg, Winfried Pohlmeier, Frank Windmeijer, Rainer Winkelmann, my former colleagues at IZA and two anonymous referees for their valuable comments. The author gratefully acknowledges DIW for providing the data.First version received: December 2001/Final version received: December 2003     

Preference for Flexibility and Dynamic Consistency

Dekel, Lipman, and Rustichini [3] characterize preferences over menus of lotteries that can be represented by the use of a unique subjective state space and a prior. We investigate what would be the appropriate version of Dynamic Consistency in such a setup. The condition we find, which we call Flexibility Consistency, is linked to a comparative theory of preference for flexibility. When the subjective state space is finite, we show that Flexibility Consistency is equivalent to a subjective version of Dynamic Consistency and that it implies that the decision maker is a subjective state space Bayesian updater. Later we characterize when a collection of signals can be interpreted as a partition of the subjective state space of the decision maker.     

Migration as a test of the happiness set-point hypothesis: Evidence from immigration to Canada and the United Kingdom

Strong versions of the set-point hypothesis argue that subjective well-being measures reflect primarily each individual's own personality and that deviations are temporary. International migration provides an excellent test, since life circumstances and subjective well-being differ greatly among countries. With or without adjustments for selection effects, the levels and distributions of immigrant life-satisfaction scores for immigrants to the United Kingdom and Canada from up to 100 source countries mimic those in their destination countries, and even the destination regions within those countries, rather than those in their source countries, showing that subjective life evaluations are substantially driven by life circumstances and respond when those circumstances change.     

SOCIAL COMPARISON AND SUBJECTIVE WELL‐BEING: DOES THE HEALTH OF OTHERS MATTER?

The importance of social comparison in shaping individual utility has been widely documented by subjective well‐being literature. So far, income and unemployment have been the main dimensions considered in social comparison. This paper aims to investigate whether subjective well‐being is influenced by inter‐personal comparison with respect to health. Thus, we study the effects of the health of others and relative health hypotheses on two measures of subjective well‐being: happiness and subjective health. Using data from the Italian Health Conditions survey, we show that a high incidence of chronic conditions and disability among reference groups negatively affects both happiness and subjective health. Such effects are stronger among people in the same condition. These results, robust to different econometric specifications and estimation techniques, suggest the presence of some sympathy in individual preferences with respect to health and reveal that other people's health status serves as a benchmark to assess one's own health condition.