Commodity Rates of Interest and Intertemporal Substitution in Commodity Demand and Consumption

This paper examines the role of commodity own rates of interest in intertemporal analysis of consumer behaviour and presents a disaggregate analysis of intertemporal substitution in commodity demand and consumption. Commodity rates of interest are defined from the Euler equations implied by the intertemporal consumer choice problem. The relationship between commodity own rates and the real interest rate is derived, and the conditions for equality of commodity own rates are discussed. The intertemporal commodity substitution elasticities are characterised using commodity rates of interest, and the intertemporal substitution elasticity of consumption is derived from its constituent commodity demands. Evidence from estimation of the demand system and the consumption function reveals high intertemporal substitution for consumer goods as well as consumption.     

The endowment effect and intertemporal choice: a laboratory investigation

We present a laboratory investigation of intertemporal choice (i.e., elicited discount rates) allowing for the influence of the endowment effect. Consistent with the previous literature, we hypothesize that the endowment effect in an intertemporal choice setting results in substantially higher discount rates relative to when individuals treat the resources in question as found money. Our results support this hypothesis and our experimental design provides a new protocol for conducting choice experiments wherein the endowment effect is an important determinant of behaviour.     

Intertemporal choice of marine ecosystem exploitation

Exploitation of the marine ecosystem brings with it an intertemporal choice: there is a choice of catching the fish today, or restrain from fishing with the option of an increase in the benefit from future harvest. In a marine ecosystem under common pool management regime the contribution margin from catching the fish belongs to the fisher, while the benefit from the investment of leaving the fish in the sea will be shared in the common pool. The intertemporal choice therefore creates a driver for short sighted use of the ecosystem. The intertemporal balance of the exploitation is analyzed by applying capital theory to a size-based ecosystem model. The model reveals a need for intertemporal balance with respect to both fish size and harvest volume. The management therefore is, at an ecosystem level, to set target and regulate not only harvest volume but also size.     

Inter-temporal choices with temporal reference dependence

I develop an intertemporal choice model for rational deviators whose preferences depend not only on their actual consumption but also on comparison to their beliefs about the optimal consumption. The standard decision maker is loss averse with respect to this belief-dependent reference point. When psychologically weighted loss aversion is low, a decision maker deviates from the standard intertemporal choice behavior and over-consumption, as well as the alternative possibility of under-consumption can be rationalized. When the decision maker has time-varying degrees of loss aversion, he re-optimizes the consumption plan through adjusted beliefs as subsequent selves realize that past decision for the present period is no longer optimal. In the dynamic model, I solve for consistent intertemporal optimization rules by which a dynamic deviator should meet rational intertemporal consistency at each point in time. Finally, I demonstrate that the dynamic reference dependent model can solve a puzzling feature in lifecycle consumption data.     

Intertemporal pricing in laboratory posted offer markets with differential information

Summary. This paper analyzes intertemporal seller pricing and buyer purchasing behavior in a laboratory retail market with differential information. A seller posts one price each period that a buyer either accepts or rejects. Trade occurs over a sequence of "market periods" with a random termination date. The buyer and seller are differentially informed: The seller's cost of producing a unit of a fictitious good is known and constant in all periods, but the buyer's value for the good (demand) is a random variable governed by a Markov Process whose structure is common knowledge. At the beginning of each period the unit's value is determined by "nature" and is privately revealed only to the buyer. The market termination rule is a binary random variable. We conduct 32 laboratory experiments designed to study intertemporal pricing by human subjects in the Posted Offer Institution when demand follows a stochastic process. There are four series of experiments: 8 with simulated buyers, 8 with inexperienced subjects, 8 with once experienced subjects, and 8 with twice experienced subjects.     

True indexes and rational habit formation

In this paper we discuss the construction of true indexes when tastes change endogenously. True indexes take the substitution possibilities of the consumer to a changing economic situation into account when equating the utility level of a particular period to the utility level attained in the base period through an appropriate change in income or the wage level. When tastes change endogenously, the current decision depends on the past history of consumption but, by the same token, the future path of consumption will depend on the current choice. In a true index, these intertemporal links of the current decision have to be taken into account. For a particular specification of the habit formation process, this is achieved by an appropriate transformation of prices and expenditures. A true intertemporal wage index is computed for the period 1946–1967 in the U.S. Because of increasing needs and intertemporal rationality, this index is roughly constant and equal to 1: real wages remained constant!     

Polarisation, uncertainty and public investment failure

In a political economy model, the effect of political polarisation on a government's intertemporal choice between redistribution and public investment is shown to be similar to the effect of political uncertainty. Moreover, polarisation and uncertainty reinforce one another in their impact on public underinvestment and may ultimately lead to no investment at all.     

Financial fragility and economic fluctuations

This paper proposes a simple prototype model that describes the complex dynamics of a sophisticated monetary economy. The interaction between the current and intertemporal financial constraints on economic units brings about irregular fluctuations at both micro and macro levels. We use qualitative dynamic analysis and numerical simulations to investigate the interaction between financial fragility, modeled in terms of structural instability, and dynamically unstable financial fluctuations. The model, suggested recently by one of the authors, is here reformulated in more operational terms and extended in a number of new directions.     

Exploring policy options in joint intertemporal-spatial trade models using an incomplete markets approach

In this paper we discuss the desirability of service trade liberlization in the presence of incompleteness of markets where there is both inter-spatial and intertemporal trade between countries. We use numerical simulation methods for insights and relate our discussion to the General Agreement on Trade in Services (GATS) in the WTO. We interpret the absence of intertemporal trade as an absence of intermediation services provided by both domestic and foreign service providers. For simplicity, we consider extreme cases where intertemporal intermediation services can only be provided by domestic providers, so that when intertemporal trade in services is not allowed, markets are not complete. To our knowledge, this type of models is not used in the trade literature as general comparative statics results are unavailable. We first consider the liberalization of trade in financial services in an inter-spatial and intertemporal model of two countries, and we show how services liberalization can be welfare worsening in the presence of a tariff on spatial trade in goods. We show that this can hold in an artificial world with no domestic financial services provider. We compare financial service trade autarky in which there is no intermediation to financial service trade liberalization which involves costless intertemporal intermediation provided by foreign service providers. We also consider a more complex (and realistic) world where costly intermediation services can be provided by both domestic and foreign providers. This paper draws in part on material of an earlier paper, “Financial Services Trade Liberalization in A Joint Spatial Intertemporal Multi-Country Model” by Huang et al. (2004). We acknowledge the financial support from The Centre for Intentional Governance Innovation (CIGI), Waterloo, Canada and from National Social Science Foundation of China (SSFC Grant 07AJL002), National Natural Science Foundation of China (NSFC Grant 70825003) and “Humanities and Social Science” Major Project, Chinese Ministry of Education (Grant Number 07JJD790145).     

Status,Risk-Taking and Intertemporal Substitution in an Endogenous Growth Model

This paper examines intertemporal risk-taking in a stochastically growing economy with externalities in human capital accumulation where agents have preferences for social status. In order to isolate the effects of status concerns on long-run expected growth, the analysis is embedded in a non-expected utility setting, which disentangles the effects from risk aversion and intertemporal substitution. We examine the interaction between status desire and risk, risk aversion and intertemporal substitution. The externalities generated by the status game are able to correct the allocative distortions from the knowledge spillovers.Acknowledgement The author would like to thank an anonymous referee for his valuable comments.     

Intertemporal Choice,Saving and Investment,and Interest Rate: Contributions from a Neglected Hayekian Model

Hayek’s ‘Utility analysis and interest’ expounds a graphical model of intertemporal choice that has not received the attention it deserves. This model is important in that it can be used as a basic macroeconomic model and can therefore perform for the Austrian School the role that the Solow model plays for the standard neo-classical paradigm. This article provides an in-depth presentation of the Hayekian model, and then applies the model to key theoretical issues in macroeconomics; namely, the effects upon intertemporal equilibrium and upon the interest rate of a change in time preference, of the implementation of a technical development and of an increase in the supply of labor.     

MULTIATTRIBUTE UTILITY THEORY,INTERTEMPORAL UTILITY,AND CORRELATION AVERSION

Convenient assumptions about qualitative properties of the intertemporal utility function have generated counterintuitive implications for the relationship between atemporal risk aversion and the intertemporal elasticity of substitution. If the intertemporal utility function is additively separable, then the latter two concepts are the inverse of each other. We review a theoretical specification with a long lineage in the literature on multi‐attribute utility and use this theoretical structure to guide the design of a series of experiments that allow us to identify and estimate intertemporal correlation aversion. Our results show that subjects are correlation averse over lotteries with intertemporal income profiles.     

Rationality and intertemporal choice

The alleged problems associated with self-control, hyperbolic discounting and other examples of seemingly irrational intertemporal choice are examined in the context of an evolution-based neurobiological model that emphasizes the role of the biological evolution of big brains and language and the cultural evolution of institutions. There is no utility function in the brain; it has no central-planner, in fact, the brain is a self-organized complex system, a decentralized spontaneous order. This spontaneous order is coordinated, much like an economy, by a distributed network that maintains and makes available the discounted net value of various options to decentralized and specialized areas in the brain when making decisions. Further, that decision making is embodied and embedded in the decision making environment. For humans, an important part of that environment is the social environment consisting of institutions and other components of culture. It was, in part, the evolution of this environment that made long-range planning possible. Additionally, it is very often the lack of embedded experience with the environment that leads to what seems to be irrational intertemporal choices. In fact, under close examination the evidence for consistent irrational intertemporal choice is weak.     

Dissertation abstract: The effect of involvement, time, and vividness on consumers’ value judgments: A test of prospect theory

The literature in psychology and behavioral economics offers abundant instances of anomalies to the rational choice paradigm. One of the most prominent works attempting to reconcile these is Kahneman and Tversky’s Prospect Theory. Its well-known S-shaped value function accounts for some of the anomalies such as reference dependence, loss aversion, and diminishing sensitivity. Although Prospect Theory describes the manner in which individuals are loss averse, it does not explain why people show loss aversion. This dissertation investigates the factors that affect the cognitive processes behind loss aversion. We find an anomaly in the S-shaped value function. Specifically, the studies demonstrate that the degree of involvement affects the slope of the value curve both for atemporal and intertemporal choices. In addition, we also test the relationship between loss aversion and involvement with varying vividness of outcomes (i.e., when outcomes are related to more versus less vivid stimuli). Testing the vividness effects further extends and confirms our proposed relationship between involvement and loss aversion. The data from several experiments show that there is a difference in the slopes of the value function for low and high involvement decisions. For low involvement conditions, the value curve has roughly the same steepness for losses as for gains close to the neutral reference point (i.e., contrary to the diminishing sensitivity characteristic). By contrast, in the high involvement conditions this is not the case: there is a distinct difference in the slopes of the loss and gain curves. This leads us to propose that different value functions exist for people in the low and high involvement conditions. This important finding suggests that in cases where people are not highly involved with a product, they display significantly less loss aversion than predicted by Prospect Theory. Three experiments investigate the relationship of loss aversion to subjects’ level of involvement in atemporal choice, intertemporal choice, and differential vividness of stimuli situations, respectively. The first study uses a 2 (involvement: low and high) by 2 (outcome: gain and loss) between subjects design. The results show that loss aversion significantly attenuates in the low involvement condition for atemporal choice. Study two replicates the results of study one in the context of intertemporal choice, where timing of outcomes (now versus three months) is introduced as another factor. Finally, the third study manipulates the vividness of outcomes and finds an interaction effect of vividness and involvement on loss aversion. Dissertation Committee: Norman Frohlich (Co- Chair), I.H. Asper School of Business, University of Manitoba Edward Bruning (Co- Chair), I.H. Asper School of Business, University of Manitoba Namita Bhatnagar, I.H. Asper School of Business, University of Manitoba Wayne Simpson, Department of Economics, University of Manitoba Michael Hu, Department of Marketing, Kent State University     

Intertemporal substitution and the liquidity effect in a sticky price model

The liquidity effect, defined as a decrease in nominal interest rates in response to a monetary expansion, is a major stylized fact of the business cycle. This paper first confirms that, with separable preferences, a low degree of intertemporal substitution in consumption is a necessary condition for the existence of the liquidity effect. In contrast to this result, in a model with non-separable preferences and capital accumulation it takes an implausibly high elasticity of intertemporal substitution to produce a liquidity effect. The robustness of these results to alternative degrees of nominal rigidities, capital adjustment costs and stochastic monetary processes is also analysed. We conclude that price stickiness, by itself, does not guarantee the existence of a liquidity effect.     

Superneutrality, indeterminacy and endogenous growth

In this paper, we explore the possibility of having money as a source of indeterminacy in endogenous growth models. We adopt the simple Ak model of endogenous growth to be the main analytical vehicle whose balanced growth paths do not display local indeterminacy. Money is introduced via either a general cash-in-advance (CIA) constraint or a pecuniary transactions costs (PTC) technology. It is shown that local indeterminacy of the dynamics is due to the presence of an intertemporal substitution effect on capital accumulation that works against and dominates the conventional inflation effect of Tobin [1965, Money and economical growth. Econometrica 33(4), Part 2, 671]. If money is growth-rate superneutral, then the intertemporal substitution effect is absent so that local indeterminacy cannot occur. Finally, the strength of the intertemporal substitution effect depends positively on the intertemporal elasticity of substitution in consumption.     

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 Reswitching and Intertemporal Prices

Abstract

Bliss (Capital Theory and Distribution of Income, Amsterdam/New York: North-Holland/Elsevier) claims that reswitching is nothing but an ‘optical illusion’ due to the exclusion of non-stationary price sequences from the analysis. This note develops this point. The standard case for choice of techniques and reswitching is reformulated in terms of Arrow-Debreu intertemporal prices and the conditions making these prices stationary are highlighted separately. It is then shown that the analysis of the choice of techniques in terms of ‘switch points’ requires stationary conditions.     

Fiscal policy and the structure of production in a two-sector developing economy

This paper develops a two-sector model of a developing economy and examines the role of the informal sector in limiting the government's ability to increase tax revenues. A key feature is the introduction of auditing of the informal sector and degree of tax enforcement in that sector. We emphasize the interdependence between tax policy and enforcement in achieving a developing economy's fiscal objectives and show that by judicious policy choices the presence of the informal sector need not hinder its ability to raise tax revenues. We supplement the formal analysis with numerical simulations highlighting the contrasting intertemporal tradeoffs implied by higher tax rates and tax-enforcement levels.     

International capital mobility: An alternative test based on intertemporal current account models

This paper examines international capital mobility by estimating intertemporal current account models for nine major industrialized countries. To account for the large fluctuations of oil prices (the terms-of-trade) and their effects on the current account, an intertemporal current account model incorporating such effects is devised. The model estimation reveals significant terms-of-trade effects on the current account and, moreover, does not exhibit any “excess capital mobility” found in the previous literature. These results indicate that to achieve a more accurate measure of international capital mobility, a proper account of the terms-of-trade effect is essential.