Unemployment Risk, Labour Force Participation and Savings

This paper analyses labour force participation and precautionary savings in the presence of risks of being fired or failing to secure a job offer when out of the labour market. We use a finite horizon framework with two employment states and a stage utility function which is CARA in consumption but non-separable in leisure. The results are that there is precautionary labour force participation: employment risk lowers the reservation wage; generally it also reduces consumption. However due to the non-separability assumption, precautionary savings, as usually defined, may not be positive. We characterize the reservation wage and contrast the results with those in which the stage utility is additive in leisure and consumption. We extend the analysis to study the effects of cyclical variation in employment risk, of stochastic future wage rates, and of adding a third employment state of search.     

Intellectual property rights and R&D subsidies: are they complementary policies?

IPR protection and R&D subsidy are simultaneously implemented in many economies. Are they complementary policies for improving the welfare of consumers? We address this question in a dynamic general equilibrium model with innovation-driven growth. Under concave utility, the answer is yes for two cases: (1) the economy does not begin from steady state and the elasticity of intertemporal substitution (EIS) is relatively large; (2) the economy begins from steady state with either a sufficiently small initial consumption and a relatively large EIS or a sufficiently big initial consumption and a relatively small EIS. Under linear utility, the answer is yes if the discounted lifetime utility is finite in equilibrium, no matter the economy begins from the steady state or not. As empirical evidence finds cross-country heterogeneity in EIS, they are not complementary for all economies. We also identify reasonable cases whereby they are substitute policies, so we show when it is not welfare-enhancing to simultaneously implement both policies.     

International trade and the negotiability of global climate change agreements

This paper examines the incentives for individual countries to engage in global negotiations to reduce carbon emissions in order to prevent global warming. To reduce carbon emissions a country reduces consumption of its own good. The direct effect of reducing its own consumption is that consumption declines and with it utility. However, reducing carbon emissions also lowers global temperatures and that increases utility. The trade-off between these two effects determines the incentive for countries to reduce carbon emissions. We find that larger countries are more likely to participate because a given percentage reduction in output will result in a larger reduction in global temperatures. Longer time horizons also lead to greater willingness to participate. The presence of international trade makes carbon reduction agreements more likely because reducing the output of your own (export) good has a positive terms of trade effect which reduces the cost of output reduction.     

Life with habit and expectation: A new explanation of equity premium puzzle

Previous writers have attempted to resolve the equity premium puzzle by employing a utility function that depends on current consumption minus (or relative to) past habit consumption. This paper points out that an individual's current utility may also depend upon how well off in the recent past he or she had expected to be today. Hence we add the concept “expectation formation” to the utility modification term in a model with a habit‐formation utility function. We apply the model to the equity premium puzzle and find that it is able to fit the data with a relatively low coefficient of relative risk aversion. Furthermore, we introduce an updated data sample and apply different values of discounting factors, and find that in all circumstances, the model is able to generate coefficients of risk aversion that are consistent with theory. Hence we conclude that the model is able to resolve the equity premium puzzle.     

Systems of Benevolent Utility Functions

This paper studies systems of utility functions in which each person's utility depends on his or her own consumption as well as on the utilities of others. We consider the question of when a system of interdependent utility functions induces unique utility functions over allocations and identifies the class of transformations on interdependent utility functions that are equivalent in the sense of inducing the same preferences over allocations. We show that well-behaved systems of this kind can be studied by means of the theory of dominant-diagonal matrices and that the theory of dominant-diagonal matrices with finitely many elements extends in a satisfactory way to denumerable matrices. The theory of denumerable dominant diagonal matrices allows an elegant analysis of systems of intergenerational benevolence. We also revisit and extend the theory of two-sided altruism as formulated by Kimball and by Hori and Kanaya.     

Relative consumption, economic growth, and taxation

This paper studies the influence of consumption externalities in the Ramsey model. In contrast to the recent literature, a quite general specification of preferences is used and the concept of the effective intertemporal elasticity of substitution is introduced. We give conditions for the observational equivalence between economies with consumption externalities and externality-free economies. An additional key result is that there exist several types of instantaneous utility functions in which the decentralized solution coincides with the socially planned one in spite of the presence of consumption externalities. The conditions for optimal taxation are also derived.     

Dynamic effects of changes to Japanese immigration policy

This paper uses a single-sector dynamic stochastic general equilibrium model with heterogeneous households to analyse Japanese immigration policy. We examine the effects on output, consumption, factor prices, and utility. We do this for both steady states and transition paths. We find that: (a) aggregate output, investment, and consumption in Japan are likely to rise with any sort of loosening of immigration restrictions; (b) allowing more skilled immigration generates greater aggregate changes; (c) raising skilled immigration relative to unskilled immigration drives down skilled workers’ wages, consumption, and utility, while cutting the skilled to unskilled immigration share has the opposite effects; and (d) such immigration policy changes have small effects compared to those that occur naturally due to business cycle fluctuations     

社会地位、非期望效用函数、资产定价和经济增长

本文利用非期望偏好结构 ,讨论消费和资产收益的时间序列行为。在这种递归偏好结构中 ,投资者积累财富不仅仅为了消费 ,也为了财富所带来的社会地位 ,我们研究这一假设对消费、投资组合策略、证券市场价格以及经济增长的影响 ,并利用所得到的定价方程讨论风险溢金问题。     

Stochastic optimization applied to self-financing portfolio: does bequest matter?

The article studies stochastic optimization of an intertemporal consumption model to allocate financial assets between risky and risk-free assets. We use a stochastic optimization technique, in which utility is maximized subject to a self-financing portfolio constraint. The papers in literature have estimated the errors of Euler equations using data from financial markets. It has been shown that it is sufficient to test the first order Euler equation implied by the model. However, they all assume a constant consumption–wealth ratio that constrains the boundary conditions, hence influencing the coefficient of the risk premium. The main contribution of our article is that we drop the assumption of a constant consumption–wealth ratio. We have an analytical solution using a utility maximization model with a stochastic self-financing portfolio. We introduce a terminal condition of wealth with and without bequests. We also simulate the stochastic optimization with a self-financing portfolio, distinguishing risk neutral investors (γ-low) from high risk averse investors (γ-high). We show that the model with bequest has a higher level of wealth and a smoother decline of consumption over time than the model with no bequest at the end of the period. The model with no bequest has the same level of consumption and a sharp fall at the end of the period. Risk averse agents with high return assets have a higher amount of wealth than risk-neutral agents with lower return assets.     

Uncertainty and the theory of international trade in long-run equilibrium

We consider a country with two factors and two industries, each of which faces technical and price uncertainty. Entrepreneurs choose outputs in order to maximize the expected utility of profits. They also draw factor payments and purchase consumption goods after the uncertainty isresolved. They enter and exit from an industry according to whether participation there increases their expected utility. Within this model, the validity of the propositions of neoclassical trade theory depends on how the entrepreneurs' entry decisions are affected by parameter changes via their roles as risk bearers, consumers and factor owners.     

The effect on optimal consumption of increased uncertainty in labor income in the multiperiod case

We consider a multiperiod, additive utility, optimal consumption model with a riskless investment and a stochastic labor income. The main result is that for utility functions belonging to the set F, consumption decreases when we go from any sequence of distribution functions representing labor income to a more risky sequence. A concave utility function belongs to F if its first derivative exists everywhere and is convex.     

CONSUMPTION–LEISURE TRADE‐OFFS AND PERSISTENCY IN BUSINESS CYCLES

This paper studies whether non‐separabilities between consumption and leisure may help to explain the observed persistence in GNP growth. We consider an extended version of Lucas's (1988) human capital investment model that includes labour adjustment costs and compare its performance under different utility specifications with different degrees of complementarity and substitutability between consumption and leisure. We find that when consumption and leisure are complements the model succeeds in matching not only the autocorrelation of output growth but also the important trend‐reverting component found in US data. These results hold even if low adjustment costs of labour are considered. Hence, we conclude that an arguably simple margin not considered conventionally can provide useful insights into observed business cycle patterns.     

Spectral Welfare Cost Functions

If preferences are not time-separable, economic agents care not only about the magnitude of fluctuations in consumption but also about the persistence and other temporal characteristics of those fluctuations. This paper extends and develops the theory of spectral utility functions, which measure utility frequency by frequency, to illustrate the interaction between consumption volatility and time-non-separable preferences. To highlight the economic implications of the interaction, spectral welfare cost functions are developed to provide a quantitative measure of the importance to economic agents of the temporal delivery of consumption volatility.     

Myopia and Addictive Behaviour

We present a theory of addictive behaviour which can account for addicts' apparent disregard for the future consequences of their current actions. The discounting of future utility is increasing in past consumption, indicating increasingly myopic behaviour as consumption increases. The intertemporal complementarity generated by the endogenous discounting produces multiple steady states which can account for the simultaneous existence of myopic addicts and non-myopic non-addicts within a time consiste nt expected utility framework. The theory also accounts for the probabilistic incidence of addiction and successful rehabilitation and the possibility of recurrence.     

ENDOGENOUS BUSINESS CYCLES: THE INFLUENCE OF CHARACTER TRAITS*

This article deals with how business cycles can occur, in light of character traits which influence individual behaviour in an economy. We assume an overlapping generations model in which every consumer has identical instantaneous utility which is additively separable with respect to time. The parameters of utility here include character traits which influence the choice between consumption and savings. In this situation, young individuals choose between current consumption and current savings which lead to future consumption in their old age. Individual character traits, which appear both in the shape of utility functions and in evaluations about utility in the future, affect these choices. And since these choices determine savings, individual character traits can eventually determine how our economy moves. Focusing on the relationship between individual character traits and savings formation, we demonstrate that endogenous business cycles with two periods can occur, in an economy comprised of individuals who opt for current consumption and who are careless in relation to future events, like Aesopian grasshoppers, and in other cases they do not.     

Unique and multiple equilibria in a macroeconomic model with environmental quality: An analysis of local stability

This paper develops and analyzes an economic growth model which incorporates environmental quality into the production and utility functions. We solve our model for the balanced growth path and find that a unique low growth equilibrium is attained when environmental quality is given less weight in the utility function. Multiple equilibria exist if environment quality is given greater weight in the utility function. We also perform local stability analysis of our model. We conclude that an economy in which the environmental quality is given relatively less importance by the agents will be caught in low growth, high consumption poverty traps as is the case for many developing countries while other economies can potentially reach a relatively low consumption, high growth steady state if they place greater weight on environmental quality. Finally we look at how the gap between low and high growth equilibria shrinks when individuals place greater weight on environmental quality and how governmental policies can promote growth when societies give less weight to the environment.     

NONHOMOTHETIC GROWTH MODELS FOR THE ENVIRONMENTAL KUZNETS CURVE

We show the role of the elasticity of substitution between general consumption and the environment in environmental degradation. Specifically, our numerical experiments demonstrate, for a wide range of models, exponential utility generates the environmental Kuznets curve without adding any special assumptions. With exponential utility, the elasticity of substitution and hence the substitution effect between consumption and the environment are both decreasing in income. Hence, when income is low, society (the government) readily gives up environmental quality in return for more consumption, but it does not want to substitute consumption for the environment anymore, once it becomes wealthy enough.     

Can Habit Formation Be Reconciled with Business Cycle Facts?

Many asset pricing puzzles can be explained when habit formation is added to standard preferences. We show that utility functions with a habit then gives rise to a puzzle of consumption volatility in place of the asset pricing puzzles when agents can choose consumption and labor optimally in response to more fundamental shocks. We show that the consumption reaction to technology shocks is too small by an order of magnitude when a utility includes a consumption habit. Moreover, once a habit in leisure is included, labor input is counterfactually smooth over the cycle. In the case of habits in both consumption and leisure, labor input is even countercyclical. Consumption continues to be too smooth. Journal of Economic Literature Classification Numbers: E13, E21, E32.     

Public consumption composition in a growing economy

This paper explores the role of the composition of public consumption within a three sector R&D growth model. A competitive industry supplies a homogeneous good and a monopolistic sector manufactures a composite commodity differentiated in many varieties, whose size can be increased through investment in R&D. We investigate the effects of changes in the level and in the composition of public consumption on the steady state and on the economy’s transitional dynamics. By varying the aggregate composition of demand, the government can effectively move resources away from the traditional industry to foster innovation. Welfare effects are also evaluated. We show that the composition of government consumption affects the entire time path of utility.     

A note on external habits and efficiency in the AK model

This paper examines the implications for equilibrium efficiency of alternative formulations of habit formation in the AK model with external habits. Agent’s utility depends on how her current consumption compares to a reference consumption level—the habits stock—determined by average past consumption in the economy. We first prove that perfect substitutability between consumption and habits along the equilibrium path is necessary and sufficient for efficiency. Then, we prove that the competitive equilibrium is efficient if and only if habits enter utility in a subtractive form.