Real estate and relative risk aversion with generalized recursive preferences

This paper investigates how real estate wealth affects the household’s attitude toward risk, and derives the closed-form expressions for risk aversion with generalized recursive preferences. We find three channels through which real estate wealth affects risk aversion, and these channels are absent in the traditional measure of relative risk aversion as in Arrow (1965) and Pratt (1964). First, illiquidity and fluctuations in real estate value increase consumption risk, thereby increasing risk aversion. Second, real estate as an asset provides a cushion for absorbing negative shocks to households, reducing risk aversion. Third, an increase in real estate prices lowers the profit of the firm that uses real estate as a factor of production, induces a decline in the real wage, and causes a rise in consumption risk. This channel increases risk aversion. We study how these channels as a whole determine relative risk aversion using a basic real business cycle model with generalized recursive preferences and compare the results with the case of expected utility preferences. Finally, we explore the implications of the firm’s and the household’s real estate holdings and illiquidity of real estate on the risk premiums for equity and real estate.     

Allotment in first-price auctions: an experimental investigation

We experimentally study the effects of allotment—the division of an item into homogeneous units—in independent private value auctions. We compare a bundling first-price auction with two equivalent treatments where allotment is implemented: a two-unit discriminatory auction and two simultaneous single-unit first-price auctions. We find that allotment in the form of a discriminatory auction generates a loss of efficiency with respect to bundling. In the allotment treatments, we observe large and persistent bid spread, and the discriminatory auction is less efficient than simultaneous auctions. We provide a unified interpretation of our results that is based on both a non-equilibrium response to the coordination problem characterizing the simultaneous auction format and a general class of behavioral preferences that includes risk aversion, joy of winning and loser’s regret as specific cases.     

Social responsibility promotes conservative risk behavior

Previous studies show that group risk taking can be more conservative than individual risk taking. Two common, but untested reasons for this greater caution are the influence of social responsibility and a tendency to conform to the preferences of others. We study changes in risk taking in simple settings, where another’s risk taking can sometimes be observed, and where decisions affect not only one’s own payoffs but sometimes also affect those of a passive, second party. We find that social responsibility leads to more conservative risk behavior in group decision making. Conformism has a more symmetric effect: observing the choice of another tends to lead both individual and social decisions toward whatever the other’s expressed risk preference is. Direct tests fail to link the social behavior we observe to the social preference for distributional fairness common in decision-making under certainty.     

Strong,bold, and kind: self-control and cooperation in social dilemmas

We develop a model that relates self-control to cooperation patterns in social dilemmas, and we test the model in a laboratory public goods experiment. As predicted, we find a robust association between stronger self-control and higher levels of cooperation, and the association is at its strongest when the decision maker’s risk aversion is low and the cooperation levels of others high. We interpret the pattern as evidence for the notion that individuals may experience an impulse to act in self-interest—and that cooperative behavior benefits from self-control. Free-riders differ from other contributor types only in their tendency not to have identified a self-control conflict in the first place.     

Optimal hedge ratio under a subjective re-weighting of the original measure

In this article we study a risk-minimizing hedge ratio with futures contracts, where the risk of the hedged portfolio is measured through a spectral risk measure (SRM), thus incorporating the degree of agent’s risk aversion. We empirically estimate the optimal hedge ratio (OHR) using a long time series of UK and US equity indices, the EURUSD and EURGBP exchange rates and four liquid commodities (Brent crude oil, corn, gold and copper), to represent different asset classes. Comparing the results with common OHRs (such as the minimum variance and the minimum expected shortfall), we find that the agent’s risk aversion has a material impact, and should not be ignored in risk management.     

Determinants of control structure choice between entrepreneurs and investors in venture capital-backed startups

This study examines two kinds of control structures in venture capital-backed startups. Based on incomplete contracting theory, we analyze the influence of various factors on these control structures in venture capital models, from the perspectives of investors, entrepreneurs, and startups. In particular, we show how factors such as bargaining power, monitoring costs, private benefits, and risk aversion impact the allocation of control rights. Using the survey data on a heterogeneous group of venture capital-backed startups in China, we empirically examine the impacts of various factors on the control structures of these enterprises. Based on the full sample of enterprises, we find that the stronger the venture capitalist’s bargaining power and the higher the monitoring costs, the more likely investors and entrepreneurs are to prefer joint control. Further, the greater the entrepreneur’s financing need and private benefits, the more likely investors and entrepreneurs are to choose joint control. High-tech startups are more likely to choose a joint control model than those in traditional industries. This is especially true for high-tech startups at an early stage of development. In addition, for high-tech startups, the probability of choosing joint control shows a negative relationship with investors’ strategic benefits and a positive relationship with investors’ risk aversion. Regarding startups in traditional industries, investors’ strategic benefits and risk aversion have an insignificant impact on their control structures.     

Disapproval aversion or inflated inequity acceptance? The impact of expressing emotions in ultimatum bargaining

Past experimental research has shown that when rating systems are available, buyers are more generous in accepting unfair offers in ultimatum bargaining. However, it also suggests that, under these conditions, sellers behave more fairly to avoid receiving negative feedback. This paper experimentally investigates which effect is stronger with the use of a rating system: buyers’ inflated inequity acceptance or sellers’ disapproval aversion. We explore this question by varying the information condition on the buyers’ side. Our experiment shows that in a setup where the size of the pie is common knowledge for both buyers and sellers, when a rating system is present, the sellers exhibit disapproval aversion but the buyers do not display greater acceptance of inequity. By contrast, when only sellers are aware of the size of the pie, sellers behave aggressively to exploit buyers and their behavior does not change in the presence of a rating system; however, buyers display greater acceptance of inequity when a rating system is present. We discuss how these results can be explained by a theoretical model that includes sellers’ social disapproval aversion and buyers’ disappointment aversion in addition to the players’ inequality aversion.     

Differential mortality and social security

Abstract This paper studies the normative problem of redistribution between individuals who differ in their lifespans. We discuss aspects related to the objective function and argue that aversion to multiperiod inequality should be taken into account. Then, we study the properties of the social optimum both with full information and with asymmetric information. We highlight the role of aversion to multiperiod inequality and show that it has substantial consequences on the design of Social Security schemes. In particular, we show that for a low (resp. high) aversion to multiperiod inequality, a negative (resp. positive) implicit tax rate on continued activity is desirable.     

市场经济运行中的效率与公平及分配正义辨正

要建立一个真正意义上的和谐社会,必须以实现分配正义为前提.而仅靠市场经济的分配模式尚不能实现合理、公正的分配,解决社会不公问题.政府介入是经济运行的必要调控手段,政府介入到市场经济的运行中来,必然会面临如何处理公平与效率的关系问题.只有理顺这一关系才能使社会财富的分配走向更加合理化,才能创造一个和谐的制度环境,从而实现和谐社会构建.     

新能源成本不确定下能源最优开采研究

随着全球气候变暖和环境的恶化,低污染高效率的新能源成为各国能源政策的主要发展对象,因此新能源取代传统能源是大势所趋。针对未来新能源对传统能源的替代趋势,本文通过建立基于社会和企业总效益最大化的能源最优开采的动态模型,分析了新能源成本不确定性和社会风险偏好的差异对能源耗竭速度的影响,并提出了提高社会总收益的合理方案。分析表明：在替代品出现之前能源的开采量随着新能源替代品成本不确定性的增加而增加;而社会风险厌恶倾向于减少社会的最优开采,但是会增加竞争性企业的的开采量;对T时刻之前的能源开采征收额外的税收可以减缓能源耗竭速度,增加社会总收益。最后,本文提出了T时刻之前的能源开采征收额外的税收,或者是对T时刻之后的能源开采进行补贴来实现我国能源最优开采,提高能源利用效率的建议。     

Two-part tariffs set by a risk-averse monopolist

This paper revisits the classical issues of two-part tariffs by considering risk aversion of a monopolistic seller. Under demand uncertainty, equilibrium unit price declines and approaches towards marginal cost as the seller becomes more risk averse. Marginal-cost pricing prevails, irrespective of the seller’s risk attitude, if clients are homogenous. Under cost uncertainty, unit price is higher than marginal cost and monotonically increases in risk aversion. The model is then extended to accommodate buyers’ risk aversion and it is found that demand uncertainty makes unit price decline in the seller’s risk aversion again but increase in buyers’ risk aversion.     

Mandating behavioral conformity in social groups with conformist members

Social interaction among individuals with a preference for conformity gives rise to coordination externalities which are not internalized in a non-cooperative setting. Mandating behavioral conformity, by centrally imposing a common, group-wide action, internalizes these coordination externalities, but also comes at a cost of restraining individuals’ self-regarding goals. We explore a framework of social interaction among privately informed individuals with conformist preferences to examine when mandating behavioral conformity improves group welfare. Our analysis elucidates how the desirability of mandating behavioral conformity is shaped by the group's socio-economic structure. We find that mandating behavioral conformity is not desirable in social groups that are ex ante homogeneous—either with respect to members’ contribution to group welfare or their innate conformist tendency. In contrast, mandating behavioral conformity can be beneficial in those ex ante heterogeneous social groups where the individuals who contribute most to group welfare also exhibit the strongest preference for conformity.     

Is it my money or not? An experiment on risk aversion and the house-money effect

The house-money effect, understood as people’s tendency to be more daring with easily-gotten money, is a behavioral pattern that poses questions about the external validity of experiments in economics: to what extent do people behave in experiments like they would have in a real-life situation, given that they play with easily-gotten house money? We ran an economic experiment with 122 students to measure the house-money effect on their risk preferences. They received an amount of money with which they made risky decisions involving losses and gains; a randomly selected treatment group received the money 21 days in advance and a control group got it the day of the experiment. From a simple calculation we found that participants in the treatment group only spent on average approximately 35 % of their cash in advance. The data confirms the well documented results that men are more tolerant to risk than women, and that individuals in general are more risk tolerant towards losses than towards gains. With our preferred specification, we find a mean CRRA risk aversion coefficient of 0.34, with a standard deviation of 0.09. Furthermore, if subjects in the treatment group spent 35 % of the endowment their CRRA risk aversion coefficient is higher than that of the control group by approximately 0.3 standard deviations. We interpret this result as evidence of a small and indirect house money effect operating though the amount of the cash in advance that was actually spent. We conclude that the house money effect may play a small role in decisions under uncertainty, especially when involving losses. Our novel design, however, could be used for other domains of decision making both in the lab and for calibration of economic models used in micro and macroeconomics.     

“Fair go” for all? Wealth and Risk Aversion of Australian Households*

A mean‐variance framework is applied to Australian household financial portfolios in order to provide estimates of relative risk aversion in the economy. Controlling for various socio‐economic characteristics, we explore whether risk aversion heterogeneity is a function of wealth heterogeneity. In contrast to most studies, we find evidence of very high risk aversion amongst the majority of households of poor households but vastly lower risk aversion amongst the high percentiles in the wealth distribution. Applying a first differences model across three survey waves spanning 2002 to 2010, we find that risk tolerance increases significantly with wealth. Risk tolerance is positively associated with mortgage payments, but rental payments have no relationship. In addition, we found no evidence that holding a university education has any discernible impact on risk aversion. Lastly, we present some preliminary findings as to the impact of financial advice on observed risk aversion. Financial advice is found to accentuating risk aversion, particularly amongst the wealthiest households. The findings have potential implications for the distribution of wealth in Australia that has received renewed interest recently.     

Diversification versus optimality: is there really a diversification puzzle?

In this paper, we provide a general valuation of the diversification attitude of investors. First, we empirically examine the diversification of mean-variance optimal choices in the US stock market during the 11-year period 2003–2013. We then analyze the diversification problem from the perspective of risk-averse investors and risk-seeking investors. Second, we prove that investors’ optimal choices will be similar if their utility functions are not too distant, independent of their tolerance (or aversion) to risk. Finally, we discuss investors’ attitude towards diversification when the choices available to investors depend on several parameters.     

风险厌恶测定与我国银行治理效率的实证研究

基于FDIC对商业银行贷款损失所设定的概率分布,本文利用VaR方法对商业银行风险厌恶程度进行了测定,并利用我国上市银行2004～2008年间的财务数据对商业银行的风险厌恶程度进行了实证分析,结果表明商业银行的风险控制可以反映其风险厌恶程度,风险厌恶程度在风险控制中得到充分体现.银行的风险厌恶程度越高,净资产回报率越高.     

Convex and decreasing absolute risk aversion is proper

Proper risk aversion, a pivotal concept in the study of behavioral conditions on utility functions, states that an undesirable risk can never be made desirable by the presence of an independent risk. It is well known that standard risk aversion is sufficient for this concept. We show in this short article that convex and decreasing absolute risk aversion is an alternative sufficient condition.     

Lie aversion and self-reporting in optimal law enforcement

Requirements that individuals or companies self-report violations are common in regulation and law enforcement. This paper studies how violators’ aversion to lying affects the design and merit of enforcement regimes that require self-reporting. Even when a self-reporting requirement produces costs of lies and enjoys no economic advantage in the absence of lie aversion, I find that self-reporting improves enforcement efficiency. With lie aversion, self-reporting enables greater deterrence of violations at a lower cost of monitoring. Corollaries to this result are that (1) the presence of lie aversion enhances social welfare; (2) enforcement regimes that elicit more noxious lies when false reports are made—for example, a compulsory versus voluntary self-reporting feature—are advantageous; and (3) under an optimal enforcement regime, lying generally occurs and the self-reporting sanction is higher than the average sanction for a false report.     

Higher-order risk preferences in social settings

We study prudence and temperance (next to risk aversion) in social settings. Previous experimental studies have shown that these higher-order risk preferences affect the choices of individuals deciding privately on lotteries that only affect their own payoff. Yet, many risky and financially relevant decisions are made in the social settings of households or organizations. We elicit higher-order risk preferences of individuals and systematically vary how an individual’s decision is made (alone or while communicating with a partner) and who is affected by the decision (only the individual or the partner as well). In doing so, we can isolate the effects of other-regarding concerns and communication on choices. Our results reveal that the majority of choices are risk averse, prudent, and temperate across social settings. We also observe that individuals are influenced significantly by the preferences of a partner when they are able to communicate and choices are payoff-relevant for both of them.