Natural vs. financial insurance in the management of public-good ecosystems

In the face of uncertainty, ecosystems can provide natural insurance to risk averse users of ecosystem services. We employ a conceptual ecological-economic model in which ecosystem management has a private insurance value and, through ecosystem processes at higher hierarchical levels, generates a positive externality on other ecosystem users. We analyze the allocation of (endogenous) risk and ecosystem quality by risk averse ecosystem managers who have access to financial insurance, and study the implications for individually and socially optimal ecosystem management, and policy design. We show that while an improved access to financial insurance leads to lower ecosystem quality, the effect on the extent of the public-good problem and on welfare is determined by ecosystem properties. We derive conditions on ecosystem functioning under which, if financial insurance becomes more accessible, (i) the extent of optimal regulation increases or decreases; and (ii) welfare, in the absence of environmental regulation, increases or decreases.     

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.     

Ambiguous act equilibria

A game-theoretic framework that allows for explicitly randomized strategies is used to study the effect of ambiguity aversion on equilibrium outcomes. The notions of “independent strategies” as well as of “common priors” are amended to render them applicable to games in which players lack probabilistic sophistication. Within this framework the equilibrium predictions of two-player games with ambiguity-averse and with ambiguity-neutral players are observationally equivalent. This equivalence result does not extend to the case of games with more than two players. A translation of the concept of equilibrium in beliefs to the context of ambiguity aversion yields substantially different predictions – even for the case with just two players.     

Is it possible to be too risk averse? Considerations for financial management in the public sector

Within the financial management discipline, risk aversion is viewed as ‘secure’ and ‘responsible’. Yet, frequently risk aversion is associated with delays, failure to take action, decreased employee morale and stakeholder frustration. This article considers the role of risk aversion within the public sector and questions whether the risk-averse nature of the organization, coupled with risk-averse leaders can result in negative outcomes for the agency. The article concludes that while risk aversion is important, there are actions that a risk-averse leader can take to minimize the implications of risk-averse behaviour on the organization as a whole.     

Extreme inequality aversion without separability

Hammond (J Econ Theory 11, 465–467, 1975), Meyer (J Econ Theory 11, 119–132, 1975), and Lambert (The distribution and redistribution of income Manchester University Press, Manchester, 2001) provide the formal result connecting leximin and the idea of extreme inequality aversion for social preferences of the expected utility type. Using an analogous approach, we show that for social preferences not necessarily satisfying the separability axiom that underlies expected utility theory, the case of extreme inequality aversion is covered by the class of weakly maximin social preferences—i.e., the class of social preferences that give priority to the worst off in all cases in which the worst off is not indifferent. I wish to thank Bart Capéau, Frank Cowell, Peter Lambert, Luc Lauwers, Erik Schokkaert, Frans Spinnewyn, and Bertil Tungodden for valuable comments. Remaining shortcomings are mine. Financial support from the Fund for Scientific Research - Flanders (grant G.0005.04) and the Interuniversity Attraction Poles network funded by the Federal Public Planning Service, Belgian Science Policy (grant P5/21-A) is gratefully acknowledged.     

Intertemporal substitution, risk aversion and ambiguity aversion

Summary. This paper axiomatizes a form of recursive utility on consumption processes that permits a role for ambiguity as well as risk. The model has two prominent special cases: (i) the recursive model of risk preference due to Kreps and Porteus [18]; and (ii) an intertemporal version of multiple-priors utility due to Epstein and Schneider [8]. The generalization presented here permits a three-way separation of intertemporal substitution, risk aversion and ambiguity aversion.Received: 5 August 2003, Revised: 12 March 2004, JEL Classification Numbers: D80, D81, D90.I am grateful to Larry Epstein for his guidance and invaluable advice, and to a referee for helpful comments and suggestions.     

Estimation of relative risk aversion across time

This article examines relative risk aversion in the framework of a three-moment asset pricing model that accounts for skewness. Accounting for skewness in calculating risk aversion gives a more accurate series of estimates of risk aversion and helps to reconcile the wide disparity in risk coefficients found in past literature. Risk aversion coefficients are calculated from 1926 to 2014 using stock market returns. This procedure results in a time series of data that can be related to other variables such as real interest rates and changes in demand for various asset classes.     

Regulating a risk-averse firm under incomplete information

We examine the optimal regulatory policy for a risk-averse firm when the firm is imperfectly informed about its efficiency parameter for a project at the time of contracting. The firm’s risk aversion shifts the optimal regulatory policy from a fixed-price contract to a cost-plus contract. The optimal regulatory policy entails undereffort by an inefficient firm as in Laffont and Tirole (J Polit Econ 94(3):614–641, 1986) and the effort distortion increases as the firm becomes more risk-averse. Further, the regulator benefits from sequential contracting with the firm where the firm chooses contract terms gradually as it acquires information, albeit the benefit diminishes as the firm becomes more risk-averse.      

An ecological economic simulation model for assessing fire and grazing management effects on mesquite rangelands in Texas

In the southern Great Plains of North America, fire exclusion has contributed to many rangelands converting from native grassland to woody shrublands dominated by mesquite (Prosopis glandulosa Torr.) and cactus (Opuntia spp.), threatening ecosystem health and human livelihoods in the region. Prescribed fire is the least expensive method of treating mesquite and other undesirable plants, but its role is as a maintenance treatment to prolong the life of more expensive brush control treatments. Using a simulation model of a hypothetical 1000 ha ranch, we evaluate the biological and economic implications of management scenarios involving the regular application of summer fire to reduce mesquite and cactus over a 30-year time period. We compared the model output with experimental data to corroborate model output before evaluating various management scenarios over a range of stocking rates. Scenarios included (a) varying initial range condition, (b) different frequencies of summer burning, and (c) different initial amounts of mesquite brush. Model simulations corroborated field data sufficiently well to give confidence in the output of the model. In our simulations the option of not treating to reduce brush and cactus had a major negative impact on range condition, secondary productivity and profitability. In contrast, all simulated fire treatments improved range condition, productivity and profitability except when initial range condition was poor. Initial range condition and stocking rate were the major factors affecting both productivity and profitability. Compared to other factors over which managers have short-term control, frequency of burning and the initial amount of mesquite cover, had a relatively minor impact. Simulations indicated that the highest level of profit consistent with maintaining or improving range condition was attained when individual animal production was 92-95% that of the maximum production per animal, a situation invariably associated with relatively low stocking rates.     

Economic implications of maintaining rangeland ecosystem health in a semi-arid savanna

A simulation model was used to determine the ecological and economic consequences of managing stocking rate on semi-arid savanna rangeland continuously stocked with livestock to achieve the alternate management goals: (1) maintaining current range condition, (2) maximizing profit, or (3) improving range condition over a 30-year time frame. We developed values for end of the year herbaceous standing crop and utilization required to attain these management goals for rangeland in poor to excellent condition. Based on extensive field research conducted in this region over 5 decades, range condition in this model is programmed to decline in response to three factors: excessive grazing pressure, below average precipitation, and an increase in woody plants. Earning capacity is four times higher for range in excellent condition than that in poor condition. For all initial range condition (RC) values, simulated stocking rates that maintained RC resulted in simulated mean weaning weights 93-94% of maximum. Maximum short-term and long-term profit is attained at higher stocking rates than would maintain long-term range condition and at much higher levels than would increase range condition levels. When stocked for maximum profit, individual animal performance was 90% of maximum. The model predicts that low stocking rates allow range condition to improve. At these recovery stocking rates, total 30-year profits were found to be 78%-87% of the stocking rates that would maintain range condition, and only 67%-75% of stocking rates that would maximize profit. Predictions of the end of year standing crop to maintain range condition were in broad agreement with the 1000 kg ha^− 1 advised for this region. To improve range condition, the model predicts that an end of year standing crop of 1500-2000 kg ha^− 1 is required, compared to the generally advised level of 1200-1500 kg ha^− 1. The predicted end of year forage standing crops for the maximum profit goal are well below the advised 800 kg ha^− 1 threshold required to prevent degradation for all of the initial range conditions that were simulated. To ensure maintenance of range in excellent condition, our results concur with the advised utilization levels of 20-25%. However, for range in poorer than excellent condition, the model predicted much lower utilization levels were needed to maintain or improve range condition.     

Sustainability and its relation to efficiency under uncertainty

Evaluating the long-run consequences of present actions, as in the context of sustainability, requires information about the actions’ outcomes and about future preferences that is often uncertain. We analyze a risk-based criterion of sustainability and a corresponding efficiency concept that cover these uncertainties. We derive several properties of these criteria and formally characterize the trade-off between sustainability and efficiency. Furthermore, we show that maximizing the probability of ex post efficiency under a sustainability constraint provides an interesting choice rule and that, for a special case, this rule is connected to portfolio theory. We are indebted to an anonymous referee whose comments helped substantially to improve the article.     

Ambiguity,uncertainty aversion and equilibrium welfare

Summary. In order to analyse the effect of ambiguity and uncertainty aversion on equilibrium welfare, a two period, pure exchange one good economy is considered. Agents are Choquet-expected-utility maximizers with same convex capacity and strictly concave utility index. It is proven that equilibrium is indeterminate whenever several probabilities in the core of the capacity minimize the expected value of aggregate endowment and not all agents have same expected endowments under those probabilities. It is further shown that small changes in aggregate endowment may have drastic welfare implications. A more general model is considered in the case of no aggregate uncertainty: agents have a set of priors and are uncertainty averse as modelled by Gilboa-Schmeidler [1989]. In the case of complete markets, it is shown that assets have a spread of equilibrium prices similar to the spread of no-arbitrage prices compatible with absence of arbitrage in markets with imperfections.Received: 2 June 2000, Revised: 27 March 2003, JEL Classification Numbers: D46, D59,D60, G12.I have benefited from conversations with L. Epstein, F. Magnien and J. M. Tallon.     

Utility functions of equivalent form and the effect of parameter changes on optimum decision making

We derive a class of utility functions that are equivalent with respect to a well-defined functional form. We study the case of constant relative risk aversion (of some order) to investigate on different equivalence relations in order to determine the, possibly infinite, number of equivalence classes when utility functions satisfy a specific form. Then we apply our results to standard applications in economics and finance, for example, to the effect of price volatility on optimum hedging. We would like to thank Bernhard Eckwert and Itzhak Zilcha for constructive comments and suggestions.