A systematic analysis of the links amongst the Marshallian,Hicksian, and Frischian demand functions: A note

Three types of demand functions are central to contemporary consumer theory: the Marshallian, the Hicksian, and the Frischian demand functions. This paper presents a systematic definition of the analytical relationships amongst these demand functions under the maintained hypothesis that the decision maker is a profit maximizer.     

An alternative proof of Fishburn’s axiomatization of lexicographic preferences

We present an alternative proof of Fishburn’s (1975) axiomatization of lexicographic preferences. The essence of our proof lies in identifying “an extremely pivotal factor”. Our proof reconfirms the strong interconnections between Arrow’s and Gibbard–Satterthwaite’s theorems with Fishburn’s axiomatization.     

Errors in self-reported earnings: The role of previous earnings volatility and individual characteristics

I report the measurement error in self-reported earnings for a developing country using a novel data set. The data set consists of two cross-sections of the Federated States of Micronesia (FSM) wage and salary sectors; additionally, a subset of the two cross-sections may be linked to create a panel. Administrative data from FSM Social Security office are matched to the FSM Census data for the wage and salary sectors. I find that the error in annual self-reported earnings is centered on zero. Additionally, I find strong evidence for mean reversion in the data suggesting non-classical measurement error. I identify the impact of prior years' earnings variability on the current reporting of earnings using administrative data on earnings histories. Prior earnings volatility strongly affects measurement error in current period. However, the effect of prior shocks diminish significantly over time—suggesting that first-differencing and fixed-effects techniques will not improve accuracy.     

The Cass criterion, the net dividend criterion, and optimality

Abel, Mankiw, Summers, and Zeckhauser [Assessing dynamic efficiency: theory and evidence, Rev. Econ. Stud. 56 (1989) 1-20] propose the net dividend criterion as an easy to use sufficient condition for optimality in general stochastic overlapping generations economies with production. We provide examples based on the criterion due to Cass [On capital overaccumulation in the aggregative neoclassical model of economic growth: a complete characterization, J. Econ. Theory 4 (1972) 200-223] and its extensions, the usual tools for such problems, to show that the net dividend criterion need not give the right answer. We identify the flaw in their proof. We also provide an alternative condition which, by an argument unrelated to theirs, is a sufficient condition for optimality when dividends are nonnegative and then argue that the condition is not innocuous since it cannot be verified in actual economies.     

Knightian decision theory and econometric inferences

An uncertainty averse Knightian decision maker has a set of probability distributions over outcomes and chooses something other than the status quo only if the change increases the expected payoff according to all the distributions. It is possible to define a standardized degree of uncertainty aversion. To each such degree, there corresponds a set of prior distributions over the parameters of a Gaussian linear regression model, these priors being centered on a uniform prior. The set of posterior means corresponding to this set of priors has the same properties as a standard confidence region.     

Ecological-economic viability as a criterion of strong sustainability under uncertainty

Strong sustainability, according to the common definition, requires that different natural and economic capital stocks be maintained as physical quantities separately. Yet, in a world of uncertainty this cannot be guaranteed. To therefore define strong sustainability under uncertainty in an operational manner we propose to use the concept of viability. Viability means that the different components and functions of a dynamic, stochastic system at any time remain in a domain where the future existence of these components and functions is guaranteed with sufficiently high probability. We develop a unifying and general ecological-economic concept of viability that encompasses the traditional ecological and economic notions of viability as special cases. It provides an operational criterion of strong sustainability under a mild form of uncertainty and for medium spatial and temporal scales. We illustrate this concept and demonstrate its usefulness by applying it to livestock grazing management in semi-arid rangelands.     

Financial risk attitudes and aging in Australia

A number of empirical studies document that people tend to become more risk averse as they get older. But other studies find only little evidence that age matters for financial risk attitudes. This prompts a call for revisiting the relationship between age and risk attitude to better support policy recommendations. The current paper contributes to this effort by utilising large-scale population data to conduct a dynamic panel analysis. Care is taken to avoid the problem of endogeneity of lagged risk attitude in modelling its effects. Analysis reveals that individuals' past risk attitude has a positive effect on their current risk attitude. However, there is only little evidence that risk attitude and age are systematically related. Our results shed some light on the previous contradictory empirical findings in the literature and suggest that past risk attitude is potentially of greater relevance than chronological age in determining current risk attitude.     

Externalities, potential, value and consistency

We provide new characterization results for the value of games in partition function form. In particular, we use the potential of a game to define the value. We also provide a characterization of the class of values which satisfies one form of reduced game consistency.     

Recursive preferences,learning and large deviations

We estimate the relative contribution of recursive preferences versus adaptive learning in accounting for the tail thickness of price–dividends/rents ratios. We find that both of these sources of volatility account for volatility in liquid (stocks) but not illiquid (housing) assets.     

Effective global regularity and empirical modelling of direct, inverse, and mixed demand systems

Abstract .  This paper utilizes the notion of 'effective global regularity' and the intuition stemming from Cooper and McLaren (1996)'s General Exponential Form to develop a family of 'composite' (product and ratio) direct, inverse and mixed demand systems. Apart from having larger regularity regions, the resulting specifications are also of potentially arbitrary rank, which can better approximate non-linear Engel curves. We also make extensive use of duality theory and a numerical inversion estimation method to rectify the endogeneity problem encountered in the estimation of the mixed demand systems. We illustrate the techniques by estimating different types of demand systems for Japanese quarterly meat and fish consumption.     

Seasonal adjustment,demography, and GDP growth

Seasonal adjustment removes the predictable seasonal variation in GDP. If there is seasonal variation in factor inputs, then seasonal adjustment factors may be correlated with those inputs. This correlation can obscure statistically the importance of those inputs for GDP. This effect is apparent for the demographic composition of the labour force for Canada. Seasonal adjustment also changes the time‐series properties of GDP. Accounting for the seasonal pattern and trend change in demography suggests that the period of reduced volatility in GDP growth for Canada, the ‘Great Moderation,’ can be traced to the changing demographic structure of the labour force.     

Optimal annuitization, uncertain survival probabilities, and maxmin preferences

We consider a life-cycle model with bequest motives, and assume that the individual does not know his/her survival probability and has maxmin utility preferences; we show that it is optimal not to annuitize but to purchase pure life insurance policies instead.     

Certainty Independence and the Separation of Utility and Beliefs

Economists often operate under an implicit assumption that the tastes of a decision maker are quite stable, while his beliefs change with the availability of new information. We show that for a general class of preferences, a separation of a key component of tastes, the utility function, from the other components of the representation is possible only if the decision maker's preferences satisfy a mild but not completely innocuous condition, called ‘certainty independence’. We also outline the axiomatic characterization of the preferences that obtain such separation, which are a subset of the biseparable preferences.     

Illiquidity, position limits, and optimal investment for mutual funds

We study the optimal trading strategy of mutual funds that face both position limits and differential illiquidity. We provide explicit characterization of the optimal trading strategy and conduct an extensive analytical and numerical analysis of the optimal trading strategy. We show that the optimal trading boundaries are increasing in both the lower and the upper position limits. We find that position limits can affect current trading strategy even when they are not currently binding and other seemingly intuitive trading strategies can be costly. We also examine the optimal choice of position limits.     

Investment horizons,cash flow news,and the profitability of momentum and reversal strategies in the Chinese stock market

This study investigates the profitability of momentum and reversal strategies of different investment horizons in the Chinese stock market. The findings indicate that momentum strategies are profitable for investment horizons less than one week. For longer investment horizons, reversal strategies are profitable. This result is very different from the US market, where profitable momentum strategies yield to much longer investment horizons. We show that this is because investors in Chinese stock market generally overreact to the company cash flow news while investors in US market underreact to cash flow news.     

Asset prices, debt constraints and inefficiency

We consider (possibly non-stationary) economies with endogenous solvency constraints under uncertainty over an infinite horizon, as in Alvarez and Jermann (2000) [5]. A sort of Cass Criterion (Cass, 1972 [10]) completely characterizes constrained inefficiency under the hypothesis of uniform gains from risk-sharing (which is always satisfied in stationary economies when the autarchy is constrained inefficient). Uniform gains from risk-sharing also guarantee a finite value of the intertemporal aggregate endowment at a constrained optimum. Hence, no equilibrium exhibits a null interest rate in the long run. Finally, constrained inefficiency occurs if and only if there exists a feasible redistribution producing a welfare improvement at all contingencies.     

Consumption, Wealth, and Indebtedness in the Context of Uncertainty: The Consumption Function Meets Portfolio Theory

The objective of this paper is to provide a sound theoretical framework for the empirical analysis of consumer indebtedness, by integrating Portfolio theory with the Life-Cycle hypothesis (LCH) model of consumption. Modern versions of this LCH theory almost always assume that utility is additive over time, but in this study, the multiplicative Cobb–Douglas function is used. The new synthesis also explains the stochastic properties of consumption more fully and clearly than previous studies, in particular the uncertainty arising from rates of return on risky assets. The new theory will also help to improve the explanation of the surprise changes in consumption because these sources of risk are incorporated explicitly into the analysis.     

THE EFFECTS OF FEEDBACK ON SELF‐ASSESSMENT

It is a well‐known phenomenon that people have difficulties in assessing their ability correctly. Often they overestimate their (relative) abilities. We conduct an experiment to test whether the self‐assessment of individuals improves when they receive feedback and there are incentives to make a correct self‐assessment. We investigate the subjects' reactions to feedback in several subsequent rounds to see not only if, but also when and how they react. Our main finding is that feedback influences subjects' decisions and can improve their overall self‐assessment. The effects, however, depend on the kind of feedback. Furthermore, we observe differences in the reactions of subjects (e.g., to what extent they follow feedback), the robustness of their belief about their relative ability, and how they process feedback.