Welfare cost of inflation in a stochastic balanced growth model

There is a large and growing literature on the welfare cost of inflation. However, work in this area tend to find moderate estimates of welfare gains. In this paper we reexamine welfare costs of inflation within a stochastic general equilibrium balanced growth model paying a particular attention to recursive utility, portfolio balance effects, and monetary volatility and monetary policy uncertainty. Our numerical analysis shows that a monetary policy that brings down inflation to the optimum level can have substantial welfare effects. Portfolio adjustment effects seem to be the dominant factor behind the welfare gains.     

The ramsey model revisited: The optimality of cyclical consumption and growth

This paper reconsiders the familiar Ramsey model of optimal saving. This model is modified with two respects: direct spillovers (positive or negative) of capital on utility and penalties for changes of consumption. It will be shown that these two modifications may substantially change the stability properties of an optimal programme if capital provides utility directly (in addition to indirectly through production). More precisely, complex strategies such as (stable) limit cycles or even unstable policies may be optimal. Adjustment costs must be sufficiently high in order to obtain stable limit cycles (or even exploding spirals). This is quite surprising because large adjustment costs are expected to smooth intertemporal strategies.     

On the solution of a stochastic optimal growth model

This note discusses a stochastic optimal growth model in which the optimal paths can be obtained by a simple direct argument. The structural characteristics of the model are the infinite horizon, the form of the instantaneous utility function, and uncertainty as a Wiener process in a linear production constraint. The note explains that, for optimality, at each point in time a formally identical problem must be solved. This implies that the optimal saving ratio must be constant.A proof, employing the rules of stochastic calculus, that the ensuing paths are the unique globally optimal paths is also given.We are very grateful to two referees of this journal for their invaluable comments and suggestions.     

Comparing risk aversion in a probability triangle

An agent's acceptance set consists of the probability distributions preferred to the status quo. One agent is more risk averse than another if the more risk averse agent's acceptance set is a proper subset of the less risk averse agent's acceptance set. An agent's odds premium expresses the odds in favor of winning the largest cash prize in a lottery over the best and worst alternatives that is indifferent to the the agent's initial wealth. Comparisons of two agents odds premia completely characterizes the risk aversion relations between them when facing lotteries in a probability triangle. The result applies to expected utility and some non-expected utility theories. Received: December 30, 1998; revised version: February 10, 1999     

On capital accumulation paths in a neoclassical stochastic growth model

Summary. Boldrin and Montrucchio [2] showed that any twice continuously differentiable function could be obtained as the optimal policy function for some value of the discount parameter in a deterministic neoclassical growth model. I extend their result to the stochastic growth model with non-degenerate shocks to preferences or technology. This indicates that one can obtain complex dynamics endogenously in a wide variety of economic models, both under certainty and uncertainty. Further, this result motivates the analysis of convergence of adaptive learning mechanisms to rational expectations in economic models with (potentially) complicated dynamics. Received: June 21, 1996; revised version: October 31, 1996     

More pessimism than greediness: a characterization of monotone risk aversion in the rank-dependent expected utility model

Summary. This paper studies monotone risk aversion, the aversion to monotone, mean-preserving increase in risk (Quiggin [21]), in the Rank Dependent Expected Utility (RDEU) model. This model replaces expected utility by another functional, characterized by two functions, a utility function u in conjunction with a probability-perception function f. Monotone mean-preserving increases in risk are closely related to the notion of comparative dispersion introduced by Bickel and Lehmann [3,4] in Non-parametric Statistics. We present a characterization of the pairs (u,f) of monotone risk averse decision makers, based on an index of greediness G _u of the utility function u and an index of pessimism P _f of the probability perception function f: the decision maker is monotone risk averse if and only if . The index of greediness (non-concavity) of u is the supremum of taken over . The index of pessimism of f is the infimum of taken over 0 < v < 1. Thus, , with G _u = 1 iff u is concave. If then , i.e., f is majorized by the identity function. Since P _f = 1 for Expected Utility maximizers, forces u to be concave in this case; thus, the characterization of risk aversion as is a direct generalization from EU to RDEU. A novel element is that concavity of u is not necessary. In fact, u must be concave only if P _f = 1.Received: 10 April 2001, Revised: 18 November 2003, JEL Classification Numbers: D81. Correspondence to: Michéle CohenAlain Chateauneuf, Michéle Cohen, Isaac Meilijson: We are most grateful to Mark Machina, Peter Wakker and two anonymous referees for very helpful suggestions and comments.     

International investment in a model of stochastic growth and development traps

This paper investigates the effects of financial integration in a stochastic endogenous growth model of two economies in which heterogeneous agents face fixed costs of productive investment. The removal of investment barriers may enable a poor country to escape from a state of low and unstable growth by leading to large capital inflows and by raising the number of agents who invest in productive capital. However, since the two economies are characterized by increasing returns to capital and since financial integration may lower the saving rate, it is also possible that both countries' growth prospects worsen.     

Asymptotic behavior of market shares for a stochastic growth model

Consider a market with finitely many firms, each enjoying an uncertain growth. We assume the (random) growth rates of these firms are independent and identically distributed. We show that the asymptotic probability distribution of the market shares gives each firm an equal probability of dominating the market (while all other firms are almost extinguished). In particular, these conclusions are independent of the initial market shares of the firms. We conclude that sample paths fluctuate between almost domination and almost extinction. We also demonstrate that these fluctuations may be very slow. Extensions to situations where the total demand is restricted are discussed.     

Marginal risk aversion and preferences in a betting market

An individual's behavioural attitudes toward variance and non-symmetry in the payoff distributions of pari-mutuel gambles are empirically examined using the von Neumann - Morgenstern expected utility of wealth paradigm. Preferences over payoff distributions for a representative bettor are estimated from observed payoffs at a greyhound racetrack. The results indicate that the representative bettor exhibits increasing absolute risk aversion and, given that the representative bettor is locally non-satiated with regard to wealth, exhibits preference for variance and aversion to positive skewness in the payoff distributions of the gambles examined.     

Preference intensities and risk aversion in school choice: a laboratory experiment

We experimentally investigate in the laboratory prominent mechanisms that are employed in school choice programs to assign students to public schools and study how individual behavior is influenced by preference intensities and risk aversion. Our main results show that (a) the Gale–Shapley mechanism is more robust to changes in cardinal preferences than the Boston mechanism independently of whether individuals can submit a complete or only a restricted ranking of the schools and (b) subjects with a higher degree of risk aversion are more likely to play “safer” strategies under the Gale–Shapley but not under the Boston mechanism. Both results have important implications for enrollment planning and the possible protection risk averse agents seek.     

Risk aversion and risk loving in the small: a decomposition of the multivariate risk premium

This note proposes a decomposition of the familiar scalar multivariate risk premium into components which can be easily interpreted in the context of consumer theory. The premium under consideration is the standard one used to ascertain the impact of price and income risk on consumer welfare. This proposed premium decomposition allows for a more intuitive identification of the detrimental and beneficial effects that arise from income and price risk. As an illustrative example, this decomposition is used to ascertain the welfare effects arising from the price fluctuations experienced by UK households over the period 1963–97.     

Sustained output growth under uncertainty: A simple model with human capital

In a model where agents use their labour/education choice to adjust their consumption profile over time, I show that the impact of uncertainty on growth depends, critically, on agents’ attitudes towards risk, reflected by the coefficient of relative risk aversion. In this respect, the well known result from the literature on ‘saving under uncertainty’ can be extended into a broader context, whereby the intertemporal profile of consumption is determined via human capital accumulation rather than saving and physical capital investment.     

The design of a consumption tax under capital risk

This paper focuses on the design of a consumption tax in a world of capital risk. The certainty literature discusses two standard options, namely the cash flow method and the pre-payment method (i.e., the wage tax), and finds the two approaches to be equivalent. Models that consider capital risk (via asset choice) reach different conclusions. This discrepancy arises in part due to a different choice of the social discount rate. In light of the failure of the discount-rate argument to resolve the issue at hand, we explore the market certainty equivalence of risky government revenue. We let revenue risks stay in the private sector, and examine the market value of the feasible transfer (e.g., in the form of a public good) back to households. We reach three broad conclusions. First, we find that if the state returns to each household its own tax-revenue risks, equivalence will be re-established as in certainty models. Next, we show that if the state engages in intergenerational risk sharing (e.g., through a system of stochastic tax transfers), the wage tax cannot be construed to be a valid pre-payment alternative to the cash flow or a modified wage-tax-ation system. Efficient risk allocation across generations under a cash flow tax (or, one that includes future capital gains as well as wages in the tax base) leads to a Pareto improvement over the simple wage tax. Finally, a major policy implication follows; in order to be practicable, a consumption tax would have to be implemented via registered savings accounts much in the fashion of the Canadian registered retirement savings plans program rather than through the pre-payment route.     

The role of transaction costs and risk aversion when selecting between one and two regimes for portfolio models

Estimation of the inputs is the main problem when applying portfolio analysis, and Markov regime-switching models have been shown to improve these estimates. We investigate whether the use of two-regime models remains superior across a range of values of risk aversion and transaction costs, in the presence of skewness and kurtosis and no short sales. Our results for US data suggest that, due to differences in their risk preferences and transactions costs, most retail investors may prefer to use one-regime models, while investment banks may prefer to use two-regime models.     

The impact of risk aversion on information transmission between firms

This paper investigates whether and to what extent the presence of risk aversion affects the welfare implications of information transmission in one of the most fundamental oligopoly models—a Cournot duopoly model with common demand uncertainty. It aims to make a bridge between the literature dealing with information sharing in oligopoly and the one discussing the firm under uncertainty. We can show that the average output level of each firm is quite sensitive to the type and amount of information, and that the presence of risk aversion has an effect of decreasing the welfare of firms, whence information transmission may sometimes be harmful rather than beneficial to risk averse firms. These results have some policy implications.We are indebted to Hirofumi Uzawa, Masao Fukuoka, Ryuzo Sato, Koichi Hamada, Michihiro Ohyama, Kunio Kawamata, Yasunori Ishii, Noboru Sakashita, Koji Okuguchi, and Masamichi Kawano for useful comments and discussions. An earlier version of this paper was presented at the Annual Meeting of the Japan Association of Economic Theory and Econometrics, University of Tsukuba, October 1989, and at the Keio Conference on Market Mechanism and Industrial Organization, Hakone, November 1989. Any errors which may remain are our sole responsibility. Partial financial help from the Tokyo Council for Economic Research, New York University, and the Ministry of Education, Grant C-01530001 is gratefully acknowledged.     

Stability of stochastic optimal growth models: a new approach

The paper proposes an Euler equation technique for analyzing the stability of differentiable stochastic programs. The main innovation is to use marginal reward directly as a Foster-Lyapunov function. This allows us to extend known stability results for stochastic optimal growth models, both weakening hypotheses and strengthening conclusions.     

Efficient delays in a stochastic model of bargaining

Summary. We consider a k-player sequential bargaining model in which both the cake size and the identity of the proposer are determined by a stochastic process. For the case where the cake is a simplex (of random size) and the players share a common discount factor, we establish the existence of a unique stationary subgame perfect payoff which is efficient and characterize the conditions under which agreement is delayed. We also investigate how the equilibrium payoffs depend on the order in which the players move and on the correlation between the identity of the proposer and the cake size.Received: November 5, 1996; revised version: December 31, 1996This revised version was published online in February 2005 with corrections to the cover date.     

On the interaction between risk sharing and capital accumulation in a stochastic OLG model with production

We analyze the interaction between risk sharing and capital accumulation in a stochastic OLG model with production. We give a complete characterization of interim Pareto optimal competitive equilibrium allocations. Furthermore, we provide tests of Pareto optimality/suboptimality based on (risky) rates of return only.     

食品安全在食物消费中的角色分析

一般意义上的食品安全只是食物消费中的一只砝码,消费者对效用最大化的追求使价格在食品消费中的作用突出,并最终使消费者对食品安全的担心停留在口头上;饮食习惯、生活方式等因素会削弱消费者对食品安全的关注程度;食品安全问题的最终解决依赖于消费水平的提高、饮食习惯的优化及贸易标准的科学合理。