Fixed versus variable rate loans under state-dependent preferences

This paper examines the optimal mix of fixed and variable rate loans of a competitive bank facing uncertain funding costs. The bank's preferences are state-dependent in that the utility function depends on a state variable. We show that the optimal amount of loans extended by the bank depends neither on the state-dependent preferences of the bank, nor on the joint distribution of the marginal cost of funds and the state variable. The bank, however, optimally lends less should it be forced to assume all interest rate risk by exclusively extending fixed rate loans. We show further that a non-positive spread between fixed and variable rate loans is no longer a necessary and sufficient condition for the bank to refrain from extending fixed rate loans should the marginal cost of funds be correlated with the state variable in the sense of expectation dependence. State-dependent preferences as such play a pivotal role in determining the bank's optimal choice between fixed and variable rate loans.     

Fixed versus variable rate loans under regret aversion

This paper examines the optimal mix of fixed and variable rate loans of a competitive bank facing funding cost uncertainty, where the bank is not only risk averse but also regret averse. Regret aversion is characterized by a utility function that includes disutility from having chosen ex-post suboptimal alternatives. We show that a negative spread between fixed and variable rate loans is a necessary but not sufficient condition for the dominance of variable rate loans over fixed rate loans. If the bank optimally extends both fixed and variable rate loans, the total amount of loans depends neither on the bank's regret aversion nor on the funding cost uncertainty. The bank, however, optimally lends less should it be forced to assume the entire funding cost uncertainty by exclusively extending fixed rate loans. Finally, using a two-state example, we show that the bank optimally extends more (less) fixed rate loans than in the case of pure risk aversion if the high (low) marginal cost of funds is more likely to prevail. Regret aversion as such plays a crucial role in determining the bank's optimal choice between fixed and variable rate loans.     

Lobbying under political uncertainty

This paper considers a model of lobbying described as a common agency game; it departs from the current literature by assuming that the special interest groups are not a priori organized or unorganized and that the type of the politician is not common knowledge. We characterize equilibria when the choice set of the politician consists of two policies; we discuss the conditions leading to efficiency and the characteristics of the groups explaining their relative success in the process of influence. We also offer some results for the general case, including disjoint necessary and sufficient conditions for the equilibria to be efficient.     

Neutral taxation under uncertainty

The analogs under uncertainty of two well-known certainty results are derived: first, if there are timing differences between tax payments and accruals, neutrality is preserved if the resulting tax credits or liabilities are carried forward at the risk-free interest rate, provided that tax credits and liabilities are sure to be redeemed eventually. Second, the invariance of asset valuations with respect to the rate of income tax, at a given pre-tax interest rate, proved by Johansson and Samuelson under certainty, can be extended to cover the case of uncertainty, given analogous ceteris paribus conditions.     

Cobb-Douglas preferences under uncertainty

This paper axiomatizes Cobb-Douglas preferences under uncertainty. First, we extend the original Trockel (Econ Lett 30:7–10, 1989)’s axiomatic foundation to a general state space framework based on the Strong Homotheticity Axiom, obtaining also the incomplete case a la Bewley (Decis Econ Financ 25:79–110, 2002). We show that this key axiom for the Cobb-Douglas expected utility specification is refuted by Ellsberg’s uncertainty aversion behavioral pattern. Our main result provides a set of meaningful axioms characterizing Cobb-Douglas min-expected utility preferences, an important class of uncertainty averse preferences for studying the consequences of ambiguity in finance and other fields. Finally, we present briefly how to obtain more general representations like the variational case.     

Macroprudential policy under uncertainty

Portuguese Economic Journal - In this paper, an index of domestic macroprudential policy tools is constructed and the effectiveness of these tools in controlling credit growth, managing GDP growth...     

Commodity taxes under uncertainty

This paper considers the relative distorting effect on output of commodity taxes, specific and ad valorem, in a situation where a firm faces revenue uncertainty. It is shown generally that this effect depends both on the precise nature of the firm's revenue uncertainty and on the degree of its risk aversion. More specifically, the distorting effect of each tax is characterised for a selection of objective functions and uncertain environments. These characterisations are compared in order to show the influence of alternative specifications on the relative distorting effect.     

Finite-maturity stock loans under the constant elasticity of variance model

This article expresses the constant elasticity of variance stock loans pricing formula in terms of the noncentral chi-square distribution. By using the numerical solutions of the integral equation for the early exit boundary, we calculated the valuation of the stock loans. Numerical analysis is carried out to establish explicitly the value of such a loan, as well as the loan amount and the fee for providing such a service.     

Markets and regulation under uncertainty

Unlike many comparisons of control strategies under uncertainty, this letter will report that, in some cases, optimality can be achieved ex ante if specific andad valorem taxes are imposed upon a functioning market with externalities.     

Interim efficient allocations under uncertainty

This paper considers an exchange economy under uncertainty with asymmetric information. Uncertainty is represented by multiple priors and posteriors of agents who have either Bewley's incomplete preferences or Gilboa-Schmeidler's maximin expected utility preferences. The main results characterize interim efficient allocations under uncertainty; that is, they provide conditions on the sets of posteriors, thus implicitly on the way how agents update the sets of priors, for non-existence of a trade which makes all agents better off at any realization of private information. For agents with the incomplete preferences, the condition is necessary and sufficient, but for agents with the maximin expected utility preferences, the condition is sufficient only. A couple of necessary conditions for the latter case are provided.     

Optimal policy choice under uncertainty

Neutrality is shown to be the appropriate goal of policy in the class of realistic policy situation in which allocative decisions are taken with virtually no knowledge of the direction or magnitude of pre-existing resource misallocation. This follows as the principal corollary of the central theorem of the paper which states that with linear demand and constant marginal cost schedules, the appropriate excise tax under uncertainty is equal to the expected value of the market distortion. This theorem is proved and its major implications for corrective fiscal policy are discussed.     

Soviet enterprise behavior under uncertainty

Input-supply uncertainty is a well-documented characteristic of Soviet economic planning. The formal literature on Soviet enterprise behavior is found to be asymmetric in its development. A more general model of the enterprise's behavior under uncertainty is developed. Among other results, it is demonstrated that all agents, regardless of attitude toward risk, will overorder an input subject to supply uncertainty.     

Production and savings under uncertainty

This paper studies an integrated model of production and savings under uncertainty in which production inputs and the amount of savings are jointly chosen. The analysis shows that if the agent's risk preferences exhibit constant absolute risk aversion, then all results from nonintegrated or separate models of savings and production extend to the integrated framework. Under decreasing absolute risk aversion, the comparative static properties of optimal production decisions with respect to mean preserving spread and spread preserving mean parameters extend from the non-integrated to the integrated framework. However, extension of the savings model results for the same parameters requires a restriction on production technology.     

Optimal corporate strategy under uncertainty

Within a dynamic setting, optimal corporate strategy management for a multi-division corporation involves restructuring a portfolio of Strategic Business Units (SBUs) periodically so as to maximize the firm's market value. Real option theory has been applied to model and explain managerial flexibility for both project selection and operational decisions. In general, optimal corporate strategy has focused on strategic environments and characteristics of business units rather than on managerial flexibility. In this article, we develop a feasible discrete-time model for optimal corporate strategy that incorporates both endogenous and exogenous factors and is consistent with the value-based criterion for maximizing shareholders’ wealth.     

On industry equilibrium under uncertainty

The paper considers an industry consisting of numerous firms that produce a homogeneous output, the demand for which is a random variable. Each firm belongs to one of K possible types, and each type is characterized by a U-shaped average cost curve. It is shown that: (i) the first-order necessary conditions for efficient investment and output are sufficient; accordingly, the set of competitive equilibria is non-empty and coincides with the set of efficient allocations; (ii) a dynamic process of free entry and exit of firms, guided by expected profits, is quasistable and every limit point is a competitive equilibrium. The paper also defines a sufficient condition for uniqueness of the competitive equilibrium, in which case it is stable.     

On optimal growth under uncertainty

In a recent paper Brock and Mirman showed that in a one-sector model of economic growth under uncertainty the long-run behavior of the optimal capital stock is governed by the basic properties of an acyclic ergodic Markov process. This paper considers a similar model and has two purposes. First, necessary and sufficient conditions for optimal policy functions are derived in a regime in which future utilities are discounted. These conditions lead, in an example, to an explicit optimal policy function, which is used to display the steady-state solution for the capital stock under an optimal policy. Secondly, in the Brock and Mirman paper it was assumed that the production functions are ordered. We show that all the properties proved by Brock and Mirman are satisfied even when the production functions are not ordered.