Capital accumulation and longevity

Increased survival probability and expected lifespan is shown to increase capital intensity and welfare in an overlapping generations model with uncertain lifetimes in the presence of annuities market and production.     

FAIR RETIREMENT UNDER RISKY LIFETIME*

A premature death unexpectedly brings a life and a career to their end, leading to substantial welfare losses. We study the retirement decision in an economy with risky lifetime and compare the laissez‐faire with egalitarian social optima. We consider two social objectives: (1) the maximin on expected lifetime welfare, allowing for a compensation for unequal life expectancies, and (2) the maximin on realized lifetime welfare, allowing for a compensation for unequal lifetimes. The latter optimum involves, in general, decreasing lifetime consumption profiles as well as raising the retirement age. This result is robust to the introduction of unequal life expectancies and unequal productivities.     

A complete characterization of Pareto optimality for general OLG economies

In the context of general pure exchange OLG economies where agents can have heterogeneous longevities, we provide both sufficient and necessary conditions for Pareto optimality of competitive equilibria. For the case in which all agents live for the same number of periods, we find that these conditions are equivalent. We also find this equivalence when agents can have different lifetimes, but in this case we need to impose particular restrictions on relative equilibrium prices. Moreover, we show that without these conditions on prices the equivalence, and hence a full characterization, is not necessarily obtained.     

LIFETIMES OF MACHINERY AND EQUIPMENT: EVIDENCE FROM DUTCH MANUFACTURING

This paper estimates service lifetimes for capital assets in Dutch manufacturing industries, using information on asset retirement patterns. A Weibull distribution function is estimated using a non-linear regression technique to derive service lifetimes for three selected asset types: transport equipment, machinery and computers. For this purpose, benchmark capital stock surveys for different two-digit industries are linked to annual discard surveys. On average the estimated lifetimes are 6, 9 and 26 years for transport equipment, computers and machinery, respectively. However, these estimates vary across industries. A comparison of our estimates with Canadian, U.S. and Japanese estimates shows notable differences in the lifetimes of all the asset types, with machinery showing the largest difference.     

Bush v. Gore and the Effect of New Source Review on Power Plant Emissions

New Source Review (NSR) is a Clean Air Act regulation that requires electric utilities to meet emission standards when making modifications to existing power plants. The regulation increases the cost of replacing worn out parts, and limits the firm’s scope of potential capital investments. Such restrictions may lead to greater retirements and lower utilization, adversely affecting profits. Prior to the 2000 presidential election, investors expected Bush to have a narrower interpretation of NSR than Gore. Therefore, we use changes in stock prices to estimate the effect on profits of differences in NSR policy. Our results indicate that investors expected the average boiler to be $38 million more valuable under the Bush administration. Over the boilers’ lifetimes, the additional utilization will have increased emissions by 19 million tons of sulfur dioxide, 5.9 million tons of nitrogen oxides and 980 million tons of carbon dioxide, relative to natural gas generation.      

Current Account, Capital Formation and Terms of Trade Shocks: a Revisit of the Harberger-Laursen-Metzler Effect

This paper extends the Blanchard model of a closed-economy to a three-good (exportable, importable and non-tradable goods) open-economy model with capital accumulation and uncertain lifetimes to study the impacts of terms of trade shocks on the current account. The simulation results show that a model with uncertain lifetimes is more appropriate to describe a small open economy like Taiwan at the steady-state equilibrium than a model with infinite lifetimes. We find that the Harberger-Laursen-Metzler effect is discernible for temporary or permanent terms of trade shocks. Furthermore, the steady state is a saddle point and the speed of convergence of capital and consumption is quite low.     

Random competitive exchange: Price distributions and gains from trade

This paper studies the behavior of a competitive exchange under uncertain preferences and random indivisible endowments. We obtain explicit closed-form results for the price distribution and expected gains from trade, both for case where the market is “thin” and the number of traders is low, and for the asymptotic case where the number of traders tends to infinity. We demonstrate that increasing the number of traders reduces price variability and increases the expected gains from trade, and that increasing the variability of traders' reservation prices increases price variability as well as the expected asymptotic gains from trade.     

Expected Life-earnings Paths with and without Higher Education: The case of India

The paper analyses students' expectations of earnings with and without higher education at three career points: at entry to the labour force, at the five year point, and career peak, constructing paths of expected earnings. The estimated expected internal rates of return to investment in different types of higher education are quite high. Considering ratios of expected peak-year to entry earnings, the highest gradient is in the case of specialised/professional education. Similarly for the case of students of urban origin as compared with those of semi-urban or rural origin. Likewise, the gradient is relatively high in the case of students with an English medium of study compared with the case of students with Punjabi or Hindi. As expected, the gradient is higher for those who aspire to higher education than those who do not, in all three types of higher education. The association between expected peak earnings and the proportion of gains in earnings that take place in the first five years is negative in all cases; only expectations of sustained growth in earnings lead to the highest predicted peak earnings levels. The regression results suggest that socio-economic background, social capital, ability, and school-related variables significantly influence the formation of expectations about earnings.     

An upper bound for wealth distribution in a model of accidental bequests

An explicit upper bound is calculated for wealth distribution in a model of overlapping generations with uncertain lifetimes and an imperfect annuities market     

基于盖斯克模型与模糊数的综合模型在风险投资项目中的应用

风险投资项目具有高不确定性,因此将风险投资项目复合实物期权方法中的期望现金流现值和投资成本均假定为确定值是不现实的。因此本文运用了复合实物期权(Geske模型)与模糊数的综合模型。该综合模型较好地解决了风险投资项目中的期望现金流现值和投资成本不为确定值的情况,并结合实例证明了其有效性。     

A NEW LOOK AT THE WEALTH ADEQUACY OF OLDER U.S. HOUSEHOLDS

We examine the current wealth adequacy of older U.S. households using the 1998–2006 waves of the Health and Retirement Study (HRS). We find that the median older U.S. household is reasonably well situated, with a ratio of comprehensive net wealth to present value poverty‐line wealth of about 3.9 in 2006. About 18 percent of households, however, have less wealth than would be needed to generate 150 percent of poverty‐line income over their expected future lifetimes. We see similar patterns of wealth adequacy when we examine ratios of annualized comprehensive wealth to pre‐retirement earnings. Comparing the leading edge of the baby boomers in 2006 to households of the same age in 1998, we find that the baby boomers show slightly less wealth, in real terms, than their elders did, but still appear to have adequate resources at the median. Moreover, we find a rising age profile of annualized wealth, even within households over time and after controlling for other factors, suggesting that older households are not spending their wealth as quickly as their survival probabilities are falling.     

Mortality change,the uncertainty effect,and retirement

We examine the role of declining mortality in explaining the rise of retirement over the course of the twentieth century. We construct a model in which individuals make labor/leisure choices over their lifetimes subject to uncertainty about their dates of death. In an environment with high mortality, an individual who saves for retirement faces a high risk of dying before he can enjoy his planned leisure. In this case, the optimal plan is for people to work until they die. As mortality falls, however, it becomes optimal to plan, and save for, retirement. We analyze our model using two mathematical formulations of the survival function as well as data on actual changes in the US life table over the last century, and show that this “uncertainty effect” of declining mortality would have more than outweighed the “horizon effect” by which rising life expectancy would have led to later retirement.     

Nonlinear income effects in random utility models: revisiting the accuracy of the representative consumer approximation

This article investigates the implications of nonlinear income effects in Random Utility Models (RUM) for measuring general equilibrium welfare impacts. A popular approach in applied welfare analysis is to approximate the expected compensating variation (cv) for an amenity change as the cv of a representative consumer whose indirect utility is given by the expected maximum utility. However, this approach can be misleading in the case of nonmarginal changes as it implies that changes in income do not affect the consumer's choice. In this case the true expected cv can be obtained via simulation. Empirical applications to recreational demand find that the bias from the representative approach is small. This article re-evaluates the accuracy of the representative consumer approximation in the context of measuring the general equilibrium welfare impacts of large environmental changes. Our findings suggest that, though the representative consumer approximation could lead to biased point estimates of the expected cv, this bias is overwhelmed by the size of the confidence intervals that result from the empirical estimation of household preferences.     

Unemployment Benefits, Contract Length and Nominal Wage Flexibility

In a bargaining model, we show that a decrease in the unemployment benefit level increases not only equilibrium employment, but also nominal wage flexibility, and thus reduces employment variations in the case of nominal shocks. Long‐term wage contracts lead to higher expected real wages and hence higher expected unemployment than short‐term contracts. Therefore, a decrease in the benefit level reduces the expected utility gross of contract costs of a union member more with long‐term than with short‐term contracts, thereby creating an incentive for shorter contracts. Incentives for employers are shown to change in the same direction.     

Bilateral retrovesical testes: An unusual location for impalpable undescended testes

Although the majority of impalpable undescended testes lie in an intracanalicular location, a significant number are also found to be intraabdominal. The expected location of intraabdominal testes is a line joining the renal hilum and the internal inguinal ring. We describe a case of an adult patient in whom impalpable undescended testes were located in a retrovesical location. This case highlights the importance of performing a thorough inspection of the entire abdomen and pelvis if the impalpable testis is not found in an expected location.     

Expected utility maximization and demand behavior

This paper extends the non-parametric approach to consumer demand analysis to the case of expected utility maximization. We provide necessary and sufficient conditions for a set of price-quantity pairs to be consistent with expected utility maximization, and investigate their relationship to revealed preference conditions. Extensions to incomplete markets and intertemporal resolution of uncertainty are also considered.     

Lifetime Utility Maximization When the Consumer's Lifetime Depends on his Consumption*

A model of consumer behaviour is postulated whereby expected lifetime is an argument of the consumer's utility function and the consumption pattern chosen by the consumer affects his subjective probability distribution over expected, lifetime. Although introducing uncertainty makes the derivation of general conclusions difficult, it is shown for a simple two-good case that there are significant implications for income and substitution effects and the shape of the consumer's demand curve.     

Asymptotic Revenue Equivalence in Auctions

We study the revenue in auctions of a single object when the number of bidders becomes large. We show that all sequences of auctions belonging to a class of mechanisms have limiting expected revenue equal to the expected best-use value of the object. An important special case that is covered is common value auctions, but more generally not even affiliation of values is assumed. This provides an asymptotic revenue equivalence result for settings beyond that of private values. Journal of Economic Literature Classification Numbers: D44, C72.     

The impossibility of compromise: some uniqueness properties of expected utility preferences

Summary. We focus on the following uniqueness property of expected utility preferences: Agreement of two preferences on one interior indifference class implies their equality. We show that, besides expected utility preferences under (objective) risk, this uniqueness property holds for subjective expected utility preferences in Anscombe-Aumann's (partially subjective) and Savage's (fully subjective) settings, while it does not hold for subjective expected utility preferences in settings without rich state spaces. Indeed, when it holds the uniqueness property is even stronger than described above, as it needs only agreement on binary acts. The extension of the uniqueness property to the subjective case is possible because beliefs in the mentioned settings are shown to satisfy an analogous property: If two decision makers agree on a likelihood indifference class, they must have identical beliefs. Received: November 15, 1999; revised version: December 29, 1999     

Wealth transfers and the role of collateral when lifetimes are uncertain

We develop a general equilibrium model of wealth transfers in the presence of uncertain lifetimes and default. Without introducing exogenous debt constraints, agents are allowed to make collateral-backed promises at any state of their life span.