Decreasing absolute prudence: Characterization and applications to second-best risk sharing

In this paper, we provide two basic properties of utility functions u which exhibit decreasing absolute prudence i.e. (− u/u″)′ ≤ 0. These properties are used to examine the allocation of risks in an economy when some agents bear non-transferable risks. We show that it is fair Pareto-efficient to let those with a non-transferable risk bear relatively less of the transferable risk in the economy if and only if absolute prudence is decreasing. In another model, there is a complete set of contingent markets, but some agents have no direct access to them. We examine the fair efficient allocation of risk in a pool gathering a trader and a non-trader. Decreasing absolute prudence provides an upper bound to the share of the pool's risk that should be borne by the trader.     

Aggregate risk sharing and equivalent financial mechanisms in an endowment economy of incomplete participation

Summary. A pure endowment overlapping generations economy can be inefficient because of insufficient risk sharing. The introduction of an outside asset by a government or the existence of a clearing house can remedy the inefficiency by allowing some intergenerational risk sharing. While the typical outside asset is fiat money, many alternative financial mechanisms, such as social security, risk-free government bonds, mispriced deposit insurance, and income insurance can serve the same function as fiat money. Hence there are many equivalent financial mechanisms that provide intergenerational insurance. In the presence of uncertainty, there are several concepts of Pareto optimality that can be appropriately applied in an overlapping generations setting. I examine the risk-sharing arrangements associated with two different concepts of optimality, including how these arrangements are financed. The results are related to, and in some instances an extension of, the equivalence results obtained by Chamley and Polemarcharkis (1984), Weiss (1977), and Wallace (1981).Received: 4 March 2003, Revised: 30 January 2004JEL Classification Numbers: E40, E44, D51.P. Labadie: I would like to thank the participants of the Economic Theory Symposium Recent Developments in Money and Finance at Purdue University, May 2-4, 2003 and an anonymous referee for comments on this version. I am grateful to Bruce Smith for comments on an earlier version.     

Why don't we observe improvements in consumption smoothing as countries get more financially integrated: Bridging theory and empirics

This study provides suggestive theoretical and empirical evidence that the productivity shock correlation between a country and the rest of the world may help explain why we do not observe more consumption smoothing as countries have become more financially liberalized.     

Measuring and explaining implicit risk sharing in defined benefit pension funds

This article investigates responses to changes in solvency by occupational pension funds using a unique panel data set containing the balance sheets of all registered pension funds in the Netherlands over a period of 13 years (1993–2005). A fixed discount rate for liabilities in the supervisory framework allows us to measure the response of pension funds to solvency shocks. We find that pension rights are expanded, by e.g. indexation, or limited, by for instance setting the pension premium over its actuarially fair price, in line with the funding ratio but that the pension funds’ response function exhibits two sharp and significant behavioural breaks, close to the minimum funding ratio of 105% and the target ratio of around 125%. We further find that large funds and grey funds are relatively generous to current participants.     

An analysis of wine and food consumption dynamics in Japan using a vector error correction model

This article provides an analysis of long-term equilibrium relationships between wine and food-related consumptions in Japan through the vector error correction model. Utilizing longitudinal data from 1970 to 2009, the analysis suggests that wine consumptions and food-related consumptions are co-integrated. The investigation of orthogonal impulse response functions suggests that food-related items, such as bread, vegetables and eating out are positive factors for wine consumptions. With the expansion of wine consumption and diversification of food consumption patterns, wine is deemed to have gained its place in Japanese ordinary life, regardless of the general state of economy. The estimated results also provide a supporting evidence for previous cross-sectional study findings by others that wine consumers tend to have healthier diet. Despite the downward forecasts for economic performance and some food items, wine consumption is predicted to grow continuously.     

Mobile money,risk sharing,and educational investment: Panel evidence from rural Uganda

We examine the impact of the rapidly expanding mobile banking service “mobile money” on rural households' ability to smooth investment in schooling after a negative shock. We find that a negative shock induces a 9.3‐percentage point decrease in per school‐age child educational expenditure for households who do not use mobile money compared to an 8.3‐percentage point decrease for households that have adopted mobile money. The underlying mechanism is an increase in remittance receipt and the diversity of senders owing to the reduction in transactions cost provided by mobile money. We show that our results are robust to alternative mechanisms. We use the expansion in mobile money agent network as an exogenous variation in access to mobile money.     

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.     

Knowledge sharing and the dynamics of social capital

Mutual aid often entails the sharing of knowledge. We investigate how, in turn, knowledge sharing affects the long-run dynamics of mutual aid. In our economy, agents with specific knowledge are “held up” by their principals. Inside communities, agents aid each other by sharing their specific knowledge. This process generates a new type of knowledge which exacerbates the specificity of the existing types and induces more agents to engage in mutual aid. However, since the knowledge generated is shared, it progressively renders agents inside communities more flexible and, thus, less dependent on mutual aid. We characterize conditions under which in the long-run mutual aid spreads or is abandoned.     

The crowding-out effect of formal insurance on informal risk sharing: An experimental study

This paper investigates the crowding-out effect of formal insurance on informal risk-sharing arrangements via theory and laboratory experiment. Our model and simulation predict that the crowding out of private transfers is often more than one-for-one and will reduce the total risk coverage. Furthermore, the existence of a moderate degree of altruism exaggerates the crowding-out effect, especially when there is an ex-ante income inequality. These predictions are mostly supported by the laboratory experiment, except that the crowding-out effect is not more than one-for-one, and hence the total risk coverage is not significantly reduced by formal insurance.     

Segmented risk sharing in a continuous-time setting

Summary. The economy we study is comprised of a continuum of individuals. Each has a stochastic endowment that evolves continuously and independently of all other individuals' endowment processes. Individuals are risk averse and would therefore like to insure their endowment processes. The mutual independence of their endowment processes makes it feasible for them to obtain this insurance by pooling their endowments. We investigate whether such a scheme would survive as an equilibrium in a noncooperative setting. Received: October 16, 2000; revised version: August 8, 2001     

A test of the household income process using consumption and wealth data

The evolution of household income can be explained almost equally well by rival models. However, rival models have very different implications for other household behaviours, such as consumption. I therefore test between two prominent models in the UK using panel data on consumption and wealth, as well as income, over 1991–2006. To operate the test, I show that long-lived income shocks transmit far less than one-for-one through to consumption, and particularly so for younger households. I then compare these estimates of transmission with estimates of households’ ability to smooth shocks, captured by the data on wealth. Conditional on the suitability of the consumption model, my estimates provide evidence against the restricted income process (RIP) and in favour of an alternative heterogeneous income process (HIP). This finding also explains why cross-sectional consumption inequality grew slowly over the period even though the variance of long-lived shocks was high. Finally, I conclude that it is important to consider mean reversion of shocks when constructing life-cycle consumption models.     

Household heterogeneity and consumption dynamics in the presence of borrowing and liquidity constraints

I study the effects of borrowing and liquidity constraints on the response of consumption to anticipated income changes. Using the PSID over 1999–2013, I find that the well-documented strong excess sensitivity of consumption to income of highly constrained households can be explained by episodes of income increases. In addition, I look into the heterogeneity of households without debt, a group that has been largely disregarded by the literature. My fixed-effects estimates show that only those without debt tend to increase their saving in response to anticipated income declines, irrespective of the amount of liquid assets held.     

Risk sharing role of foreign aid in developing countries

The effects of foreign aid on economic growth have been extensively investigated over the past 40 years. However, even though foreign aid can be a significant source of insurance against domestic output shocks for developing countries, its risk-sharing role has not been well explored. Using a sample of 22 developing countries over the period 2003–2013, we estimate the degree of income smoothing generated by foreign aid serving as an effective channel of international income smoothing. In particular, for the period 2003–2008, we estimate that foreign aid offset about 4% of the domestic output shocks. Furthermore, we investigate the determinants of the extent of risk sharing via foreign aid, recognizing the diversification of the originating countries as a key factor. Surprisingly, humanitarian aid seems to have a negative effect, which might be explained by its predominant role in the short run.     

Innovation and knowledge sharing in crowdfunding: how social dynamics affect project success

The aim of this study is to contribute to the existing literature on innovation and knowledge sharing in crowdfunding, by exploring the importance of internal social capital, and how the previous failure of a campaign may lead to the success of a second one from the same project creator. Thus, the research question of the study is: how do social dynamics affect project success in a crowdfunding context? The paper reports an illustrative case study which has been promoted on the Kickstarter platform. The authors analysed data, documentation and physical artefacts, especially regarding the network size during the funding period. The results show that the self-learning which project creators gain from previous failure supports them in relaunching their crowdfunding campaign. However, various revisions take place during the second campaign (e.g. social capital size, product redesign and knowledge sharing) to achieve success.     

Linking global economic dynamics to a South African-specific credit risk correlation model

In order to address practical questions in credit portfolio management it is necessary to link the cyclical or systematic components of firm credit risk with the firm's own idiosyncratic credit risk as well as the systematic credit risk component of every other exposure in the portfolio. This paper builds on the methodology proposed by Pesaran, Schuermann, and Weiner [Pesaran, M.H., Schuermann, T., and Weiner, S.M., (2004), Modeling regional interdependencies using a global error correcting macroeconometric model, Journal of Business and Economic Statistics, 22, 2, 129–169.] and supplemented by Pesaran, Schuermann, Treutler and Weiner [Pesaran, M.H., Schuermann, T., Treutler, B., and Weiner, S.M., (2006), Macroeconomic dynamics and credit risk: a global perspective, Journal of Money, Credit, and Banking, Volume 38, Number 5, August 2006, 1211–1261.] which has made a significant advance in credit risk modelling in that it avoids the use of proprietary balance sheet and distance-to-default data, focusing on credit ratings which are more freely available.In this paper a country-specific macroeconometric risk-driver engine which is compatible with and could feed into the GVAR model and framework of PSW (2004) is constructed, using vector error-correcting (VECM) techniques. This allows conditional loss estimation of a South African-specific credit portfolio but also opens the door for credit portfolio modelling on a global scale, as such a model can easily be linked to the GVAR model. The set of domestic factors is extended beyond those used in PSW (2004) in such a way that the risk-driver model is applicable for both retail and corporate credit risk. As such, the model can be applied to a total bank balance sheet, incorporating the correlation and diversification between both retail and corporate credit exposures.Assuming statistical over-identification restrictions, the results indicate that it is possible to construct a South African component for the GVAR model that can easily be integrated into the global component. From a practical application perspective the framework and model is particularly appealing since it can be used as a theoretically consistent correlation model within a South African-specific credit portfolio management tool.     

Incomplete risk sharing arrangements and the value of information

Summary. The paper constructs a theoretical framework in which the value of information in general equilibrium is determined by the interaction of two opposing mechanisms: first, more information about future random events leads to better individual decisions and, therefore, higher welfare. This is the ‘Blackwell effect’ where information has positive value. Second, more information in advance of trading limits the risk sharing opportunities in the economy and, therefore, reduces welfare. This is the ‘Hirshleifer effect’ where information has negative value. We demonstrate that in an economy with production information has positive value if the information refers to non-tradable risks; hence, such information does not destroy the Blackwell theorem. Information which refers to tradable risks may invalidate the Blackwell theorem if the consumers are highly risk averse. The critical level of relative risk aversion beyond which the value of information becomes negative is less than 0.5. Received: May 14, 2001; revised version: March 5, 2002     

The Empirical Analysis on the Influence of Foreign Exchange Reserves on China＇ s Price Level --Based on the Cointegration Test and the Error Correction Model analysis

协整和格兰杰因果检验结果表明,我国外汇储备与物价水平存在协整关系,且外汇储备是物价水平的格兰杰原因,表明外汇储备增加将对通货膨胀形成压力。但从误差修正模型的检验结果看,我国外汇储备对物价水平的影响在短期内较为有限,其主要原因是我国央行短期内进行大量的外汇冲销操作。因此,我国需要采取有效的措施来缓解通胀压力,如加大央行公开市场业务操作、改革外汇管理体制、适当放宽汇率浮动幅度以及合理使用我国现有外汇储备等。     

Securitization,collateral constraints and consumption risk sharing in the euro area

Scarcity of housing collateral is associated with lower credit volumes and hence decreases consumption risk sharing among seven euro area countries in the time period from 1987Q1 to 2007Q4. At the same time, securitization improves risk sharing but does not seem to outweigh the collateral scarcity effect.     

On the contingent valuation of mortality risk reduction in developing countries

Using the contingent valuation method in developing countries to value mortality risk reduction is particularly challenging because of the low level education of the respondents. In this article, we investigate whether some brief training regarding probability and risk concepts has any significant effect on the willingness-to-pay (WTP) responses. We elicit individuals’ risk perceptions by providing information on age specific mortality risks and find that people on average overestimate the mortality risk at younger ages and underestimate it at older ages. Our results indicate a significantly higher WTP for the trained sub-sample and WTP is sensitive to the magnitude of risk reduction for both the sub-samples.     

中国创业投资区域网络结构与区域合作研究

为揭示创业投资空间行为,促进创业投资对区域经济发展的推动作用,运用社会网络方法,从宏观、中观、微观3个角度剖析我国创业投资区域网络结构,并分析区域间投资合作行为及区域网络的形成。结果表明：我国创业投资区域网络节点间具有互惠性;区域网络可划分为核心区、半边缘区和边缘区,其中核心区成员稳定,各区域节点整体上呈现从半边缘区向边缘区移动的趋势;核心区发展主要依靠核心区内的相互投资,表现为地域上的投资集聚;半边缘区表现出较强的吸引力,主要依靠区域资源及禀赋吸引核心区创投机构投资;核心区节点主要是因为其属于核心区所以更倾向于投资合作关系的形成,而不仅仅是因为关系形成的另一端与自身属于同一区域。