Risk preferences in multi-period consumption models, the equity premium puzzle, and habit formation utility

The relationship between the relative risk aversion measure for the utility function for consumption and that for the value function for wealth is a derived relationship whose properties depend on how consumption and wealth are defined and measured. This fact together with information concerning estimates for these two relative risk aversion measures is used to give another perspective on the equity premium puzzle, and to explain why it is that the habit formation utility function is effective in eliminating that puzzle. A time separable utility function that can serve as an alternative to the assumption of habit formation is also presented.     

Catching up with the Americans

This paper develops an international version of the consumption-based capital asset pricing (CCAPM), which we refer to as “catching up with the Americans.” Previous CCAPM research develops the concept of “catching up with the Joneses,” where a representative economic agent exhibits higher marginal utility of consumption as a result of higher past per capita consumption in his own country. Catching up with the Americans, on the other hand, is an international habit-preference hypothesis. It extends the idea of catching up with the Joneses by stating that consumers of non-U.S. countries gain higher marginal utility of consumption as a result of higher past American consumption growth. Contrary to much of the CCAPM literature, we test this version of the model using long bond rates rather than equity returns. However, like most of the previous research on the CCAPM, the catching up with the Americans model fails to explain the relationship between consumption and asset returns.     

Worker separations in a nonstationary corporate environment

Assessing ten years of unique personnel data from a large firm, this paper investigates how determinants of worker turnover differ between periods of corporate expansion and decline. Performance and career progress considerably reduce the hazard of job separation during downsizing for blue-collar workers, but are less important for white-collar workers. Effects of firm-tenure, occupation, education, training, part-time status, and gender are largely in accordance with the implications from existing models. But no model generates all patterns observed in the data. Age effects are sensitive to retirement options and discontinuous, dropping in response to the anticipation of becoming eligible for early retirement during downsizing and jumping at the actual retirement age.     

TRENDS IN RURAL WAGES,WEST JAVA, 1977–83

This paper examines monthly wage data collected by the Agro Economic Survey from seven villages in the Cimanuk River Basin of West Java, where data on agricultural and non-agricultural wages and prices of nine essential commodities were collected twice monthly between 1977 and 1983. Movements in money wages deflated by both the rice price and a weighted index of basic commodities are analysed in detail and differences between lowland and upland villages are discussed.     

A Personal Agenda for the Next Decade

The paper sets a broad agenda touching several areas of policy. It starts from the least likely policy at this point of time, the use of the tax system for redistribution. It discusses prudent macroeconomic coordination without the strings of the Maastricht Treaty in business troughs. Regulation of financial markets, agricultural policies, and health issues are coming up on a desirable agenda of the United States, but are probably important for all countries, as are social security policy and climate change.     

Should the Pre‐Notification of Mergers Be Compulsory in Australia?

Australia is unusual among the world's antitrust jurisdictions in not making the pre‐notification of mergers compulsory. However, if the parties are concerned that the Australian Competition and Consumer Commission (ACCC) is likely to object to the merger, there are strong incentives for them to notify the ACCC as the regulator has developed a strong reputation for imposing heavy costs on parties that fail to notify such mergers. The result is a system of quasi‐compulsory notification that creates the strongest incentives for parties to notify the ACCC of those proposals to which it is most likely to object. This study analyses data extracted from the ACCC's merger database and the empirical results are consistent with this characterisation. Mergers reported voluntarily by the parties are found to experience longer delays to completion, and are more likely to be challenged by the ACCC, when compared with a sample of all other mergers assessed by the regulator. The results suggest that non‐compulsory notification allows the parties themselves to pre‐sort the proposed merger vis‐à‐vis its interest to the ACCC.     

Competitive equilibria with limited enforcement

We show how to decentralize constrained efficient allocations that arise from enforcement constraints between sovereign nations. In a pure exchange economy these allocations can be decentralized with private agents acting competitively and taking as given government default decisions on foreign debt. In an economy with capital these allocations can be decentralized if the government can tax capital income as well as default on foreign debt. The tax on capital income is needed to make private agents internalize a subtle externality. The decisions of the government can arise as an equilibrium of a dynamic game between governments.     

MODELING THE TERM STRUCTURE FROM THE ON‐THE‐RUN TREASURY YIELD CURVE

We propose a new model to estimate the term structure of interest rates using observed on‐the‐run Treasury yields. The new model is an improvement over models that require a priori knowledge of the shape of the yield curve to estimate the term structure. The general form of the model is an exponential function that depends on the estimation of four parameters fit by nonlinear least squares and has straightforward interpretations. In comparing the proposed model with current yield‐curve‐smoothing models, we find that, for the data used, the proposed model does best overall in terms of pricing accuracy both in sample and out of sample. JEL classification: E43, G12