Does Ricardian Equivalence Hold When Expectations Are Not Rational?

This paper considers the Ricardian Equivalence proposition when expectations are not rational and are instead formed using adaptive learning rules. We show that Ricardian Equivalence continues to hold provided suitable additional conditions on learning dynamics are satisfied. However, new cases of failure can also emerge under learning. In particular, for Ricardian Equivalence to obtain, agents’ expectations must not depend on government’s financial variables under deficit financing.     

Attitude toward Risk and Risk‐Taking Behavior of Business‐Owning Families

Using data from the 1995 Survey of Consumer Finances, this study found that family business owners are more risk tolerant than nonowners. Among family business owners, age, race, net worth, and the number of employees in the business affect risk‐taking attitudes and behavior. In addition, the following factors are associated with risk‐taking behaviors: number of years of ownership, gross sales, who started the business, and sole proprietorship. Education influences risk‐taking attitudes.     

Capital Budgeting for Advertising Expenditures: A Contingent Claims Approach

Advertising expenditures constitute a big part of the budgets of firms. Through their impact on demand and costs, advertising activities affect the firm's pricing and output decisions as well as the firm's market value. Yet, there is no analytical framework by which these effects can be measured. This paper develops a cash flow model for a product where the advertising budget is divided between a strategic component designed to increase expected demand and a contingent component allocated to be used only if sales fall short of capacity. Contingent claims techniques are employed to evaluate the present value of the cash flows and to provide a framework for determining the size of the advertising budget, and the pricing and production strategies that maximize the firm's value. The impact of the price sensitivity, volatility, and growth rate of demand on the size of the advertising budget is also analyzed.