Infinite horizon CAPM equilibrium

Summary. This paper derives the equilibrium of an infinite-horizon discrete-time CAPM economy in which agents have discounted expected quadratic utility functions. We show that there is an income stream obtainable by trading on the financial markets which best approximates perfect consumption smoothing (called the {\it least variable income stream} or LVI) such that the equilibrium consumption of each agent is some multiple of the LVI and some share of aggregate output. The welfare of agents is a decreasing function of the lack of consumption smoothing achievable, measured by the distance of the LVI from the perpetuity of one unit of income for ever. If in addition the economy has a Markov structure, the LVI, and hence the equilibrium, can be calculated by dynamic programming. When the model is calibrated to US data a striking prediction emerges: the quasi-irrelevance of the bond market. Infinitely-lived agents achieve almost all their desired consumption smoothing by applying carryover strategies to equity, the proportion of agents' portfolios in bonds rarely exceeding 3%.     

Complementary and alternative medicine: Consumers in search of wellness or an expression of need by the sick?

The provision of health care in Western societies is examined in relation to the arrival of complementary and alternative medicine (CAM) as a serious provider in the latter half of the 20th century. This article examines the underlying components of the increasing uptake of CAM and attempts to cluster health‐care consumers according to their attitudes and motivation toward the use of health‐care products and services. The analysis does not support the idea of a widespread uptake of CAM practitioner treatments on the part of the general public except for particular segments of that public, including the seriously ill. There is also little evidence of exclusive use of CAM for personal health care. On the other hand, there is significant evidence for an uptake of non‐practitioner‐based CAM by wider segments of the population. The findings raise issues regarding the evidence for the efficacy of CAM and the methodology for testing it. These are discussed. © 2004 Wiley Periodicals, Inc.     

Subsidizing low-skilled jobs in a dual labor market

We introduce a matching model that allows for classical and frictional unemployment. The labor market is dual featuring low-skilled and high-skilled workers and simple and complex jobs. Simple jobs pay a minimum wage, while wages in the complex jobs are determined by Nash bargaining. Opportunities for low-skilled workers are limited to simple jobs; while high-skilled unemployed can apply for both types of jobs, and thereby can accept to be downgraded. We analyze the outcomes of simple job subsidy policies assuming that government budget is balanced through taxes on occupied workers. We first give conditions for the existence and uniqueness of a steady-state equilibrium and we then analyze the effects of different fiscal instruments. We show that in this set-up, increasing simple job subsidies does not necessarily reduce low-skilled unemployment or unemployment spells. By introducing heterogeneous skills and possible downgrading of the high-skilled workers, we show that the effectiveness of such policies in reducing the classical unemployment is decreasing. In fact, any additional classical unemployed re-entering the job market is accompanied by an increasing number of high-skilled workers downgrading to low-skilled jobs. We calibrate the model on French labor market data. It is found that for five low-skilled workers leaving classical unemployment, two high-skilled workers are downgraded.     

Partial Identification and Bound Estimation of the Average Treatment Effect of Education on Earnings for South Africa

We partially identify the average treatment effect of education on earnings and non‐parametrically estimate its upper bound for African, Coloured (mixed race) and White males in South Africa. We address endogenous selection into education, cohort effects and endogenous selection into work. Using the September 2007 South African Labour Force Survey, the upper bound estimates are considerably lower than existing parametric point estimates of the return to education. As a lesson, policy makers should focus less on increasing the amount of education obtained by Africans and Coloureds, but rather on measures that can grow the return to existing levels of education.