Stochastic growth with short-run prediction of shocks

We study a variation of the one-sector stochastic optimal growth model with independent and identically distributed shocks where agents acquire information that enables them to accurately predict the next period??s productivity shock (but not shocks in later periods). Optimal policy depends on the forthcoming shock. A ??better?? predicted realization of the shock that increases both marginal and total product always increases next period??s optimal output. We derive conditions on the degree of relative risk aversion and the elasticity of marginal product under which optimal investment increases or decreases with a better shock. Under fairly regular restrictions, optimal outputs converge in distribution to a unique invariant distribution whose support is bounded away from zero. We derive explicit solutions to the optimal policy for three well-known families of production and utility functions and use these to show that volatility of output, sensitivity of output to shocks, and expected total investment may be higher or lower than in the standard model where no new information is acquired over time; the limiting steady state may also differ significantly from that in the standard model.     

On optimal growth under uncertainty

In a recent paper Brock and Mirman showed that in a one-sector model of economic growth under uncertainty the long-run behavior of the optimal capital stock is governed by the basic properties of an acyclic ergodic Markov process. This paper considers a similar model and has two purposes. First, necessary and sufficient conditions for optimal policy functions are derived in a regime in which future utilities are discounted. These conditions lead, in an example, to an explicit optimal policy function, which is used to display the steady-state solution for the capital stock under an optimal policy. Secondly, in the Brock and Mirman paper it was assumed that the production functions are ordered. We show that all the properties proved by Brock and Mirman are satisfied even when the production functions are not ordered.     

On the behavioral differences between professional and amateur investors after the weekend

This paper compares the trading patterns of amateur and professional investors during the days following the weekend. The comparison is based on all the daily transactions of a large sample of both amateurs and professionally managed investors in a major brokerage house in Israel from 1994 to 1998. We find that weekends influence both amateurs and professional investors; however they affect them in opposite directions. Individuals increase both their buy and sell activities, and their propensity to sell rises more than their propensity to buy. Professionals on the other hand tend to perform fewer buy as well as sell trades after the weekend, but unlike individuals, the drop in their activity is almost the same for buy trades and for sell trades.     

Consumption-loan type models the Samuelson case

This is a further study of the overlapping generations model with fixed amount of fiat money. We show that when the economy is Samuelsonian then there exists some Pareto optimal stationary competitive equilibrium from some initial money holdings. Moreover, if the steady-state interest factor is less than unity, then a non-monetary Pareto optimal equilibrium exists from any initial money endowments.     

The effect of increased variance on the duration of search: A note

A search procedure with a finite number of possible periods of search is considered here. It is assumed that the offers at different periods are independent of each other, that there are no search costs, and that there is no discounting of future receipts. It is shown that if the offers come from a normal population with the same mean then the expected duration of the search, given that an optimal search procedure is followed, is independent of the variance.     

Capital Adequacy, Bank Mergers, and the Medium of Payment

We examine how banks' capital requirements affect the way bank mergers are financed, as well as the stock-market reaction to the merger announcement. We find that the capital position of the acquirer is one of the two factors most strongly influencing the choice of financing method; the other is the relative size of the merging banks. The smaller the acquirer in relation to the target bank and the higher the acquirer's capital adequacy ratio, the more likely it is that the acquisition will be financed by a stock swap. The capital requirements also affect the market reaction, through their effect on the financing method choice. The value of the acquirer's equity decreases more at the time of the merger announcement if the method of payment is stock. Like prior studies, we find that the abnormal return on the target banks' stock is positive.     

Technological progress and income inequality

Summary This paper examines the effects of Hicks-neutral, Harrod-neutral, and Solow-neutral technological improvements on the distribution of income in an overlapping generations economy with endogenous labor supply and a bequest motive. Income inequality in this model is generated by a stochastic process representing random variations in intergenerational transfers and pure luck. The comparative dynamics analysis trace the effects of the aforementioned technological changes in each and every period after they occur. These effects depend on the nature of the technological change and on the elasticity of substitution.We thank Carl Davidson, James Foster, and two anonymous referees for their useful comments.