Utility in Case-Based Decision Theory

This paper provides two axiomatic derivations of a case-based decision rule. Each axiomatization shows that, if preference orders over available acts in various contexts satisfy certain consistency requirements, then these orders can be numerically represented by maximization of a similarity-weighted utility function. In each axiomatization, both the similarity function and the utility function are simultaneously derived from preferences, and the axiomatic derivation also suggests a way to elicit these theoretical concepts from in-principle observable preferences. The two axiomatizations differ in the type of decisions that they assume as data. Journal of Economic Literature Classification Number: D80.     

Out-of-Pocket Health Expenditures: A Suggested Role for Social Security

We present economic data to demonstrate that the (random) out-of-pocket health-related expenses of seniors who face medical problems are significant and increasing over time. This remains the case even when we take into account the availability of supplemental health insurance. We propose to apply a modest part of Social Security benefits, without increasing the total expenses of this system, to provide mandatory supplemental health insurance for all recipients. Using a theoretical framework we demonstrate that introducing such additional role for Social Security makes individuals (ex ante) better off and hence results in a Pareto dominating new regime for Social Security.     

The Effect of Better Information on Income Inequality

We consider an OLG economy with endogenous investment in human capital. Heterogeneity in individual human capital levels is modelled by a distribution of innate ability across agents. This distribution is common knowledge but, at young age, no agent knows his/her ability. The production of human capital depends on each individual’s investment in education. This investment decision is taken only after observing a signal which is correlated to his/her true ability, and which is used for updating beliefs. Thus, a better information system affects the distribution of human capital in each generation. Assuming separable and identical preferences for all individuals, we derive the following results in equilibrium: (a) If the relative measure of risk aversion is less (more) than 1 then more information raises (reduces) income inequality. (b) When a risk sharing market is available better information results in higher inequality regardless of the measure risk aversion. We are grateful to Alex Cukierman, Zvi Eckstein, Yona Rubinstein and Daniel Tsiddon. An anonymous referee made extremely useful comments and suggestions. Financial support from the German-Israeli Foundation for Scientific Research and Development (GIF) is gratefully acknowledged.     

A POSSIBLE RECONCILIATION OF SOME OF THE CONFLICTING FINDINGS ON CLOSED-END FUND DISCOUNTS: A NOTE

The most obvious explanation for the closed-end fund puzzle, the existence of managerial contribution (i.e., managerial performance less managerial fees), has been called into disrepute because of the inability of researchers to consistently document a negative relationship between such benefits and discounts. We present a model which shows that it is possible to account for some of the stylized facts without abandoning market efficiency and rationality. It is suggested that when one takes into consideration the impact of managerial contribution on the probability of open-ending, a negative relationship between managerial contribution and discounts actually may result.     

The Effect of Trading Halts on the Speed of Price Discovery

Trading halts are aimed at reducing information asymmetry by granting investors the opportunity to reassess trades upon arrival of new, substantial information. This study is the first to address the efficiency of the price discovery process with respect to time, i.e., the speed of adjustment to new information. A unique database allow us to conduct an event study analysis and measure the impact of trading halts on price discovery while controlling for content, operational and value effects. We find that information dissemination following trading halts is over 40% faster and that abnormal trading activity is positively related to the speed of price adjustment.     

Saving behavior in stationary equilibrium with random discounting

Summary. We study the implications of random discount rates of future generations for saving behavior and capital holdings in a steady state competitive equilibrium with heterogeneous population. A well-known difficulty in deterministic economies with heterogeneous households is that in steady state only the most patient households hold capital. In this paper we state conditions under which this random discounting is sufficient for households other than the most patient ones to save. We thus provide a simple and natural way of overcoming the aforementioned difficulty. Received: December 28, 1998; revised version: May 19, 1999     

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.