Entrepreneurship and Philanthropy in American Capitalism

American capitalism differs from all other forms of industrial capitalism is its historical focus on both the creation of wealth (entrepreneurship) and the reconstitution of wealth (philanthropy). Philanthropy is part of the implicit social contract that continuously nurtures and revitalizes economic prosperity. Much of the new wealth created historically has been given back to the community, to build up the great social institutions that have a positive feedback on future economic growth. This entrepreneurship-philanthropy nexus has not been fully explored by either economists or the general public. The purpose of this paper is to suggest that American philanthropists – especially those who have made their own fortunes – create foundations that, in turn, contribute to greater and more widespread economic prosperity through knowledge creation. If we do not analyze philanthropy we can understand neither how economic development occurred nor what accounts for American economic dominance.     

A RE-EXAMINATION OF THE PROXY HYPOTHESIS

In this study we examine whether the proxy hypothesis can explain the puzzling negative relation between real stock returns and expected inflation. Our study improves upon previous tests that suffer from model misspecification and are incomplete. With correctly specified models, we provide a comprehensive test using data from four major industrialized nations during the period of floating exchange rates. Results do not support the proxy hypothesis.     

Environmental Taxes and Pre-Existing Distortions: The Normalization Trap

The double-dividend hypothesisclaims that green taxes will both improve the environment andreduce the distortions of existing taxes. According to the earlierliterature on the double dividend the tax rate for pollutinggoods should be higher than the Pigovian tax which fully internalizesthe marginal social damage from pollution, in order to obtaina second dividend. On the contrary, Bovenberg and de Mooij(1994) argue that environmental taxes typically exacerbate, ratherthan alleviate, pre-existing distortions. The optimal pollutiontax should therefore lie below the Pigovian tax. This paper pointsout that there is no real contradiction between these apparentlyopposing policy recommendations. It will be shown that the differencein the results appears because, implicitly, different definitionsof the second-best optimal pollution tax are chosen.     

Consumption adaptation,anticipation‐bias,and optimal income taxation

Adaptation is omnipresent but people systematically fail to correctly anticipate the degree to which they adapt, leading them to make irrational intertemporal decisions. This paper concerns optimal income taxation to correct for such anticipation‐biases in a framework where consumers adapt to earlier consumption levels. The analysis is based on a general equilibrium OLG model with endogenous labor supply and savings where each consumer lives for three periods. The results show how a paternalistic government may correct for the effects of anticipation‐bias through a combination of time‐variant marginal labor income taxes and savings subsidies/taxes. The optimal policy mix remains the same, irrespective of whether consumers commit to their original life time plan for work hours and consumption or reoptimize later on when realizing that they have already adapted more than expected.     

Predictability and the earnings–returns relation

This paper studies the effects of predictability on the earnings–returns relation for individual firms and for the aggregate. We demonstrate that prices better anticipate earnings growth at the aggregate level than at the firm level, which implies that random-walk models are inappropriate for gauging aggregate earnings expectations. Moreover, we show that the contemporaneous correlation of earnings growth and stock returns decreases with the ability to predict future earnings. Our results may therefore help explain the apparently conflicting recent evidence that the earnings–returns relation is negative at the aggregate level but positive at the firm level.     

PORTFOLIO OPTIMIZATION AND STOCHASTIC VOLATILITY ASYMPTOTICS

We study the Merton portfolio optimization problem in the presence of stochastic volatility using asymptotic approximations when the volatility process is characterized by its timescales of fluctuation. This approach is tractable because it treats the incomplete markets problem as a perturbation around the complete market constant volatility problem for the value function, which is well understood. When volatility is fast mean‐reverting, this is a singular perturbation problem for a nonlinear Hamilton–Jacobi–Bellman partial differential equation, while when volatility is slowly varying, it is a regular perturbation. These analyses can be combined for multifactor multiscale stochastic volatility models. The asymptotics shares remarkable similarities with the linear option pricing problem, which follows from some new properties of the Merton risk tolerance function. We give examples in the family of mixture of power utilities and also use our asymptotic analysis to suggest a “practical” strategy that does not require tracking the fast‐moving volatility. In this paper, we present formal derivations of asymptotic approximations, and we provide a convergence proof in the case of power utility and single‐factor stochastic volatility. We assess our approximation in a particular case where there is an explicit solution.     

Improving the participation of smallholder mango farmers in modern retail channels in Indonesia

Demand for fresh fruits and vegetables in Indonesia has been continuously growing as the result of increasing incomes, high growth of the urban population, and modern retail development. The growth of modern retail chains in Indonesia in the last few decades has intrigued some development experts and practitioners because it had been expected to provide greater opportunities for linking small farmers to high value globalized market chains. The modern private sector would, it was hoped, incorporate small producers with the goal of both securing supply and contributing to poverty reduction. However, in terms of mangoes, previous studies have indicated that only a very small proportion of local production is marketed to modern retail chains and/or exported. The main objective of this study is to identify the factors affecting farmers' participation in modernizing retail channels. The study randomly selected 636 mango farmers from the two main mango production zones in Indonesia, West Java and East Java provinces. The study shows that an expansion of the modernized retail segment has not always benefitted local producers, especially smallholder farmers. It is demonstrated that smallholder farmer participation could be higher when the level of commercialization in the market is high and/or retail procurement was already more modernized. Factors that increase farmer capacity to participate in the modern retail chain are irrigation, farm tools, and infrastructure. To increase smallholder farmer participation, the study suggests a policy of encouraging enforcement of quality standards at wholesale markets, technical assistance to farmers relating to value-adding postharvest activities, and improvements in rural infrastructure.     

OPTIMAL STATIC–DYNAMIC HEDGES FOR BARRIER OPTIONS

We study optimal hedging of barrier options, using a combination of a static position in vanilla options and dynamic trading of the underlying asset. The problem reduces to computing the Fenchel–Legendre transform of the utility-indifference price as a function of the number of vanilla options used to hedge. Using the well-known duality between exponential utility and relative entropy, we provide a new characterization of the indifference price in terms of the minimal entropy measure, and give conditions guaranteeing differentiability and strict convexity in the hedging quantity, and hence a unique solution to the hedging problem. We discuss computational approaches within the context of Markovian stochastic volatility models.