Regret aversion and opportunity dependence

This paper provides an axiomatic model of decision making under uncertainty in which the decision maker is driven by anticipated ex post regrets. Our model allows both regret aversion and likelihood judgement over states to coexist. Also, we characterize two special cases, minimax regret with multiple priors that generalizes Savage's minimax regret, and a smooth model of regret aversion.     

Dynamic optimization with a nonsmooth, nonconvex technology: the case of a linear objective function

This paper studies a one-sector optimal growth model with linear utility in which the production function is only required to be increasing and upper semicontinuous. The model also allows for a general form of irreversible investment. We show that every optimal capital path is strictly monotone until it reaches a steady state; further, it either converges to zero, or reaches a positive steady state in finite time and possibly jumps among different steady states afterwards. We establish conditions for extinction (convergence to zero), survival (boundedness away from zero), and the existence of a critical capital stock below which extinction is possible and above which survival is ensured. These conditions generalize those known for the case of S-shaped production functions. We also show that as the discount factor approaches one, optimal paths converge to a small neighborhood of the capital stock that maximizes sustainable consumption.This paper is dedicated to Professor Mukul Majumdar on his 60th birthday. His research with various co-authors in the late 70s and the 80s pioneered innovative techniques for the analysis of nonconvex dynamic optimization models – both deterministic and stochastic. Roy considers himself particularly fortunate for having had the opportunity to learn economic theory and mathematical economics from Professor Majumdar. This paper has benefited from helpful comments and suggestions by an anonymous referee. Financial support from the 21st Century COE Program at GSE and RIEB, Kobe University, is gratefully acknowledged.     

Almost sure convergence to zero in stochastic growth models

This paper considers the resource constraint commonly used in stochastic one-sector growth models. Shocks are not required to be i.i.d. It is shown that any feasible path converges to zero exponentially fast almost surely under a certain condition. In the case of multiplicative shocks, the condition means that the shocks are sufficiently volatile. Convergence is faster the larger their volatility, and the smaller the maximum average product of capital.I would like to thank Santanu Roy, John Stachurski, Lars J. Olson, and an anonymous referee for helpful comments and suggestions. The general result in section 2 owes much to the referee’s comments on an earlier version of this paper. Financial support from the 21 Century COE Program at GSE and RIEB, Kobe University is gratefully acknowledged.     

Comparative statics in the large based on a fixed point algorithm

The purpose of this paper is to present a theorem on comparative statics in the large by making use of theorems on a fixed point algorithm, and also to show its economic applications focused on Hicksian laws. We provide a unified approach to comparative statics in the large, and obtain laws of demand globally valid for generalized gross-substitute systems.     

Product Variety and Real Exchange Rates: The Balassa-Samuelson Model Reconsidered

This paper introduces product variety into the Balassa-Samuelson model in order to extend the model of real exchange rate determination. With product differentiation, real exchange rates depend not only on the relative price of nontradables to tradables but also on relative prices among tradables. This paper identifies a new factor that determines the extent of variety, termed Infrastructural Technology, and that affects real exchange rates not through the relative price of nontradables but through relative prices among tradables. This paper also conducts empirical tests, and the results of these tests support the model. Received May 31, 2001; revised version received March 20, 2002 Published online: April 30, 2003     

Quasi-stationary cardinal utility and present bias

This note gives an axiomatic foundation for utility exhibiting quasi-geometric discounting. In addition, it introduces a wider class of utility functions satisfying weakened stationarity, called quasi-stationary utility. Both are established as von Neumann-Morgenstern utility indices in a model of risk preference.     

Generalized potentials and robust sets of equilibria

This paper introduces generalized potential functions of complete information games and studies the robustness of sets of equilibria to incomplete information. A set of equilibria of a complete information game is robust if every incomplete information game where payoffs are almost always given by the complete information game has an equilibrium which generates behavior close to some equilibrium in the set. This paper provides sufficient conditions for the robustness of sets of equilibria in terms of argmax sets of generalized potential functions. These sufficient conditions unify and generalize existing sufficient conditions. Our generalization of potential games is useful in other game theoretic problems where potential methods have been applied.     

South Korea’s finance–growth nexus: evidence from VARX analysis with financial crisis and openness

South Korea’s finance–growth nexus is empirically investigated by taking the elements of financial crisis and trade and financial openness through the newly developed approach of vector error-correction models (ECMs) with weakly exogenous I(1) variables (VARX). Considering financial development as a more complex phenomenon, we take into estimation two aspects of financial deepening that are measured by its size (private credit to GDP) and efficiency (private credit to total domestic deposits). The main findings are (1) financial efficiency contributes to accelerating economic growth; (2) the causality between economic growth and financial size is bilateral and negative; and (3) financial crisis is negative to both economic growth and financial development, whereas the growth-promoting effects of trade and financial openness are confirmed.     

Separating the Age Effect from a Repeat Sales Index: Land and Structure Decomposition

Since real estate is heterogeneous and not all its quality attributes are observable, the repeat sales model pioneered by Bailey et al. (1963) has become one of the standard methods to estimate a constant-quality price index. The model, however, fails to adjust for depreciation, as age and time between sales have an exact linear relationship. This paper proposes a new method to estimate an age-adjusted repeat sales index by decomposing property value into land and structure components. As depreciation is more relevant to the structure than land, the property’s depreciation rate should depend on the relative size of land and structure. The larger the land component, the lower the depreciation rate of the property. This new method is applied to property transactions in Hong Kong and Tokyo. Hong Kong is shown to have a higher depreciation rate based on a fixed structure-to-property value ratio, while the resulting age adjustment is larger in Tokyo because its land value has shrunken over time.