On Nudging: A Review of Nudge: Improving Decisions About Health,Wealth and Happiness by Richard H. Thaler and Cass R. Sunstein

This paper reviews the case for libertarian paternalism presented by Thaler and Sunstein in Nudge. Thaler and Sunstein argue that individuals’ preferences are often incoherent, making paternalism is unavoidable; however, paternalistic interventions should ‘nudge’ individuals without restricting their choices, and should nudge them towards what they would have chosen had they not been subject to specific limitations of rationality. I argue that the latter criterion provides inadequate guidance to nudgers. It is inescapably normative, and so allows nudgers’ conceptions of well‐being to override those of nudgees. Even if nudgees’ rationality were unbounded, their revealed preferences might still be incoherent.     

Measuring a boom and bust: The Sydney housing market 2001–2006

The Sydney housing market peaked in 2003. The period 2001–2006 is, therefore, of particular interest since it captures a boom and bust in the housing market. We compute hedonic, repeat-sales and median price indexes for five regions in Sydney over this period. While the three approaches are in broad agreement regarding the timing of the turning point in the housing market, some important differences also emerge. In particular, we find evidence of sample selection bias in our hedonic and repeat-sales data sets (with the former focusing more on better quality dwellings and the latter more on lower quality dwellings). These sample selection biases could in turn cause bias (in opposite directions) in our hedonic and repeat-sales indexes. Median indexes may likewise be biased as a result of an apparent decline in the average quality of dwellings sold in the latter part of the sample. We also find evidence of convergence in prices across regions during the boom and divergence in the subsequent bust.     

The underpricing of initial public offerings: A theoretical and empirical reconsideration of the adverse selection hypothesis

In this paper we generalize Rock's theory regarding the underpricing of IPOs. In Rock's model, informed investors have a firm-specific informational advantage pertaining to a firm's cash flow. We derive the new results that the level of beta and the size of the market risk premium positively affect underpricing. These implications extend the adverse selection theory and further distinguish this theory from the current state of signalling theories of underpricing. The results put the “hot and cold” issue markets phenomenon in a theoretical context. Empirical results are consistent with the theoretical propositions and provide support for Rock's theory of underpricing.     

Competition and Participation in Religious Markets: Evidence from Victorian Scotland

In 1885, the largest churches in Scotland were engaged in a dispute about state funding. We use data generated in the course of that dispute to test two related hypotheses. First, as market size (proxied by population) increases, the competitiveness (or complexity) of the religious market structure will not decrease. Second, religious activity, as measured by giving per member, church income and participation, will not decrease as market competitiveness (or complexity) increases. Empirical evidence lends support to the first hypothesis, but casts doubt on the second, and the supply-side theories underpinning it, which posit a causal link between increased competitiveness (complexity) and higher levels of religious activity. In interpreting the results the importance of a rich understanding of institutional arrangements—particularly market structure, governance and financing—is underlined.     

The trade wind,the statesman and the system of commerce: Sir James Steuart's vision of political economy

In the conception of history of the abbé de Condillac, one thing is really original. He establishes a causal relation between the functioning of the human mind and the history of societies. First, the understanding of humankind is not disordered: society develops, stages follow one another. But the commercial stage leads societies to divide into classes, the landowners are interested only in frivolous, luxurious objects: they have become denatured. Their behaviour entails society in a long phase of decline. However, this course is not inevitable. Condillac wishes to reform the individual in order to modify society and he proposes economic safeguards capable of reducing disparities. Life is simple, but history is not halted.     

Options in income support for the aged: A critique of the two-tier approach

Support for the two-tier approach to income maintenance for the aged is becoming widespread. Two-tier formulas combine an income-conditioned bottom tier with an earnings-related top tier to achieve antipoverty and earnings replacement objectives. This paper first refutes the claim that the two-tier approach is generally more target-efficient in reaching the poor than is the earnings-related top tier with progressive replacement rates. Next, the paper compares the effectiveness of the two systems in terms of other goals. The paper concludes by showing that a top tier with a low tax on current income can virtually dominate a wide range of two-tier formulas.     

WILL BUSINESS CYCLES IN THE EURO AREA CONVERGE? A CRITICAL SURVEY OF EMPIRICAL RESEARCH

Abstract.  This survey of business cycle synchronization in the European monetary union focuses on two issues: have business cycles become more similar, and which factors drive business cycle synchronization. We conclude that business cycles in the euro area have gone through periods of both convergence and divergence. Still, there is quite some evidence that during the 1990s business cycle synchronization in the euro area has increased. Higher trade intensity is found to lead to more synchronization, but the point estimates vary widely. The evidence for other factors affecting business cycle synchronization is very mixed.     

A Value at Risk Approach to Background Risk

This paper studies the effects of an uninsurable background risk (BR) on the demand for insurance (proportional and with deductible). We study both the case of BR uncorrelated with the insurable one and the perfectly correlated one, in a Gaussian world. In order to perform our study, we exploit the new risk measure known as Value at Risk (VaR) and consider insurance contracts which are Mean-VaR efficient. We obtain results which depend on the parameters (moments) of both risks and on the magnitude of loadings charged by the insurance company, instead of depending on the risk attitudes of the insured, such as risk aversion and prudence.We demonstrate that, if loadings are not too high, the demand for insurance increases with positively correlated BR; it decreases with BR negatively correlated if the latter is less risky than the insurable one (in this case it can even go to zero, if loadings are too high); it goes to zero with BR which is negatively correlated and more risky than the insurable one.     

EXCHANGE RATE FUNDAMENTALS,FORECASTING, AND SPECULATION: BAYESIAN MODELS IN BLACK MARKETS

Although speculative activity is central to black markets for currency, the out‐of‐sample performance of structural models in those settings is unknown. We substantially update the literature on empirical determinants of black market rates and evaluate the out‐of‐sample performance of linear models and non‐parametric Bayesian treed Gaussian process (BTGP) models against the random walk benchmark. Fundamentals‐based models outperform the benchmark in out‐of‐sample prediction accuracy and trading rule profitability measures given future values of fundamentals. In simulated real‐time trading exercises, however, the BTGP achieves superior realized profitability, accuracy and market timing, while linear models do no better than a random walk. Copyright © 2013 John Wiley & Sons, Ltd.