Uncovering the Risk–Return Relation in the Stock Market

There is ongoing debate about the apparent weak or negative relation between risk (conditional variance) and expected returns in the aggregate stock market. We develop and estimate an empirical model based on the intertemporal capital asset pricing model (ICAPM) that separately identifies the two components of expected returns, namely, the risk component and the component due to the desire to hedge changes in investment opportunities. The estimated coefficient of relative risk aversion is positive, statistically significant, and reasonable in magnitude. However, expected returns are driven primarily by the hedge component. The omission of this component is partly responsible for the existing contradictory results.     

THE VALUE OF CLEANER AIR: AN INTEGRATED APPROACH

Policymakers in the legislative and regulatory arenas face increasing public expectations that authorities will both promulgate and implement strict environmental programs. At the same time, the aggregate cost of such programs is rising and is impacting economic sectors previously untouched. In this context, a major study used an integrated interdisciplinary perspective to determine what economic benefits would result from air pollution controls. Specifically, the study developed estimates for the health benefits of reducing ozone and fine particulate matter concentrations in the nation's most polluted region—the South Coast Air Basin centering on Los Angeles. This paper presents the economic methodologies and results of that study. It also discusses how health and atmospheric sciences informed the economic assessment.     

Nader's Support: Its Sources and Concerns

Do the consumer advocates, such as Nader, have a real constituency? Where do they get their support? This study, based on a nationwide sample, investigated the extent of support for Ralph Nader and his program, and its sources. Nader was found to have substantial support, a major portion of it consisting of middle-income political liberals. Those supporting Nader were found to be active complainers and supporters of other political and social causes, suggesting that support for Nader is part of a broader pattern of activisim.     

ARE DISAGREEMENTS AMONG MALE AND FEMALE ECONOMISTS MARGINAL AT BEST?: A SURVEY OF AEA MEMBERS AND THEIR VIEWS ON ECONOMICS AND ECONOMIC POLICY

The authors survey economists in the United States holding membership in the American Economic Association (AEA) to determine if there are significant differences in views between male and female economists on important policy issues. Controlling for place of current employment (academic institution with graduate program, academic institution—undergraduate only, government, for‐profit institution) and decade of PhD, the authors find many areas in which economists agree. However, important differences exist in the views of male and female economists on issues including the minimum wage, views on labor standards, health insurance, and especially on explanations for the gender wage gap and issues of equal opportunity in the labor market and the economics profession itself. These results lend support to the notion that gender diversity in policy‐making circles may be an important aspect in broadening the menu of public policy choices. (JEL A11, J78, A14)     

Do People Always Pay Less Than They Say? Testbed Laboratory Experiments with IV and HG Values

Hypothetical bias is a long‐standing issue in stated preference and contingent valuation studies—people tend to overstate their preferences when they do not experience the real monetary consequences of their decision. This view, however, has been challenged by recent evidence based on the elicitation of induced values (IV) in the lab and homegrown (HG) demand function from different countries. This paper uses an experimental design to assess the extent and relevance of hypothetical bias in demand elicitation exercises for both induced (IV) and homegrown (HG) values. For testbed purpose, we use a classic second‐price auction to elicit preferences. Comparing the demand curve we elicit in both, hypothetical bias unambiguously (i) vanishes in an IV, private good context and (ii) persists in HG values elicitation context. This suggests hypothetical bias in preference elicitation appears to be driven by “preference formation” rather than “preference elicitation.” In addition, companion treatments highlight two sources of the discrepancy observed in the HG setting: the hypothetical context leads bidders to underestimate the constraints imposed by their budget limitations, whereas the real context creates pressure leading them to bid “zero” to opt out from the elicitation mechanism. As a result, there is a need for a demand elicitation procedure that helps subjects take the valuation exercise sincerely, but without putting extra pressure on them.     

FORECASTING FDI EQUITY INCOME FOR THE DANISH BALANCE OF PAYMENTS

Late and significant revisions are often observed in FDI equity income in many countries, hampering the quality of preliminary balance of payments statistics. We test a range of models on Danish data and find that forecasts for FDI equity income based on a combination of past profitability and consensus data for changes in expected private consumption growth outperform forecasts solely based on historical profitability. When the refined models are applied to the Danish balance of payments, the largest improvements are observed for outward and inward FDI separately. Revisions of net FDI equity income only decrease marginally because the significant revisions in gross terms resulting from the historical models have a tendency to (partly) cancel out each other on a net basis.