AN EMPIRICAL ESTIMATE OF THE RELATION BETWEEN TWO MEASURES OF ECONOMIC WELFARE*

The main objective of this paper is to explore and quantify the difference between two measures of comparative economic welfare: (a) the more or less conventional measure of per capita national income, and (b) the capitalized value of expected future income per capita. The paper begins with a brief summary of the argument in favor of the present value of expected future income per capita as a measure of economic welfare. This is followed by an examination of the empirical relationship of the ratio of the suggested alternative measure to per capita income and an analysis of the variables used to compute the present value of expected income per capita. The main conclusion drawn from the calculations is that very substantial differences occur in the measurement of relative economic well-being depending on which measure is used. A final section discusses the implications of this finding for international comparisons of economic welfare.     

Option market making under inventory risk

We propose a mean-variance framework to analyze the optimal quoting policy of an option market maker. The market maker’s profits come from the bid-ask spreads received over the course of a trading day, while the risk comes from uncertainty in the value of his portfolio, or inventory. Within this framework, we study the impact of liquidity and market incompleteness on the optimal bid and ask prices of the option. First, we consider a market maker in a complete market, where continuous trading in a perfectly liquid underlying stock is allowed. In this setting, the market maker may remove all risk by Delta hedging, and the optimal quotes will depend on the option’s liquidity, but not on the inventory. Second, we model a market maker who may not trade continuously in the underlying stock, but rather sets bid and ask quotes in the option and this illiquid stock. We find that the optimal stock and option quotes depend on the relative liquidity of both instruments as well as on the net Delta of the inventory. Third, we consider an incomplete market with residual risks due to stochastic volatility and large overnight moves in the stock price. In this setting, the optimal quotes depend on the liquidity of the option and on the net Vega and Gamma of the inventory.      

The micro-price: a high-frequency estimator of future prices

The micro-price estimated using high-frequency data is empirically a better predictor of short-term prices than the mid-price or the weighted mid-price     

HOW MISLEADING ARE INCOME DISTRIBUTIONS?

Starting from the proposition that economic welfare is better measured by the capitalized value of expected future income at age 18 than by income at a point of time, the present paper explores the bias introduced in comparison of earnings and income distributions.
The earning distribution chosen for study is that for males in 1959 in the United States. It is shown that earnings distributions are biased and therfore can be considered highly misleading in most comparisons unless the comparison involves two groups with identical age distributions and identical distributions of earnings over the working life of earners.
Further, a most striking effect can be discerned in comparing the earnings to the present value distributions by educational level. As one moves up the educational ladder, the within-group distribution of lifetime income becomes more and more equal, in sharp contrast to the findings for the distribution of earnings at a point in time.
The result are sufficiently interesting and striking to warrant further studies of distributions of present value of lifetime expected earnings (and income).     

Job search models and frictional unemployment

A number of job search models based on Stigler's classic paper on information in the labor market have appeared recently in the literature. Since the duration of job search is a by-product of these models, they give important insights into the theory of frictional unemployment. What is particularly striking about these models is their basic assumption that individuals attempt to maximize the discounted stream of future income. The present paper attempts to make up this oversimplification by presenting an alternative job search model which posits that individuals attempt to maximize the discounted stream of future satisfaction. Predictions of the two basic models are compared. A final section draws out the implications of the utility model for frictional unemployment.