Risk aversion, intertemporal substitution, and the aggregate investment-uncertainty relationship

We analyze the role of risk aversion and intertemporal substitution in a simple dynamic general equilibrium model of investment and savings. Our main finding is that risk aversion cannot by itself explain a negative relationship between aggregate investment and aggregate uncertainty, as the effect of increased uncertainty on investment also depends on the intertemporal elasticity of substitution. In particular, the relationship between aggregate investment and aggregate uncertainty is positive even if agents are very risk averse, as long as the elasticity of intertemporal substitution is low. A negative investment-uncertainty relationship requires that the relative risk aversion and the elasticity of intertemporal substitution are both relatively high or both relatively low. We also show that the implications of our model are consistent with the available empirical evidence

Audit probability versus effectiveness: The Beckerian approach revisited

The Beckerian approach to tax compliance examines how a tax authority can maximize social welfare by trading-off audit probability against the fine rate on undeclared tax. This paper offers an alternative examination of the privately optimal behavior of a tax authority tasked by government to maximize expected revenue. The tax authority is able to trade-off audit probability against audit effectiveness, but takes the fine rate as fixed in the short run. I find that the tax authority's privately optimal audit strategy does not maximize vol- untary compliance, and that voluntary compliance is non-monotonic as a function of the tax authority's budget. Last, the tax authority's privately optimal effective fine rate on undeclared tax does not exceed two at interior optima

RISK AND MARKET PARTICIPANT BEHAVIOR IN THE U.S. SLAUGHTER-CATTLE MARKET

Incomplete information generates uncertainty for market participants in the slaughter-cattle market. Buyer and seller behavior in the presence of that uncertainty is examined. Statistically significant risk premiums are charged by packers when buying slaughter cattle on either a live- or dressed-weight basis compared to buying on a grade-and-yield basis. Pratt-Arrow risk-aversion coefficients are calculated for buyers and these remain constant over all marketing methods. Sellers market cattle under all three marketing methods, suggesting producersÂ’' attitudes toward risk (risk-aversion coefficients) vary.Risk and Uncertainty,

SOME GUIDING PRINCIPLES FOR EMPIRICAL PRODUCTION RESEARCH IN AGRICULTURE

Constraints on production economic research are examined in three dimensions: problem focus, methodology, and data availability. Data availability has played a large role in the choice of problem focus and explains some misdirected focus. A proposal is made to address the data availability constraint. The greatest self-imposed constraints are methodological. Production economics has focused on flexible representations of technology at the expense of specificity in preferences. Yet some of the major problems faced by decision makers relate to long-term problems, e.g., the commodity boom and ensuring debt crisis of the 1970s and 1980s where standard short-term profit maximization models are unlikely to capture the essence of decision maker concerns.Production Economics,

Optimal Trade Policies for a Developing Country Under Uncertainty

This paper investigates optimal trade policies for a developing small open economy which faces international price uncertainty. Trade taxes are used to finance provision of a public good, which enters the utility function of consumers. If demands for private goods are independent of the public good, the optimal composite tariff dominates the optimal quota. If the optimal state-contingent tariff increases with the foreign price, the optimal specific tariff also dominates the optimal quota, regardless of risk aversion. However, the ranking of the optimal specific tariff and the optimal quota generally depends on risk attitudes as well as ordinal preferences.International Relations/Trade,

Uncertainty and the Double Dividend Hypothesis

This paper examines the double dividend hypothesis in the presence of labour income uncertainty. Empirical evidence shows that uncertainty over labour income is particularly significant in developing, while not negligible in developed countries. Under uncertainty, and assuming incomplete capital markets, the tax system plays a role in providing social insurance and a green tax reform influences its effectiveness. We show that the increase in environmental tax reduces consumption risk while the balanced budget decrease in labour income tax increases income risk. We find that the total welfare effect of a green tax reform differs substantially from the case of certainty. The critical parameters determining the existence of a second dividend are the lump sum transfers, the relative substitutability of the two goods for leisure and the initial tax rates relative to their optimal that determine also the response of labour supply to a change in the tax mix.Double Dividend Hypothesis, Environmental Taxation, Labor Income Taxation, Uncertainty, Tax Incidence Analysis

The Quality-Quantity Trade-off in the Principal-Agent Framework

This paper uses the principal-agent theory to analytically investigate the optimal incentive-based compensation contract that a processor should offer to a grower performing efforts in quantity and quality. In this process, we contribute to the substantive literature on multi-task principal-agent models by analyzing the quality-quantity trade-off and studying the implications of such a relationship in the principal-agent framework. One striking result of these effects is that, under appropriate incentive-based grower’s compensation, the processor may encourage grower’s effort in quality without crowding out grower’s effort in quantity.quality, quantity, trade-off, incentive contract, principal-agent framework, uncertainty, Agribusiness, Agricultural and Food Policy, D86,