MAGNITUDE ESTIMATION: AN APPLICATION TO FARMERS' RISK-INCOME PREFERENCES

Magnitude estimation, a technique developed by psychology for obtaining ratio scaled values, was used to derive risk-income preferences of ninety-one central Indiana farmers. Both variability-income and bankruptcy-income measures were developed and related to farmers' socio-economic attributes. Wealth and education had limited effects compared with off-farm employment, percent debt and expected levels of income, percent debt and net worth growth. Magnitude estimation provided reliable estimates of preferences. Farmers gave greater importance to the bankruptcy-income measure of risk-income preferences, but only a small portion of the variation of either measure could be explained.Farm Management, Risk and Uncertainty,

Direct Measures of Time Preference

This work constitutes an attempt to estimate time preference factors in a direct way from survey data, without relying on consumption data and on particular estimation techniques. By using microeconomic data obtained from the Bank of Italy Survey of Household Income and Wealth (for the year 2000) and a simple second order Taylor expansion of a generic utility function we will compute, for each agent, a utility discount factor. The interesting features of the dataset will also enable us to relate discount factors to a large number of social, economic, and demographic variables. Agents do appear to discount future utility flows at rates which vary across age, education, civil status, income and wealth situations; more importantly, it is suggested that risk and market incompleteness should be considered as important determinants of time preference parameters.

The Relationship Between Risk Attitudes and Heuristics in Search Tasks: A Laboratory Experiment

Experimental studies of search behavior suggest that individuals stop searching earlier than predicted by the optimal, risk-neutral stopping rule. Such behavior could be generated by two different classes of decision rules: rules that are optimal conditional on utility functions departing from risk neutrality, or heuristics derived from limited cognitive processing capacities and satisfycing. To discriminate among these two possibilities, we conduct an experiment that consists of a standard search task as well as a lottery task designed to elicit utility functions. We find that search heuristics are not related to measures of risk aversion, but to measures of loss aversion

The Effects of Loss Aversion on Trade Policy and the Anti-Trade Bias Puzzle

We study the implications of loss aversion for trade policy determination and show how it allows us to explain a number of important and puzzling features of trade policy. In particular, we show that if individual preferences exhibit loss aversion and the coefficient of loss aversion is large enough, there will be an anti-trade bias in trade policy. We also show that, for a sufficiently high coefficient of loss aversion, more import-competing lobbies will form than under the current leading political economy model of trade protection due to Grossman and Helpman (1994), and import-competing sectors will be more likely to form a lobby than export sectors, reinforcing the anti-trade bias result. The predictions for protection that we obtain also imply that, everything else equal, higher protection will be given to those sectors in which profitability is declining. We use a nonlinear regression procedure to directly estimate the parameters of the model and test the empirical validity of its predictions. We find empirical support for the model and, very importantly, we obtain estimates of the parameters that are very close to those estimated by Kahneman and Tversky (1992) using experimental data. In order to test some predictions on the lobbying side, we estimate a Probit equation on political organization using the two-stage conditional maximum likelihood estimator proposed by Rivers and Vuong (1988), and find evidence of loss aversion in lobby formation. Finally but importantly, we find that the data favors our model over the Grossman and Helpman modelTrade policy, anti-trade bias, loss aversion

The equilibrium approach to exchange rates: theory and tests.

We characterize the equilibrium exchange rate in a general equilibrium economy without imposing strong restrictions on the output processes, preferences, or commodity market imperfections. The nomial exchange rate is determined by differences in initial wealths - the currencies of richer countries tend to be overvalued, by PPP standards - and by differences of marginal indirect utilities of total nominal spending. Changes in the exchange rate mirror differences in growth rates of real spending weighted by relative risk-aversion (which can be time-varying and can differ across countries), and, in the case of non-homothetic utility functions, differences in inflation rates computed from marginal spending weights. Thus, standard regression or cointegration tests of PPP suffer from missing-variables biases and ignore variations in risk aversions across countries and over time. We also present cointegration test of the homothecy/ CRRA version of the model. When nominal spending is given an independent role (next to prices) in the short-term dynamics, both PPP and the CRRA model become acceptable.Equilibrium; Theory; Trade;

Evaluation of the performance and of the integration of the euro zone stock market: which are the "right moments"?

This study intends to verify if, on the stock markets of the Euro zone, the integration as a process that lead to their unification is applied, even if several disparities exist among the national characteristics of the return-risk. We verify the pertinence of the consideration of third and fourth order moments in the comprehension of the arbitration mechanisms. The first part focuses on establishing the situation of the integration of the stock markets from the Euro zone member countries on the basis of the main characteristics of the returns and the associated risk premiums. Starting with the apparent inadequacy in the traditional theory, the second part considers the usual responses to the main questions posed on the empirical plan: non-normality of the returns distributions and non-quadratic preferences of the investors. The third part solves the apparent contradiction among the risk’s characteristics and price, on one side, and the stronger and stronger correlations among the national markets and the European indexes, on the other side.

The Nature of Risk Preferences: Evidence from Insurance Choices

The authors use data on insurance deductible choices to estimate a structural model of risky choice that incorporates standard risk aversion (diminishing marginal utility for wealth) and probability distortions. They find that probability distortions--characterized by substantial overweighting of small probabilities and only mild insensitivity to probability changes--play an important role in explaining the aversion to risk manifested in deductible choices. This finding is robust to allowing for observed and unobserved heterogeneity in preferences. They demonstrate that neither Kőszegi-Rabin loss aversion alone nor Gul disappointment aversion alone can explain our estimated probability distortions, signifying a key role for probability weighting

Is there an Equity Premium Puzzle in Italy? A Look at Asset Returns, Consumption and Financial Structure Data over the Last Century

This paper reconstructs the series of the real returns on Italian equities, bank and PO deposits and long-term government bonds from 1860 to today. In the long-run the return on shares was much higher than that on government securities and also that on bank and PO deposits. However, this summary assessment is considerably influenced by the exceptional falls in the real value of government securities and bank deposits caused by the hyperinflation that occurred in conjunction with the two world wars. Within the period, there were alternate phases, paralleling the economic cycle and the main institutional changes, in which the return on shares was higher than those on the other two instruments and vice versa. Overall, the Italian equity market provided long-run returns to investors comparable to those of other major countries, although a large fraction of the risk premium for the whole period can be accounted for by the performance following of the hyperinflation episodes of the wars. However, the risk-return trade-off, owing to much larger volatility, compared unfavourably with other markets. Moreover, the Italian equity market in the last 30 years (up to 1994), when equity prices barely kept up with inflation, looks very different. The econometric analysis suggests the presence of an equity premium puzzle in Italy during the estimation period, 1892-1993. In contrast, for government securities the observed returns were approximately in line with the theoretical values. The estimates show that both the returns on government securities and those on shares include an inflation risk premium. For government securities, this was estimated at around 0.8 percentage points. The inflation risk premium was smaller for shares.intertemporal consumer choice, asset prices, equity premium, Italian financial markets history

Unionism and peer-referencing

This study assesses the “fair-wage-effort” hypothesis, by examining (a) the relationship between relative wage comparisons and job satisfaction and quitting intensions, and (b) the relative ranking of stated effort inducing-incentives, in a novel dataset of unionised and non-unionised European employees. By distinguishing between downward and upward-looking wage comparisons, it is shown that wage comparisons to similar workers exert an asymmetric impact on the job satisfaction of union workers, a pattern consistent with inequity-aversion and conformism to the reference point. Moreover, union workers evaluate peer observation and good industrial relations more highly than payment and other incentives. In contrast, non-union workers are found to be more status-seeking in their satisfaction responses and less dependent on their peers in their effort choices The results are robust to endogenous union membership, considerations of generic loss aversion and across different tenure profiles. They are supportive of the individual egalitarian bias of collective wage determination and self-enforcing effort norms.EPICURUS, a project supported by the European Commission through the 5th Framework Programme “Improving Human Potential” (contract number: HPSE-CT-2002-00143