Intergenerational transfer of time and risk preferences

Date of Acceptance: 03/06/15 Acknowledgements The Chief Scientist Office of the Scottish Government Health and Social Care Directorates funds HERU. The views expressed in this paper are those of the authors only and not those of the funding body. HB received financial support from the Medical Research Council/Economic and Social Research Council/National Institute of Health Research under grant G0802291. This paper uses unit record data from the Household, Income and Labour Dynamics in Australia (HILDA) Survey. The HILDA Project was initiated and is funded by the Australian Government Department of Families, Housing, Community Services and Indigenous Affairs (FaHCSIA) and is managed by the Melbourne Institute of Applied Economic and Social Research (Melbourne Institute). The findings and views reported in this paper, however, are those of the author and should not be attributed to either FaHCSIA or the Melbourne Institute.Peer reviewedPublisher PD

An approach for uncertainty aggregation using generalised conjunction/disjunction aggregators

Decision Support Systems are often used in the area of system evaluation. The quality of the output of such a system is only as good as the quality of the data that is used as input. Uncertainty on data, if not taken into account, can lead to evaluation results that are not representative. In this paper, we propose a technique to extend Generalised Con- junction/Disjunction aggregators to deal with un- certainty in Decision Support Systems. We first de- fine the logic properties of uncertainty aggregation through reasoning on strict aggregators and after- wards extend this logic to partial aggregators

Scenario Analysis with Recursive Utility: Dynamic Consumption Plans for Charitable Endowments

We determine optimal consumption paths under a series of returns scenarios for charitable endowments with distinct tastes over investment risk and inter-temporal substitution. Charities typically prefer smooth consumption paths but are investment-risk tolerant. Using a recursive, Kreps-Porteus utility function, we model the optimal disbursement from an infinitely-lived charitable trust, then, allowing a general form for the returns density, we apply stochastic dominance relations to estimate income/substitution effects whereby a change in future returns influences the current consumption rate. The elasticity of intertemporal substitution rather than risk aversion is key: optimal consumption rises or falls as the elasticity diverges from one.recursive utility; stochastic dominance; inter-temporal choice

A computational theory of willingness to exchange, ESRI working paper no. 477, January 2014

A new model of exchange is presented following Marr’s conception of a “computational theory”. The model combines assumptions from perceptual theory and economic theory to develop a highly generalised formal model. The approach departs from previous models by focussing not on how ownership alters preferences, but instead on difficulties inherent in the process of exchange in real markets. Agents treat their own perceptual uncertainty when valuing a potential exchange item as a signal regarding the variability of potential bids and offers. The analysis shows how optimising agents, with no aversion to risk or loss, will produce an endowment effect of variable degree, in line with empirical findings. The model implies that the endowment effect is not a laboratory finding that may not occur in real markets, but rather a market phenomenon that may not occur in the laboratory

The state-contingent approach to production under uncertainty

Chambers and Quiggin, claim that the state-contingent approach provides the best way to think about all problems in the economics of un- certainty, including problems of consumer choice, the theory of the firm, and principal?agent relationships. The purpose of this paper is to restate this claim, and to defend it in the light of recent developments in, and applications of, the state-contingent approach.

Risk management strategies using seasonal climate forecasting in irrigated cotton production: a tale of stochastic dominance

Decision‐making in agriculture is carried out in an uncertain environment with farmers often seeking information to reduce risk. As a result of the extreme variability of rainfall and stream‐flows in north‐eastern Australia, water supplies for irrigated agriculture are a limiting factor and a source of risk. The present study examined the use of seasonal climate forecasting (SCF) when calculating planting areas for irrigated cotton in the northern Murray Darling Basin. Results show that minimising risk by adjusting plant areas in response to SCF can lead to significant gains in gross margin returns. However, how farmers respond to SCF is dependent on several other factors including irrigators’ attitude towards risk.Crop Production/Industries, Risk and Uncertainty,

The state-contingent approach to production under uncertainty

The central claim of this paper is that the state-contingent approach provides the best way to think about all problems in the economics of uncertainty, including problems of consumer choice, the theory of the firm, and principal–agent relationships. This claim is illustrated by recent developments in, and applications of, the state-contingent approach.risk, state-contingent production, uncertainty, Risk and Uncertainty,

Do Preferences in EU Member-States Support Fiscal Federalism?

The aim of this paper is to assess preferences with respect to fiscal federalism in EU member-states. In particular, we address the question of whether each EU country would - if the decision were taken by 'majority voting' - or should – if the decision were takenby a social planner – favour centralisation or decentralisation of mutual risk insurance. Our analysis implicitly assumes that each EU median voter or each EU social planner takes the composition of the fiscal federation as given, leaving aside the issue of how manyand which countries take part in the optimal EU fiscal federation. With majority voting, the median voter 'individual' and the median voter 'region' in each EU country are decisive. In this situation, the national (federal) government level for redistribution is preferredif the national ratio between median income and mean income is lower (higher) than the EU ratio. In contrast, were the decision taken by the social planner, the choice in favour of centralisation(decentralisation) would be derived from the maximisation of a social welfare function. In terms of European regions, the index of 'jurisdictional distance' indicates that social welfare ismaximised by (de)centralised redistribution whenever intra -national income dispersion is greater (smaller) than inter-national income dispersion. The results show that, for the large majority ofEU member-states, when one of the two decision-makers prefers centralisation (decentralisation), the other has the opposite preference; moreover, the chosen government level is in most cases thesame for interpersonal redistribution and inter-jurisdictional redistribution: what is good for the individual is also good for the nation.Income Distribution ; Public Choice ; Fiscal Federalism ; European Economics

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