Preference Reversals and the Analysis of Income Distributions

It is known from the literature on uncertainty that in cases where individuals express a preference for a high win-probability bet over a bet with high winnings they nevertheless will bid more to obtain the bet with high winnings. We investigate whether a similar phenomenon applies in the parallel social-choice situation. Here decisions are to be made between a distribution with a small group of very high-income people. Results from a number of experimental designs are analysed.Preference reversals, social welfare, inequality, risk and experiments.

Income Distributions versus Lotteries Happiness, Response-Mode Effects, and Preference

This paper provides a comparative experimental study of risky prospects (lotteries) and income distributions. The experimental design consisted of multi?outcome lotteries and n?dimensional income distributions arranged in the shapes of ten distributions which were judged in terms of ratings and valuations, respectively. Material incentives applied. We found heavy response?mode effects, which cause inconsistent behavior between rating and valuation of lotteries and income distributions in more than 50% of all cases. This means that ethical inequality measures lack support in peoples? perceptions. In addition to classical preference reversals between generalized P?bets and $?bets we observed three additional patterns of preference reversal, two of which apply only to income distributions. Dominating Lorenz curves and Lorenz curves cutting others from below receive decidedly higher ratings (which implies risk and inequality aversion), but lower valuations. The transfer principle is largely violated. The rating of lotteries is a decreasing function of skewness, the rating of income distributions is a decreasing function of standard deviation. The valuation of lotteries is an increasing function of standard deviation and kurtosis, and the valuation of income distributions is an increasing function of standard deviation, skewness, and kurtosis. --Income Distribution,Lotteries,Income Happiness,Inequality and Risk Aversion,Ethical Inequality Measures,Preference Reversal

Concerning Technology Adoption and Inequality

Empirical evidence suggests that there has been a divergence over time in income distributions across countries and within countries. Furthermore, developing economies show a great deal of diversity in their growth patterns during the process of economic development. For example, some of these countries converge rapidly on the leaders, while others stagnate, or even experience reversals and declines in their growth processes. In this paper we study a simple dynamic general equilibrium model with household specific costs of technology adoption which is consistent with these stylized facts. In our model, growth is endogenous, and there are two-period lived overlapping generations of agents, assumed to be heterogeneous in their initial holdings of wealth and capital. We find that in a special case of our model, with costs associated with the adoption of more productive technologies fixed across households, inequalities in wealth and income may increase over time, tending to delay the convergence in international income differences. The model is also capable of explaining some of the observed diversity in the growth pattern of transitional economies. According to the model, this diversity may be the result of variability in adoption costs over time, or the relative position of a transitional economy in the world income distribution. In the more general case of the model with household specific adoption costs, negative growth rates during the transitional process are also possible. The model’s prediction that inequality has negative impact on technology adoption is supported by empirical evidence based on a cross country data set.inequality, technology adoption, international income differences, altruism, negative growth rates.

Repeated Rounds with Price Feedback in Experimental Auction Valuation: An Adversarial Collaboration

It is generally thought that market outcomes are improved with the provision of market information. As a result, the use of repeated rounds with price feedback has become standard practice in the applied experimental auction valuation literature. We conducted two experiments to determine how rationally subjects behave with and without price feedback in a second price auction. Results from an auction for lotteries show that subjects exposed to price feedback are significantly more likely to commit preference reversals. However, this irrationality diminishes in later rounds. Results from an induced value auction indicate that price feedback caused greater deviations from the Nash equilibrium bidding strategy. Our results suggest that while bidding on the same item repeatedly improves auction outcomes, this improvement is not the result of price feedback

Quantitative Implication of A Debt-Deflation Theory of Sudden Stops and Asset Prices

This paper shows that the quantitative predictions of an equilibrium asset pricing model with financial frictions are consistent with the large consumption and current-account reversals and asset-price collapses observed in the "Sudden Stops" of emerging markets crises. Margin requirements set a collateral constraint on foreign borrowing by domestic agents. Foreign traders incur costs in trading assets with domestic agents. Margin constraints bind occasionally depending on equilibrium portfolios and asset prices. When the constraints do not bind, productivity shocks cause standard real-business-cycle effects. When the constraints bind, shocks of the same magnitude cause strikingly different effects that vary with the leverage ratio and the liquidity of asset markets. With high leverage and liquid markets, the shocks trigger margin calls forcing "fire sales" of assets. Fisher's debt-deflation mechanism causes subsequent rounds of margin calls, a fall in asset prices and large consumption and current account reversals. The size of the price decline depends on trading costs parameters because these parameters determine the price elasticity of the foreign traders' asset demand function. Price declines of the magnitude observed in the data require a less-than-unitary price elasticity. Precautionary saving makes Sudden Stops infrequent in the long run so that the model can explain both regular business cycles and the unusually large reversals of consumption and current accounts associated with Sudden Stops.

Retirement and the Stock Market Bubble

This paper specifies and estimates a structural dynamic stochastic model of the way individuals make retirement and saving choices in an uncertain world, and applies that model to analyze the effects of the stock market bubble on retirement behavior. The model includes individual variation both in retirement preferences and in time preferences. Estimates are based on information covering the period 1992 through 2000 from the Health and Retirement Study (HRS), a panel survey of retirement age respondents and their spouses. The extraordinary returns in the stock market in the late 1990's, which more than doubled stock prices and unexpectedly increased the value of a mixed portfolio by nearly 60 percent, increased retirement for the HRS sample of workers by over 3 percentage points by the turn of the century and would have decreased the average retirement age by about a quarter of a year if it had not been interrupted. The subsequent decline in the market, which very nearly wiped out the gains that had been made during the preceding surge, effectively neutralized the effect of the preceding stock market gains on retirement. The effects of the bubble were to increase retirement as long as the bubble continued, but any continuing effects of the bubble after its end will probably be minimal.

Are Asset Price Guarantees Useful for Preventing Sudden Stops?: A Quantitative Investigation of the Globalization Hazard-Moral Hazard Tradeoff

The globalization hazard hypothesis maintains that the current account reversals and asset price collapses observed during 'Sudden Stops' are caused by global capital market frictions. A policy implication of this view is that Sudden Stops can be prevented by offering global investors price guarantees on emerging markets assets. These guarantees, however, introduce a moral hazard incentive for global investors, thus creating a tradeoff by which price guarantees weaken globalization hazard but strengthen international moral hazard. This paper studies the quantitative implications of this tradeoff using a dynamic stochastic equilibrium asset-pricing model. Without guarantees, distortions induced by margin calls and trading costs cause Sudden Stops driven by Fisher's debt-deflation mechanism. Price guarantees prevent this deflation by introducing a distortion that props up foreign demand for assets. Non-state-contingent guarantees contain Sudden Stops but they are executed often and induce persistent asset overvaluation. Guarantees offered only in high-debt states are executed rarely and prevent Sudden Stops without persistent asset overvaluation. If the elasticity of foreign asset demand is low, price guarantees can still contain Sudden Stops but domestic agents obtain smaller welfare gains at Sudden Stop states and suffer welfare losses on average in the stochastic steady state.

Credit Frictions and 'Sudden Stops' in Small Open Economies: An Equilibrium Business Cycle Framework for Emerging Markets Crises

Financial frictions are a central element of most of the models that the literature on emerging markets crises has proposed for explaining the Sudden Stop' phenomenon. To date, few studies have aimed to examine the quantitative implications of these models and to integrate them with an equilibrium business cycle framework for emerging economies. This paper surveys these studies viewing them as ability-to-pay and willingness-to-pay variations of a framework that adds occasionally binding borrowing constraints to the small open economy real-business-cycle model. A common feature of the different models is that agents factor in the risk of future Sudden Stops in their optimal plans, so that equilibrium allocations and prices are distorted even when credit constraints do not bind. Sudden Stops are a property of the unique, flexible-price competitive equilibrium of these models that occurs in a particular region of the state space in which negative shocks make borrowing constraints bind. The resulting nonlinear effects imply that solving the models requires non-linear numerical methods, which are described in the survey. The results show that the models can yield relatively infrequent Sudden Stops with large current account reversals and deep recessions nested within smoother business cycles. Still, research in this area is at an early stage and this survey aims to stimulate further work.

Fricciones crediticias y 'paradas repentinas' en pequeñas economías abiertas: un marco de equilibrio del ciclo económico para crisis en mercados emergentes

(Disponible en idioma inglés únicamente) Las fricciones financieras son un elemento central de la mayoría de los modelos que ha propuesto la obra publicada sobre los mercados emergentes para explicar el fenómeno de las paradas repentinas. A la fecha, son pocos los estudios que han procurado analizar las implicaciones cuantitativas de esos modelos e integrarlos a un marco de equilibrio del ciclo económico de las economías emergentes. En este trabajo se analizan esos estudios, considerándoselos variaciones de la capacidad de pago y de la disposición a pagar en un marco que ocasionalmente incorpora limitantes del endeudamiento al modelo del ciclo económico real de economías pequeñas que a veces resultan de obligatorio acatamiento. Una característica que tienen en común los diversos modelos es que los agentes toman en cuenta el riesgo de paradas repentinas futuras en sus planes óptimos, de modo que las asignaciones de equilibrio y los precios se distorsionan incluso cuando las limitantes crediticias no son obligatorias. Las paradas repentinas pertenecen al equilibrio competitivo de precios flexibles y únicos de esos modelos, que ocurren en una región determinada del espacio del Estado en el que sacudidas negativas hacen obligatorias las limitantes al endeudamiento. Los efectos resultantes no lineales implican que resolver los modelos requiere métodos numéricos no lineales, los cuales se describen en el sondeo. Los resultados demuestran que los modelos pueden arrojar paradas repentinas poco frecuentes con efectos negativos de la cuenta corriente y recesiones profundas enmarcadas en ciclos económicos más suaves. Aún así, las investigaciones en este campo se hallan en una etapa incipiente y este estudio procura estimular nuevos trabajos en esta área.

Improving scope sensitivity in contingent valuation: joint and separate evaluation of health states

We present data of a contingent valuation survey, testing the effect of evaluation mode on the monetary valuation of preventing road accidents. Half of the interviewees was asked to state their willingness to pay (WTP) to reduce the risk of having only 1 type of injury (separate evaluation, SE), and the other half of the sample was asked to state their WTP for 4 types of injuries evaluated simultaneously (joint evaluation, JE). In the SE group, we observed lack of sensitivity to scope while in the JE group WTP increased with the severity of the injury prevented. However, WTP values in this group were subject to context effects. Our results suggest that the traditional explanation of the disparity between SE and JE, namely, the so-called “evaluability,” does not apply here. The paper presents new explanations based on the role of preference imprecision