Demand for Cash with Intra-Period Endogenous Consumption

We study the demand for money when agents can optimally choose mean rates of consumption and cash holdings over a period. Consistent with empirical evidence, we find that agents do not smooth intra-period consumption. Instead, their rate of consumption is positively correlated with their cash position. This positive correlation depends on the volatility of the consumption process. When volatility is very low or very high, agents choose to consume at a relatively high rate immediately after a cash withdrawal, drawing down quite rapidly their cash balances. Later in the period, their rate of consumption and cash depletion is more restrained. This sizeable deviation from consumption smoothing is much less pronounced when volatility is moderate.money demand; consumption smoothing; drift control

The Response to Fines and Probability of Detection in a Series of Experiments

We use traffic data from a series of experiments in the United States and Israel to examine how illegal behavior is deterred by various penalty schemes and whether deterrence varies with age, income, driving record and criminal record. We find that red light running decreases sharply in response to an increase in the fine or an increase in the probability of being caught. The elasticity of violations with respect to the fine is larger for younger drivers and drivers with older cars. Drivers convicted of violent offenses or property offenses run more red lights on average but have the same elasticity as drivers without a criminal record. Within Israel, members of ethnic minority groups have the smallest elasticity with respect to a fine increase.

Job search by employed workers : the effects of restrictions

Within the framework of a general equilibrium search model, the authors study the effect of institutional restrictions on workers'job mobility. The model generates endogenuous job searches on the job and off the job with two forms of labor contracts emerging and coexisting in equilibrium. One form of contract involves the workers'long-term commitment to the firm ("reversed tenure"): some firms offer high wages in return for their workers'commitment not to search for better jobs. The other is a short-term contract requiring no such commitment: some firms that cannot afford to pay wages that guarantee lifetime attachment pay lower wages, have lower turn-over costs, but impose no restrictions on searches for better jobs. The authors study the effects on employment of exogenous restrictions on mobility - in the form of a transfer from the quitting worker, made either to the employer or to a third party. These transfers, the separation bonds, are typically the benefits lost by the quitting worker, such as vested pension. Restrictions of this type, by crowding out the firms that allow on-the-job searches for employment directly increase unemployment. When restrictions on workers'mobility take the form of a zero-sum transfer, there is no real effect so long as the transfer is below some bound - the worker loses nothing. When the separation bond is prohibitively large, or when it is forfeited to a third party, employment among all types of workers falls.Health Monitoring&Evaluation,Health Economics&Finance,Environmental Economics&Policies,Economic Theory&Research,Labor Markets

The Life-Cycle Permanent-Income Model and Consumer Durables

This paper presents an extension of the life-cycle permanent-income model of consumption to the case of a durable good whose purchase involves lumpy trans- actions costs. Where individual behavior is concerned, the implications of the model are different in some respects from those of standard consumption theory. Specifically, rather than choose an optimal path for the service flow from durables, the optimizing consumer will choose an optimal range and try to keep his service flow inside that range. The dynamics implied by this behavior is different from that of the stock adjustment model. Properties of aggregate durables consumption are derived by explicit aggregation. In particular, it is shown that expenditures on durables display very large short-run elasticity to changes in permanent income. Empirical tests of the sort suggested by Hall (1978) generally produce results that are in line with the predictions of the theory.

A meta-analysis of the investment-uncertainty relationship

In this article we use meta-analysis to investigate the investment-uncertainty relationship. We focus on the direction and statistical significance of empirical estimates. Specifically, we estimate an ordered probit model and transform the estimated coefficients into marginal effects to reflect the changes in the probability of finding a significantly negative estimate, an insignificant estimate, or a significantly positive estimate. Exploratory data analysis shows that there is little empirical evidence for a positive relationship. The regression results suggest that the source of uncertainty, the level of data aggregation, the underlying model specification, and differences between short- and long-run effects are important sources of variation in study outcomes. These findings are, by and large, robust to the introduction of a trend variable to capture publication trends in the literature. The probability of finding a significantly negative relationship is higher in more recently published studies. JEL Classification: D21, D80, E22 1

On the Theoretical Foundations of the Permanent Income Hypothesis

In its certainty equivalence form, consumption is proportional to the sum of human and non-human wealth. With labor income uncertainty the proportionality takes the form of homogeneity of consumption with respect to the two components of wealth. In this paper we analyze the stochastic properties of labor income which yield the homogeneity property as the utility maximizing solution. A sufficient condition is derived on the Way in which a certain income shift (in time series analysis) or difference (in cross section comparison) preserves the homogeneity result. Application of this condition to some geometric processes and normal distribution of income is made. For other income processes the response of consumption to a certain income movement may be larger, which appears as excess sensitivity

Choosing a Price and Cost Combination—The Role of Correlation

Often, firms can choose from different combinations of price and cost processes. For example, they can choose between different production locations or technologies, between different products to produce, or between different locations for selling them. To study the choice of the optimal combination, we return to themodel that was developed by Dixit and Pindyck, where both output price and production cost are stochastic processes, and add a novel focus on how the correlation between these processes affects the firm’s decision. We find that, ceteris paribus, the firm prefers the combination with the lowest correlation between the processes, as it seeks a greater profitability variance which maximizes its value