Consumption Commitments and Risk Preferences

Many households devote a large fraction of their budgets to "consumption commitments" -- goods that involve transaction costs and are infrequently adjusted. This paper characterizes risk preferences in an expected utility model with commitments. We show that commitments affect risk preferences in two ways: (1) they amplify risk aversion with respect to moderate-stake shocks and (2) they create a motive to take large-payoff gambles. The model thus helps resolve two basic puzzles in expected utility theory: the discrepancy between moderate-stake and large-stake risk aversion and lottery playing by insurance buyers. We discuss applications of the model such as the optimal design of social insurance and tax policies, added worker effects in labor supply, and portfolio choice. Using event studies of unemployment shocks, we document evidence consistent with the consumption adjustment patterns implied by the model.

Pricing Illiquid Assets

The present paper investigates the portfolio allocation decisions of an investor with infinite horizon when available financial assets differ in their degrees of liquidity. A model with risk neutral agents allows us to endogenously determine the liquidity premium. With risk averse agents, we develop a nontrivial portfolio allocation problem, which enables us to calculate the demand for an illiquid asset for any given yield premium. We calibrate and numerically simulate both models. Reasonable parameter values imply a liquidity premium of 1.7% for the risk neutral case. In the portfolio allocation problem we find that a reasonable amount of illiquidity can cause a substantial drop of demand for the asset. We are also able to calculate the price discount at which an agent would be indifferent between immediate sale and waiting for a buyer with a fundamentally justified price.

Trust and Social Collateral

This paper builds a theory of informal contract enforcement in social networks. In our model, relationships between individuals generate social collateral that can be used to control moral hazard when agents interact in a borrowing relationship. We define trust between two agents as the maximum amount that one can borrow from the other, and derive a simple reduced form expression for trust as a function of the social network. We show that trust is higher in more connected and more homogenous societies, and relate our trust measure to commonly used network statistics. Our model predicts that dense networks generate greater welfare when arrangements typically require high trust, and loose networks create more welfare otherwise. Using data on social networks and behavior in dictator games, we document evidence consistent with the quantitative predictions of the model.

Contagion and state dependent mutations

Early results of evolutionary game theory showed that the risk dominant equilibrium is uniquely selected on the long run by the best response dynamics with mutation. Bergin and Lipman (1996) qualified this result by showing that for a given population size the evolutionary process can select any strict Nash equilibrium if the probability of choosing a nonbest reply is state-dependent. This paper shows that the unique selection of the risk dominant equilibrium is robust with respect to state dependent mutation in local interaction games. More precisely, for a given mutation structure there exists a minimum population size beyond which the risk dominant equilibrium is uniquely selected. Our result is driven by contagion and cohesion among players, which exists only in local interaction settings and favors the play of the risk dominant strategy. Our result strengthens the equilibrium selection result of evolutionary game theor

Studying Blazhko RR Lyrae stars with the 24-inch telescope of the Konkoly Observatory

About a dozen field RR Lyrae stars have been observed with the 24-inch Heyde-Zeiss telescope of the Konkoly Observatory at Sv\'abhegy, Budapest, since its refurbishment in 2003. Most of the observing time is allocated for the investigation of the Blazhko modulation, a phenomenon that still does not have a satisfactory explanation. The obtained multicolour CCD observations are unique in extent. The accuracy of the measurements makes it possible to detect low amplitude modulation of the light curve as well. The discovery of Blazhko stars with low modulation amplitudes warns that the incidence rate of the Blazhko modulation is, in fact, much larger than it was previously expected. This makes the efforts exploring the cause of the modulation even more important. A summary of our measurements and results achieved during the last 3 years is presented.Comment: Accepted for publication in Astronomische Nachrichten (Astronomical Notes). 4 pages, 3 fig

Consumption Risk-sharing in Social Networks

We build a model of informal risk-sharing among agents organized in a social network. A connection between individuals serves as collateral that can be used to enforce insurance payments. We characterize incentive compatible risk-sharing arrangements for any network structure, and develop two main results. (1) Expansive networks, where every group of agents have a large number of links with the rest of the community relative to the size of the group, facilitate better risk-sharing. In particular, “two-dimensional” village networks organized by geography are sufficiently expansive to allow very good risk-sharing. (2) In second-best arrangements, agents organize in endogenous “risksharing islands” in the network, where shocks are shared fully within but imperfectly across islands. As a result, risk-sharing in second-best arrangements is local: socially closer agents insure each other more. In an application of the model, we explore the spillover effect of development aid on the consumption of non-treated individuals.

Imported Inputs and Productivity

We estimate a model of importers in Hungarian micro data and conduct counterfactual policy analysis to investigate the effect of imports on productivity. We find that importing all foreign varieties would increase firm productivity by 12 percent, almost two-fifths of which is due to imperfect substitution between foreign and domestic goods. The effectiveness of import use is higher for foreign firms and increases when a firm becomes foreign-owned. Our estimates imply that during 1993-2002 one-third of the productivity growth in Hungary was due to imported inputs. Simulations show that the productivity gain from a tariff cut is largest when the economy has many importers and many foreign firms, implying policy complementarities between tariff cuts, dismantling non-tariff barriers, and FDI liberalization.

On Compatibility Conditions for Mixed Boundary Value Problems

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