A Parsimonious Macroeconomic Model for Asset Pricing

I study asset prices in a two‐agent macroeconomic model with two key features: limited stock market participation and heterogeneity in the elasticity of intertemporal substitution in consumption (EIS). The model is consistent with some prominent features of asset prices, such as a high equity premium, relatively smooth interest rates, procyclical stock prices, and countercyclical variation in the equity premium, its volatility, and in the Sharpe ratio. In this model, the risk‐free asset market plays a central role by allowing non‐stockholders (with low EIS) to smooth the fluctuations in their labor income. This process concentrates non‐stockholders' labor income risk among a small group of stockholders, who then demand a high premium for bearing the aggregate equity risk. Furthermore, this mechanism is consistent with the very small share of aggregate wealth held by non‐stockholders in the U.S. data, which has proved problematic for previous models with limited participation. I show that this large wealth inequality is also important for the model's ability to generate a countercyclical equity premium. When it comes to business cycle performance, the model's progress has been more limited: consumption is still too volatile compared to the data, whereas investment is still too smooth. These are important areas for potential improvement in this framework.     

PRICING RISK IN ECONOMIES WITH HETEROGENEOUS AGENTS AND INCOMPLETE MARKETS

Habit formation has been proposed as a possible solution to the equity premium puzzle. This paper extends the class of models that support the habits explanation in order to account for heterogeneity in earnings, wealth, habits, and consumption. I find that habit formation does indeed increase the equity premium. However, contrary to earlier results, the habit hypothesis does not imply a price for risk as largeas the one measured in the data. There are three reasons for this. First, households in a habits economy modify their consumption/savings decision. Second, they modify their portfolio choice. These two changes in behavior diminish the consumption fluctuations faced by households. Third, the composition of the set of agents pricing risk in the economy changes so that relatively better self‐insured households end up pricing risk. (JEL: D52, G12, E21, C68)     

UNCERTAINTY,PERSISTENCE, AND HETEROGENEITY: A PANEL DATA PERSPECTIVE

The purpose of this paper is to review newly developed identification and estimation tools that are relevant for the analysis of dynamic dependence structures of income risk. I present an application to nonlinear permanent–transitory models of household income using data from the Panel Study of Income Dynamics (PSID), but the empirical approach is more generally applicable. Household income processes are of interest because the size of shocks, the nature of their persistence, and cross‐household heterogeneity are all important to understand how income inequality varies with age and cohort and how it translates into consumption inequality. I argue that going from an econometrics of autocovariances to an econometrics of flexible distributions is feasible and has the potential to reveal richer aspects of risk—for example, nonlinear persistence of unusual shocks.     

INTERTEMPORAL CHOICE AND CONSUMPTION MOBILITY

The theory of intertemporal consumption choice makes sharp predictions about the evolution of the entire distribution of household consumption, not just about its conditional mean. In the paper, we study the empirical transition matrix of consumption using a panel drawn from the Bank of Italy Survey of Household Income and Wealth. We estimate the parameters that minimize the distance between the empirical and the theoretical transition matrix of the consumption distribution. The transition matrix generated by our estimates matches remarkably well the empirical matrix, both in the aggregate and in samples stratified by education. Our estimates strongly reject the consumption insurance model and suggest that households smooth income shocks to a lesser extent than implied by the permanent income hypothesis. (JEL: D52, D91, I30)     

OPTIMAL MONETARY POLICY AND FINANCIAL STABILITY IN A NON‐RICARDIAN ECONOMY

I present a model with discontinuous asset‐market participation (DAMP), where all agents are non‐Ricardian, and where heterogeneity among market participants implies financial‐wealth effects on aggregate consumption. The implied welfare criterion shows that financial stability arises as an additional and independent target, besides inflation and output stability. Evaluation of optimal policy under discretion and commitment reveals that price stability may no longer be optimal, even absent inefficient supply shocks: some fluctuations in output and inflation may be optimal as long as they reduce financial instability. Ignoring the heterogeneity among market participants may lead monetary policy to induce substantially higher welfare losses.     

EXPECTATIONS‐BASED REFERENCE‐DEPENDENT PREFERENCES AND ASSET PRICING

This paper explores the quantitative asset‐pricing implications of expectations‐based reference‐dependent preferences, as introduced by Koszegi and Rabin (2009, American Economic Review, 99(3), 909–936), in an otherwise traditional Lucas‐tree model. I find that the model easily succeeds in matching the historical equity premium and its variability when the preference parameters are calibrated in line with micro evidence. The equity premium is high because expectations‐based loss aversion makes uncertain fluctuations in consumption more painful. Additionally, loss aversion introduces variation in returns because unexpected cuts in consumption are particularly painful, and the agent wants to postpone such cuts to let his reference point decrease. This variation generates strong predictability. However, it also causes counterfactually high volatility in the risk‐free rate, which I address by allowing for variation in expected consumption growth, heteroskedasticity in consumption growth, time‐variant disaster risk, and sluggish belief updating.     

Consumption Commitments and Habit Formation

We analyze the implications of household‐level adjustment costs for the dynamics of aggregate consumption. We show that an economy in which agents have “consumption commitments” is approximately equivalent to a habit formation model in which the habit stock is a weighted average of past consumption if idiosyncratic risk is large relative to aggregate risk. Consumption commitments can thus explain the empirical regularity that consumption is excessively sensitive and excessively smooth, findings that are typically attributed to habit formation. Unlike habit formation and other theories, but consistent with empirical evidence, the consumption commitments model also predicts that excess sensitivity and smoothness vanish for large shocks. These results suggest that behavior previously attributed to habit formation may be better explained by adjustment costs. We develop additional testable predictions to further distinguish the commitment and habit models and show that the two models have different welfare implications.     

LACK OF COMMITMENT AND THE LEVEL OF DEBT

The tendency of countries to accumulate public debt has been rationalized in models of political disagreement and lack of commitment. We analyze in a benchmark model how the evolution of public debt is affected by lack of commitment per se. While commitment introduces indeterminacy in the level of debt, lack of commitment creates incentives for debt to converge to specific levels. One of the levels that debt often converges to implies no debt accumulation at all. In a simple example we prove analytically that debt converges to zero, and we analyze numerically more complex models. We also show in an imperfect credibility setting that a small deviation from full‐commitment is enough to obtain these results.     

RISK SHARING,COMMITMENT, AND INFORMATION: AN EXPERIMENTAL ANALYSIS

This paper describes and analyzes the results of a unique field experiment especially designed to test the effects of the level of commitment and information available to individuals when sharing risk. We find that limiting exogenously provided commitmentis associated with less risk sharing, whereas limiting information on defections can be associated with more risk sharing. These results can be understood by distinguishing between intrinsic and extrinsic incentives, and by recognizing that social sanctions are costly to inflict or that individuals suffer from time‐inconsistent preferences. Comparing the groups formed within our experiment with the real life risk‐sharing networks in a few villages allows us to test the external validity of our experiment and suggests that the results are salient to our understanding of risk‐sharing arrangements observed in developing countries. (JEL: C93, D71, D81, O12)     

RISK AVERSION,WEALTH, AND BACKGROUND RISK

We use household survey data to construct a direct measure of absolute risk aversion based on the maximum price a consumer is willing to pay for a risky security. We relate this measure to consumer's endowments and attributes and to measures of background risk and liquidity constraints. We find that risk aversion is a decreasing function of the endowment—thus rejecting CARA preferences. We estimate the elasticity of risk aversion to consumption at about 0.7, below the unitary value predicted by CRRA utility. We also find that households' attributes are of little help in predicting their degree of risk aversion, which is characterized by massive unexplained heterogeneity. We show that the consumer's environment affects risk aversion. Individuals who are more likely to face income uncertainty or to become liquidity constrained exhibit a higher degree of absolute risk aversion, consistent with recent theories of attitudes toward risk in the presence of uninsurable risks. (JEL: D1, D8)     

Formal and Informal Risk Sharing in LDCs: Theory and Empirical Evidence

We develop and estimate a model of dynamic interactions in which commitment is limited and contracts are incomplete to explain the patterns of income and consumption growth in village economies of less developed countries. Households can insure each other through both formal contracts and informal agreements, that is, self‐enforcing agreements specifying voluntary transfers. This theoretical setting nests the case of complete markets and the case where only informal agreements are available. We derive a system of nonlinear equations for income and consumption growth. A key prediction of our model is that both variables are affected by lagged consumption as a consequence of the interplay of formal and informal contracting possibilities. In a semiparametric setting, we prove identification, derive testable restrictions, and estimate the model with the use of data from Pakistani villages. Empirical results are consistent with the economic arguments. Incentive constraints due to self‐enforcement bind with positive probability and formal contracts are used to reduce this probability.     

Farms,Families, and Markets: New Evidence on Completeness of Markets in Agricultural Settings

The farm household model has played a central role in improving the understanding of small‐scale agricultural households and non‐farm enterprises. Under the assumptions that all current and future markets exist and that farmers treat all prices as given, the model simplifies households' simultaneous production and consumption decisions into a recursive form in which production can be treated as independent of preferences of household members. These assumptions, which are the foundation of a large literature in labor and development, have been tested and not rejected in several important studies including Benjamin (1992). Using multiple waves of longitudinal survey data from Central Java, Indonesia, this paper tests a key prediction of the recursive model: demand for farm labor is unrelated to the demographic composition of the farm household. The prediction is unambiguously rejected. The rejection cannot be explained by contamination due to unobserved heterogeneity that is fixed at the farm level, local area shocks, or farm‐specific shocks that affect changes in household composition and farm labor demand. We conclude that the recursive form of the farm household model is not consistent with the data. Developing empirically tractable models of farm households when markets are incomplete remains an important challenge.     

WILLPOWER AND THE OPTIMAL CONTROL OF VISCERAL URGES

Common intuition and experimental psychology suggest that the ability to self‐regulate (willpower) is a depletable resource. We investigate the behavior of an agent with limited willpower who optimally consumes over time an endowment of a tempting and storable consumption good or cake. We assume that restraining consumption below the most tempting feasible rate requires willpower. Any willpower not used to regulate consumption may be valuable in controlling other urges. Willpower thus links otherwise unrelated behaviors requiring self‐control. An agent with limited willpower will display apparent domain‐specific time preference. Such an agent will almost never perfectly smooth his consumption, even when it is feasible to do so. Whether the agent relaxes control of his consumption over time as experimental psychologists predict or tightens it as most behavioral theories predict depends in our model on the net effect of two analytically distinct but opposing forces.     

UNDERSTANDING THE EVOLUTION OF THE US WAGE DISTRIBUTION: A THEORETICAL ANALYSIS

In this paper, we propose an analytically tractable overlapping‐generations model of human capital accumulation and study its implications for the evolution of the US wage distribution from 1970 to 2000. The key feature of the model, and the only source of heterogeneity, is that individuals differ in their ability to accumulate human capital. Therefore, wage inequality results only from differences in human capital accumulation. We examine the response of this model to skill‐biased technical change (SBTC) theoretically. We show that in response to SBTC, the model generates behavior consistent with some prominent trends observed in the US data including (i) a rise in overall wage inequality both in the short run and long run, (ii) an initial fall in the education premium followed by a strong recovery, leading to a higher premium in the long run, (iii) the fact that most of this fall and rise takes place among younger workers, (iv) a rise in within‐group inequality, (v) stagnation in median wage growth (and a slowdown in aggregate labor productivity), and (vi) a rise in consumption inequality that is much smaller than the rise in wage inequality. These results suggest that the heterogeneity in the ability to accumulate human capital is an important feature for understanding the effects of SBTC and interpreting the transformation of the US labor markets since the 1970s.     

基于FS模型的设计施工总承包联合体领导-成员风险分配策略分析

合理的风险分配是实施设计施工总承包模式的重要保障。在分析联合体成员公平偏好的基础上,通过对FS模型的改进,构建了联合体牵头方与联合体成员之间的Stackelberg博弈模型,从联合体成员嫉妒负效用以及同情正效用两方面,对联合体牵头方的最优风险分配以及联合体成员的最优风险投入进行了均衡分析。最后,采用调研获取的参数分析了不同风险承担比例下联合体成员的公平偏好系数对联合体成员风险投入、联合体成员效用、联合体牵头方效用以及联合体整体绩效的影响。特别地,联合体成员应对不同风险分配方案时会产生不同心理偏好,低分配比例情景下嫉妒偏好的增强会提高自身效用但降低联合体牵头方的效用;高分配比例情景下嫉妒偏好的增强不仅会降低联合体成员效用还会降低联合体牵头方以及整体效用,相反,同情偏好对联合体绩效具有正向调节作用。     

THE WELFARE GAINS OF FINANCIAL LIBERALIZATION: CAPITAL ACCUMULATION AND HETEROGENEITY

Research has shown that, absent individual heterogeneity and under complete markets, the welfare impact of financial openness is quantitatively limited. Not only are inequalities in wealth and labor productivity a feature of most societies, but also financial markets suffer from many well‐known frictions. This paper demonstrates that, when households face borrowing constraints and uninsurable idiosyncratic shocks to income, the welfare implications of financial liberalization are considerable. For instance, the average increase in welfare of a typical emerging market economy that switches from a closed capital market to perfect capital mobility is equivalent to a permanent increase in average consumption of roughly 5.4%. This is about 3.9 times more than the welfare gains of the same policy under a complete markets environment without any individual heterogeneity. We show that individual heterogeneity accounts for two thirds of this additional increase in the average welfare gain; market incompleteness accounts for the remaining third. In our calibration, the median household in capital‐scarce countries is in favor of international financial integration. However, if the pivotal voter is wealthy enough then such reform might not be implemented, since richer households have a vested interest in capital market closedness.     

Consistency of Higher Order Risk Preferences

Risk aversion (a second‐order risk preference) is a time‐proven concept in economic models of choice under risk. More recently, the higher order risk preferences of prudence (third‐order) and temperance (fourth‐order) also have been shown to be quite important. While a majority of the population seems to exhibit both risk aversion and these higher order risk preferences, a significant minority does not. We show how both risk‐averse and risk‐loving behaviors might be generated by a simple type of basic lottery preference for either (1) combining “good” outcomes with “bad” ones, or (2) combining “good with good” and “bad with bad,” respectively. We further show that this dichotomy is fairly robust at explaining higher order risk attitudes in the laboratory. In addition to our own experimental evidence, we take a second look at the extant laboratory experiments that measure higher order risk preferences and we find a fair amount of support for this dichotomy. Our own experiment also is the first to look beyond fourth‐order risk preferences, and we examine risk attitudes at even higher orders.     

Intra‐household Allocation of Time to Household Production Activities: Evidence from Swedish Household Data

Abstract. The purpose of this paper is to study the intra‐household allocation of time to different household production activities using Swedish cross‐sectional household data. The Tobit model is rejected in favor of the Cragg model, suggesting that an empirical model has to take into consideration that allocation of time within the household is determined by two separate processes. Moreover, the results indicate that valuable information concerning the intra‐household allocation of time may be missing when household production is defined as the sum of different household activities, but there is no indication that statistically significant effects are wiped out in an aggregated analysis.     

Dynamic Financial Constraints: Distinguishing Mechanism Design From Exogenously Incomplete Regimes

We formulate and solve a range of dynamic models of constrained credit/insurance that allow for moral hazard and limited commitment. We compare them to full insurance and exogenously incomplete financial regimes (autarky, saving only, borrowing and lending in a single asset). We develop computational methods based on mechanism design, linear programming, and maximum likelihood to estimate, compare, and statistically test these alternative dynamic models with financial/information constraints. Our methods can use both cross‐sectional and panel data and allow for measurement error and unobserved heterogeneity. We estimate the models using data on Thai households running small businesses from two separate samples. We find that in the rural sample, the exogenously incomplete saving only and borrowing regimes provide the best fit using data on consumption, business assets, investment, and income. Family and other networks help consumption smoothing there, as in a moral hazard constrained regime. In contrast, in urban areas, we find mechanism design financial/information regimes that are decidedly less constrained, with the moral hazard model fitting best combined business and consumption data. We perform numerous robustness checks in both the Thai data and in Monte Carlo simulations and compare our maximum likelihood criterion with results from other metrics and data not used in the estimation. A prototypical counterfactual policy evaluation exercise using the estimation results is also featured.     

THE REPLACEMENT PROBLEM IN FRICTIONAL ECONOMIES: A NEAR‐EQUIVALENCE RESULT

We examine how technological change affects wage inequality and unemployment in a calibrated model of matching frictions in the labor market. We distinguish between two polar cases studied in the literature: a “creative destruction” economy, where new machines enter chiefly through new matches and an “upgrading” economy, where machines in existing matches are replaced by new machines. Our main results are: (i) these two economies produce very similar quantitative outcomes, and (ii) the total amount of wage inequality generated by frictions is very small. We explain these findings in light of the fact that, in the model calibrated to the US economy, both unemployment and vacancy durations are very short, i.e., the matching frictions are quantitatively minor. Hence, the equilibrium allocations of the model are remarkably close to those of a frictionless version of our economy where firms are indifferent between upgrading and creative destruction, and where every worker is paid the same market‐clearing wage. These results are robust to the inclusion of machine‐specific or match‐specific heterogeneity into the benchmark model. (JEL: J41, J64, O33)