The behavioural wedge

When nations fail to agree, can individual citizens make a difference? The third of our post-Copenhagen features is by Jonathan Gilligan, Thomas Dietz, Gerald T. Gardner, Paul C. Stern , and Michael P. Vandenbergh . They look at the effects that voluntary actions by individuals can have, and at the policies that can best encourage such actions.     

Partial Round-Robin Comparisons with Perfect Rankings

In teaching the development of uniformly most powerful unbiased (UMPU) tests, one rarely discusses the performance of alternative biased tests. It is shown, through the comparison of two independent Bernoulli proportions, that a biased test (the Z test) can be more powerful than the UMPU test (Fisher's exact test—randomized) in a large region of the alternative parameter space. A more general example is also given.     

Extended generalised Pareto models for tail estimation

The most popular approach in extreme value statistics is the modelling of threshold exceedances using the asymptotically motivated generalised Pareto distribution. This approach involves the selection of a high threshold above which the model fits the data well. Sometimes, few observations of a measurement process might be recorded in applications and so selecting a high quantile of the sample as the threshold leads to almost no exceedances. In this paper we propose extensions of the generalised Pareto distribution that incorporate an additional shape parameter while keeping the tail behaviour unaffected. The inclusion of this parameter offers additional structure for the main body of the distribution, improves the stability of the modified scale, tail index and return level estimates to threshold choice and allows a lower threshold to be selected. We illustrate the benefits of the proposed models with a simulation study and two case studies.     

Climate change

At the Copenhagen conference our leaders failed to agree on a course of firm action against climate change. We present three articles on the post-Copenhagen world. In the first of them, Richard Chandler, Jonathan Rougier and Mat Collins describe statistical work that still needs to be done.     

Family support in Romania and the UK: different circumstances,similar challenges

This paper offers reflections on the challenges of refocusing child and family social work services towards family support in Romania and the UK. It analyses the major reforms to Romania's child care legislation introduced in 1997, identifying political, economic and social factors which create both opportunities and obstacles for changing policy and practice in that country. Ways in which intercountry adoption undermines the development of family support services are given particular attention. The insights generated by the discussion are doubled back to shed new light on the continuing difficulties of refocusing services from child protection to family support in the UK. Copyright © 1999 John Wiley & Sons, Ltd.     

Dimensions of mental health: Life satisfaction,positive affect,anxiety and depression

Psychological well-being and psychological distress are often regarded as distinct, if not orthogonal dimensions of mental health. Based on analyses in this paper, we consider the distinction misleading. Four dimensions seem worth measuring in general population surveys: life satisfaction, positive affect, anxiety and depression. Furthermore, one of the well-being dimensions, life satisfaction, is quite strongly correlated with a distress dimension, depression. A person is unlikely to be both satisfied with life and depressed, but may be satisfied and anxious. The paper is based on convergent validity (exploratory and confirmatory factor analyses) and divergent validity assessments of a range of widely used measures, which were included in the Victorian Quality of Life Panel Survey, 1987.     

Observing Unobservables: Identifying Information Asymmetries With a Consumer Credit Field Experiment

Information asymmetries are important in theory but difficult to identify in practice. We estimate the presence and importance of hidden information and hidden action problems in a consumer credit market using a new field experiment methodology. We randomized 58,000 direct mail offers to former clients of a major South African lender along three dimensions: (i) an initial “offer interest rate” featured on a direct mail solicitation; (ii) a “contract interest rate” that was revealed only after a borrower agreed to the initial offer rate; and (ii) a dynamic repayment incentive that was also a surprise and extended preferential pricing on future loans to borrowers who remained in good standing. These three randomizations, combined with complete knowledge of the lender's information set, permit identification of specific types of private information problems. Our setup distinguishes hidden information effects from selection on the offer rate (via unobservable risk and anticipated effort), from hidden action effects (via moral hazard in effort) induced by actual contract terms. We find strong evidence of moral hazard and weaker evidence of hidden information problems. A rough estimate suggests that perhaps 13% to 21% of default is due to moral hazard. Asymmetric information thus may help explain the prevalence of credit constraints even in a market that specializes in financing high‐risk borrowers.     

Consumption Over the Life Cycle

This paper estimates a structural model of optimal life‐cycle consumption expenditures in the presence of realistic labor income uncertainty. We employ synthetic cohort techniques and Consumer Expenditure Survey data to construct average age‐profiles of consumption and income over the working lives of typical households across different education and occupation groups. The model fits the profiles quite well. In addition to providing reasonable estimates of the discount rate and risk aversion, we find that consumer behavior changes strikingly over the life cycle. Young consumers behave as buffer‐stock agents. Around age 40, the typical household starts accumulating liquid assets for retirement and its behavior mimics more closely that of a certainty equivalent consumer. Our methodology provides a natural decomposition of saving and wealth into its precautionary and life‐cycle components.