We solve the problem of an investor who maximizes utility but is uncertain about preferences. We propose a problem formulation based on expected certainty equivalents. We tackle the time-consistency issues arising from that formulation by applying the equilibrium theory approach. To this end, we provide the proper de nitions and proof a rigorous veri fication theorem. We complete the calculations for the cases of power and exponential utility. For power utility, we illustrate in a numerical example, that the optimal stock proportion is independent of wealth, but decreasing in time. For exponential utility, the usual constant absolute risk aversion is replaced by its expectation.
{"title":"Optimal Investment with Uncertain Risk Aversion","authors":"Sascha Desmettre, Mogens Steffensen","doi":"10.2139/ssrn.3805069","DOIUrl":"https://doi.org/10.2139/ssrn.3805069","url":null,"abstract":"We solve the problem of an investor who maximizes utility but is uncertain about preferences. We propose a problem formulation based on expected certainty equivalents. We tackle the time-consistency issues arising from that formulation by applying the equilibrium theory approach. To this end, we provide the proper de nitions and proof a rigorous veri fication theorem. We complete the calculations for the cases of power and exponential utility. For power utility, we illustrate in a numerical example, that the optimal stock proportion is independent of wealth, but decreasing in time. For exponential utility, the usual constant absolute risk aversion is replaced by its expectation.","PeriodicalId":176300,"journal":{"name":"Microeconomics: Intertemporal Consumer Choice & Savings eJournal","volume":"14 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-03-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116501541","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This summary is the third in a series describing the financial health of low- and modest-middle income participants involved in the Canadian Financial Diaries Research Project. The seven participants in this summary were selected because they were all employed full-time. This summary aims to highlight for the reader the participants’ financial values and practices and to offer insights into participants’ financial wellbeing, including any barriers or opportunities which might impact their financial health or inform their financial decisions.
{"title":"The Finances of Full-Time Employed Participants: With Canadian Financial Diaries Research Project, Phase One Participants","authors":"Jerry Buckland, Wendy Nur","doi":"10.2139/ssrn.3803415","DOIUrl":"https://doi.org/10.2139/ssrn.3803415","url":null,"abstract":"This summary is the third in a series describing the financial health of low- and modest-middle income participants involved in the Canadian Financial Diaries Research Project. The seven participants in this summary were selected because they were all employed full-time. This summary aims to highlight for the reader the participants’ financial values and practices and to offer insights into participants’ financial wellbeing, including any barriers or opportunities which might impact their financial health or inform their financial decisions.","PeriodicalId":176300,"journal":{"name":"Microeconomics: Intertemporal Consumer Choice & Savings eJournal","volume":"42 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-03-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127924601","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
I incorporate the recursive utility into Pagel (2016)'s reference-dependent preference and study their aggregate implications in a consumption-based asset pricing model. In the case of recursive utility, the proposed model reproduces crucial asset pricing moments and time-varying risk premiums with a simple IID process for consumption growth. Second, the proposed model consistently predicts that the agent prefers a late resolution of uncertainty in both time-separable and recursive utility. My additional finding is that intertemporal substitution elasticity is more sensitive to asset prices given the recursive preference. Finally, the introduction of sluggish-updating can improve model performances.
{"title":"The Sensitivity of Risk Premiums to the Elasticity of Inter-Temporal Substitution","authors":"Zhiting Wu","doi":"10.2139/ssrn.3780403","DOIUrl":"https://doi.org/10.2139/ssrn.3780403","url":null,"abstract":"I incorporate the recursive utility into Pagel (2016)'s reference-dependent preference and study their aggregate implications in a consumption-based asset pricing model. In the case of recursive utility, the proposed model reproduces crucial asset pricing moments and time-varying risk premiums with a simple IID process for consumption growth. Second, the proposed model consistently predicts that the agent prefers a late resolution of uncertainty in both time-separable and recursive utility. My additional finding is that intertemporal substitution elasticity is more sensitive to asset prices given the recursive preference. Finally, the introduction of sluggish-updating can improve model performances.","PeriodicalId":176300,"journal":{"name":"Microeconomics: Intertemporal Consumer Choice & Savings eJournal","volume":"23 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-02-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124237417","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study identifies and validates a set of scorable retirement income factors to define preferences for an overall retirement income style. This investigation further attempts to create a workable model for retirement income planning by showing how the factors connect to four main retirement income strategies: systematic withdrawals with total return investing, risk wrap with deferred annuities, protected income with immediate annuities, and time segmentation or bucketing. Approaching retirement income agnostically and matching retirement income strategies based on an individual’s personal retirement income style may lead to improved outcomes that achieve greater “buy in” and comfort.
{"title":"A Model Approach to Selecting a Personalized Retirement Income Strategy","authors":"Alejandro Murguía, W. Pfau","doi":"10.2139/ssrn.3788232","DOIUrl":"https://doi.org/10.2139/ssrn.3788232","url":null,"abstract":"This study identifies and validates a set of scorable retirement income factors to define preferences for an overall retirement income style. This investigation further attempts to create a workable model for retirement income planning by showing how the factors connect to four main retirement income strategies: systematic withdrawals with total return investing, risk wrap with deferred annuities, protected income with immediate annuities, and time segmentation or bucketing. Approaching retirement income agnostically and matching retirement income strategies based on an individual’s personal retirement income style may lead to improved outcomes that achieve greater “buy in” and comfort.","PeriodicalId":176300,"journal":{"name":"Microeconomics: Intertemporal Consumer Choice & Savings eJournal","volume":"24 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132344855","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper studies the e¤ects of consumer income heterogeneity on monopolistically competitive product markets and individual welfare in the context of non-homothetic preferences. When expenditure of richer individuals is less sensitive to price change compared to poorer ones, a mean-preserving contraction of income distribution makes firm revenue less sensitive to price changes. This entices firms to charge higher prices. As a result, new firms enter the market, broadening product diversity. General equilibrium effects have a negative impact on poorer individuals and, in specific circumstances, on richer individuals. Furthermore, reduced income inequality may shift the market equilibrium further away from optimal product diversity. In open economies, lower income inequality in a country creates a price divergence between countries and decreases trade volumes and values. Those general equilibrium effects are shown to be quantitatively non negligible.
{"title":"On the Effects of Income Heterogeneity in Monopolistically Competitive Markets","authors":"S. Kichko, P. Picard","doi":"10.2139/ssrn.3751042","DOIUrl":"https://doi.org/10.2139/ssrn.3751042","url":null,"abstract":"This paper studies the e¤ects of consumer income heterogeneity on monopolistically competitive product markets and individual welfare in the context of non-homothetic preferences. When expenditure of richer individuals is less sensitive to price change compared to poorer ones, a mean-preserving contraction of income distribution makes firm revenue less sensitive to price changes. This entices firms to charge higher prices. As a result, new firms enter the market, broadening product diversity. General equilibrium effects have a negative impact on poorer individuals and, in specific circumstances, on richer individuals. Furthermore, reduced income inequality may shift the market equilibrium further away from optimal product diversity. In open economies, lower income inequality in a country creates a price divergence between countries and decreases trade volumes and values. Those general equilibrium effects are shown to be quantitatively non negligible.","PeriodicalId":176300,"journal":{"name":"Microeconomics: Intertemporal Consumer Choice & Savings eJournal","volume":"20 4","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-12-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114009994","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Mikhail Galashin, Martin Kanz, Ricardo Perez-Truglia
How do macroeconomic expectations affect consumer decisions? We examine this question using a natural field experiment with 2,872 credit card customers from a large commercial bank. We conduct a survey to measure consumer expectations about future inflation and the nominal exchange rate and combine this with an information-provision experiment that generates exogenous variation in these expectations. We merge the survey and experimental data with detailed administrative data on the subjects' credit card transactions and balances. The experiment is designed to test three standard predictions from models of intertemporal consumption choice: inflation expectations should affect spending on durables; exchange rate expectations should affect spending on tradables; and, holding constant the nominal interest rate, inflation expectations should affect borrowing. We find that the information provided to participants strongly affects subjective expectations. However, we do not find any significant effects on actual consumer behavior (as measured in administrative data) or self-reported consumption plans (as measured in survey data). Our preferred interpretation is that consumers are not sophisticated enough to factor inflation and exchange rate expectations into their consumption decisions. The absence of a link between consumer expectations and behavior has potentially important implications for macroeconomic policies such as forward guidance. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
{"title":"Macroeconomic Expectations and Credit Card Spending","authors":"Mikhail Galashin, Martin Kanz, Ricardo Perez-Truglia","doi":"10.2139/ssrn.3752523","DOIUrl":"https://doi.org/10.2139/ssrn.3752523","url":null,"abstract":"How do macroeconomic expectations affect consumer decisions? We examine this question using a natural field experiment with 2,872 credit card customers from a large commercial bank. We conduct a survey to measure consumer expectations about future inflation and the nominal exchange rate and combine this with an information-provision experiment that generates exogenous variation in these expectations. We merge the survey and experimental data with detailed administrative data on the subjects' credit card transactions and balances. The experiment is designed to test three standard predictions from models of intertemporal consumption choice: inflation expectations should affect spending on durables; exchange rate expectations should affect spending on tradables; and, holding constant the nominal interest rate, inflation expectations should affect borrowing. We find that the information provided to participants strongly affects subjective expectations. However, we do not find any significant effects on actual consumer behavior (as measured in administrative data) or self-reported consumption plans (as measured in survey data). Our preferred interpretation is that consumers are not sophisticated enough to factor inflation and exchange rate expectations into their consumption decisions. The absence of a link between consumer expectations and behavior has potentially important implications for macroeconomic policies such as forward guidance. \u0000 \u0000Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.","PeriodicalId":176300,"journal":{"name":"Microeconomics: Intertemporal Consumer Choice & Savings eJournal","volume":"20 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121547306","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Luciano I. de Castro, L. Cundy, A. Galvao, R. Westenberger
This paper uses a consumption-based dynamic quantile preference model to estimate the elasticity of intertemporal substitution (EIS) across different levels of risk attitude. In the quantile model, the risk attitude is captured by the quantile and is, therefore, separable from the EIS. This is an advantage with respect to the standard expected utility model, under which risk attitude and EIS are necessarily linked. We derive the quantile Euler equation from the dynamic problem, and use disaggregated consumption data from the Nielsen Consumer Panel together with recently developed instrumental variables quantile regression for nonlinear models to estimate the corresponding EIS across specified quantiles. The empirical results document evidence of heterogeneity in the EIS across different levels of risk attitude, as well as the presence of negative estimates on part of the distribution. The negative estimates help to shed light and reconcile recent results in the literature documenting strong selective reporting, where negative and insignificant EIS estimates are too often discarded.
{"title":"A Dynamic Quantile Model for Distinguishing Intertemporal Substitution from Risk Aversion","authors":"Luciano I. de Castro, L. Cundy, A. Galvao, R. Westenberger","doi":"10.2139/ssrn.3728208","DOIUrl":"https://doi.org/10.2139/ssrn.3728208","url":null,"abstract":"This paper uses a consumption-based dynamic quantile preference model to estimate the elasticity of intertemporal substitution (EIS) across different levels of risk attitude. In the quantile model, the risk attitude is captured by the quantile and is, therefore, separable from the EIS. This is an advantage with respect to the standard expected utility model, under which risk attitude and EIS are necessarily linked. We derive the quantile Euler equation from the dynamic problem, and use disaggregated consumption data from the Nielsen Consumer Panel together with recently developed instrumental variables quantile regression for nonlinear models to estimate the corresponding EIS across specified quantiles. The empirical results document evidence of heterogeneity in the EIS across different levels of risk attitude, as well as the presence of negative estimates on part of the distribution. The negative estimates help to shed light and reconcile recent results in the literature documenting strong selective reporting, where negative and insignificant EIS estimates are too often discarded.","PeriodicalId":176300,"journal":{"name":"Microeconomics: Intertemporal Consumer Choice & Savings eJournal","volume":"13 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-11-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124488557","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We address how recursive utility affects important results in the theory of economics of uncertainty and time, as compared to the standard model, where the focus is on dynamic models in discrete time. Several puzzles associated with the standard theory are less puzzling with recursive utility, even if this type of preference representation seems close to the standard one at first sight. An inconsistency with the axioms behind the standard, separable and additive expected utility representation is pointed out and extended to also be relevant for recursive utility. The basic difference from the standard model is that recursive utility allows a form of separation of consumption substitution from risk aversion. This also means that the timing of resolution of uncertainty matters. In dynamic models, however, this turns out to be a rather crucial step.
{"title":"Elements of Economics of Uncertainty and Time with Recursive Utility","authors":"K. Aase","doi":"10.2139/ssrn.3725505","DOIUrl":"https://doi.org/10.2139/ssrn.3725505","url":null,"abstract":"We address how recursive utility affects important results in the theory of economics of uncertainty and time, as compared to the standard model, where the focus is on dynamic models in discrete time. Several puzzles associated with the standard theory are less puzzling with recursive utility, even if this type of preference representation seems close to the standard one at first sight. An inconsistency with the axioms behind the standard, separable and additive expected utility representation is pointed out and extended to also be relevant for recursive utility. The basic difference from the standard model is that recursive utility allows a form of separation of consumption substitution from risk aversion. This also means that the timing of resolution of uncertainty matters. In dynamic models, however, this turns out to be a rather crucial step.","PeriodicalId":176300,"journal":{"name":"Microeconomics: Intertemporal Consumer Choice & Savings eJournal","volume":"6 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-10-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127991155","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study a duopoly vertical competition in which one firm sells a transparent product and the other sells an uncertain product that may induce consumer feelings. We identify a neutrality condition under which those feelings do not affect either firm’s profit, but this neutrality can be broken. The provider of an uncertain (resp., transparent) product can benefit from (resp., be harmed by) the negative consumer feelings associated with uncertainty. We use regret and risk aversion to illustrate our results and the underlying mechanism: reverse quality discrimination (i.e., consumer perceived quality for an uncertain product decreases within their taste for quality).
{"title":"Neutral or Not? The Role of Uncertainty-Induced Feelings in Vertical Competition","authors":"Yong Chao, Lin Liu, Dongyuan Zhan","doi":"10.2139/ssrn.3723040","DOIUrl":"https://doi.org/10.2139/ssrn.3723040","url":null,"abstract":"We study a duopoly vertical competition in which one firm sells a transparent product and the other sells an uncertain product that may induce consumer feelings. We identify a neutrality condition under which those feelings do not affect either firm’s profit, but this neutrality can be broken. The provider of an uncertain (resp., transparent) product can benefit from (resp., be harmed by) the negative consumer feelings associated with uncertainty. We use regret and risk aversion to illustrate our results and the underlying mechanism: reverse quality discrimination (i.e., consumer perceived quality for an uncertain product decreases within their taste for quality).","PeriodicalId":176300,"journal":{"name":"Microeconomics: Intertemporal Consumer Choice & Savings eJournal","volume":"9 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-10-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133435637","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Households debt for the housing and utility services increased against the 2017–2019 indexes and in H1 constituted 6.3%. Current situation is similar to that in 2013–2014 when the debt for housing and utility services in H1 came to 6.4–6.6% of accruals. On average across the Russian Federation the organizational form practically does not affect the proportion of unpaid debt: it’s identical both for services provided through agencies and for utility companies working with the population on direct contracts.
{"title":"Households Debt for Housing and Utility Services in H1 2020: Familiar Pathway","authors":"A. Burdyak","doi":"10.2139/ssrn.3713069","DOIUrl":"https://doi.org/10.2139/ssrn.3713069","url":null,"abstract":"Households debt for the housing and utility services increased against the 2017–2019 indexes and in H1 constituted 6.3%. Current situation is similar to that in 2013–2014 when the debt for housing and utility services in H1 came to 6.4–6.6% of accruals. On average across the Russian Federation the organizational form practically does not affect the proportion of unpaid debt: it’s identical both for services provided through agencies and for utility companies working with the population on direct contracts.","PeriodicalId":176300,"journal":{"name":"Microeconomics: Intertemporal Consumer Choice & Savings eJournal","volume":"80 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-10-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124633437","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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