1,720,997 research outputs found
The evaluation of public investments under uncertainty
No full textIn this paper we revise and extend the theory of the evaluation of public investments under uncertainty. Precisely, we argue that
the value of the investments that the public sector would be willing to undertake is never below its market value, and that it can be
higher if it provides social insurance
Evaluation of public investments and individual discounting
No full textArrow and Lind's theorem postulates that 'when the risks associated with a public investment are publicly borne, the total cost of risk-bearing is insignificant and, therefore, the government should ignore uncertainty in evaluating public investments. Similarly the choice of the rate of discount should in this case be independent of considerations of risk.' [Arrow, K. J., Lind, R. C. (1970). Uncertainty and the evaluation of public investment decisions. American Economic Review, LX, June, p.366] The theorem holds regardless security markets are complete, for any public project that is: i) statistically independent of individual income, ii) measured according to an objective probability distribution, iii) evaluated considering individual costs and benefits represented by von Neumann-Morgestern, state-independent utilities; moreover, it holds provided iv) the government spreads the project risks among a 'large' population of people.
The independence assumption is necessary to attain that, at the margin, the individual values a public investment as a risk-free claim on future income. Yet, it is a strong one. Arrow and Lind, along with other economists (e.g., Samuelson and Vickrey, 1964), recognize that many public projects alter individuals' income profiles, either providing new (social) insurance opportunities or representing a further source of risk. They, briefly, address the issue in section III of their paper and conclude that in such cases 'it is appropriate to discount for risk as would these individuals' [p. 377].
In this note we discuss and elaborate on Arrow and Lind's consideration that public projects should effectively be evaluated from the perspective of individuals. The main issue at stake is that this approach, although theoretically sound, is informationally very demanding, requiring the measurement of individuals' benefits and costs or, equivalently, the observation of their preferences and income profiles. Our main point is to argue that this requirement can be weakened exploiting the information revealed by security market prices. More precisely, we appeal to well known results in the theory of asset prices in economies with incomplete markets, to discuss how a (public) decision maker could use market data on security prices to infer on traders' discount factors and, ultimately, to construct (approximate) measures of the individuals' willingness to pay for a project. These are the cost-benefit measures suggested by Arrow and Lind, that can be utilized to evaluate any investment project, public and private, independently of the fact they are marketable or give rise to a risk that is uninsurable. At the end of this note we also mention which are the alternative data, different from those on security prices, that can be exploited to attain information on individual discount factors
Politica Monetaria e Tassi di Interesse a Breve - un modello econometrico per l'analisi e la previsione
No full textConstrained inefficiency in GEI: a geometric argument
No full textIn this paper we use global analysis to study the welfare properties of general equilibrium economies with incomplete markets
(GEI). Our main result is to show that constrained Pareto optimal equilibria are contained in a submanifold of the equilibrium set.
This result is explicitly derived for economies with real assets and fixed aggregate resources, of which real num ́eraire assets are a
special case. As a by product of our analysis, we propose an original global parametrization of the equilibrium set that generalizes
to incomplete markets the classical one, first, proposed by Lange [Lange, O., 1942. The foundations of welfare economics.
Econometrica 10, 215–228]
Optimal financial contracts with unobservable investments
Full text linkIn this article we propose a security-design problem in which risk neutral entrepreneurs
make unobservable investment decisions while employing the investment funds of risk-neutral out-
side investor/creditor(s). Contracts are restricted to satisfy limited liability and monotonicity of
the payment schedule. The model we present extends the classical one proposed by Innes (1990,
Journal of Economic Theory 52, 47-67) along two main directions: agents’ decisions may be re-
stricted by their initial capital and outside financial opportunities; and their investment decisions
may also consist in hiding funds in an asset placed outside their firms. We motivate our interest
in this security-design problem referring to the ‘opacity’ that often characterizes financial decisions
of small firms, a particularly large fraction of the non-financial sector in most developed countries
Subjective income risk and precautionary saving
Full text linkWhile economists agree that prudent households save to hedge subjective risk in income, they still debate the
relevance of precautionary saving. The main problem in estimating this saving motive is the lack of micro data
on perceived income risk, preferences, trade opportunities, and its potential bias effects. In the present work
we overcome this problem by exploiting a wave of the Italian Survey on Household Income and Wealth that
contains unique information on households’: perceived income risk, risk aversion, patience, saving attitudes,
liquidity and credit constraints. Results robustly indicate that precautionary saving is significant but low: an
average of 4%–6% of households’ total net wealth. Data richness is used to produce a detailed analysis of
the omission-variable bias discussed in earlier studies; both highlighting differences in signs and significance.
Finally, we extend our analysis to group heterogeneity, with regard to precautionary saving of business owners
and senior citizens
A Social Welfare Function Characterizing Competitive Equilibria of Incomplete Financial Markets
No full textimizing
a weighted sum of utilities. It has been applied to establish fundamental properties
of the equilibrium notion, such as existence, determinacy, and computability. However, it
fails for economies with missing financial markets.
We give such a characterization for economies with a single commodity and missing
financial markets, by an amended social welfare function. Its parameters capture both the
relative importance of households welfare, through the classic welfare weights, as well as
the disagreements among them as to the value of the missing markets.
As a by-product, we identify the dimension of the set of interior equilibrium allocations
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