In this note I explore how a non-constant rate of time preference on the part of policymakers aff... more In this note I explore how a non-constant rate of time preference on the part of policymakers affects economic growth. In a simple dynamic general equilibrium model I show that if the incumbent government has a rate of time preference in the form of a quasi-hyperbolic discounting function tax rates can be substantially higher and economic growth considerably lower than the standard case of exponential discounting.
This paper seeks to characterise optimal monetary policy rules in the presence of risk and uncert... more This paper seeks to characterise optimal monetary policy rules in the presence of risk and uncertainty. I explore a situation in which the true parameters and the true structure of the economy are unknown to the policymaker, and he is reluctant to make a decision based on a single distribution estimate (i.e. he faces Knightian uncertainty). I show analytically that if the policymaker does not know the true structure of the economy he will be more cautious than in the case of only parameter risk. Further, I show that Knightian uncertainty can also lead to an extra precautionary motive when one considers its interaction with parameter risk. In a simple exercise, I provide empirical estimates that demonstrate that adjustments due to parameter and structural risk and Knightian uncertainty can potentially be quite large.
The first inequality follows from x2 ∈ X2, the second inequality follows from the statement that ... more The first inequality follows from x2 ∈ X2, the second inequality follows from the statement that lottery A is preferred to lottery B (equivalently, that the payoff function has decreasing differences in (x, ̃)), and the third inequality follows from the definition of X1 and x1 ∈ X1. Since the inequalities are enclosed by zeroes, it follows that max {x1, x2} ∈ X2. Similarly, min {x1, x2} ∈ X1, so we conclude that X2 ≥s X1. By Lemma 1 in the main body of the paper, lottery A is preferred to lottery B for all ̃1 N ̃2 and all x ≥ x if and only if (−1) ( h ( y0 − x, x + ) − h ( y0 − x, x + )) ≥ 0 for all , i.e. if and only if (−1) ( h − h ) ≥ 0, which is the required result. We remark that U (0,N) = h and, by continuity, U (1,N) = h − h. Thus, (−1) ( h − h ) ≥ 0⇐⇒ (−1) U (1,N) ≥ 0, as established in Proposition 1. ∗Clarkson University, School of Business. P.O.Box 5790, Potsdam NY. Email: dnocetti@clarkson.edu
In this paper we extend the theory of precautionary saving to the case in which uncertainty is mu... more In this paper we extend the theory of precautionary saving to the case in which uncertainty is multidimensional and we develop a matrix-measure of multivariate prudence. Furthermore, we characterize comparative prudence, decreasing and increasing prudence, the e¤ect of uncertainty on the marginal propensity to consume out of wealth, and the Drèze-Modigliani substitution e¤ect in this multivariate setting. We also characterize the concept of multivariate downside risk aversion as a multivariate preference for harm disaggregation. We show that our de nition is equivalent to a positive precautionary saving motive. We propose an alternative measure of the intensity of downside risk aversion and show that this measure is useful in understanding several economic problems that involve multivariate preferences.
The private exchange of charitable gifts (e.g. charity gift-cards) has recently become an importa... more The private exchange of charitable gifts (e.g. charity gift-cards) has recently become an important source of donations to charities. In this paper we study this new phenomenon using the classical model of private provision of public goods, modified to account for exchange of private gifts. Contrary to intuition, we show that a change in social norms characterized by an increase in the amount spent on charitable gifts and a decrease in the amount spent on traditional gifts can decrease the total supply of donations. The magnitude of the change in donations depends on the contributors' degree of altruism, the efficiency of traditional gifts relative to a monetary gift, and the efficiency of charitable gifts in generating warm-glow.
Pooled forecasts frequently outperform individual forecasts of economic time series. This paper s... more Pooled forecasts frequently outperform individual forecasts of economic time series. This paper shows that the introduction of model uncertainty into the formation of expectations can account for the regularity. We conjecture that agents learn in a Bayesian way, using an optimally designed combination of forecasts to form expectations. When these expectations alter the ex-post realization of the data generating mechanism the pooled forecast may dominate the best individual device.
We analyze the value that decision makers place on the acquisition of information that partially ... more We analyze the value that decision makers place on the acquisition of information that partially or completely resolves uncertainty over the correct distribution of outcomes. We distinguish two sources of ambiguity of a given message service: posterior uncertainty over the correct probability distribution and uncertainty over the message which will be received. Given this distinction, we present a model where attitudes towards the two sources of ambiguity are separated and we study how these attitudes affect the value of information. The analysis clarifies and integrates seemingly contradictory results obtained previously in the literature.
We study comparative statics of Nth-degree risk increases within a large class of problems that i... more We study comparative statics of Nth-degree risk increases within a large class of problems that involve bidimensional payoffs and additive or multiplicative risks. We establish necessary and sufficient conditions for unambiguous impact of Nth-degree risk increases on optimal decision making. We develop a simple and intuitive approach to interpret these conditions : novel notions of directional Nth-degree risk aversion that are characterized via preferences over lotteries.
The private exchange of charitable gifts (e.g. charity gift-cards) has recently become an importa... more The private exchange of charitable gifts (e.g. charity gift-cards) has recently become an important source of donations to charities. In this paper we study this new phenomenon using the classical model of private provision of public goods, modified to account for exchange of private gifts. Contrary to intuition, we show that a change in social norms characterized by an increase in the amount spent on charitable gifts and a decrease in the amount spent on traditional gifts can decrease the total supply of donations. The magnitude of the change in donations depends on the contributors' degree of altruism, the efficiency of traditional gifts relative to a monetary gift, and the efficiency of charitable gifts in generating warm-glow.
In this note I explore how a non-constant rate of time preference on the part of policymakers aff... more In this note I explore how a non-constant rate of time preference on the part of policymakers affects economic growth. In a simple dynamic general equilibrium model I show that if the incumbent government has a rate of time preference in the form of a quasi-hyperbolic discounting function tax rates can be substantially higher and economic growth considerably lower than the standard case of exponential discounting.
This paper seeks to characterise optimal monetary policy rules in the presence of risk and uncert... more This paper seeks to characterise optimal monetary policy rules in the presence of risk and uncertainty. I explore a situation in which the true parameters and the true structure of the economy are unknown to the policymaker, and he is reluctant to make a decision based on a single distribution estimate (i.e. he faces Knightian uncertainty). I show analytically that if the policymaker does not know the true structure of the economy he will be more cautious than in the case of only parameter risk. Further, I show that Knightian uncertainty can also lead to an extra precautionary motive when one considers its interaction with parameter risk. In a simple exercise, I provide empirical estimates that demonstrate that adjustments due to parameter and structural risk and Knightian uncertainty can potentially be quite large.
The first inequality follows from x2 ∈ X2, the second inequality follows from the statement that ... more The first inequality follows from x2 ∈ X2, the second inequality follows from the statement that lottery A is preferred to lottery B (equivalently, that the payoff function has decreasing differences in (x, ̃)), and the third inequality follows from the definition of X1 and x1 ∈ X1. Since the inequalities are enclosed by zeroes, it follows that max {x1, x2} ∈ X2. Similarly, min {x1, x2} ∈ X1, so we conclude that X2 ≥s X1. By Lemma 1 in the main body of the paper, lottery A is preferred to lottery B for all ̃1 N ̃2 and all x ≥ x if and only if (−1) ( h ( y0 − x, x + ) − h ( y0 − x, x + )) ≥ 0 for all , i.e. if and only if (−1) ( h − h ) ≥ 0, which is the required result. We remark that U (0,N) = h and, by continuity, U (1,N) = h − h. Thus, (−1) ( h − h ) ≥ 0⇐⇒ (−1) U (1,N) ≥ 0, as established in Proposition 1. ∗Clarkson University, School of Business. P.O.Box 5790, Potsdam NY. Email: dnocetti@clarkson.edu
In this paper we extend the theory of precautionary saving to the case in which uncertainty is mu... more In this paper we extend the theory of precautionary saving to the case in which uncertainty is multidimensional and we develop a matrix-measure of multivariate prudence. Furthermore, we characterize comparative prudence, decreasing and increasing prudence, the e¤ect of uncertainty on the marginal propensity to consume out of wealth, and the Drèze-Modigliani substitution e¤ect in this multivariate setting. We also characterize the concept of multivariate downside risk aversion as a multivariate preference for harm disaggregation. We show that our de nition is equivalent to a positive precautionary saving motive. We propose an alternative measure of the intensity of downside risk aversion and show that this measure is useful in understanding several economic problems that involve multivariate preferences.
The private exchange of charitable gifts (e.g. charity gift-cards) has recently become an importa... more The private exchange of charitable gifts (e.g. charity gift-cards) has recently become an important source of donations to charities. In this paper we study this new phenomenon using the classical model of private provision of public goods, modified to account for exchange of private gifts. Contrary to intuition, we show that a change in social norms characterized by an increase in the amount spent on charitable gifts and a decrease in the amount spent on traditional gifts can decrease the total supply of donations. The magnitude of the change in donations depends on the contributors' degree of altruism, the efficiency of traditional gifts relative to a monetary gift, and the efficiency of charitable gifts in generating warm-glow.
Pooled forecasts frequently outperform individual forecasts of economic time series. This paper s... more Pooled forecasts frequently outperform individual forecasts of economic time series. This paper shows that the introduction of model uncertainty into the formation of expectations can account for the regularity. We conjecture that agents learn in a Bayesian way, using an optimally designed combination of forecasts to form expectations. When these expectations alter the ex-post realization of the data generating mechanism the pooled forecast may dominate the best individual device.
We analyze the value that decision makers place on the acquisition of information that partially ... more We analyze the value that decision makers place on the acquisition of information that partially or completely resolves uncertainty over the correct distribution of outcomes. We distinguish two sources of ambiguity of a given message service: posterior uncertainty over the correct probability distribution and uncertainty over the message which will be received. Given this distinction, we present a model where attitudes towards the two sources of ambiguity are separated and we study how these attitudes affect the value of information. The analysis clarifies and integrates seemingly contradictory results obtained previously in the literature.
We study comparative statics of Nth-degree risk increases within a large class of problems that i... more We study comparative statics of Nth-degree risk increases within a large class of problems that involve bidimensional payoffs and additive or multiplicative risks. We establish necessary and sufficient conditions for unambiguous impact of Nth-degree risk increases on optimal decision making. We develop a simple and intuitive approach to interpret these conditions : novel notions of directional Nth-degree risk aversion that are characterized via preferences over lotteries.
The private exchange of charitable gifts (e.g. charity gift-cards) has recently become an importa... more The private exchange of charitable gifts (e.g. charity gift-cards) has recently become an important source of donations to charities. In this paper we study this new phenomenon using the classical model of private provision of public goods, modified to account for exchange of private gifts. Contrary to intuition, we show that a change in social norms characterized by an increase in the amount spent on charitable gifts and a decrease in the amount spent on traditional gifts can decrease the total supply of donations. The magnitude of the change in donations depends on the contributors' degree of altruism, the efficiency of traditional gifts relative to a monetary gift, and the efficiency of charitable gifts in generating warm-glow.
Uploads
Papers by Diego Nocetti