Development Economics Part II Lecture 7
|
|
- Bertram Griffith
- 5 years ago
- Views:
Transcription
1 Development Economics Part II Lecture 7 Risk and Insurance Theory: How do households cope with large income shocks? What are testable implications of different models? Empirics: Can households insure themselves (fully) and what are the mechanisms they use to insure themselves? 1
2 Risk and Insurance Introduction: fluctuations in consumption reduce the utility of risk averse individuals See graphical example: concave utility function, either low C or high C with probability ½ or middle C =(low C+high C)/2 with probability 1 There are two ways to keep C constant when Y fluctuates: 1. self-insurance (saving and borrowing) and 2. mutual insurance A third possibility to reduce fluctuations in consumption C is by reducing the fluctuations in income Y. How? For example chosing a less risky occupation or less risky crop to plant. 2
3 Risk and Insurance Three methods of consumption smoothing: 1. Mutual insurance: smoothing through interaction between people smoothing over different states of the world at one point in time 2. Self-insurance: consumption smoothing using one s own assets intertemporal smoothing over time, borrow or use up assets in bad times and save in good times ex-post consumption smoothing given the income process 3. Chosing economic activities that have a smoother income process ex-ante (e.g. plot and crop diversification) Potential efficiency loss, as less risky projects are often the ones with lower expected returns. Thus not being able to insure oneself might imply, that these HH have to pick low risk-low return projects. 3
4 Credit versus Insurance The distinguishing feature of mutual insurance (compared to self-insurance via credit): a certain lack of regard for history. transfers do not carry an obligation to repay example: medical insurance 4
5 Insurance: Example Two farmers 1 and 2: Both farmers produce the same crop and use the same amount of inputs Harvest can take two values (prob ½ each, independent for 1, 2): $2000 if things go well $1000 if there is damage to the crop Assume: Farmers are risk-averse theywouldliketosmooth consumption 5
6 Insurance: Example Case 1: Farmers 1 and 2 do not know each other Self-insurance Farmers have to rely on self-insurance using own wealth, that is assets can be run down in bad times and added to in good times. Possible assets are: Credit: saving and borrowing Stocks of cash or accumulated savings in banks Stocks of grain (though not perfectly durable) Livestock or jewlry can be sold (dangers of selling productive assets lower production in the future, costly means of insurance) 6
7 Insurance: Example Case 2: Farmers 1 and 2 know each other Mutual insurance between economic agents Without insurance: Farmer 1: C(H)=2000, C(L)=1000 with prob ½ each (independent of harvest outcome of other farmer) Farmer 2: same With insurance: C(1=H, 2=H)=2000 C(1=L, 2=L)=1000 C(1=L, 2=H)=1500 C(1=H, 2=L)=1500 withprob¼foreachstate In the first two cases farmers 1 and 2 cannot help each other, as both are either in the good or both are in the bad state. In the last two they can agree to share the output equally (farmer 1 pays farmer 2 $500 if 1 produces high and 2 produces low) 7
8 Distinct features of insurance (in contrast to credit): At any date, the farmer with the high outcome makes a unilateral payment After this transfer the slate is wiped clear, i.e. next year the SAME person may be asked to pay up again Past transfer from one person to the other does not carry a historical burden for the recipient 8
9 Possibility of insurance crucially depends on correlation between outcomes of the two farmers: 1. Independent outcomes: each of the four states (HH, LL, HL, LH) happens with prob ¼ as shown before scope for insurance in the last two states 2. Outcomes are perfectly positively correlated: HH or LL with probability ½ NO scope for insurance (e.g. for aggregate shocks such as weather) 3. Outcomes are perfectly negatively correlated: HL or LH Farmers can insure themselves completely and receive a certain income $
10 General points: For mutual insurance to work, outcomes cannot be perfectly positively correlated Problem for crop insurance: agriculture does present large correlations because of the weather. Results suggests that insurance groups are most likely to be formed among people whose fortunes are as negatively correlated as possible We will see in a few slides that there are also reasons to avoid such extremes connected to the fact that one knows less about people who live far or do very different things ( Limited information ) 10
11 Another determinant of the possible degree of insurance is group size For a very large group of farmers, people can completely insure their income even without perfect negative correlation (only need independence) What will be the average income of a large string of people in any given year? Problem is identical to coin-tossing problem: toss a coin several times, each time write down $2000 for head and $1000 for tail. The average income will be $1500 (identify each independent coin toss with a person), provided that the number of farmers is large ( Law of large numbers ). 11
12 Show formally (HERE OR BEFORE LIMITED ENFORCEMENT??): Two outputs: H with probability p, L with probability (1-p) Without insurance (or savings), C=Y: EU=pU(H)+(1-p)U(L) Perfect insurance: Everyone with Y=H pays (1-p)(H-L) Everyone with Y=L pays p(h-l) EY=p[H-(1-p)(H-L)] + (1-p)[L-p(H-L)]=pH+(1-p)L as certain income regardless of state of the world U(EY)>EU 12
13 The Perfect Insurance Model Theory: Large number of identical farmers with income: Farmer s average income Idiosyncratic shock may have the same distribution across farmers, but affects each independently Aggregate shock captures common variation in village, affects all farmers in the same way in any year (example: weather shocks such as flood or drought) as is average income 13
14 If there are a large number of farmers, all the idiosyncratic variation can be insured away. Illustration: Farmers pay their realized value of epsilon into a common fund and get back the average income. As epsilon is sometimes positive and sometimes negative, this implies that some farmers make positive contributions, whereas others receive payouts from the common fund. idiosyncratic variation can be ironed out. Farmer s insured income is now given by: 14
15 Farmer s insured income is now given by: Income is less risky than as the idiosyncratic component is removed. risk averse individuals will prefer this system of mutual insurance What about the aggregate shock? The realization of theta is the same for all the farmers in the village, so there is no insurance possible here. Thus under perfect insurance income may still fluctuate, but the ONLY source of fluctuation in that case is the aggregate uncertainty in the system (that cannot be insured away with a common pool of funds) Important determinant of degree of insurance: relative significance of idiosyncratic to aggregate risk. 15
16 Farmer s insured income is now given by: This is the Pareto-efficient solution. Income is less risky than as the idiosyncratic component is removed. risk averse individuals will prefer this system of mutual insurance What about the aggregate shock? The realization of theta is the same for all the farmers in the village, so there is no insurance possible here. Thus under perfect insurance income may still fluctuate, but the ONLY source of fluctuation in that case is the aggregate uncertainty in the system (that cannot be insured away with a common pool of funds) Important determinant of degree of insurance: relative significance of idiosyncratic to aggregate risk. 16
17 Pareto efficient allocation of risk Setup Assume households cannot store income from one period to the next. There are i=1,..., N households, t=1,...,t periods and s=1,...,s states of nature (each occuring with probability ) Income received by household i in state s at time t: Consumption of household i in state s at time t: Each household has an additively separable utility function where and 17
18 Pareto efficient allocation of risk The problem to be solved to find the consumption levels that achieve the Pareto efficient allocation of risk is: where is the weight of household i in the social welfare function, with 18
19 Pareto efficient allocation of risk We set up the Lagrangian and derive the first order conditions as follows 19
20 Pareto efficient allocation of risk We set up the Lagrangian and derive the first order conditions as follows The first order conditions imply for HH i and j 20
21 Pareto efficient allocation of risk Assume the utility function exhibits constant absolute risk aversion (CARA) We use this to derive the first order condition Taking logs leads to Rearranging give us consumption of HH i in state s at time t 21
22 Pareto efficient allocation of risk We can write consumption of HH i in state s at time t as: Implication: Average village consumption Household consumption is given by the village average plus an individual specific term that depends only on the household's weight in the Pareto programme. 22
23 Pareto efficient allocation of risk Key predictions for the Pareto efficient allocation of risk in mutual insurance: Household consumption is given by the village average plus an individual specific term that depends only on the household's weight in the Pareto programme. In particular, household i s consumption does not depend on household i s income, which is an implication that can be tested in the data. The reason is that when households can efficiently insure within the community, idiosyncratic income shocks are fully insured and only aggregate risk remains. 23
24 Benchmark Model: Perfect Insurance Large number of people who face an aggregate shock that is common to all of them (say weather) and the additional possibility of idiosyncratic variations in income Optimal to pool all the idiosyncratic variation, which reduces the idiosyncratic risk to zero (for uncorrelated shocks of a large number of people) while the aggregate shock can not be insured against Testable hypothesis: If the model is good, then we should see that individual (HH) consumption is unaffected by individual incomes, but it should move in perfect correlation with the aggregate consumption of the entire group (eg entire village) 24
25 Test of Model of Perfect Insurance Method: Regression analysis Dependent variable: Household consumption Independent variables: Group consumption, household income, and other household observables (such as spell of unemployment, sickness, etc) Test: If the theory of perfect insurance is right, then the estimated coefficients on all the household-specific variables should be zero and the coefficient on group average consumption should be unity Testable equation: Test: If there is perfect insurance 25
26 TestsofRiskSharing Specific mechanisms: Udry (94), Platteau and Abraham (97): informal credit Rosenzweig and Wolpin (93): bullock sales Rosenzweig (88): transfers between family members By studying one mechanism at a time, one may miss others. General equilibrium framework take into account all channels by looking at outcomes, i.e. consumption and labor supply 26
27 Townsend (1994) Risk and Insurance in Village India General equilibrium framework: Data: ICRISAT, , 3 villages in semi-arid rural India, 40 HH in each village Methodological questions: What is the relevant group that is engaged in insurance? This determines how we construct average consumption. Is a village the natural unit to study? Why? What other unit would be reasonable? Pareto optimum was formulated for individual How go to HH? 27
28 Test of Model of Perfect Insurance First question: What is the potential for mutual insurance? Even within villages not all HH are planting the same crops in the same soil. They are not engaged in the same income-generating activities. Figure 1: difference between HH income and average income to remove aggregate risk lots of idiosyncrativ risk that fluctuates independently across HH, i.e. no comovement potential for mutual insurance Problems of Implementation: missing data, as we do not observe consumption of everyone in village but only sample HH 28
29 29
30 30
31 Test of Model of Perfect Insurance Method: Regression analysis Dependent variable: Household consumption Independent variables: Group consumption, household income, and other household observables (such as spell of unemployment, sickness, etc) Test: If the theory of perfect insurance is right, then the estimated coefficients on all the household-specific variables should be zero and the coefficient on group average consumption should be unity Testable equation: Test: If there is perfect insurance 31
32 32
33 Results (see table): The coefficient on HH income is usually small, but significantly different from zero some smoothing is taking place, but not clear if insurance or some other form of smoothing such as self-insurance or credit Individual and aggregate consumption do move together some insurance 33
34 Potential caveats/extensions: Even amonmg the ICRISAT villages, the ability to smooth may vary significantly across HH The better-off farmers are able to smooth but no the small farmers and landless laborers. Insurance might look good simply because HH try to smooth their INCOME streams so that the remaining fluctuations can be absorbed by the available consumption smoothing mechanisms 34
35 Constraints on degree of insurance Why is there no perfect insurance? Two factors that put constraints on insurance: 1. Limited information about outcomes or what led to the outcomes (for example luck or insufficient effort) 2. Limited enforcement Townsend s framework implicitly assumes perfect enforcement (to prevent people from not paying into the pool if their own harvest is good). If you need self-enforcing contracts, best implementable scheme may differ from the First Best. study models with imperfect insurance Remember: Perfect insurance means full insurance of idiosyncratic shocks, income can still fluctuate due to aggregate shocks!! 35
36 1. Limited Information Limited information creates moral hazard problems, which means group members: 1. may not be able to verify the outcome on which the insurance transfers are based Person might provide wrong or misleading information about economic state, e.g. size of the harvest). 2. Or it may be possible to verify outcome, but not what led to it (i.e. occurence of some insurable event can be influenced by the unobservable action of the individual) Example: Did a farmer suffer a bad harvest because he was really unlucky (eg sick) or did he apply inadequate levels of effort to cultivation. 36
37 1. Limited Information Implementing perfect insurance would then lead to efficiency losses, because people have an incentive to apply inadequate effort to income-generating activities Intuition: if each farmer receives amount ph+(1-p)l regardless of wether his output is high or low, then why incur the extra effort to raise the probability that output will be high? Thus each farmer has an incentive to slack off under the perfect insurance scheme, and if all farmers think this way, the scheme cannot survive. Implement the Second-Best Insurance Arrangement, constrained by limited information i.e. only provide some insurance, so that individual consumption does move with individual income to some degree. In that case the individual has an incentive to excert effort to raise the probability of high output. 37
38 1. Limited Information Practical Implication: trade-off between diversification and moral hazard 1. Diversified uncorrelated incomes across group members are easiest to achieve when members are in different occupations or geographically separated 2. But an extension of insurance schemes across villages increases probability of moral hazard because it is harder to verify output Informational problems are increased, unless for example through marriage to people from different region so that there are family ties making up for geographic distance see next paper we discuss (Rosenzweig (1988)) 38
39 1. Limited Information Possible solutions to problem of limited information: Traditional societies are highly endowed with social capital: social capital provides a fund of socially available information Problems: increasing migration or segmentation of village into subgroups, e.g. caste lines insurance schemes might not cut across these lines of segmentation because flow of information is restricted (IMPORTANT: for empirical work one has to define the relevant community ) 39
40 Limited Information: Formal Treatment Formal treatment to see what is the best implementable risk sharing agreement under limited information Eliana addressed the problem of moral hazard in the discussion of credit markets Key point: trade-off between provision of insurance and provision of incentives if the community wants to maintain a high level of effort, it will have to offer incomplete insurance so that individual incentives are not destroyed Formally: can compute second-best insurance scheme that secures high effort but only incomplete insurance 40
Lecture Notes - Insurance
1 Introduction need for insurance arises from Lecture Notes - Insurance uncertain income (e.g. agricultural output) risk aversion - people dislike variations in consumption - would give up some output
More informationDevelopment Economics 455 Prof. Karaivanov
Development Economics 455 Prof. Karaivanov Notes on Credit Markets in Developing Countries Introduction ------------------ credit markets intermediation between savers and borrowers: o many economic activities
More informationDevelopment Economics 855 Lecture Notes 7
Development Economics 855 Lecture Notes 7 Financial Markets in Developing Countries Introduction ------------------ financial (credit) markets important to be able to save and borrow: o many economic activities
More informationThe Effects of Rainfall Insurance on the Agricultural Labor Market. A. Mushfiq Mobarak, Yale University Mark Rosenzweig, Yale University
The Effects of Rainfall Insurance on the Agricultural Labor Market A. Mushfiq Mobarak, Yale University Mark Rosenzweig, Yale University Background on the project and the grant In the IGC-funded precursors
More information1 Asset Pricing: Bonds vs Stocks
Asset Pricing: Bonds vs Stocks The historical data on financial asset returns show that one dollar invested in the Dow- Jones yields 6 times more than one dollar invested in U.S. Treasury bonds. The return
More informationRisk, Insurance and Wages in General Equilibrium. A. Mushfiq Mobarak, Yale University Mark Rosenzweig, Yale University
Risk, Insurance and Wages in General Equilibrium A. Mushfiq Mobarak, Yale University Mark Rosenzweig, Yale University 750 All India: Real Monthly Harvest Agricultural Wage in September, by Year 730 710
More informationRisk and Insurance Market Failures
Risk and Insurance Market Failures Dilip Mookherjee Boston University Ec 721 Lectures 9-10 DM (BU) 2018 1 / 30 Introduction Role of Uncertainty in Rural Areas Households in rural areas of LDCs are subject
More informationA livelihood portfolio theory of social protection
A livelihood portfolio theory of social protection Chris de Neubourg Maastricht Graduate School of Governance, Maastricht University Brussels, December 9 th, 2009. Livelihood portfolio decisions within
More informationTesting for Poverty Traps: Asset Smoothing versus Consumption Smoothing in Burkina Faso (with some thoughts on what to do about it)
Testing for Poverty Traps: Asset Smoothing versus Consumption Smoothing in Burkina Faso (with some thoughts on what to do about it) Travis Lybbert Michael Carter University of California, Davis Risk &
More informationHow do we cope with uncertainty?
Topic 3: Choice under uncertainty (K&R Ch. 6) In 1965, a Frenchman named Raffray thought that he had found a great deal: He would pay a 90-year-old woman $500 a month until she died, then move into her
More informationMicroeconomics of Banking: Lecture 2
Microeconomics of Banking: Lecture 2 Prof. Ronaldo CARPIO September 25, 2015 A Brief Look at General Equilibrium Asset Pricing Last week, we saw a general equilibrium model in which banks were irrelevant.
More informationEcon 101A Final Exam We May 9, 2012.
Econ 101A Final Exam We May 9, 2012. You have 3 hours to answer the questions in the final exam. We will collect the exams at 2.30 sharp. Show your work, and good luck! Problem 1. Utility Maximization.
More informationDynamic Contracts. Prof. Lutz Hendricks. December 5, Econ720
Dynamic Contracts Prof. Lutz Hendricks Econ720 December 5, 2016 1 / 43 Issues Many markets work through intertemporal contracts Labor markets, credit markets, intermediate input supplies,... Contracts
More informationAgricultural Markets. Spring Lecture 24
Agricultural Markets Spring 2014 Two Finance Concepts My claim: the two critical ideas of finance (what you learn in MBA program). 1. Time Value of Money. 2. Risk Aversion and Pooling. Time Value of Money
More informationRisk, Financial Markets, and Human Capital in a Developing Country, by Jacoby and Skouas
Risk, Financial Markets, and Human Capital in a Developing Country, by Jacoby and Skouas Mark Klee 12/11/06 Risk, Financial Markets, and Human Capital in a Developing Country, by Jacoby and Skouas 2 1
More informationProblem Set # Public Economics
Problem Set #3 14.41 Public Economics DUE: October 29, 2010 1 Social Security DIscuss the validity of the following claims about Social Security. Determine whether each claim is True or False and present
More informationGraduate Macro Theory II: Two Period Consumption-Saving Models
Graduate Macro Theory II: Two Period Consumption-Saving Models Eric Sims University of Notre Dame Spring 207 Introduction This note works through some simple two-period consumption-saving problems. In
More informationTopic 3: International Risk Sharing and Portfolio Diversification
Topic 3: International Risk Sharing and Portfolio Diversification Part 1) Working through a complete markets case - In the previous lecture, I claimed that assuming complete asset markets produced a perfect-pooling
More informationProblem Set # Due Monday, April 19, 3004 by 6:00pm
Problem Set #5 14.74 Due Monday, April 19, 3004 by 6:00pm 1. Savings: Evidence from Thailand Paxson (1992), in her article entitled Using Weather Variability to Estimate the Response of Savings to Transitory
More informationEx ante moral hazard on borrowers actions
Lecture 9 Capital markets INTRODUCTION Evidence that majority of population is excluded from credit markets Demand for Credit arises for three reasons: (a) To finance fixed capital acquisitions (e.g. new
More informationEcon 277A: Economic Development I. Final Exam (06 May 2012)
Econ 277A: Economic Development I Semester II, 2011-12 Tridip Ray ISI, Delhi Final Exam (06 May 2012) There are 2 questions; you have to answer both of them. You have 3 hours to write this exam. 1. [30
More informationEndogenous Insurance and Informal Relationships
Endogenous Insurance and Informal Relationships Xiao Yu Wang Duke May 2014 Wang (Duke) Endogenous Informal Insurance 05/14 1 / 20 Introduction The Idea "Informal institution": multi-purpose relationships
More informationRevision Lecture Microeconomics of Banking MSc Finance: Theory of Finance I MSc Economics: Financial Economics I
Revision Lecture Microeconomics of Banking MSc Finance: Theory of Finance I MSc Economics: Financial Economics I April 2005 PREPARING FOR THE EXAM What models do you need to study? All the models we studied
More informationShould Unconventional Monetary Policies Become Conventional?
Should Unconventional Monetary Policies Become Conventional? Dominic Quint and Pau Rabanal Discussant: Annette Vissing-Jorgensen, University of California Berkeley and NBER Question: Should LSAPs be used
More informationMicroeconomics of Banking: Lecture 3
Microeconomics of Banking: Lecture 3 Prof. Ronaldo CARPIO Oct. 9, 2015 Review of Last Week Consumer choice problem General equilibrium Contingent claims Risk aversion The optimal choice, x = (X, Y ), is
More informationAgricultural Commodity Risk Management: Policy Options and Practical Instruments with Emphasis on the Tea Economy
Agricultural Commodity Risk Management: Policy Options and Practical Instruments with Emphasis on the Tea Economy Alexander Sarris Director, Trade and Markets Division, FAO Presentation at the Intergovernmental
More informationPortfolio Investment
Portfolio Investment Robert A. Miller Tepper School of Business CMU 45-871 Lecture 5 Miller (Tepper School of Business CMU) Portfolio Investment 45-871 Lecture 5 1 / 22 Simplifying the framework for analysis
More informationEconomics Discussion Paper Series EDP Buffer Stock Savings by Portfolio Adjustment: Evidence from Rural India
Economics Discussion Paper Series EDP-1403 Buffer Stock Savings by Portfolio Adjustment: Evidence from Rural India Katsushi S. Imai, Bilal Malaeb March 2014 Economics School of Social Sciences The University
More informationRural Financial Intermediaries
Rural Financial Intermediaries 1. Limited Liability, Collateral and Its Substitutes 1 A striking empirical fact about the operation of rural financial markets is how markedly the conditions of access can
More informationEU i (x i ) = p(s)u i (x i (s)),
Abstract. Agents increase their expected utility by using statecontingent transfers to share risk; many institutions seem to play an important role in permitting such transfers. If agents are suitably
More informationIn the previous session we learned about the various categories of Risk in agriculture. Of course the whole point of talking about risk in this
In the previous session we learned about the various categories of Risk in agriculture. Of course the whole point of talking about risk in this educational series is so that we can talk about managing
More informationChapter 8. Risk and Insurance in an Agricultural Economy. poverty but with extremely variable incomes. This is most apparent for the majority who are
Chapter 8 Risk and Insurance in an Agricultural Economy I People who live in the rural areas of poor countries often must cope not only with severe poverty but with extremely variable incomes. This is
More informationBarriers to Household Risk Management: Evidence from India
Barriers to Household Risk Management: Evidence from India Shawn Cole Xavier Gine Jeremy Tobacman (HBS) (World Bank) (Wharton) Petia Topalova Robert Townsend James Vickery (IMF) (MIT) (NY Fed) Presentation
More informationRisk and Insurance in Village India
Risk and Insurance in Village India Robert M. Townsend (1994) Presented by Chi-hung Kang November 14, 2016 Robert M. Townsend (1994) Risk and Insurance in Village India November 14, 2016 1 / 31 1/ 31 Motivation
More informationInequalities and Investment. Abhijit V. Banerjee
Inequalities and Investment Abhijit V. Banerjee The ideal If all asset markets operate perfectly, investment decisions should have very little to do with the wealth or social status of the decision maker.
More informationSlides III - Complete Markets
Slides III - Complete Markets Julio Garín University of Georgia Macroeconomic Theory II (Ph.D.) Spring 2017 Macroeconomic Theory II Slides III - Complete Markets Spring 2017 1 / 33 Outline 1. Risk, Uncertainty,
More informationExploring the Effect of Wealth Distribution on Efficiency Using a Model of Land Tenancy with Limited Liability. Nicholas Reynolds
Exploring the Effect of Wealth Distribution on Efficiency Using a Model of Land Tenancy with Limited Liability Nicholas Reynolds Senior Thesis in Economics Haverford College Advisor Richard Ball Spring
More informationFinancial Market Imperfections Uribe, Ch 7
Financial Market Imperfections Uribe, Ch 7 1 Imperfect Credibility of Policy: Trade Reform 1.1 Model Assumptions Output is exogenous constant endowment (y), not useful for consumption, but can be exported
More informationDevelopment Economics
Development Economics Development Microeconomics (by) Bardhan and Udry Chapter 7 Rural credit markets [1] Importance Smoothing consumption in an environment where production is risky and insurance markets
More informationBusiness Cycles II: Theories
Macroeconomic Policy Class Notes Business Cycles II: Theories Revised: December 5, 2011 Latest version available at www.fperri.net/teaching/macropolicy.f11htm In class we have explored at length the main
More informationVulnerability to Poverty and Risk Management of Rural Farm Household in Northeastern of Thailand
2011 International Conference on Financial Management and Economics IPEDR vol.11 (2011) (2011) IACSIT Press, Singapore Vulnerability to Poverty and Risk Management of Rural Farm Household in Northeastern
More informationFinancial Economics Field Exam August 2011
Financial Economics Field Exam August 2011 There are two questions on the exam, representing Macroeconomic Finance (234A) and Corporate Finance (234C). Please answer both questions to the best of your
More information8 April Rural to Urban Lecture 21
Rural to Urban Lecture 21 8 April 2014 Structural viewpoint We expect uneven growth and development. Some regions and some sectors of the economy will develop first and grow fastest. This structural transformation
More informationThe role of asymmetric information
LECTURE NOTES ON CREDIT MARKETS The role of asymmetric information Eliana La Ferrara - 2007 Credit markets are typically a ected by asymmetric information problems i.e. one party is more informed than
More informationSlides for International Finance Financial Globalization (KOM 21)
Financial Globalization (KOM 21) American University 2011-10-05 Preview International Capital Markets Gains from Trade International Capital Markets Policy constraints and international financial markets
More informationCredit II Lecture 25
Credit II Lecture 25 November 27, 2012 Operation of the Credit Market Last Tuesday I began the discussion of the credit market (Chapter 14 in Development Economics. I presented material through Section
More informationCredit Lecture 23. November 20, 2012
Credit Lecture 23 November 20, 2012 Operation of the Credit Market Credit may not function smoothly 1. Costly/impossible to monitor exactly what s done with loan. Consumption? Production? Risky investment?
More information1 Asset Pricing: Replicating portfolios
Alberto Bisin Corporate Finance: Lecture Notes Class 1: Valuation updated November 17th, 2002 1 Asset Pricing: Replicating portfolios Consider an economy with two states of nature {s 1, s 2 } and with
More informationIntermediary Balance Sheets Tobias Adrian and Nina Boyarchenko, NY Fed Discussant: Annette Vissing-Jorgensen, UC Berkeley
Intermediary Balance Sheets Tobias Adrian and Nina Boyarchenko, NY Fed Discussant: Annette Vissing-Jorgensen, UC Berkeley Objective: Construct a general equilibrium model with two types of intermediaries:
More informationBusiness Cycles II: Theories
International Economics and Business Dynamics Class Notes Business Cycles II: Theories Revised: November 23, 2012 Latest version available at http://www.fperri.net/teaching/20205.htm In the previous lecture
More informationECON385: A note on the Permanent Income Hypothesis (PIH). In this note, we will try to understand the permanent income hypothesis (PIH).
ECON385: A note on the Permanent Income Hypothesis (PIH). Prepared by Dmytro Hryshko. In this note, we will try to understand the permanent income hypothesis (PIH). Let us consider the following two-period
More informationInternational Economic Development Spring 2017 Midterm Examination
Please complete the following questions in the space provided. Each question has equal value. Please be concise, but do write in complete sentences. Question 1 In thinking about economic growth among poor
More informationInformal Risk Sharing, Index Insurance and Risk-Taking in Developing Countries
Working paper Informal Risk Sharing, Index Insurance and Risk-Taking in Developing Countries Ahmed Mushfiq Mobarak Mark Rosenzweig December 2012 When citing this paper, please use the title and the following
More informationNotes II: Consumption-Saving Decisions, Ricardian Equivalence, and Fiscal Policy. Julio Garín Intermediate Macroeconomics Fall 2018
Notes II: Consumption-Saving Decisions, Ricardian Equivalence, and Fiscal Policy Julio Garín Intermediate Macroeconomics Fall 2018 Introduction Intermediate Macroeconomics Consumption/Saving, Ricardian
More informationProblem Set 3. Thomas Philippon. April 19, Human Wealth, Financial Wealth and Consumption
Problem Set 3 Thomas Philippon April 19, 2002 1 Human Wealth, Financial Wealth and Consumption The goal of the question is to derive the formulas on p13 of Topic 2. This is a partial equilibrium analysis
More informationFinal Exam Solutions
14.06 Macroeconomics Spring 2003 Final Exam Solutions Part A (True, false or uncertain) 1. Because more capital allows more output to be produced, it is always better for a country to have more capital
More information1. Cash-in-Advance models a. Basic model under certainty b. Extended model in stochastic case. recommended)
Monetary Economics: Macro Aspects, 26/2 2013 Henrik Jensen Department of Economics University of Copenhagen 1. Cash-in-Advance models a. Basic model under certainty b. Extended model in stochastic case
More informationMultiple Shocks and Vulnerability of Chinese Rural Households
Multiple Shocks and Vulnerability of Chinese Rural Households Hideyuki Nakagawa Akita International University, Japan Yuwa, Akita City 010-1292 Japan Tel +81-18-886-5803 Fax +81-18-886-5910 hnakagawa@aiu.ac.jp
More informationIntertemporal choice: Consumption and Savings
Econ 20200 - Elements of Economics Analysis 3 (Honors Macroeconomics) Lecturer: Chanont (Big) Banternghansa TA: Jonathan J. Adams Spring 2013 Introduction Intertemporal choice: Consumption and Savings
More informationFinancial Frictions Under Asymmetric Information and Costly State Verification
Financial Frictions Under Asymmetric Information and Costly State Verification General Idea Standard dsge model assumes borrowers and lenders are the same people..no conflict of interest. Financial friction
More informationEx-ante Impacts of Agricultural Insurance: Evidence from a Field Experiment in Mali
Ex-ante Impacts of Agricultural Insurance: Evidence from a Field Experiment in Mali Ghada Elabed* & Michael R Carter** *Mathematica Policy Research **University of California, Davis & NBER BASIS Assets
More informationChapter 7 Moral Hazard: Hidden Actions
Chapter 7 Moral Hazard: Hidden Actions 7.1 Categories of Asymmetric Information Models We will make heavy use of the principal-agent model. ð The principal hires an agent to perform a task, and the agent
More informationGraduate Microeconomics II Lecture 8: Insurance Markets
Graduate Microeconomics II Lecture 8: Insurance Markets Patrick Legros 1 / 31 Outline Introduction 2 / 31 Outline Introduction Contingent Markets 3 / 31 Outline Introduction Contingent Markets Insurance
More informationChapter 7. Economic Growth I: Capital Accumulation and Population Growth (The Very Long Run) CHAPTER 7 Economic Growth I. slide 0
Chapter 7 Economic Growth I: Capital Accumulation and Population Growth (The Very Long Run) slide 0 In this chapter, you will learn the closed economy Solow model how a country s standard of living depends
More informationBank Leverage and Social Welfare
Bank Leverage and Social Welfare By LAWRENCE CHRISTIANO AND DAISUKE IKEDA We describe a general equilibrium model in which there is a particular agency problem in banks. The agency problem arises because
More informationTopic 2: International Comovement Part1: International Business cycle Facts: Quantities
Topic 2: International Comovement Part1: International Business cycle Facts: Quantities Issue: We now expand our study beyond consumption and the current account, to study a wider range of macroeconomic
More informationECMC49S Midterm. Instructor: Travis NG Date: Feb 27, 2007 Duration: From 3:05pm to 5:00pm Total Marks: 100
ECMC49S Midterm Instructor: Travis NG Date: Feb 27, 2007 Duration: From 3:05pm to 5:00pm Total Marks: 100 [1] [25 marks] Decision-making under certainty (a) [10 marks] (i) State the Fisher Separation Theorem
More informationEC 324: Macroeconomics (Advanced)
EC 324: Macroeconomics (Advanced) Consumption Nicole Kuschy January 17, 2011 Course Organization Contact time: Lectures: Monday, 15:00-16:00 Friday, 10:00-11:00 Class: Thursday, 13:00-14:00 (week 17-25)
More informationADVANCED MODERN MACROECONOMICS
ADVANCED MODERN MACROECONOMICS ANALYSIS AND APPLICATION Max Gillman Cardiff Business School, Cardiff University Financial Times Prentice Halt is an imprint of Harlow, England London New York Boston San
More informationTransactions with Hidden Action: Part 1. Dr. Margaret Meyer Nuffield College
Transactions with Hidden Action: Part 1 Dr. Margaret Meyer Nuffield College 2015 Transactions with hidden action A risk-neutral principal (P) delegates performance of a task to an agent (A) Key features
More information3/1/2016. Intermediate Microeconomics W3211. Lecture 4: Solving the Consumer s Problem. The Story So Far. Today s Aims. Solving the Consumer s Problem
1 Intermediate Microeconomics W3211 Lecture 4: Introduction Columbia University, Spring 2016 Mark Dean: mark.dean@columbia.edu 2 The Story So Far. 3 Today s Aims 4 We have now (exhaustively) described
More informationFINC3017: Investment and Portfolio Management
FINC3017: Investment and Portfolio Management Investment Funds Topic 1: Introduction Unit Trusts: investor s funds are pooled, usually into specific types of assets. o Investors are assigned tradeable
More informationLabor Economics Field Exam Spring 2011
Labor Economics Field Exam Spring 2011 Instructions You have 4 hours to complete this exam. This is a closed book examination. No written materials are allowed. You can use a calculator. THE EXAM IS COMPOSED
More informationDepartment of Agricultural Economics. PhD Qualifier Examination. August 2010
Department of Agricultural Economics PhD Qualifier Examination August 200 Instructions: The exam consists of six questions. You must answer all questions. If you need an assumption to complete a question,
More informationProblem set 5. Asset pricing. Markus Roth. Chair for Macroeconomics Johannes Gutenberg Universität Mainz. Juli 5, 2010
Problem set 5 Asset pricing Markus Roth Chair for Macroeconomics Johannes Gutenberg Universität Mainz Juli 5, 200 Markus Roth (Macroeconomics 2) Problem set 5 Juli 5, 200 / 40 Contents Problem 5 of problem
More informationManaging Risk with Operational and Financial Instruments
Managing Risk with Operational and Financial Instruments John R. Birge The University of Chicago Booth School of Business www.chicagobooth.edu/fac/john.birge Motivation Operations (e.g., flexible production,
More informationPublic Investment and the Risk Premium for Equity
Economica (2003) 70, 1 18 Public Investment and the Risk Premium for Equity By SIMON GRANT{{ and JOHN QUIGGIN{ { Tilburg University { Australian National University Final version received 19 December 2001.
More informationUNCERTAINTY AND INFORMATION
UNCERTAINTY AND INFORMATION M. En C. Eduardo Bustos Farías 1 Objectives After studying this chapter, you will be able to: Explain how people make decisions when they are uncertain about the consequences
More informationIndex Insurance: Financial Innovations for Agricultural Risk Management and Development
Index Insurance: Financial Innovations for Agricultural Risk Management and Development Sommarat Chantarat Arndt-Corden Department of Economics Australian National University PSEKP Seminar Series, Gadjah
More informationFinancial Literacy, Social Networks, & Index Insurance
Financial Literacy, Social Networks, and Index-Based Weather Insurance Xavier Giné, Dean Karlan and Mũthoni Ngatia Building Financial Capability January 2013 Introduction Introduction Agriculture in developing
More informationFinancial Mathematics III Theory summary
Financial Mathematics III Theory summary Table of Contents Lecture 1... 7 1. State the objective of modern portfolio theory... 7 2. Define the return of an asset... 7 3. How is expected return defined?...
More informationIntermediate Macroeconomics
Intermediate Macroeconomics Lecture 10 - Consumption 2 Zsófia L. Bárány Sciences Po 2014 April Last week Keynesian consumption function Kuznets puzzle permanent income hypothesis life-cycle theory of consumption
More informationProblem set Fall 2012.
Problem set 1. 14.461 Fall 2012. Ivan Werning September 13, 2012 References: 1. Ljungqvist L., and Thomas J. Sargent (2000), Recursive Macroeconomic Theory, sections 17.2 for Problem 1,2. 2. Werning Ivan
More informationGeneral Examination in Macroeconomic Theory SPRING 2014
HARVARD UNIVERSITY DEPARTMENT OF ECONOMICS General Examination in Macroeconomic Theory SPRING 2014 You have FOUR hours. Answer all questions Part A (Prof. Laibson): 48 minutes Part B (Prof. Aghion): 48
More informationInterest Rates and Currency Prices in a Two-Country World. Robert E. Lucas, Jr. 1982
Interest Rates and Currency Prices in a Two-Country World Robert E. Lucas, Jr. 1982 Contribution Integrates domestic and international monetary theory with financial economics to provide a complete theory
More informationAttitudes Toward Risk. Joseph Tao-yi Wang 2013/10/16. (Lecture 11, Micro Theory I)
Joseph Tao-yi Wang 2013/10/16 (Lecture 11, Micro Theory I) Dealing with Uncertainty 2 Preferences over risky choices (Section 7.1) One simple model: Expected Utility How can old tools be applied to analyze
More information1 Consumption and saving under uncertainty
1 Consumption and saving under uncertainty 1.1 Modelling uncertainty As in the deterministic case, we keep assuming that agents live for two periods. The novelty here is that their earnings in the second
More informationSAVINGS BEHAVIOUR IN LOW-INCOME COUNTRIES
SAVINGS BEHAVIOUR IN LOW-INCOME COUNTRIES MARK R. ROSENZWEIG University of Pennsylvania 1 The empirical literature on savings in low-income countries has exploited some remarkable data sets to shed new
More informationBernanke & Gertler (1989) - Agency Costs, Net Worth, & Business Fluctuations
Bernanke & Gertler (1989) - Agency Costs, Net Worth, & Business Fluctuations Robert Kirkby UC3M November 2010 The Idea Motivation Condition of firm & household often suggested as a determinant of macroeconomic
More informationTo lower auto insurance rate premium we should put a stake on each steering wheel
Risk and the market for insurance Armen Alchian: To lower auto insurance rate premium we should put a stake on each steering wheel 1 Outline Risk and Risk attitudes Kinds of risk Mitigating ii i risk ik
More informationIntroductory Economics of Taxation. Lecture 1: The definition of taxes, types of taxes and tax rules, types of progressivity of taxes
Introductory Economics of Taxation Lecture 1: The definition of taxes, types of taxes and tax rules, types of progressivity of taxes 1 Introduction Introduction Objective of the course Theory and practice
More informationEx Ante Financing for Disaster Risk Management and Adaptation
Ex Ante Financing for Disaster Risk Management and Adaptation A Public Policy Perspective Dr. Jerry Skees H.B. Price Professor, University of Kentucky, and President, GlobalAgRisk, Inc. Piura, Peru November
More information14.05: SECTION HANDOUT #4 CONSUMPTION (AND SAVINGS) Fall 2005
14.05: SECION HANDOU #4 CONSUMPION (AND SAVINGS) A: JOSE ESSADA Fall 2005 1. Motivation In our study of economic growth we assumed that consumers saved a fixed (and exogenous) fraction of their income.
More informationThe I Theory of Money
The I Theory of Money Markus Brunnermeier and Yuliy Sannikov Presented by Felipe Bastos G Silva 09/12/2017 Overview Motivation: A theory of money needs a place for financial intermediaries (inside money
More informationLimits to Arbitrage. George Pennacchi. Finance 591 Asset Pricing Theory
Limits to Arbitrage George Pennacchi Finance 591 Asset Pricing Theory I.Example: CARA Utility and Normal Asset Returns I Several single-period portfolio choice models assume constant absolute risk-aversion
More informationInequality, Heterogeneity, and Consumption in the Journal of Political Economy Greg Kaplan August 2017
Inequality, Heterogeneity, and Consumption in the Journal of Political Economy Greg Kaplan August 2017 Today, inequality and heterogeneity are front-and-center in macroeconomics. Most macroeconomists agree
More informationVolatility and Growth: Credit Constraints and the Composition of Investment
Volatility and Growth: Credit Constraints and the Composition of Investment Journal of Monetary Economics 57 (2010), p.246-265. Philippe Aghion Harvard and NBER George-Marios Angeletos MIT and NBER Abhijit
More informationConsumption-Savings Decisions and Credit Markets
Consumption-Savings Decisions and Credit Markets Economics 3307 - Intermediate Macroeconomics Aaron Hedlund Baylor University Fall 2013 Econ 3307 (Baylor University) Consumption-Savings Decisions Fall
More informationPopulation Economics Field Exam September 2010
Population Economics Field Exam September 2010 Instructions You have 4 hours to complete this exam. This is a closed book examination. No materials are allowed. The exam consists of two parts each worth
More informationMicroeconomic Theory May 2013 Applied Economics. Ph.D. PRELIMINARY EXAMINATION MICROECONOMIC THEORY. Applied Economics Graduate Program.
Ph.D. PRELIMINARY EXAMINATION MICROECONOMIC THEORY Applied Economics Graduate Program May 2013 *********************************************** COVER SHEET ***********************************************
More information