The two most common approaches to analyzing behavior under uncertainty are the expected utility model (EU) and the meanstandard deviation model (MS). Jack Meyer (1987) has recently established in this Review that when the choice set consists of random variables which are represented by distribution functions that differ from one another only by location and scale parameters, EU and MS are consistent in the sense that any EU ranking of elements of a choice set can also be represented by an MS ranking. No claim has been made by Meyer regarding the EUand MS-efficient sets. However, it can be easily shown that with no additional restrictions, risk-averters' EUefficient set is a subset (in the weak sense) of the MS-efficient set. In this note we extend Meyer's work and prove that under a certain restriction on the support of the distribution, random variables which are MS efficient are also EU efficient, namely, MS and EU yield identical efficient sets. We analyze separately the relationship of MSand EU-efficient sets for all unrestricted (with U'> 0), and alternatively for all risk-averse (with U'> 0 and U < 0). Only pairwise comparisons of risky options are considered.
The authors study social security legislated endogenously by altruistic, overlapping generations. Starting from a steady-state equilibrium without social security, both generations living in a period can gain from legislation that mandates transfers from young to old in that and all subsequent periods. The social security allocation is Pareto optimal. Later living pairs of generations may lose, but do not amend the law.
The author estimates the change in the value of common stock resulting from an unexpected change in collectively bargained labor costs. Using bargaining unit wage data and NYSE stock returns, he estimates a dollar for dollar trade-off between these variables. This result is consistent with stock valuations based on present value maximizing managerial decisions; that is, the results are consistent with Hotelling's lemma. The author also finds support for the hypothesis that collective bargains maximize the sum of shareholder and union member wealth; that is, the results are consistent with strong efficiency in the contracting environment.
A breadwinner's demand for life insurance depends on the demographic structure of his or her household. The author captures the relationship by extending Menahem E. Yaari's life insurance framework to include the preferences of all household members explicitly. In many households, the insured is the husband and the beneficiaries are his wife and offspring. Their demand for insurance of the husband's life is derived from a life cycle model in which income is uncertain. The results are intuitively appealing in that they describe the explicit calculation made by purchasers of life insurance. Empirical estimates based on observed life insurance ownership also are encouraging.
William Kaempfer and Anton Lowenberg (in this Review, September 1988) have developed an engaging model of the sanctions process grounded public choice. They identify potentially influential private forces that might affect the nature of a sanctions package. While the spirit of their effort is laudable, the model fails to incorporate some absolutely essential information about the legal, institutional, and strategic framework which sanctions decisions are made. As a consequence they reach a conclusion that flies the face of existing facts. Contrary to what is suggested by Kaempfer and Lowenberg (KL), and contrary to the implications of their model, the evidence clearly indicates there is an unequivocal bias against the use of import restrictions favor of export controls. The recent history of economic sanctions shows that only somewhat more than one-third of sanction episodes involved both export and import controls.' Further, Gary Hufbauer and Jeffrey Schott (1985) observe that, in instances where only one or the other is invoked, export controls are almost always preferred to restrictions on imports.2 An almost exclusive reliance on export controls economic foreign policy measures is particularly evident the actions of the United States the 1970s.3 The purpose of this comment is to explore the causes of this asymmetry. There are at least three reasons why export controls have been favored over import controls, reasons that play no part the KL model. First, the General Agreement on Tariffs and Trade (GATT) has institutionalized a bias against import favor of export controls. Second, the United States domestic legal constraints favor export controls and discourage import controls. Third, as will be argued, export controls are more easily reversed than import controls and reversibility is a desirable component any foreign-policy based intervention. Consider these points turn. In the 1946-1948 period, during which time the GATT was first negotiated, trade barriers were identified most often with those artificial impediments to that restrict foreign access to domestic markets, especially tariffs. For this reason, GATT rules and actions have sought primarily to dismantle import barriers. John Jackson (1969, p. 502) notes that despite the fact that extensive export controls do exist, there has been only one complaint with respect to such controls reflected GATT documents. This is the Czechoslovakian complaint against the United States... 1949 for the imposition of discriminatory export controls.4 Jackson (p. 502) observes that there is ... . very little, if any, effective GATT policing of export control policy. And he comments later (p. 539) that insofar as any GATT obligations can be avoided without consequences, this avoidance operates effect as an exception. This suggests that those foreign policy export controls that are pro*Department of Economics, University of Arizona, Tucson, AZ 85721. I thank Alan Deardorff, Bernard Hoekman, and Robert Stem for helpful discussions on work related to this note. My thanks also to two anonymous referees for their constructive comments. 'See p. 28 and Tables 4.1-4.5, pp. 70-77, Hufbauer and Schott (1985). 2Ibid., p. 28. 3See, for example, Richard Cooper (1987), pp. 301-302 and p. 305, and Kenneth Abbott (1981), p. 741. 4This is confirmed more recently by Barry Carter (1988, p. 97). The only other event involving export restrictions challenged before the GATT was the U.S. embargo against Nicaragua 1985 which involved both import and export restrictions.
Three variants on the famous Allais example were administered to student subjects. Two variants involved small changes in the example, yet greatly diminished the qualitative behavior known as the Allais Paradox. The third variant is almost a direct test of Daniel Kahneman and Amos Tversky's certainty effect against Mark Machina's fanning out hypothesis; the results favor the certainty effect over the fanning out hypothesis for at least the case of straight line indifference curves.
The excess sensitivity of consumption to current income fluctuations is higher in countries where consumers borrow less. Low levels of consumer debt can result either from capital market imperfections or from a low demand for loans. The evidence suggests that the former view is more appropriate than the latter, and thus supports the hypothesis that excess sensitivity may be attributed to liquidity constraints, rather than to other factors.
The insensitivity of the U.S. trade balance to the sharp depreciation of the dollar in the past three years has revived interest in the relationship between exchange rates and the trade balance. A central issue in most analyses of the relation between the current account and the exchange rate concerns the price adjustment process.' The simple integrated, competitive market model predicts that local currency prices should change in proportion to the nominal exchange rate for a country too small to influence world prices. The relationship between local currency import prices and exchange rates has been referred to as the relationship in the empirical literature in international economics. If the proportional relationship between import prices and exchange rates holds, pass-through is said to be complete. Accounts of recent U.S. experience cite the failure of dollar prices of imported goods to rise in proportion to exchange rates (i.e., incomplete pass-through) as an important factor in explaining the persistence of the trade deficit. Unfortunately, observations on pass-through alone provide limited insight into the behavior of markets, since incomplete pass-through is consistent with at least two fundamentally different paradigms. One is the standard competitive model of trade in which the law of one price holds, but exchange rate fluctuations are associated with large changes in import demand due to other factors. For example, if dollar appreciation is correlated with increases in world demand and industry marginal cost is increasing, then pass-through will be less than complete. The other is an imperfectly competitive model in which exporters are capable of price discriminating across destination markets, a phenomenon. Paul Krugman (1987) has labeled pricing to market. In this model incomplete pass-through is typically associated with fluctuations in the markup of price over marginal cost on exports.2 These fluctuations in markups are believed to be countryspecific; they do not reflect the behavior of prices to other export destinations. Both models are plausible explanations of recent U.S. experience. Unfortunately, it is impossible to distinguish between these competing models using only information on import prices and exchange rates for a single country. In order to distinguish between the competing models, an empirical analysis of goods prices and exchange rates must be capable of measuring either marginal cost or the markup over marginal cost. Either of these tasks poses formidable empirical problems. Much of the empirical literature in industrial organization has been concerned with precisely these issues, since markups are an important measure of the competitiveness of industries.