This paper shows how the demand for non-life insurance interacts with consumption and saving. The analysis is set in continuous time, using the maximum principle. When insurance is actuarially fair, the insurance and consumption decisions are separable. With loaded premiums, and alternatively without insurance, optimal consumption is dynamically related to the growth rate of the loss probability, and a growing loss probability generates precautionary saving. With loaded premiums, less than full insurance is demanded at each instant, and optimal cover varies over time, whether or not the loss probability is constant.

U.S. stock returns are large, predictable over time, and predictable across stocks. The average return on a diversified market portfolio has averaged 8 percent per year more than the return on a short-term treasury bill. The predictability of time variation in returns is modest at high frequencies (about 10 percent of the variation in returns one quarter ahead is predictable) and quite large over longer periods (just under half of the variation in returns over five-year periods is predictable). Finally, portfolios based on the intersection of quintiles of stocks ranked by market value and by the ratio of book value to market value have differences in average annual returns across stocks of several percent per year. The natural explanation for these variations in returns is risk. But variations in consumption risk have done a poor job of explaining these differences in expected returns (see e.g., Sanford J. Grossman and Robert J. Shiller, 1981; Shiller, 1982; Lars Peter Hansen and Kenneth J. Singleton, 1983; N. Gregory Mankiw and Mat

When bidders anticipate an opportunity for resale trade, the value of winning an auction is determined in part by the option values of buying and selling in the secondary market. One implication is that a bidder's willingness to pay at an auction increases with the expected level of competition between resale buyers. Empirical evidence from auctions of timber contracts supports this prediction and rejects standard models that ignore resale. The estimated effect is smaller after policy changes expected to diminish the prevalence of resale. Additional evidence supports the predicted presence of a common value element introduced by the resale opportunity.

(i) It does not always keep the normative analysis of decision-making distinct from its descriptive analysis, losing sight of the fact that these methods are appealing shortcut approximations, not improvements on, decision-making based on the Savage axioms. (ii) In all the existing applications to monetary policy it analyzes uncertainty about relatively unimportant aspects of models, while making strong, but actually uncertain, assumptions about other, more important aspects.

Robert A. Mundell held his Prize Lecture December 8, 1999, at Aula Magna, Stockholm University. He was presented by Lars E.O. Svensson, Chairman of the Prize Committee.(This abstract was borrowed from another version of this item.)

The key implication of rational expectations and the basic life-cycle/permanent-income hypothesis: that predictable changes in income have no effect on the growth rate of consumption expenditures, is examined. This implication is important for understanding the effectiveness and optimal timing of fiscal policy, the causes and propagation of business cycles, and the effects of income fluctuations on the growth rate of the economy. Using household-level consumption data from the Consumer Expenditure Survey, whether expenditures on nondurable goods increase contemporaneously with predictable changes in Social Security tax withholding is tested. It is found that households do change their consumption expenditures in response to the predictable fluctuations in income induced by the Social Security tax system.