This paper uses the consumption Euler equation to derive a decomposition of consumption growth into four sources. These four sources are new information, and three sources of predictable consumption growth: intertemporal substitution, changes in the preferences for consumption, and incomplete markets for consumption insurance. Using household-level data, we implement this decomposition for the average growth rate of consumption expenditures on nondurable goods in the United States from 1982 to 1997. The economic importance of precautionary saving rivals that of the real interest rate, but the relative importance of each source of movement in the volatility of consumption is not precisely measured.

Forward-looking agents care about expected future utility flows, and hence have higher current felicity if they are optimistic. This paper studies utility-based biases in beliefs by supposing that beliefs maximize average felicity, optimally balancing this benefit of optimism against the costs of worse decision making. A small optimistic bias in beliefs typically leads to first-order gains in anticipatory utility and only second-order costs in realized outcomes. In a portfolio choice example, investors overestimate their return and exhibit a preference for skewness; in general equilibrium, investors' prior beliefs are endogenously heterogeneous. In a consumption-saving example, consumers are both overconfident and overoptimistic.

This paper develops an analytical framework for assessing the second-best optimal level of gasoline taxation taking into account unpriced pollution, congestion, and accident externalities, and interactions with the broader fiscal system. We provide calculations of the optimal taxes for the US and the UK under a wide variety of parameter scenarios. Under our central parameter values, and with the gasoline tax substituting for a distorting tax on labor income, the second-best optimal gasoline tax is $0.95/gal for the US and $1.29/gal for the UK. These values are moderately sensitive to alternative plausible parameter assumptions. The congestion externality is the largest component in both nations, and the higher optimal tax for the UK is due almost entirely to a higher assumed value for marginal congestion cost. Revenue-raising needs, incorporated in a “Ramsey" component, also play a significant role, as do accident externalities and local air pollution. However, we also find that a shift in taxation off gasoline and onto vehicle miles can produce much larger welfare gains than those from implementing second-best optimal gasoline taxes.

Holt and Laury (2002) used a menu of ordered lottery choices to make inferences about risk aversion under various payment conditions. The main results of that paper were: (a) subjects are risk averse, even for relatively small payments of less than $5; (b) risk aversion increases sharply with large increases in the scale of cash payoffs; and (c) there is no significant effect from increasing the scale of hypothetical payment. With a few exceptions noted in the paper, all treatments began with a low-payment choice, followed by a choice with hypothetical payments that had been scaled up (by 20 , 50 , or 90 ), followed by a real-cash decision with the same high payment scale (20 , 50 , or 90 ), followed by a single, final, low (1 ) real payment choice. Those in the 90 treatment could earn amounts ranging from $9.00 to $346.50 in this task. As Glenn W. Harrison et al. (2004) correctly note, this design confounds order and treatment effects since the high real payment choice was always completed after the low real and high hypothetical payment tasks. In a new experiment reported below, we first seek to replicate Harrison et al.’s finding that the order effect (participating in a low-payment choice before making a high-payment choice) magnifies the scale effect. In a second treatment, each subject completes the menu of lottery choices under just one payment condition (1 or 20 , real or hypothetical), thereby eliminating any order effects. I. New Data

Demand Reduction in Multi-Unit Auctions: Evidence from a Sportscard Field Experiment: Reply by Richard Engelbrecht-Wiggans, John A. List and David H. Reiley. Published in volume 95, issue 1, pages 472-476 of American Economic Review, March 2005

Rising levels of foreign direct investment (FDI) concern growing numbers of policymakers and members of the American public. These concerns stem from the perception that foreign activities of American multinational corporations reduce employment and other economic activities within the United States. While investment flows within the United States go largely unnoticed, in an international setting the lexicon of “winners” and “losers” can be inescapable. Curiously, both capital-exporting countries and capital-importing countries have at times expressed concern over the consequences of international capital flows. Capital-exporting countries worry that too much of their capital goes abroad, while capital-importing countries fear foreign control of domestic assets and the possible macroeconomic instability associated with rapid changes in foreign investment levels. The concerns of capital-exporting countries, while diffuse, often are based on conceptions of outbound FDI as diverting economic activity. Unsurprisingly, growing overseas activities of multinational firms have become a source of economic insecurity for workers, managers, and tax collectors (see e.g., Kenneth F. Scheve and Matthew J. Slaughter, 2001).

Using a new international dataset of trade-weighed exchange rates, this paper highlights a neglected adjustment mechanism in the classical gold standard literature. Since gold-pegged countries traded extensively with economies operating more flexible monetary regimes and where parity change was a common adjustment device to systemic shocks, we show that such parity adjustments induced worldwide swings in nominal effective exchange rates. These translated into real exchange rate variations to which trade balances responded with an average elasticity of unity and in the direction of restoring external disequilibria. We conclude that some nominal exchange rate flexibility thus present in the pre-1914 system was instrumental to international payments adjustment.

Advancing annuity demand theory, we present sufficient conditions for the optimality of full annuitization under market completeness which are substantially less restrictive than those used by Menahem E. Yaari (1965). We examine demand with market incompleteness, finding that positive annuitization remains optimal widely, but complete annuitization does not. How uninsured medical expenses affect demand for illiquid annuities depends critically on the timing of the risk. A new set of calculations with optimal consumption trajectories very different from available annuity income streams still shows a preference for considerable annuitization, suggesting that limited annuity purchases are plausibly due to psychological or behavioral biases.