Journal Article Transaction Costs, Uncertainty and Generally Inactive Futures Markets Get access H. M. Shefrin H. M. Shefrin University of Santa Clara Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 48, Issue 1, January 1981, Pages 131–137, https://doi.org/10.2307/2297125 Published: 01 January 1981 Article history Received: 01 October 1978 Accepted: 01 April 1980 Published: 01 January 1981

In this paper I develop an N-person stochastic game in which each player views himself as facing a Markov decision process. Specifically, every player is assumed to choose his strategy as a policy which is optimal with respect to the process in question. It is clear that such a strategy need not be a best reply to the strategy choices of the other players, so a Nash equilibrium might not be appropriate for this game. Consider the following alternative equilibrium concept. Every player compares the subjective transition probabilities from his Markov decision process with the objective frequencies which he encounters during the course of the game. If no player receives disconfirming evidence about the subjective probabilities he is using, then the game is said to be in informational equilibrium. In this case the subjective probabilities are termed self-generating. Clearly, an informational equilibrium falls into the class of fulfilled expectations or rational equilibria. The main result of the paper is that an informational equilibrium exists for the game under consideration. The motivation for studying this particular class of games derives from the microeconomic treatment of household and firm intertemporal decisions under uncertainty. In economic theory it is common to treat these decision problems within a dynamic programming Markov decision process framework.' Here Markov transistion probabilities are used to describe the random prices faced by households and the random demand functions faced by firms. A question which would seem to be of considerable interest involves the problem of how one might model a complete economy in which each agent treats his own decision problem as a Markov decision process. Choosing an appropriate equilibrium concept would naturally be of paramount importance. This is the essential issue with which the present paper is concerned. It is important though to emphasize that the underlying approach does not really depend upon the specification of any particular economy. Therefore the general framework is described in terms of an

The concept of self-control is incorporated in a theory of individual intertemporal choice by modeling the individual as an organization. The individual at a point in time is assumed to be both a farsighted planner and a myopic doer. The resulting conflict is seen to be fundamentally similar to the agency conflict between the owners and managers of a firm. Both individuals and firms use the same techniques to mitigate the problems which the conflicts create. This paper stresses the implications of this agency model and discusses as applications the effect of pensions on saving, saving and the timing of income flows, and individual discount rates.

This study demonstrates a tractable method for analyzing schooling investment with risky incomes. Constant relative risk aversion is assumed, and borrowing in a rudimentary capital market is allowed. A linear, variance-components model on log (real income) is estimated. Only unexplained variation is treated as a source of risk. Illustrative empirical results indicate that students should take either 4 years of college or none at all, depending on time preference, loan availability, and degree of risk aversion. Estimate risk-adjusted rates of return to college exceed 10 percent for some parameter values. Risk adjustments for college rates are small but positive.

This study demonstrates a tractable method for analyzing schooling investment with risky incomes. Constant relative risk aversion is assumed, and borrowing in a rudimentary capital market is allowed. A linear, variance-components model on log (real income) is estimated. Only unexplained variation is treated as a source of risk. Illustrative empirical results indicate that students should take either 4 years of college or none at all, depending on time preference, loan availability, and degree of risk aversion. Estimate risk-adjusted rates of return to college exceed 10 percent for some parameter values. Risk adjustments for college rates are small but positive.

The concept of self-control is incorporated in a theory of individual intertemporal choice by modeling the individual as an organization. The individual at a point in time is assumed to be both a farsighted planner and a myopic doer. The resulting conflict is seen to be fundamentally similar to the agency conflict between the owners and managers of a firm. Both individuals and firms use the same techniques to mitigate the problems which the conflicts create. This paper stresses the implications of this agency model and discusses as applications the effect of pensions on saving, saving and the timing of income flows, and individual discount rates.