Ardeshir J. Dalal

Comparative Statics and Asset Substitutability/Complementarity in a Portfolio Model: A Dual Approach

This article uses a dual approach to investigate the properties of an n-asset portfolio model. The indirect expected utility and expenditure functions are used to provide an extremely simple derivation of Slutsky equations by obtaining results similar to Roys Identity and Shephards Lemma. The substitutability/complementarity relations among assets are investigated, and a number of empirically testable implications are deduced from the properties of the expenditure function.

Estimating the Demand for Risky Assets via the Indirect Expected Utility Function

This article obtains demand functions for risky assets without making a priori assumptions about the form of the utility function. In a simple portfolio model, the envelope theorem is applied to the indirect expected utility function to derive estimating equations. Tests for the existence of constant absolute or constant relative risk aversion are also developed. Empirical estimation of the demand for financial assets held by U.S. households for the period 1946–1985 indicates that aggregate household behavior is consistent with the existence of constant relative risk aversion, with the coefficient of risk aversion having a value of approximately 1.3.

Decision rules for an investor in forward exchange markets

Abstract This paper obtains decision rules for a risk-averse, expected-utility-maximizing investor in forward exchange markets who may simultaneously combine covered arbitrage, spot and forward speculation. The introduction of margin requirements makes rates of return on all alternatives directly comparable, and causes initial wealth to constrain investment in all alternative. It is shown that combinations involving more than two alternatives need not be considered, and that a comparison of (expected) rates of return alone is sufficient to choose between the relevant combinations. The inadequacy of the ‘functional’ approach for analyzing individual decision-making is demonstrated.

Domestic and Foreign Sales When Prices in Both Markets are Uncertain

This paper obtains comparative static results for a firm that sells a single output domestically and abroad when prices in both markets are uncertain. Results are obtained for both constant absolute risk aversion and for Ross decreasing absolute risk aversion, using a diagrammatic analysis which exploits the properties of expected marginal utility contours. The results depend crucially on whether foreign and domestic sales are net substitutes or complements. The model is more complex and yields fewer unambiguous results - particularly in the case of substitutes - than when there is price uncertainty in only one market. Copyright Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research 2003.

A note on Mill's theory of international values

Abstract This note provides an algebraic formulation of the analysis contained in section 7 of John Stuart Mills chapter on international values. It is shown that Mills results can be obtained as the solution to a pair of nonlinear programming problems. In addition, an error in Mills analysis regarding the post-trade terms of exchange is pointed out.

The Production Possibility Frontier as a Maximum Value Function: Concavity and Non-increasing Returns to Scale

This paper makes both a methodological as well as a substantive contribution to the literature on the concavity of the production possibility frontier (PPF). Rather than using the standard, calculus-based techniques, the method here relies on the fact that the PPF is a maximum value function. The consequent simplification in analysis makes it possible to demonstrate that the conditions which are sufficient to guarantee global concavity of the PPF are considerably less stringent than those stated in the literature. Existing analyses have assumed that production functions are (a) concave and homothetic, or (b) display non-increasing returns to scale (NIRS) and homogeneity. This paper shows that concavity without homotheticity, or NIRS and quasiconcavity without homogeneity (or even homotheticity) are sufficient, thus greatly increasing the generality of existing results. The analysis can be extended to include situations in which the input set includes industry-specific factors.

Income Redistribution Effects in the Presence of Region-Specific Factors

This paper examines the effect of changes in factor endowments on income Distribution in a four-factor, there-commodity model, in which two of the factors are region-specific while the other two are inter-regionally and inter-sectorally mobile. We provide an intermediate run model which bridges the gap between the Heckscher-Ohlin-Samuelson and the specific factor models, and which yields Results which differ from both these models. A simple derivation of factor Friendship patterns is made possible by exploiting the properties of the GNP Function. The procedure used may be applied to any n-commodity, (n+1)-factor Model. [F20]

The geometry of risk aversion: A further comment

Abstract This paper corrects errors in two earlier attempts in this journal [Hawawini (1986) and Sun (1990)] to analyze a simple portfolio model geometrically. It also points out that the general approach taken by these authors has serious shortcomings. For example, an unmodified use of their technique does not permit one to derive the result that optimal risky investment is inversely related to risk if the utility function is quadratic.