Christian E. Weber

Intertemporal non-separability and "rule of thumb" consumption

Abstract This paper reexamines previous findings that some 50% of disposable income goes to households who consume their current incomes in violation of the Permanent Income Hypothesis. In particular, I test whether such findings are robust to assumed intertemporal non-separability in the utility function. When the household utility function is permitted to be non-separable in consumption in adjacent time periods, the estimated fraction of disposable income which goes to such “rule of thumb” households is quantitatively small, sometimes negative, and never statistically significant.

“Rule-of-Thumb” Consumption, Intertemporal Substitution, and Risk Aversion

This article reexamines evidence that some 50% of disposable income goes to households who simply consume their current incomes. Previous studies of such “rule-of-thumb” behavior have typically used log-linear Euler equations and have not distinguished between intertemporal substitution and relative risk aversion. In contrast, I use generalized method of moments to estimate the importance of rule-of-thumb behavior and separate intertemporal substitution from risk aversion by using the Epstein–Zin utility function. Using postwar U.S. data, I cannot reject the hypothesis that all income goes to permanent-income households—that is, that there are no rule-of-thumb households.

Pareto and the 53 Percent Ordinal Theory of Utility

Vilfredo Pareto died more than seventy-five years ago. His last major contribution to economic theory, “Économie mathématique,” published in 1911 in the Encyclopedie des sciences mathematiques pures et appliques, is now ninety years old, and his earliest major contributions, the five-part “Considerazioni sui principii fondamentali dell’economia politica pura” (1892–93) and several other papers published at about the same time in the Giornale degli economisti, are now well over a century old. Pareto’s work has extensively influenced so much of modern economics, and intellectual historians have had ample time to digest and interpret his work. Nevertheless, confusion persists on at least one important aspect of Pareto’s contribution to modern economic theory. This confusion concerns the question of whether and to what extent Pareto adopted an ordinal theory of utility. The answers that intellectual historians have given to this question are decidedly mixed. At one extreme, many authors, perhaps the majority of those who have addressed the issue, have claimed with little or no

More on Slutsky's Equation as Pareto's Solution

ics and Finance, Albers School of Business and Economics, Seattle University, Seattle, WA 98122; e-mail: cweber@seattleu.edu. I would like to thank Dean Peterson, Peter Dooley, and two anonymous referees for very helpful comments on earlier drafts of this article. In particular, the comments of both referees led to substantial improvements. I am also grateful to Ben Sopranzetti for providing me with an English translation of the article by Ricci cited herein and to John Chipman for providing me with an English translation of parts 1–4 of Pareto’s “Considerazioni sui principii fondamentali dell’economia politica pura.” 1. As Dooley notes, Slutsky cited the wrong part of a five-part paper that Pareto published in the Giornale degli Economisti in 1892–93. Pareto’s general analysis for the case in which the marginal utility of each good can depend on the quantities of all the other goods consumed appeared in part 5, which was published in October 1893. However, Slutsky refers to part 3, published in August 1892, in which Pareto analyzed the special case of independent utilities or, as we term them today, additive utility functions. Slutsky appears to have been following Pareto’s ([1909] 1971) own incorrect citation of his earlier work. See note 17 of the appendix to Pareto’s Manual([1909] 1971). More on Slutsky’s Equation as Pareto’s Solution

A Production Function with an Inferior Input: Comment

Epstein and Spiegel (2000) have discussed a production function in which one input is inferior: an increase in the target level of output reduces the quantity of the input demanded. This paper provides a more straightforward proof that the input in question is inferior. This proof has the added advantage that, unlike the proof of Epstein and Spiegel, it is based on the firms cost minimization problem. It thus emphasizes the connection between the firms cost minimization problem and the issue of input inferiority. It is also shown that, if we treat the Epstein-Spiegel functional form as a utility function rather than a production function, then the inferior good can exhibit Giffen behavior. Copyright 2001 by Blackwell Publishers Ltd and The Victoria University of Manchester

Two further empirical implications of Auspitz-Lieben-Edgeworth-Pareto complementarity

Abstract I show that the assumptions of strong concavity and Auspitz–Lieben–Edgeworth–Pareto complementarity imply that for any good either all other goods must be gross substitutes or all other goods must be gross complements and that all goods must be compensated substitutes.

Government Purchases, Government Transfers, and the Post‐1970 Slowdown in U.S. Economic Growth

This article shows that the post‐1970 slowdown in U.S. economic growth can be explained by a shift in fiscal policy away from government purchases and toward transfer payments. Two endogenous growth models that include government purchases and transfers imply a relationship between these variables and long‐run growth. Empirically, the simultaneous decline in the fraction of output purchased by federal, state, and local governments and rise in transfer payments around 1970 dramatically overpredict the growth slowdown of the early 1970s. The growth rate is predicted to have risen in the absence of this change in fiscal policy.

A difficulty in the search for Giffen behavior

Gilley and Karels [1991] argue that economists should search for Giffen goods in cases where two or three goods are chosen subject to two constraints. This paper reconsiders their three-good model. With a third good added, traditional comparative statics analysis, which is absent from the simpler model, becomes crucial. The Slutsky equation with a negative own substitution effect reappears, suggesting that one good which is automatically Giffen in the two-good, two-constraint model may have a downward-sloping demand curve when the third good is added to the model.

The paper-bill spread and Blanchard's version of Okun's law

Blanchard (1989) interprets Okuns Law as a relationship between VAR innovations in output and the unemployment rate. Adding the paper-bill spread to a bivariate VAR in output growth and the unemployment rate and even ordering it ahead of the unemployment rate when estimating the structural disturbances does not alter Blanchards finding that Okuns coefficient for output and unemployment rate innovations rate is around -0.18.

A note on Lagrange multipliers with several binding constraints

Abstract When a function is optimized subject to one constraint, the Lagrange multipliers for the primal and dual problems are reciprocals. Here, I show how this result generalizes to the case where a function is optimized subject to several binding constraints.