Diego Nocetti

Precautionary Saving and Endogenous Labor Supply with and without Intertemporal Expected Utility

We analyze precautionary saving behavior in a framework with labor and non-labor income risks, an endogenous supply of labor, and a representation of preferences that disentangles attitudes towards risk, attitudes towards intertemporal smoothing, and ordinal preferences for consumption and leisure. This preference structure allows us to disentangle and to describe in an intuitive way the different forces that determine precautionary saving “in the small” and “in the large”.

Robust Comparative Statics of Risk Changes

The standard method for establishing the comparative statics of risk changes in optimization problems has been confined to comparing unique interior solutions, relying on strong assumptions about payoff functions and decision variables. We propose a simple and intuitive approach that hinges on considerably weaker assumptions. Merging insights from the monotone comparative statics literature with insights from the risk apportionment literature, we show that the ranking of simple lottery pairs is all that is needed for establishing the comparative statics of risk changes. We use this approach to analyze the comparative statics of N th-degree stochastic dominance shifts in a general setting with one and with multiple decision variables, and we show how these results can be applied to generalize the classical theories of precautionary saving, self-protection, and others. This paper was accepted by James Smith, decision analysis .

Healthy Life Expectancy for Selected Race and Gender Subgroups: The Case of Tennessee

Objective: To analyze healthy life expectancy (HLE) for major racial and gender subgroups, based on the diverse population of Tennessee and compared with the United States. Materials and Methods: We use life table methodology and the HLE calculation model of the National Center for Health Statistics (NCHS), using two databases for 2001: NCHS National Vital Statistics Reports life tables and CDC Behavioral Risk Factor Surveillance System (BRFSS) survey. Results: For Tennessee, although average total life expectancy (TLE) is 73.6 years at birth, only 61.1 years of “good” health are expected. Substantial racial and gender differences are found in both TLEs and HLEs with black males having the lowest and white females the highest. Although females have longer TLE, they spend more years in an unhealthy state than males. Conclusions: The findings raise new challenges for researchers and health policy makers for accomplishing the dual goals of longer life expectancy and elimination of health disparities among population subgroups.

On multivariate prudence

In this note we extend the theory of precautionary saving to the case of multivariate risk. We introduce a notion of multivariate prudence, related to a precautionary premium, and we propose a matrix-measure to capture the strength of the precautionary saving motive. We discuss the usefulness of this measure, in particular for comparing precautionary behavior among individuals. We also characterize the notion of multivariate downside risk aversion as a preference for disaggregating harms across outcomes of multivariate lotteries. We show the link between this notion and the notion of multivariate prudence, we propose a matrix-measure of its intensity, and we illustrate the usefulness of our results in a problem of social discounting.

Greater Mutual Aggravation

A large strand of research has identified when (i) a single risk is undesirable and (ii) two independent risks aggravate each other. We extend this line of inquiry by establishing when (iii) mutual aggravation is greater for greater risks. This natural property of greater mutual aggravation explains recent experimental findings on higher-order risk preferences, and can guide managerial behavior when risks in the decision environment become more severe. The online appendix is available at https://doi.org/10.1287/mnsc.2017.2746. This paper was accepted by Han Bleichrodt, decision analysis.

Collective risk aversion

In this article we analyze the risk attitude of a group of heterogeneous agents and we develop a theory of comparative collective risk tolerance. In particular, we characterize how shifts in the distribution of individual levels of risk tolerance affect the group’s attitude towards risk. In a model with efficient risk-sharing and two agents an increase in the level of risk tolerance of one or of both agents might have an ambiguous impact on the collective level of risk tolerance; the latter increases for some levels of aggregate wealth while it decreases for other levels of aggregate wealth. For more general populations we characterize the effect of first-order like shifts (individual levels of risk tolerance more concentrated on high values) and second-order like shifts (more dispersion on individual levels of risk tolerance) on the collective level of risk tolerance. We also evaluate how shifts in the distribution of individual levels of risk tolerance impact the collective level of risk tolerance in a framework with exogenous egalitarian sharing rules. Our results permit to better characterize differences in risk taking behavior between groups and individuals and among groups with different distributions of risk preferences.

A New Look into the Determinants of the Ecological Discount Rate: Disentangling Social Preferences

How should changes in environmental quality occurring in the future be discounted? To answer this question we consider a model of “ecological discounting”, where the representative consumer has a utility function defined over two attributes, consumption and environmental quality, which evolve stochastically over time. We characterize the determinants of the social discount rate and its behavior over time using a preference structure that disentangles attitudes towards intertemporal inequality, attitudes towards risk, and tastes over consumption and environmental quality. We show that the degree of substitutability between consumption and environmental quality, the degree of risk aversion, the degree of inequality aversion, and the rate at which these attitudes change as natural and man-made resources evolve over time are all important aspects of the ecological discount rate and its term structure. Our analysis suggests that over medium and long term horizons the ecological discount rate should be below the rate of time preference, supporting recent proposals for immediate action towards climate change mitigation.

Price Variability and Savings

We analyze how commodity price variability affects saving behavior in a dynamic model with multiple commodities, portfolio hedging, and a preference structure that disentangles attitudes towards risk and attitudes towards intertemporal substitution. We show that the effect of price variability on savings boils down to knowing 1) the consumer’s degree of aversion to intertemporal fluctuations (i.e. the size of the elasticity of intertemporal substitution) and 2) the effect that price variability has on the certainty-equivalent real interest rate. Price variability is more likely to decrease the certainty-equivalent rate if consumers are highly risk averse, if there is limited intra-temporal substitution among the goods, and if asset returns are a poor hedge against inflation. We also show that if price variability decreases the certainty-equivalent rate, consumer’s welfare also decreases.

On Multivariate Prudence

In this paper we extend the theory of precautionary saving to the case in which uncertainty is multidimensional and we develop a matrix-measure of multivariate prudence. Furthermore, we characterize comparative prudence, decreasing and increasing prudence, the effect of uncertainty on the marginal propensity to consume out of wealth, and the Dreze-Modigliani substitution effect in this multivariate setting. We also characterize the concept of multivariate downside risk aversion as a multivariate preference for harm disaggregation. We show that our definition is equivalent to a positive precautionary saving motive. We propose an alternative measure of the intensity of downside risk aversion and show that this measure is useful in understanding several economic problems that involve multivariate preferences.

The Biasing Effects of Memory Distortions on the Process of Legal Decision-Making

This article investigates the impact of memory limitations and memory distortions on the process of legal decision-making. I develop a simple framework in which jurors establish interim judgments, which are later used by a memory technology to reconstruct, in an inductive process, evidence related to those judgments. The resulting behavior matches a number of stylized facts that are inconsistent with the standard Bayesian framework. I show that beliefs in a given hypothesis may remain unchanged, and may even be strengthened, in the face of disconfirming evidence. This, in turn, implies that the beliefs of two jurors with different memory technologies may deviate further apart as they receive new information, accounting for heterogeneous, i.e. opposite verdict choices, and strongly held beliefs after a large amount of information is presented. Finally, I show that in this setup the probability of legal errors is highest for moderate strengths of evidence.