Franco Modigliani

Consumption decisions under uncertainty

Publisher Summary This chapter discusses three issues related to consumption decisions under uncertainty, namely, the determinants of risk aversion for future consumption, the impact of uncertainty about future resources on current consumption, and the separability of consumption decisions and portfolio choices. These issues are discussed in the context of a simple model introduced, together with the assumptions, in the chapter. The chapter presents a derivation of a (local) measure of risk aversion for delayed risks which, like the Pratt measure in the timeless context, represents twice the risk premium per unit of variance for infinitesimal risks. The aversion for delayed risks grows as curvature of the indifference loci increases, or consumers who would respond strongly to a (compensated) change in the rate of interest are relatively better suited to carry delayed risks.

Risk-Adjusted Performance

1. Franco Modigliani 1. Institute Professor Emeritus at the Massachusetts Institute of Technology in Cambridge (MA 02139). 2. Leah Modigliani 1. A U.S. investment strategist at Morgan Stanley & Co. Inc. in New York (NY 10036

The Chinese Saving Puzzle and the Life-Cycle Hypothesis

Chinas per capita income ranks below 100th in the world. Its saving rate, however, has been one of the highest worldwide in recent decades. In this paper, we attempt to explain the seeming paradox within the framework of the Life-Cycle Hypothesis developed by Franco Modigliani. The key LCH variables are income and population growth. Our results based on data we put together from official sources show that income growth has been the dominant factor behind the dramatic increase in Chinas saving rate, as predicted by the LCH. Demographic structure and inflation also had significant impact on the fluctuations of the saving rate.

New Developments on the Oligopoly Front

IN MY opinion the two books reviewed in this article represent a welcome major breakthrough on the oligopoly front. These two contributions, which appeared almost simultaneously, though clearly quite independently, have much in common in their basic models and method of approach to the problem. But, fortunately, they do not significantly repeat each other; for, having started from the same point of departure, the authors have followed divergent paths, exploring different implications of the same basic model. Sylos deals almost exclusively with homogeneous oligopoly defined as a situation in which all producers, actual and potential, are able to supply the identical commodity (more generally, commodities that are perfect substitutes for each other) and have access to the very same long-run cost function. He thus focuses on barriers to entry resulting from economies of scale. Bain, on the other hand, also analyzes the effect of competitors being altogether unable to produce perfect substitutes-that is, product-differentiation barriers-or being able to do so only at higher costs--absolute costadvantage barriers. Furthermore, Bains book is greatly enriched by fascinating empirical data, painstakingly collected

The Monetarist Controversy or, Should We Forsake Stabilization Policies?

In recent years and especially since the onset of the current depression, the economics profession and the lay public have heard a great deal about the sharp conflict between “monetarists and Keynesians” or between “monetarists and fiscalists.” The difference between the two “schools” is generally held to center on whether the money supply or fiscal variables are the major determinants of aggregate economic activity, and hence the most appropriate tool of stabilization policies.

The Pasinetti Paradox in Neoclassical and More General Models

A machine for transferring adhesive labels from both sides of a single carrier strip to two separate streams of product items on a continuous basis. A pair of spaced continuously rotating vacuum wheels come in contact with opposite sides of the carrier strip, the carrier strip passing around a loop-forming roller adjacent each vacuum wheel to bring the label in contact with the vacuum wheel. Each vacuum wheel has holes around the periphery thereof, a vacuum being applied through the openings in a stationary sector of the vacuum wheel. As each label comes in contact with the associated vacuum wheel, it is pulled off by the vacuum and transported through the sector angle to a release point, where it is transferred to the surface of a product item.

The Predictability of Social Events

1 We benefited from the criticism and advice of several colleagues who kindly read various drafts of this paper. We are especially indebted to Professor Herbert Simon, who patiently read and painstakingly criticized all drafts of the present paperof which there were many. His contributions to our argument are too numerous to be listed; in particular, he suggested the use of Brouwers Fixed Point Theorem. However, the responsibility for the final form in which this argument is now presented and, especially, for any errors of commission or omission is entirely ours.

The Age–Saving Profile and the Life-Cycle Hypothesis

The life-cycle hypothesis posits that saving is positive for young households and negative for the retired, so that wealth should be hump-shaped. Yet, if one looks at the microeconomic evidence on saving by age, dissaving by the elderly is limited or absent. But the saving measures usually computed on cross-sections or panel data are based on a concept of income that does not take into account the presence of pension arrangements. In fact, disposable income treats pension contributions as taxes, and pension benefits as transfers. But since contributions entitle the payer to receive a pension after retirement, contributions should be regarded as life-cycle saving and hence included back to income. Similarly, pension benefits accruing to the retired do not represent income produced, but a drawing from the pension wealth accumulated up to retirement. We use Italian repeated cross-sectional data from 1984 to 1995 to show the importance of this adjustment for the evaluation of the saving behavior of the elderly.

Security Markets versus Bank Finance: Legal Enforcement and Investors' Protection

When minority investors’ rights are poorly protected, the ability of firms to raise equity capital is impaired, leading to less finance for new ventures. Fewer firms will be financed with outside equity, resulting in a low market capitalization relative to GNP. External funding requires easily enforceable claims such as debt or requires long‐term relationships with institutions. Provision of funding shifts from risk capital to debt, and to a predominance of intermediated over market finance. We report supporting evidence for a few countries. To measure investor protection, we use a price measure, the premium on voting stock, related to the control premium. In countries where the voting premium is large, corporate financing is dominated by bank lending and equity markets are much smaller.

Determinants of Private Saving with Special Reference to the Role of Social Security—Cross-country Tests

The aim of this paper is to develop and test hypotheses designed to explain international differences in saving behaviour. These hypotheses are derived from the life cycle hypothesis, which suggests that such differences may be explained by differences in the rate of growth of per capita income, length of retirement, demographic factors and the availability of social security retirement pensions. Attention is focused on the role played by social security. The life cycle hypothesis explains much of the international variation in saving behaviour, and although one can identify both savings replacement and induced retirement effects for social security they appear almost to offset each other.