Optimal buffer stocks and precautionary savings with disappointment aversion:
Developing countries use various risk reduction schemes, ranging from active management of buffer stocks and international reserves to commodity stabilization funds. The purpose of this paper is to reexamine the design of these schemes in a generalized expected utility maximization model where agent...
Gespeichert in:
| 1. Verfasser: | |
|---|---|
| Format: | Buch |
| Sprache: | English |
| Veröffentlicht: |
Cambridge, Mass.
1995
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| Schriftenreihe: | National Bureau of Economic Research <Cambridge, Mass.>: NBER working paper series
5361 |
| Schlagworte: | |
| Zusammenfassung: | Developing countries use various risk reduction schemes, ranging from active management of buffer stocks and international reserves to commodity stabilization funds. The purpose of this paper is to reexamine the design of these schemes in a generalized expected utility maximization model where agents are disappointment averse. We derive first the generalized risk premium, showing that disappointment aversion increases the conventional risk premium by a term proportional to the standard deviation times the degree of disappointment aversion. Next, we show that disappointment aversion modifies the characteristics of precautionary saving. The concavity of the marginal utility continues to determine precautionary saving, but its effect is of a second order magnitude (proportional to the variance) compared to the first order effect (proportional to the standard deviation) induced by disappointment aversion. Hence, higher volatility increases the precautionary saving of a disappointment averse agent. This result applies even if the income process approaches a random walk. Finally, we reexamine the optimal size of buffer stocks, showing that disappointment aversion increases its size by a first order magnitude. A buffer stock that is rather small when agents are maximizing the conventional expected utility is rather large when agents are disappointment averse. |
| Beschreibung: | 24 S. graph. Darst. |
Internformat
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| 490 | 1 | |a National Bureau of Economic Research <Cambridge, Mass.>: NBER working paper series |v 5361 | |
| 520 | |a Developing countries use various risk reduction schemes, ranging from active management of buffer stocks and international reserves to commodity stabilization funds. The purpose of this paper is to reexamine the design of these schemes in a generalized expected utility maximization model where agents are disappointment averse. We derive first the generalized risk premium, showing that disappointment aversion increases the conventional risk premium by a term proportional to the standard deviation times the degree of disappointment aversion. Next, we show that disappointment aversion modifies the characteristics of precautionary saving. The concavity of the marginal utility continues to determine precautionary saving, but its effect is of a second order magnitude (proportional to the variance) compared to the first order effect (proportional to the standard deviation) induced by disappointment aversion. Hence, higher volatility increases the precautionary saving of a disappointment averse agent. This result applies even if the income process approaches a random walk. Finally, we reexamine the optimal size of buffer stocks, showing that disappointment aversion increases its size by a first order magnitude. A buffer stock that is rather small when agents are maximizing the conventional expected utility is rather large when agents are disappointment averse. | ||
| 650 | 4 | |a Mathematisches Modell | |
| 650 | 4 | |a Buffer stocks |x Mathematical models | |
| 650 | 4 | |a Economic stabilization | |
| 650 | 4 | |a Saving and investment |x Mathematical models | |
| 830 | 0 | |a National Bureau of Economic Research <Cambridge, Mass.>: NBER working paper series |v 5361 |w (DE-604)BV002801238 |9 5361 | |
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| id | DE-604.BV010646871 |
| illustrated | Illustrated |
| indexdate | 2024-07-09T17:56:33Z |
| institution | BVB |
| language | English |
| oai_aleph_id | oai:aleph.bib-bvb.de:BVB01-007104700 |
| oclc_num | 33977339 |
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| owner_facet | DE-19 DE-BY-UBM DE-521 DE-11 |
| physical | 24 S. graph. Darst. |
| publishDate | 1995 |
| publishDateSearch | 1995 |
| publishDateSort | 1995 |
| record_format | marc |
| series | National Bureau of Economic Research <Cambridge, Mass.>: NBER working paper series |
| series2 | National Bureau of Economic Research <Cambridge, Mass.>: NBER working paper series |
| spelling | Aizenman, Joshua 1949- Verfasser (DE-588)124080057 aut Optimal buffer stocks and precautionary savings with disappointment aversion Joshua Aizenman Cambridge, Mass. 1995 24 S. graph. Darst. txt rdacontent n rdamedia nc rdacarrier National Bureau of Economic Research <Cambridge, Mass.>: NBER working paper series 5361 Developing countries use various risk reduction schemes, ranging from active management of buffer stocks and international reserves to commodity stabilization funds. The purpose of this paper is to reexamine the design of these schemes in a generalized expected utility maximization model where agents are disappointment averse. We derive first the generalized risk premium, showing that disappointment aversion increases the conventional risk premium by a term proportional to the standard deviation times the degree of disappointment aversion. Next, we show that disappointment aversion modifies the characteristics of precautionary saving. The concavity of the marginal utility continues to determine precautionary saving, but its effect is of a second order magnitude (proportional to the variance) compared to the first order effect (proportional to the standard deviation) induced by disappointment aversion. Hence, higher volatility increases the precautionary saving of a disappointment averse agent. This result applies even if the income process approaches a random walk. Finally, we reexamine the optimal size of buffer stocks, showing that disappointment aversion increases its size by a first order magnitude. A buffer stock that is rather small when agents are maximizing the conventional expected utility is rather large when agents are disappointment averse. Mathematisches Modell Buffer stocks Mathematical models Economic stabilization Saving and investment Mathematical models National Bureau of Economic Research <Cambridge, Mass.>: NBER working paper series 5361 (DE-604)BV002801238 5361 |
| spellingShingle | Aizenman, Joshua 1949- Optimal buffer stocks and precautionary savings with disappointment aversion National Bureau of Economic Research <Cambridge, Mass.>: NBER working paper series Mathematisches Modell Buffer stocks Mathematical models Economic stabilization Saving and investment Mathematical models |
| title | Optimal buffer stocks and precautionary savings with disappointment aversion |
| title_auth | Optimal buffer stocks and precautionary savings with disappointment aversion |
| title_exact_search | Optimal buffer stocks and precautionary savings with disappointment aversion |
| title_full | Optimal buffer stocks and precautionary savings with disappointment aversion Joshua Aizenman |
| title_fullStr | Optimal buffer stocks and precautionary savings with disappointment aversion Joshua Aizenman |
| title_full_unstemmed | Optimal buffer stocks and precautionary savings with disappointment aversion Joshua Aizenman |
| title_short | Optimal buffer stocks and precautionary savings with disappointment aversion |
| title_sort | optimal buffer stocks and precautionary savings with disappointment aversion |
| topic | Mathematisches Modell Buffer stocks Mathematical models Economic stabilization Saving and investment Mathematical models |
| topic_facet | Mathematisches Modell Buffer stocks Mathematical models Economic stabilization Saving and investment Mathematical models |
| volume_link | (DE-604)BV002801238 |
| work_keys_str_mv | AT aizenmanjoshua optimalbufferstocksandprecautionarysavingswithdisappointmentaversion |