In this paper we experimentally investigate the impact that competing for funds has on the risk-taking behavior of laboratory portfolio managers compensated through an option-like scheme according to which the manager receives (most of) the compensation only for returns in excess of pre-specified strike price. We find that such a competitive environment and contractual arrangement lead, both in theory and in the lab, to inefficient risk taking behavior on the part of portfolio managers. We then study various policy interventions, obtained by manipulating various aspects of the competitive environment and the contractual arrangement, e.g., the Transparency of the contracts offered, the Risk Sharing component in the contract linking portfolio managers to investors, etc. While all these interventions would induce portfolio managers, at equilibrium, to efficiently invest funds in safe assets, we find that, in the lab, Transparency is most effective in incentivising managers to do so. Finally, we document a behavioral “Other People’s Money” effect in the lab, where portfolio managers tend to invest the funds of their investors in a more risky manner than their Own Money, even when it is not in either the investors’ or the managers’ interest to do so.

What is the relationship between short-run fluctuations in economic activity and the long-run evolution of the economy? There is empirical evidence that more perturbed economies tend to grow less. Yet matching this evidence has proven challenging for growth models without market failures. This paper examines the relationship between short-term fluctuations and long-term growth within a complete-market economy featuring Epstein-Zin preferences and unbounded growth driven by human and physical capital accumulation. With these preferences, risk aversion and intertemporal elasticity of substitution are allowed to be independent of each other. When the model is plausibly calibrated, the relationship between the mean and variance of growth turns out to be negative. In most cases, the effect of fluctuations on welfare is found to be negative and sizable, even when the long-run effect on growth is positive.

Investment decision rules in risk situations have been extensively analyzed for firms. Most research focus on financial options and the wide range of methods based on dynamic programming currently used by firms to decide on whether and when to implement an irreversible investment under uncertainty. The situation is quite different for public investments, which are decided and largely funded by public authorities. These investments are assessed by public authorities, not through market criteria, but through public Cost-Benefit Analysis (CBA) procedures. Strangely enough, these procedures pay little attention to risk and uncertainty. The present text aims at filling this gap. We address the classic problem of whether and when an investment should be implemented. This stopping time problem is established in a framework where the discount rate is typically linked to GDP, which follows a Brownian motion, and where the benefits and cost of implementation follow linked Brownian motions. We find that the decision rule depends on a threshold value of the First Year Advantage/Cost ratio. This threshold can be expressed in a closed form including the means, standard deviations and correlations of the stochastic variables. Simulations with sensible current values of these parameters show that the systemic risk, coming from the correlation between the benefits of the investment and economic growth, is not that high, and that more attention should be paid to risks relating to the construction cost of the investment; furthermore, simple rules of thumb are designed for estimating the above-mentioned threshold. Some extensions are explored. Others are suggested for further research.

Investing in a new perennial crop variety involves an irreversible commitment of capital and generates an uncertain return stream. As a result, the decision to adopt a new variety includes a significant real option value. Waiting for returns to rise above this real option causes a delay in adoption because of economic hysteresis. This study tests for hysteresis in the adoption of wine grape varieties using a sample of district-level data from the state of California. The empirical results show a significant hysteretic effect in wine grape investment, which might be reduced by activities that smooth earnings over time.

The adoption of a common central Bank has modified the strategic relationships between fiscal and monetary authorities and raised in a new context the issue of debt stabilization. To study this problem, Van Aarle et al (1997) have proposed a two-country model with a common central bank. In a sense they obtained a neutrality result: the adoption of a common central bank does not modify the evolution of debt if the authorities can commit. This note reexamines this neutrality result by departing from the previous authors on three points: i) externalities are introduced between countries to account for the elasticity of the world interest rate to macro-economic policies, ii) the model features n countries, some of them remaining outside the monetary Union, iii) analytical results are given (many results of Van Aarle et al (1997) were numeric). In this extended context the neutrality result collapses: i) the institutional change introduces an asymmetry between countries, ii) countries inside the monetary union improve their long run welfare, iii) but the outside countries can win or lose under the new institutional setting.

Dans le cadre d'un modèle à générations imbriquées, nous supposons que la gestion d'une ressource renouvelable correspond à l'émission de quotas d'exploitation transferables. Chaque agent a la possibilité d'utiliser les quotas dans la production ou de les vendre à la génération suivante. Nous montrons qu'une telle politique de gestion d'une ressource naturelle renouvelable est possible seulement pour certain niveaux de ressource au moment de l'introduction des quotas. Nous montrons alors que les quotas conduisent à l'existence d'un unique équilibre stable de long terme fonction du niveau d'exploitation défini par le planificateur.

This paper investigates empirically the influence of uncertainty on corporate investment. Uncertainty of demand, output prices and investment prices are measured by the standard deviation of (pre-)filtered Belgian (1984-1992) and Spanish (1983-1993) panel data, and included as explanatory variables in the investment equations derived from a neo-classical model with financial constraints. GMM-results indicate that investment behaviour towards output price uncertainty differs significantly in conjecture with a firm’s size and leverage.