Is the consumption-income ratio stationary? Evidence from linear and nonlinear panel unit root tests for OECD and non-OECD countries

This paper applies recently developed heterogeneous nonlinear and linear panel unit root tests that account for cross-sectional dependence to 24 OECD and 33 non-OECD countries’ consumption-income ratios over the period 1951–2003. We apply a recently developed methodology that facilitates the use of panel tests to identify which individual cross-sectional units are stationary and which are nonstationary. This extends evidence provided in the recent literature to consider both linear and nonlinear adjustment in panel unit root tests, to address the issue of cross-sectional dependence, and to substantially expand both time-series and cross sectional dimensions of the data analysed. We find that the majority (65%) of the series are nonstationary with slightly fewer OECD countries’ (61%) series exhibiting a unit root than non-OECD countries (68%).

No Good Deals - No Bad Models

Faced with the problem of pricing complex contingent claims, an investor seeks to make his valuations robust to model uncertainty. We construct a notion of a model- uncertainty-induced utility function and show that model uncertainty increases the investor's eff ective risk aversion. Using the model-uncertainty-induced utility function, we extend the \No Good Deals" methodology of Cochrane and Sa a-Requejo [2000] to compute lower and upper good deal bounds in the presence of model uncertainty. We illustrate the methodology using some numerical examples.

Effects of Experience, Knowledge and Signals on Willingness to Pay for a Public Good

This paper compares how increases in experience versus increases in knowledge about a public good affect willingness to pay (WTP) for its provision. This is challenging because while consumers are often certain about their previous experiences with a good, they may be uncertain about the accuracy of their knowledge. We therefore design and conduct a field experiment in which treated subjects receive a precise and objective signal regarding their knowledge about a public good before estimating their WTP for it. Using data for two different public goods, we show qualitative equivalence of the effect of knowledge and experience on valuation for a public good. Surprisingly, though, we find that the causal effect of objective signals about the accuracy of a subject’s knowledge for a public good can dramatically affect their valuation for it: treatment causes an increase of $150-$200 in WTP for well-informed individuals. We find no such effect for less informed subjects. Our results imply that WTP estimates for public goods are not only a function of true information states of the respondents but beliefs about those information states.

Perceiving Prospects Properly

When an agent chooses between prospects, noise in information processing generates an effect akin to the winner’s curse. Statistically unbiased perception systematically overvalues the chosen action because it fails to account for the possibility that noise is responsible for making the preferred action appear to be optimal. The optimal perception patterns share key features with prospect theory, namely, overweighting of small probability events (and corresponding underweighting of high probability events), status quo bias, and reference-dependent S-shaped valuations. These biases arise to correct for the winner’s curse effect.