Asset Prices, Business Cycles, and Markov-Perfect Fiscal Policy when Agents are Risk-Sensitive

We study a business cycle model in which a benevolent fiscal authority must determine the optimal provision of government services, while lacking credibility, lump-sum taxes, and the ability to bond finance deficits. Households and the fiscal authority have risk sensitive preferences. We find that outcomes are affected importantly by the household's risk sensitivity, but not by the fiscal authority's. Further, while household risk-sensitivity induces a strong precautionary saving motive, which raises capital and lowers the return on assets, its effects on fluctuations and the business cycle are generally small, although more pronounced for negative shocks. Holding the stochastic steady state constant, increases in household risk-sensitivity lower the risk-free rate and raise the return on equity, increasing the equity premium. Finally, although risk-sensitivity has little effect on the provision of government services, it does cause the fiscal authority to lower the income tax rate. An additional contribution of this paper is to present a method for computing Markov-perfect equilibria in models where private agents and the government are risk-sensitive decisionmakers.

Temper and Temperature: The Missing Link of Climate on Armed Conflicts

We investigate the causes of a conflict by adding ambient climate factors to the existing bundle of most significant variables. It turns out that – controlling for possible associations – temperature could actually induce a conflict. We emphasise that temperature could not be a dominant reason in starting a conflict; however, it could escalate the chances when other factors are present. This paper references some of the related psychological studies to support this claim. We also show that grievance factors could actually be rightfully effective in starting an internal conflict alongside greed based reasons. In the end, we believe that it could be informative to study ambient factors more often in economics.