Non-separable Preferences Research Articles

Who are the non-separable voters?

Non-separable preference is defined as an individual's preference on one issue being conditional to the outcome of another issue. Studies in political behavior suggest three theories explaining the non-separable preferences: (1) High cognitive capacity with strong policy preferences, (2) motivated partisan independence, and (3) non-attitude. This article exploits a new rank order question design implemented right before the 2021 Taiwan referendum, in which two power outages before the voting encouraged the formation of non-separable preferences on two referendums choosing between environmental protection and power supply. Results of a pre-registered survey (n = 910) show that the majority of the self-reported non-separable voters are driven by non-attitude instead of policy or partisan concerns, even though these non-separable voters can alter the referendum results at the aggregate level. Non-separable voters have, on average, lower education, lower political knowledge, and are non-partisan. Its implications for forming and measuring non-separable preferences are finally discussed.

Wealth effects, price markups, and the neo-Fisherian hypothesis

The present paper thoroughly investigates the occurrence of positive comovement between inflation and the nominal interest rate conditional on a nominal shock — the so-called neo-Fisherian hypothesis in a New Keynesian framework. By introducing Jaimovich–Rebelo (JR) consumption–labor nonseparable preferences into an otherwise standard New Keynesian model, we show that neo-Fisherianism depends on the extent of wealth effects in households’ labor supply decisions. Neo-Fisherianism appears more prominent in economic environments with weaker wealth effects in labor supply (in particular for Greenwood–Hercowitz–Huffmann preferences where wealth effects are absent), smaller price-to-wage markups (for which the steady state is less distorted), and smaller real wage rigidity. Following a permanent interest rate shock, the neo-Fisherian hypothesis is guaranteed to hold regardless of the utility preferences or degree of real wage rigidity. A more prominent presence of endogenous capital works in favor of neo-Fisherianism. Finally, the stabilizing properties of Taylor rules under JR preferences are scrutinized.

Fiscal Stimulus of Last Resort

AbstractI examine global dynamics in a monetary model with overlapping generations of finite‐horizon agents, nonseparable preferences over consumption and real money balances, and a binding lower bound on nominal interest rates. Debt targeting rules exacerbate the possibility of self‐fulfilling liquidity traps, for agents expect austerity following deflationary slumps. Conversely, activist but sustainable fiscal policy regimes—implementing intertemporally balanced tax cuts and/or transfer increases in response to disinflationary trajectories—are capable of escaping liquidity traps and embarking inflation into a globally stable path that converges to the target. Should fiscal stimulus of last resort be overly aggressive, however, spiral dynamics around the liquidity‐trap steady state exist, causing global indeterminacy.

Are preferences for work reference dependent or time nonseparable? New experimental evidence

Tests of labor supply models often rely on wages. However, wage variation alone generally cannot disentangle the classical time separable model and its extensions: reference dependent preferences (income targeting) and time nonseparable preferences (disutility spillovers; timing-specific preferences). We set up a novel laboratory experiment in which individuals choose their working time. We vary, independently, wages, historical income paths, and cumulative past work. We also vary the timing of experimental sessions. Statistical tests and stochastic revealed preference methods cannot reject the classical model in favor of income targeting or disutility spillovers, but the data suggest that labor supply varies by time-of-the-day.

Non-Separable Preferences in the Statistical Analysis of Roll Call Votes

AbstractConventional multidimensional statistical models of roll call votes assume that legislators’ preferences are additively separable over dimensions. In this article, we introduce an item response model of roll call votes that allows for non-separability over latent dimensions. Conceptually, non-separability matters if outcomes over dimensions are related rather than independent in legislators’ decisions. Monte Carlo simulations highlight that separable item response models of roll call votes capture non-separability via correlated ideal points and higher salience of a primary dimension. We apply our model to the U.S. Senate and the European Parliament. In both settings, we find that legislators’ preferences over two basic dimensions are non-separable. These results have general implications for our understanding of legislative decision-making, as well as for empirical descriptions of preferences in legislatures.

A New General Equilibrium Welfare Measure, with Application to Labor Income Taxes

Abstract In this paper we extend the Hicksian compensating variation welfare measure in two directions. First, we adjust the size of the compensating variation in order to account for the fact that the compensating transfers will result in changes in output, as well as in prices, because labor and, in dynamic models, capital will adjust in response to these transfers. Second, we extend the measure to a dynamic setting with possibly time non-separable preferences. We find that these considerations become more significant for the welfare cost of higher labor income taxes as one moves from static to dynamic models, to models with time non-separable preferences, and finally to models with uncertainty.

New results on precautionary saving and nonlinear risks.

We study precautionary saving in a two-period model that allows for nonlinear risks and nonseparable preferences. Permitting nonlinear risk effects is important because they are common in the developing world or when worldwide shocks hit economies, like the COVID-19 pandemic. Allowing nonseparable preferences is also important because they admit the incorporation of intergenerational transfer, habit persistence and other specific features of intertemporal decision making. We decompose the risk shock using Davis’s (Int Econ Rev 30(1):131–136, 1989) compensation method and analyze the income and substitution effect of an increase in risk. We prove that the substitution effect is always negative and, therefore, the income effect must be positive and larger in size to have a precautionary net effect. We then apply the method to various sources of risk, such as income, interest rate and wealth risk. We analyze the magnitude of each effect and find the conditions required to guarantee precautionary saving in each case. Our results are presented as signs of covariances, which provides a new perspective on precautionary saving.

Monetary Policy, Neutrality and the Environment

We study the interaction between monetary and fiscal policies in a Ramsey-Sidrauski model augmented with environmental capital. Equilibrium solutions are studied through the “Green Golden Rule”. Despite the non-separability of money in utility and intertemporally non-separable preferences, money is environmentally neutral. Policy impacts the environment via the marginal rate of transformation rather than the marginal rate of substitution between consumption and environment. Fiscal policies, lump sum and distortionary, under a balanced budget, are also environmentally non-neutral. Only under a non-balanced budget, when deficits are monetized, is money environmentally non-neutral. In alternative approaches (Cash-in-Advance, Transactions Costs), money is environmentally non-neutral. JEL Classification: E52, E62, H23

On the indeterminacy of equilibrium in an endogenous growth model with non-separable preferences

This paper studies equilibrium indeterminacy in an extended version of the two-sector endogenous growth model by Mino (1999) by allowing alternative specifications for leisure. When utility depends on pure leisure, indeterminacy may only emerge if consumption and leisure are Edgeworth complements. We obtain the necessary and sufficient conditions for indeterminacy from the arbitrage condition on the two assets of the economy: consumption and human capital. When qualified leisure is considered, indeterminacy does not arise.

Call it a Day: History Dependent Stopping Behavior

In this paper, we provide evidence of history-dependent stopping behavior. Using data from an online chess platform, we estimate a dynamic discrete choice model in which an agent may have time non-separable preferences over the stochastic outcomes of their actions. We show that the agent’s decisions cannot be reconciled in a model with time separable preferences and that there is substantial heterogeneity in preferences across players. In particular, there are two types of people: those who get discouraged by a loss and stop, and others, who get encouraged by failure and keep playing until a win. We show how to leverage the information about an agent’s type in market design to achieve various welfare goals. A counterfactual analysis demonstrates that a matching algorithm that incorporates stopping behavior can significantly increase the length of play.

Call it a Day: History Dependent Stopping Behavior

In this paper, we provide evidence of history-dependent stopping behavior. Using data from an online chess platform, we estimate a dynamic discrete choice model in which an agent may have time non-separable preferences over the stochastic outcomes of their actions. We show that the agent’s decisions cannot be reconciled in a model with time separable preferences and that there is substantial heterogeneity in preferences across players. In particular, there are two types of people: those who get discouraged by a loss and stop, and others, who get encouraged by failure and keep playing until a win. We show how to leverage the information about an agent’s type in market design to achieve various welfare goals. A counterfactual analysis demonstrates that a matching algorithm that incorporates stopping behavior can significantly increase the length of play.

Hours and employment over the business cycle: A structural analysis

We conduct Bayesian inference on a quantitative business-cycle model with search-and-matching frictions and a neoclassical hours-supply decision. Likelihood maximization with both U.S. macroeconomic and labor data shows the model cannot jointly reproduce the comovement of the labor margins with themselves and with macro data. A parsimonious set of features reconciles the model with the data: non-separable preferences with parametrized wealth effects and costly hours adjustment. The model offers a structural explanation for the observed time-varying comovement between the labor margins, being either positive or negative, across post-war U.S. recessions and recoveries. Moreover, the estimated model shows adjustment in the intensive margin contributes up to half the dynamics of total hours in these episodes, as intensive-margin adjustments increase employment losses during recessions and delay employment recoveries.

Option pricing under regime-switching models: Novel approaches removing path-dependence

A well-known approach for the pricing of options under regime-switching models is to use the regime-switching Esscher transform (also called regime-switching mean-correcting martingale measure) to obtain risk-neutrality. One way to handle regime unobservability consists in using regime probabilities that are filtered under this risk-neutral measure to compute risk-neutral expected payoffs. The current paper shows that this natural approach creates path-dependence issues within option price dynamics. Indeed, since the underlying asset price can be embedded in a Markov process under the physical measure even when regimes are unobservable, such path-dependence behavior of vanilla option prices is puzzling and may entail non-trivial theoretical features (e.g., time non-separable preferences) in a way that is difficult to characterize. This work develops novel and intuitive risk-neutral measures that can incorporate regime risk-aversion in a simple fashion and which do not lead to such path-dependence side effects. Numerical schemes either based on dynamic programming or Monte-Carlo simulations to compute option prices under the novel risk-neutral dynamics are presented.

Instrumental Rationality Without Separability

This paper argues that instrumental rationality is more permissive than expected utility theory. The most compelling instrumentalist argument in favour of separability, its core requirement, is that agents with non-separable preferences end up badly off by their own lights in some dynamic choice problems. I argue that once we focus on the question of whether agents’ attitudes to uncertain prospects help define their ends in their own right, or instead only assign instrumental value in virtue of the outcomes they may lead to, we see that the argument must fail. Either attitudes to prospects assign non-instrumental value in their own right, in which case we cannot establish the irrationality of the dynamic choice behaviour of agents with non-separable preferences. Or they don’t, in which case agents with non-separable preferences can avoid the problematic choice behaviour without adopting separable preferences.

Allocation of Time and Household-level Consumption Equivalent Welfare: A Case of South Korea

ABSTRACTUsing “2014 Time Usage and Quality of Life” of 17th KLIPS (Korean Labour and Income Panel Study), the first and most detailed time use survey of its kind in South Korea, we first document the patterns of time use in market work, nonmarket work (household work), child care, and a variety of definitions in leisure. We find that, while men work longer hours, men’s additional market work is well compensated by more leisure and less hours in nonmarket work and child care. We also find within-household unequal distribution of time use in nonmarket work, child care, and leisure in favour of men. Consistent with the cases of the US and other advanced economies, high-income earners tend to enjoy less hours of leisure while they spend more money on leisure activities. Secondly, we calculate the household-level consumption equivalent measure that considers consumption, leisure, life expectancy, and uncertainty. We find that taking into account non-separable preference over leisure and consumption and the quality of leisure is important and household-level welfare measures based solely on income or consumption are both incomplete and misleading.

On demand shocks and international business cycle puzzles

This note studies a parsimonious dynamic stochastic general equilibrium model driven by demand shocks to explain two central puzzles in open-economy macroeconomics: the comovement puzzle (Backus et al., 1992) and the Backus–Smith puzzle (Backus and Smith, 1993), while matching a large set of domestic and international business cycle properties observed in the industrialized countries. Features such as non-separable preferences, non-tradable sector, or market incompleteness do not appear to be preconditions for resolving these long-standing puzzles.

Land-price dynamics and macroeconomic fluctuations with nonseparable preferences

In this paper, we introduce a complementary relationship between consumption and labor hours by revising the household’s period utility function in Liu et al. (2013). The revision concomitantly allows for a finite Frisch elasticity of labor supply and a stronger consumption smoothing motive. We find that, in general, the estimation of Liu et al. (2013) is quite robust. In addition, the propagation mechanism of the credit constraint triggered by a housing demand shock still persists. However, the amplification effect of the credit constraint triggered by the housing demand shock on key macroeconomic variables is greatly muted. We also find that, except for land price fluctuations, the housing demand shock cannot act as the primary force to drive the fluctuations in other macroeconomic variables.

Allocation of Time and Household-Level Consumption Equivalent Welfare: A Case of South Korea

Using “2014 Time Usage and Quality of Life” of 17th KLIPS (Korean Labor and Income Panel Study), the first and most detailed time use survey of its kind in South Korea, we first document the patterns of time use in market work, nonmarket work (household work), child care, and a variety of definitions in leisure. We find that, while men work longer hours, men’s additional market work is well compensated by more leisure and less hours in nonmarket work and child care. We also find within-household unequal distribution of time use in nonmarket work, child care, and leisure in favour of men. Consistent with the cases of US and other advanced economies, high-income earners tend to enjoy less hours of leisure while they spend more money in leisure activities. Secondly, we calculate the household-level consumption equivalent measure that considers consumption, leisure, life expectancy, and uncertainty. We find that taking into account non-separable preference over leisure and consumption and quality of leisure is important and household-level welfare measures based solely on income or consumption are both incomplete and misleading.

Nonseparable Costly Attention and Revealed Preference

We provide revealed preference characterizations for choices made under various forms of costly information acquisition. We examine nonseparable, multiplicative, and constrained costly information acquisition. In particular, this allows the possibility of unknown time delay for acquiring information. The techniques we use parallel the duality properties in the standard consumer problem.

Explaining the durable goods co-movement puzzle: A Bayesian approach

A standard two-sector sticky price model with flexibly priced durables depicts negative comovement between durables and nondurables after a monetary policy shock, which is at odds with the empirical evidence. Several papers have addressed this issue with different model mechanisms, which can essentially be divided into three categories: financial frictions (on the production side or on the household side), stickiness in the price of productive inputs (labor or intermediate goods), and non-separable preferences between labor and composite consumption. While each mechanism can independently resolve the comovement problem, it is unclear which mechanism is empirically most relevant. This paper conducts a horse race among three alternatives that can resolve the puzzle in isolation, namely, a working capital channel with habit formation, sticky wages, and non-separable preferences, using a Bayesian approach. Based on the posterior estimates and a log marginal likelihood comparison exercise, the working capital channel combined with habit formation is the most important mechanism, as it can simultaneously resolve the comovement problem and fit the data well.