Risky Consumption Research Articles

The Costs of Recession: A Reply

Pemberton (I 995) raises the important issue of what is the most appropriate way to measure business cycle costs from an individual perspective. As always in these matters it is not nor should it be a case of outright victory of one side over the other. Rather, it is a question of which approach is the more plausible and on this we would wish to defend our shade of grey as being the more plausible measure. This brief reply explains why. Imagine the simplest possible textbook experiment used to explain some of the principles of expected utility maximisation. A prize in our case employed consumption C can be won with a given probability and the alternative is the booby prize of unemployed consumption. Let C be the expected value of this gamble and let C be the amount for which the player would be indifferent to the gamble. The risk premium is then simply the difference between C and C. This is exactly what is given by equation (9) in Clark et al. (I994) (equation (2) in Pemberton's comment), where the risk premium is measured as a proportion of employed consumption. So there is nothing mysterious about our recession cost measure it is simply the standard textbook risk premium. It would seem to us to be a very natural experiment to consider when measuring the cost of agents' exposure to risks and we termed it the net cost measure. Our gross cost measure is given by i C/C which is described by our equation (7). This is just the risk premium plus the difference between employed consumption and expected consumption (again all measured relative to employed consumption). We argued that the gross measure was one which would appeal to Keynesians who, because they view cycles as disequilibrium events, would wish to include losses in consumption as part of the costs. Pemberton's statement that, 'A high equilibrium (natural) rate of unemployment is surely a major problem', is an implicit endorsement of the Keynesian cost measure, in our view. The net measure, because it measures the risk premium, obviously abstracts away from any consumption losses as a result of drawing the booby prize. This is exactly the same idea as Lucas in his proposed cost measure who, because of his view that business cycles are equilibrium events, does not accept consumption losses as a proper part of costs. The Lucas measure and our own compare a risky consumption path with a riskless stream. Our measure differs from Lucas, however, in one important respect. From the macro perspective that he adopts, the important comparison when measuring economic fluctuations and their impact on the welfare of representative agents is the deviation of consumption from its trend path. Thus Lucas' recession cost measure depends on the variance of consumption around that path. Unusually high aggregate consumption is as costly as unusually low

Prevalence of Selected Food Consumption and Preparation Behaviors Associated with Increased Risks of Food-borne Disease

Although not well quantified, a portion of food-borne illnesses results from voluntary behaviors that are entirely avoidable, such as eating raw foods of animal origin or engaging in unsafe food preparation practices. A telephone survey of 1,620 respondents was conducted to assess the prevalence of selected self-reported food consumption and preparation behaviors associated with increased risks of food-borne illness and the demographic characteristics related to such behaviors. The percentages of survey respondents who reported consuming raw foods of animal origin were 53%, raw eggs; 23%, undercooked hamburgers; 17%, raw clams or oysters; and 8%, raw sushi or ceviche. A fourth of the respondents said that after cutting raw meat or chicken, they use the cutting board again without cleaning it. Safer food consumption and preparation behaviors were consistently reported by persons who were female, were at least 40 years old, and had a high-school education or less. These findings suggest that risky food consumption and preparation behaviors are common in the United States and that educational campaigns aimed at changing these behaviors may need to be targeted to specific groups of persons.

Evaluating risky consumption paths: The role of intertemporal substitutability

In dynamic stochastic welfare comparisons, a failure clearly to distinguish between risk aversion and intertemporal substitutability can result in misleading assessments of the impact of risk aversion on the welfare costs of consumption-risk changes. The problem arises in any setting in which uncertainty is propagated over time, notably, but not exclusively, in economies with stochastic consumption trends. Regardless of the preference setup adopted, an increase in risk aversion amplifies the per-period costs of risks. The weights consumers use to cumulate the per-period costs of risks with persistent effects should, however, depend on intertemporal substitutability as well as on risk aversion. Under time-separable expected-utility preferences, an increase in the period utility function's curvature therefore alters the welfare effect of risk for reasons that are in part unrelated to risk aversion. To illustrate these points I reconsider Lucas's estimate of the ‘cost of consumption instability’ for the postwar United States.

Do Smokers Underestimate Risks?

This paper uses a national survey of 3,119 individuals to examine the effect of lung cancer risk perceptions on smoking activity. Both smokers and nonsmokers greatly overestimate the lung cancer risk of cigarette smoking, and the extent of the overestimation is much greater than the extent of underestimation. These risk perceptions in turn significantly reduce the probability of smoking, as suggested by an economic model of risky consumption decisions. Cigarette excise taxes in effect endow individuals with additional risk perceptions comparable to their current assessed lung cancer risks.

The Effect of Capital Risk on Optimal Saving Decisions

I. Introduction, 653. — II. Preferences for sure and risky consumption bundles, 654. — III. Saving under certainty and under capital risk, 659. — IV. Comparison with the literature, 665.