Wealth Preferences Research Articles

Environmental policies and stagnation in a two-country economy

Global warming poses a serious and acute threat to our planet. However, negotiations over the allocation of permissible carbon emissions often lead to conflicts of interest between developed and developing countries. Developing countries claim that global warming results from long-term pollution emissions by developed countries, while developed countries demand that developing countries should make adequate efforts to reduce carbon emissions. Both developed and developing countries generally agree that stricter emission limits will strain their economies due to the associated extra abatement costs. Using a two-country model with wealth preferences, we find that the impacts of a country’s emission limit on real consumption and pollution emissions in both countries vary depending on the combination of their business situations. If both countries achieve full employment, one country’s stricter emission limit decreases real consumption in both, as expected. However, if one country faces aggregate demand stagnation while the other achieves full employment, a stricter emission limit imposed by the stagnant country increases real consumption in both countries.

Insatiable Wealth Preference: Evidence from Japanese Household Survey

Insatiable Wealth Preference: Evidence from Japanese Household Survey

Wealth preference and rational bubbles

In this paper, we show that rational bubbles can exist within a neoclassical economy, provided that households derive utility from holding wealth. Hence, we provide a microfoundation for bubbles that relies on a frictionless economy with an infinitely-lived representative household. While our bubbly equilibria are very similar to those obtained by Tirole (1985) in an overlapping generation economy, the underlying mechanism is fundamentally different. Instead of relying on an exchange across heterogeneous households, the bubble relies on the representative household’s willingness to accumulate wealth without the intention of spending it. Turning to public debt, we carefully review the similarities and the differences between rational bubbles and Ponzi schemes. We establish that the Ricardian equivalence must hold in any of our equilibria. Finally, within a monetary economy, we show that the preference for wealth is fundamentally different from money-in-the-utility-function.

Decomposing social risk preferences for health and wealth

This study reports the results of the first artefactual field experiment designed to measure the prevalence of aversion toward different components of social risks in a large and demographically representative sample. We identify social risk preferences for health and wealth for losses and gains, and decompose these attitudes into four different dimensions: individual risk, collective risk, ex-post inequality, and ex-ante inequality. The results of a non-parametric analysis suggest that aversion to risk and inequality is the mean preference for outcomes in health and wealth in the domain of gains and losses. A parametric decomposition of aversion to risk and inequality shows that respondents are averse to ex-post and ex-ante inequality in health and wealth for gains and losses. Likewise, respondents are averse to collective risk, but neutral to individual risk, which highlights the importance of considering different components of social risk preferences when managing social health and wealth risks.

Positional preferences and efficiency in a dynamic economy

In an endogenous growth model, we characterize the conditions under which positional preferences for consumption and wealth do not cause inefficiency and derive an optimal tax policy response in cases where these conditions are not satisfied. The concerns for relative consumption and relative wealth partly emanate from social comparisons with people in other countries. We distinguish between a (conventional) welfarist government and a non-welfarist government that does not attach any social value to relative concerns. We also compare the outcome of Nash-competition among local/national governments with the resource allocation implied by a global social optimum both under welfarism and non-welfarism.

The Preference for Wealth and Inequality: Towards a Piketty Theory of Wealth Inequality

The Preference for Wealth and Inequality: Towards a Piketty Theory of Wealth Inequality

The Preference for Wealth and Inequality: Towards a Piketty Theory of Wealth Inequality

The Preference for Wealth and Inequality: Towards a Piketty Theory of Wealth Inequality

A theory of progressive lending

We characterize Pareto efficient long term ‘relational’ lending contracts with one-sided lender commitment in a context where the borrower can accumulate wealth, has intertemporal consumption smoothing preferences, and the lender has some sanctioning power following default. We show the negative results of Bulow and Rogoff (1989) do not apply irrespective of the extent of sanctions, the borrower's preferences for smoothing, initial wealth or relative welfare weight. Borrowing, investment and wealth grow and converge to the first-best. Optimal allocations can be implemented by backloaded ‘progressive’ lending: a sequence of one period loans of growing size.

Are family female directors catalysts of innovation in family small and medium enterprises?

AbstractResearch SummaryWhile family small and medium enterprises (SMEs) increasingly involve women in their boards, the role of female directors as catalysts of innovation is yet to be fully understood. Drawing on upper echelons theory, we examine directors' gender in conjunction with family affiliation to investigate the influence of family female directors on family SMEs' innovation. Moreover, by analyzing the contingent role of socioemotional wealth preferences, we open the black box of noneconomic aspects shaping the cognition and behavior of boards. Our analysis of a unique survey‐based sample of 287 Belgian family SMEs reveals that family female directors do exert a positive influence on R&D intensity. However, according to the mixed gamble logic, this influence is filtered by the positive and negative moderation of their socioemotional wealth preferences.Managerial SummaryWe examine the role that women who are members of the family owning a business play in the decision making of SMEs. Specifically, we investigate the influence that the involvement of family female directors in the board of family SMEs exerts on innovation decisions. To empirically address this line of inquiry, we conducted a survey on 287 Belgian family SMEs. Our analysis shows that the involvement of family female directors in the board fosters family SME's innovation investments. Yet, such an influence is weakened by the intention of the family to retain control over the business but is enhanced by the identification of family members with the firm and by the desire to renew family bonds through dynastic succession. Therefore, our study cautions family SMEs' owners and managers to pay attention to these important dimensions of diversity when appointing directors to their board.

Decomposing Social Risk Preferences for Health and Wealth

Decomposing Social Risk Preferences for Health and Wealth

Accounting for the Slowdown in Output Growth after the Great Recession: A Wealth Preference Approach

Accounting for the Slowdown in Output Growth after the Great Recession: A Wealth Preference Approach

Relative consumption, relative wealth, and long-run growth: when and why is the standard analysis prone to incorrect conclusions?

AbstractWe employ a novel approach for analyzing the effects of relative consumption and relative wealth preferences on economic growth. In the pertinent literature, these effects are usually assessed by examining the dependence of the growth rate on the two parameters of the utility function that seem to measure the strength of the relative consumption and the relative wealth motives. Applying our fundamental factor approach, we identify specifications in which the traditional approach yields incorrect qualitative conclusions. The problematic specifications have the common unpleasant property that the parameter that seems to determine the strength of the relative consumption motive actually also affects the elasticity of intertemporal substitution of absolute consumption (and the strength of the relative wealth motive). Since the standard approach is unaware of the additional effect(s), it attributes the total change in the growth rate incorrectly to the change in the strength of the relative consumption motive.

Robust consumption policy with the desire for wealth accumulation

We study the optimal consumption-saving problem for consumers who are ambiguous about labor income shocks and have a preference for (absolute) wealth. It is shown that the preference for wealth interacts with the degree of ambiguity in non-trivial ways in determining the optimal consumption. The model predicts that ambiguity and preference for wealth can produce substitution or complementarity effects on consumption. In addition, we find that the interactions of ambiguity and desire for wealth generate different implications for MPCs. We then show that these interactions significantly influence the contribution of ambiguity to excess sensitivity of consumption growth and the contribution of preference for wealth to excess smoothness of consumption.

Corporate social responsibility and capital budgeting

Using an experiment, I examine whether managers have preferences for corporate social responsibility (CSR) in a capital budgeting setting and the factors that influence the extent to which they act on these preferences. I find that managers have and act on preferences for CSR by reporting to implement higher cost CSR investments that reduce firm profit even when they have financial incentives not to do so. I also find that when managers need to misreport to act on their preferences for CSR, their willingness to act on such preferences is decreased due to a desire to be honest. Conversely, an opportunity to create slack for personal benefit increases managers’ willingness to act on their CSR preferences, offsetting the decrease resulting from honesty concerns. Together these findings demonstrate that managers’ preferences for CSR investments can influence behavior even in the presence of competing economic incentives and social norms. Finally, an analysis of firm profit shows that firms may be better off financially with managers who act on preferences for CSR investments rather than managers who have strong preferences for wealth. This result obtains because managers with strong CSR preferences do not create slack to the same extent as managers with strong preferences for wealth. These results have implications for both theory and practice because they show that managers’ reports used to make investment decisions are influenced by their personal CSR preferences.

Structural Unemployment, Underemployment, and Secular Stagnation

We introduce a preference for wealth into the standard search and matching model to analyze the labor market when there is persistent demand shortage. We show that, under some conditions, a secular stagnation steady state exists in which the economy permanently operates below capacity due to both structural unemployment and underemployment. The latter is a direct consequence of the lack of aggregate demand. Our findings are as follows. In the absence of demand shortage, the preference for wealth creates a new transmission channel for shocks and policy measures due to induced changes in the real interest rate, in addition to the job creation channel of the standard matching model. Turning to the stagnation equilibrium, the effects of demand and supply shocks are opposite to those of the standard case and result in a co-movement of unemployment and underemployment. In contrast, the effects of wage and cost shocks depend on the degree of aggregate demand shortage, but they can explain movements of unemployment and underemployment in opposite directions. Finally, we show that fluctuations in the total employment gap under stagnation are primarily driven by fluctuations in underemployment instead of structural unemployment. Our analysis helps to understand why the unemployment rate in Japan has been surprisingly low during its lost decades and highlights the need for further policy interventions in support of aggregate demand despite a seemingly decent employment record.

Structural Unemployment, Underemployment, and Secular Stagnation

We introduce a preference for wealth into the standard search and matching model to analyze the labor market when there is persistent demand shortage. We show that, under some conditions, a secular stagnation steady state exists in which the economy permanently operates below capacity due to both structural unemployment and underemployment. The latter is a direct consequence of the lack of aggregate demand. Our findings are as follows. In the absence of demand shortage, the preference for wealth creates a new transmission channel for shocks and policy measures due to induced changes in the real interest rate, in addition to the job creation channel of the standard matching model. Turning to the stagnation equilibrium, the effects of demand and supply shocks are opposite to those of the standard case and result in a co-movement of unemployment and underemployment. In contrast, the effects of wage and cost shocks depend on the degree of aggregate demand shortage, but they can explain movements of unemployment and underemployment in opposite directions. Finally, we show that fluctuations in the total employment gap under stagnation are primarily driven by fluctuations in underemployment instead of structural unemployment. Our analysis helps to understand why the unemployment rate in Japan has been surprisingly low during its lost decades and highlights the need for further policy interventions in support of aggregate demand despite a seemingly decent employment record.

EXPECTATION-DRIVEN ASSET PRICE FLUCTUATIONS UNDER THE SPIRIT OF CAPITALISM HYPOTHESIS: THE ROLE OF HETEROGENEITY

In this paper, I study how heterogeneity amongst agents affects the occurrence of expectation-driven asset price fluctuations in a pure exchange economy à la Lucas, with infinitely lived households, under the hypothesis of spirit of capitalism (SOC). I consider heterogeneous households in terms of preferences, endowments, and initial wealth, and capture the SOC through preferences for wealth. Preferences for wealth are the key element of this paper in a twofold aspect. First, they explain the occurrence of asset price fluctuations driven by self-fulfilling changes in expectations. Second, heterogeneity in endowments affects asset price level and dynamics only if preferences are heterogeneous. For instance, if agents with the strongest SOC are also the rich in terms of endowments, heterogeneity in endowments heightens the asset price level in the long run and destabilizes by enlarging the range of parameter values for which expectation-driven asset price fluctuations occur.

Japanese Economy: Two Lost Decades and How Many More?

By introducing wealth preference to a dynamic macroeconomic model, instead of those market distortions, we can deal with the secular deficiency of aggregate demand and a discrepancy between fl ow and stock variables.

The quest for status and R&D-based growth

We analyze the effect of status preferences on R&D-based economic growth. For this purpose, we extend the standard relative wealth approach by allowing the various assets held by households to differ with respect to their status relevance. Relative wealth preferences imply that the effective rate of return on saving in the form of a particular asset is the sum of its market rate of return and its status-related extra return. We show that the status relevance of shares issued by entrants to finance new technologies is of crucial importance for long-run growth: First, an increase in the intensity of the quest for status raises the steady-state economic growth rate only if the status-related extra return of these shares is strictly positive. Second, for any given degree of status consciousness, the long-run economic growth rate depends positively on the relative status relevance of shares issued by entrants. Finally, we show how the inefficiency of the decentralized balanced growth path is affected by allowing the various assets to differ with respect to their status relevance.

Measuring multivariate risk preferences in the health domain

We investigate univariate and multivariate risk preferences for health (longevity) and wealth. We measure attitudes toward correlation and attitudes toward higher order dependence structures such as cross-prudence and cross-temperance, making use of the risk apportionment technique proposed by Eeckhoudt et al. (2007). For multivariate gains, we find correlation aversion and cross-prudence in longevity and wealth. For losses, we observe correlation seeking and cross-imprudence. We do not find clear evidence for cross-temperance. Our results indicate that longevity and wealth are considered to be substitutes for gains, but not for losses. Second, univariate (higher order) risk preferences are comparable for longevity and wealth, although somewhat closer to linearity for wealth. Third, we find evidence that attitudes toward dependence structures in the health domain are sign-dependent.