Former theoretical and empirical studies find that precautionary savings are reduced inthe presence of social security systems. The saving motive, however, does not change:individuals respond to increasing income risk by increasing their savings. Although thisstill holds for common tax and...

In his pivotal contributions during the marginal revolution, Leon Walras along with W.S. Jevons assigned subjective utility directly to commodities (goods and services) as, in effect, a simplifying assumption — an assumption destined to become the keystone of neoclassical economics. But this...

It is well known that the implicit insurance provided by labor income taxes can reduce total saving. We show that this insurance can change the composition of saving as well because the reduction in labor-income risk may affect the amount of financial risk that an individual chooses to bear....

We model a decision maker who can exert costly effort to adapt her risk assessments, thereby optimizing the value of her risky prospects. We provide an axiomatic characterization of the model, and show how costs of adaption can be elicited and compared across individuals. In a moral hazard...

Two studies attempted to discriminate between a situationaleconomic and a cultural explanation for the recently reported finding that Chinese from the People's Republic of China (PRC) are more risk-seeking than Americans. Both studies compared American and Chinese proverbs related to risk and...

In this article, we describe a multistudy project designed to explain observed cross-national differences in risk taking between respondents from the People's Republic of China and the United States. Using this example, we develop the following recommendations forcross-cultural investigations....

Prospect theory's S-shaped weighting function is often said to reflect the psychophysics of chance. We propose an affective rather than psychophysical deconstruction of the weighting function resting on two assumptions. First, preferences depend on the affective reactions associated with...

Virtually all current theories of choice under risk or uncertainty are cognitive and consequentialist. They assume that people assess the desirability and likelihood of possible outcomes of choice alternatives and integrate this information through some type of expectation-based calculus to...

We analyze efficient risk-sharing arrangements when the value from deviating is determined endogenously by another risk sharing arrangement. Coalitions form to insure against idiosyncratic income risk. Self-enforcing contracts for both the original coalition and any coalition formed (joined)...

This paper characterizes the stationary equilibrium of a continuous-time neoclassical production economy with capital accumulation in which households can insure against idiosyncratic income risk through long-term insurance contracts. Insurance companies operating in perfectly competitive...