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The relationship between the socially efficient discount rate and the time horizon is studied. The set of utility functions is characterized whereby it is efficient to discount more distant cash flows at a lower rate.

A theoretical foundation to the notions of time diversification and decreasing absolute aversion to risk on wealth is provided. The agents can split immediate gains and losses in capital into small independent pieces that are disseminated in the many consumption periods of their lifetime by which risk gets optimally time diversified and degree of risk aversion is reduced.

The author presents a procedure for determining long term socially optimal discount rates. She shows that the discount rate is smaller for more distant future, and growth causes uncertainty about the discount rate.

The effect of a change in the actual distribution of an asset's payoffs on its price, that is, on its risk-neutral expectation was examined. The result showed no effect as at equilibrium prices, the individual was indifferent to buying or selling more of the asset than to replacing the asset position with certainty.

This paper develops an adverse selection model where peer group systems are shown to trigger lower interest rates and remove credit rationing in the case where borrowers are uninformed about their potential partners and ex post state verification (or auditing) by banks is costly. Peer group formation reduces interest rates due to a 'collateral effect', namely, cross subsidisation amongst borrowers acts as collateral behind a loan. By uncovering such a collateral effect, this paper shows that peer group systems can be viewed as an effective risk pooling mechanism, and thus enhance efficiency, not just in the full information set up.

A simple two-period model has proven that investment flexibility influences an investor's ability to shift his portfolio and accept risks. The greater an investor's ability to change his investment after intermediary shocks to wealth, the riskier should be his portfolio. This proves true when an investor is not able to control the size of risky investment but can select between a risky and a riskless asset. However, if there is more risky asset every period, counterexamples show that flexibility will not usually assure greater risk taking.

Risk-neutral firms tend to behave in a specific risk-averse manner with investment behavior influenced by factors such as revenue, tax rates, tax exemption levels and project risk. The study shows that such risk averse behavior may tend to lower income at high profit levels and increase revenue at low profit levels.

In this paper, we provide two basic properties of utility functions u which exhibit decreasing absolute prudence, i.e. (-u[triple prime]/u[double prime])[prime] [less than or equal to] 0. These properties are used to examine the allocation of risks in an economy when some agents bear non-transferable risks. We show that it is fair Pareto-efficient to let those with a non-transferable risk bear relatively less of the transferable risk in the economy if and only if absolute prudence is decreasing. In another model, there is a complete set of contingent markets, but some agents have no direct access to them. We examine the fair efficient allocation of risk in a pool gathering a trader and a non-trader. Decreasing absolute prudence provides an upper bound to the share of the pool's risk that should be borne by the trader. Keywords: Decreasing absolute prudence; Efficient risk sharing; Background risk

The situation obtained under conditions characterized by changing risk is discussed and applied to a linear model. In particular, the determinants of risk change that raise the value of the decision variable for risk-averse entities is determined. Such comparative statics of changes in risk results in the attainment of a result that is characterized by a greater central riskiness dominance that proves to be on par with stochastic dominance of the second degree.

The starting point of the analysis is that a significant proportion of the labour force is not covered by efficient labour contracts. In particular, the non-existence of forward labour contracts limits the opportunity of efficient risk-sharing through private arrangements among young labour-suppliers and capital-owners. In such a context, state-dependent labour taxes and employment subsidies would be required to achieve ex ante Pareto efficiency. In the absence of employment subsidies, a certain (limited) degree of downward wage rigidity is in general Pareto superior to full wage flexibility. At the second-best optimum so defined, productive efficiency is sacrificed in some states, in order to achieve greater efficiency in risk-sharing. Thus, the unemployment associated with wage rigidity is inefficient, though voluntary due to the levels of benefits, and second-best efficient. A limited degree of wage discrimination by hiring date is typically part of the second-best policy.