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Individuals and families make key decisions that impact many aspects of financial stability and determine the future of the economy. These decisions involve balancing current sacrifice against future benefits. People have to decide how much to invest in health care, exercise, their diet, and insurance. They must decide how much debt to take on, and how much to save. And they make choices about jobs that determine employment and unemployment levels. Forward-Looking Decision Making is about modeling this individual or family-based decision making using an optimizing dynamic programming model.
Robert Hall first reviews ideas about dynamic programs and introduces new ideas about numerical solutions and the representation of solved models as Markov processes. He surveys recent research on the parameters of preferences--the intertemporal elasticity of substitution, the Frisch elasticity of labor supply, and the Frisch cross-elasticity. He then examines dynamic programming models applied to health spending, long-term care insurance, employment, entrepreneurial risk-taking, and consumer debt.
Linking theory with data and applying them to real-world problems, Forward-Looking Decision Making uses dynamic optimization programming models to shed light on individual behaviors and their economic implications.
Foreword vii
Preface ix
Chapter 1: Basic Analysis of Forward-Looking Decision Making 1
1.1 The Dynamic Program 1
1.2 Approximation 5
1.3 Stationary Case 6
1.4 Markov Representation 7
1.5 Distribution of the Stochastic Driving Force 9
Chapter 2: Research on Properties of Preferences 10
2.1 Research Based on Marshallian and Hicksian Labor Supply Functions 13
2.2 Risk Aversion 15
2.3 Intertemporal Substitution 17
2.4 Frisch Elasticity of Labor Supply 19
2.5 Consumption-Hours Complementarity 20
Chapter 3: Health 23
3.1 The Issues 23
3.2 Basic Facts 25
3.3 Basic Model 26
3.4 The Full Dynamic-Programming Model 31
3.5 The Health Production Function 35
3.6 Preference Parameters 36
3.7 Solving the Model 37
3.8 Concluding Remarks 38
Chapter 4: Insurance 42
4.1 The Model 43
4.2 Calibration 45
4.3 Results 46
Chapter 5: Employment 50
5.1 Insurance 52
5.2 Dynamic Labor-Market Equilibrium 53
5.3 The Employment Function 58
5.4 Econometric Model 59
5.5 Properties of the Data 64
5.6 Results 65
5.7 Concluding Remarks 69
Chapter 6: Idiosyncratic Risk 70
6.1 The Joint Distribution of Lifetime and Exit Value 73
6.2 Economic Payoffs to Entrepreneurs 74
6.3 Entrepreneurs in Aging Companies 82
6.4 Concluding Remarks 85
Chapter 7: Financial Stability with Government-Guaranteed Debt 87
7.1 Introduction 87
7.2 Options 92
7.3 Model 94
7.4 Calibration 100
7.5 Equilibrium 101
7.6 Roles of Key Parameters 113
7.7 Concluding Remarks 115
7.8 Appendix: Value Functions 116
References 119
Index 123
Overview
Individuals and families make key decisions that impact many aspects of financial stability and determine the future of the economy. These decisions involve balancing current sacrifice against future benefits. People have to decide how much to invest in health care, exercise, their diet, and insurance. They must decide how much debt to take on, and how much to save. And they make choices about jobs that determine employment and unemployment levels. Forward-Looking Decision Making is about modeling this individual...