Household and corporate behaviour under uncertainity

University dissertation from Uppsala : Acta Universitatis Upsaliensis

Abstract: Household and corporate behaviour under uncertainty is examined in five self-contained essays. Thefirst four essays are focused on household behaviour with an emphasis on the role of housing and thelast essay is on optimal corporate financial in relation to the tax system.Essay I: During the last decade most western countries have experienced large and unexpectedfluctuations in consumption and savings. To increase the understanding of these variations aconsumption equation is estimated on Swedish micro data with an empirical method capable of dealingwith the inherent problems associated with micro data sets. The estimated model is used to addressthree questions; 1) Does the data support or reject the implications generated by stochastic life-cyclemodels? 2) What do the consumption and wealth trajectories of a representative household look like?3) What is the micro econometric explanation of the changes in aggregate consumption?Essay II: Nondurable and durable consumption, with stochastic prices arbitrarily correlated with eachother and with financial assets, are introduced in a standard, Merton model with an infinitely livedindividual. Current wealth becomes an uncertain investment in future purchasing power, i.e. currentwealth is implicitly invested in the prices the two consumption goods. These implicit investments andcurrent holdings of durables will, to the extent possible, be hedged on the financial market. The modelprovides an explanation for the seemingly too large estimate of relative risk aversion implied by thestandard CCAPM.Essay III: Housing tenure choice is studied in a two-period model with stochastic rents and houseprices. We show that a risk-averse household chooses the tenure mode with lowest variance in the costof housing. The tenure mode chosen depends upon the variance in the prices of apartment buildings,the variance in the prices of owner-occupied housing and the correlation between these two prices.When the correlation is positive and above a critical level, a risk-averse household prefers ownership asan insurance against future uncertain housing costs.Essay IV: Housing tenure choice is investigated in a numerical two-period model where both rents andprices on owner-occupied housing are stochastic. With a positive correlation between prices onapartment buildings and prices on private homes, owner occupation serves as an insurance against thefuture uncertainty in housing costs. Due to this insurance mechanism, increased uncertainty in the costof housing has an ambiguous effect on saving. In addition, nondurable consumption may either be anincreasing or a decreasing function of unrealised capital gains from owner-occupied housing.Essay V: A theoretical and empirical analysis of tax effects on corporate financial policy is presented.The theoretical model in Bradley, Jarrell & Kim (1984) is extended to capture, the often neglected fact,that the advantages of non-debt tax shields may reverse over time. Expected future tax-shields areshown to reduce the optimal level of debt, while tax shields already utilised raise. indebtedness. Thisresult hold even though the company may be paying taxes and have un-utilised tax-shields. Finally, thepaper presents an empirical investigation, using the methodology suggested by MacKie-Mason (1990),which provide support for the theoretically derived results.

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