Policy uncertainty can reduce individual welfare when individuals have limited opportunities to mitigate or insure against consumption fluctuations induced by the policy uncertainty. For this reason, policy uncertainty surrounding future Social Security benefits may have important welfare costs. We field an original survey to measure the degree of policy uncertainty in Social Security and to estimate the impact of this uncertainty on individual welfare. On average, our survey respondents expect to receive only about 60 percent of the benefits they are supposed to get under current law. We document the wide variation around the expectation for most respondents and the heterogeneity in the perceived distributions of future benefits across respondents. This uncertainty has real costs. Our central estimates show that on average individuals would be willing to forego around 6 percent of the benefits they are supposed to get under current law to remove the policy uncertainty associated with their future benefits. This translates to a risk premium from policy uncertainty equal to 10 percent of expected benefits.

This paper studies the effect of policy uncertainty on the formation of new activities in Romer's (1994) type of an economy, where productivity of labor increases with the number of capital goods. Adding a new capital good requires a capital specific set-up cost, invested prior to using the capital good. Agents are disappointment averse, putting greater utility weight on downside risk [as modeled by Gul (1991)]. Policy uncertainty is induced by the Disappointment aversion implies that investment, labor and capitalists' income drop at a rate proportional to the standard deviation of the tax rate. Hence, policy uncertainty induces first-order adverse effects, whereas policy uncertainty leads to second-order effects when consumers maximize the conventional expected utility. The adverse effects of policy uncertainty can be partially overcome by a proper investment policy. The paper interprets the tax concessions granted to multinationals as a commitment device that helps overcoming the adverse implications of policy uncertainty.

Abstract: This paper proposes a simple index of the welfare significance of uncertainty in the public goods resulting as policy outcomes. Our measure is the ex ante compensation an individual would require to accept an uncertain level of service compared to receiving the expected value of the distribution of possible values for that service. Our compensation measure is a function of the coefficient of relative risk aversion, the variance in the measure of environmental service associated with policy and relevant for the individual, and a set of conventional parameters that describe the properties of nonmarket benefit measures under conditions of certainty. We would expect that the inverse virtual price elasticity of the for the environmental service and the square of the coefficient of relative variation are the primary factors influencing the size of our compensation index

The papers here range from description and analysis of how our political economy allocates its inventive effort, to studies of the decision making process in specific industrial laboratories. Originally published in 1962. The Princeton Legacy Library uses the latest print-on-demand technology to again make available previously out-of-print books from the distinguished backlist of Princeton University Press. These editions preserve the original texts of these important books while presenting them in durable paperback and hardcover editions. The goal of the Princeton Legacy Library is to vastly increase access to the rich scholarly heritage found in the thousands of books published by Princeton University Press since its founding in 1905.

Emerging Markets and the Global Economy investigates analytical techniques suited to emerging market economies, which are typically prone to policy shocks. Despite the large body of emerging market finance literature, their underlying dynamics and interactions with other economies remain challenging and mysterious because standard financial models measure them imprecisely. Describing the linkages between emerging and developed markets, this collection systematically explores several crucial issues in asset valuation and risk management. Contributors present new theoretical constructions and empirical methods for handling cross-country volatility and sudden regime shifts. Usually attractive for investors because of the superior growth they can deliver, emerging markets can have a low correlation with developed markets. This collection advances your knowledge about their inherent characteristics. Foreword by Ali M. Kutan - Concentrates on post-crisis roles of emerging markets in the global economy - Reports on key theoretical and technical developments in emerging financial markets - Forecasts future developments in linkages among developed and emerging economies