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Title:Are the costs of the business cycle trivially small”? Lucas's calculus of hardship and chooser-dependent, nonexpected utility preferences PDF Logo
Authors:Hannsgen, Greg
Issue Date:2007
Series/Report no.:Working papers // The Levy Economics Institute 492
Abstract:In his presidential address to the American Economic Association, Robert Lucas claimed that the welfare costs of the business cycle in the United States equaled .05 percent of consumption. His calculation compared the utility of a representative consumer receiving actual per-capita consumption each year with that of a similar consumer receiving the expectation of consumption. To a risk-averse person, the latter path of consumption confers more utility, because it is less volatile. Applying Amartya Sen’s chooser-dependent preferences to a nonexpected utility case, I will counter Lucas’s claim by arguing that people have different attitudes toward risk that is imposed and risk that is voluntarily taken on, and that policymakers, in carrying out public duties, must use sorts of reasoning different from those used by the optimizing consumers of neoclassical economic theory.
Subjects:costs of the business cycle
non-expected utility preferences
chooser-dependent preferences
Amartya Sen
JEL:E32
E50
D60
D63
D81
Document Type:Working Paper
Appears in Collections:Working Papers, Levy Economics Institute of Bard College

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