Forward-Looking Decision Making: Dynamic-Programming Models Applied to Health, Risk, Employment, and Financial Stability

Forward-Looking Decision Making: Dynamic-Programming Models Applied to Health, Risk, Employment, and Financial Stability

Forward-Looking Decision Making: Dynamic-Programming Models Applied to Health, Risk, Employment, and Financial Stability

Forward-Looking Decision Making: Dynamic-Programming Models Applied to Health, Risk, Employment, and Financial Stability

Synopsis

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.

Excerpt

Forward-looking behavior is at the heart of economics. Choices over savings, occupations, earnings, investments, etc., all require forward planning under uncertainty. Just how individuals and firms go about doing this and how, as economists, we should best model what they do are key to our understanding of economic behavior and are the core concern of this book. Few people have had such an impact on the development of these aspects of economics as has Robert Hall.

This volume makes a compelling case for the use of the dynamic-programming approach to modeling choices across a wide range of economic decision making. Not just forward-looking consumption and labor market decisions, but also health-care choices, where the payoff is measured in terms of future quality of life. Entrepreneurial startup decision making under uncertainty is carefully examined too and a coherent framework for examining moral hazard issues in the provision of insurance to the risks faced on uncertain investments is provided, using this to show the value of venture investors.

The reader is introduced to the dynamic-programming approach to modeling forward-looking behavior in an accessible but rigorous way, emphasizing the relationship to the choices being made by the decision maker and the key issues the researcher will face in practical implementation. The key preference . . .

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