EconSouth (Third Quarter 2004)


Research Notes and News

Research Notes and News highlights recently published research as well as other news from the Federal Reserve Bank of Atlanta.

Will privacy concerns
prolong money use?

As the cost of credit-based payment systems continues to decline, some economists argue that money will gradually fall into disuse. But money affords one function that credit-based payment systems do not: It preserves the purchaser’s privacy. Money’s role as an imperfect recorder of transactional histories is a strength when the purchaser wishes to retain his anonymity because a purchase made with money does not reveal the purchaser’s identity as a credit purchase does. This distinction is likely to keep money in use, according to authors Charles M. Kahn, James McAndrews, and Williams Roberds.

The authors construct a model of a simple trading economy that allows for various forms of moral hazard, especially the theft of a purchaser’s identity. In a scenario in which information about a purchaser is available following a credit-based payment, the possibility of theft exists since the purchaser’s address and other information become known. Such information is not available following a cash payment. The analysis shows that in an economy with imperfect safeguards against this sort of hazard, the anonymity that money confers on the user is also its advantage, solving the problem of transactional privacy.

Despite advances in theory that cast doubt on money’s value in technologically sophisticated economies, Kahn, McAndrews, and Roberds conclude that “the ‘demotion’ of money to a poor cousin of credit-based arrangements may have been premature.”
Working Paper 2004-18
August 2004

Measuring 9/11’s impact
on working hours

In the aftermath of the terrorist attacks of Sept. 11, 2001, the popular press predicted that Americans would reassess their priorities. Workers, it was thought, would choose to spend more time with their families and less time at work. These restructured priorities, if pursued, would amount to a shift in preferences toward more leisure time, lower incomes, reduced consumer demand, and lowered productivity growth. Authors Julie Hotchkiss and Olga Pavlova explore whether a strengthened commitment to personal life has in fact led to a broad, far-reaching change in the behavior of the American workforce.

Using data from the Current Population Survey, the authors find that when the analysis controlled for the economic weakness following 9/11, weekly hours worked actually increased during that period. The number of hours worked increased most among women with children less than six years old, Hotchkiss and Pavlova find. They also note that the number of hours worked in New York City decreased in September, a fact they attribute to the general disruption of life there. However, the number of hours worked in New York City quickly rebounded to pre-9/11 levels. The increased working hours, they speculate, might be evidence that when people are uncertain about the future they might work more as insurance for bad times.

Results suggest that the terrorist attacks did not result in a diminished commitment to the workplace. To the contrary, Hotchkiss and Pavlova conclude that one thing the events of 9/11 failed to do is dampen the American work ethic.
Working Paper 2004-16
July 2004

Retirement plans,
investment options explained

Questions about the long-term status of the Social Security system are becoming more critical because baby boomers are approaching retirement age and will place unprecedented burdens on the system. Workers’ uncertainty about their retirement income has heightened interest in employer-sponsored retirement plans and other retirement investment options.

Authors Ramon P. DeGennaro and Deborah L. Murphy explore retirement vehicles such as 401(k), 403(b), and 457 plans, each of which has risks of its own. Such plans have become more popular in the United States than defined benefit plans, in which employers bear the investment risk and are obligated to make up any shortfall if the investment income does not meet the obligations of the plan.

Although defined contribution plans place a greater burden of risk on the employee, the authors argue that risk can be mitigated by viewing them as only a part of the employee’s portfolio and by applying standard portfolio management techniques, particularly diversification. These investment plans also have restrictions and rules associated with them, and DeGennaro and Murphy explore these constraints and explain strategies for circumventing them.

Retirement savings should be viewed as only one part of an investment portfolio, the authors conclude. Understanding the inherent risks, potential benefits, and limitations of each investment option will allow investors to maximize their expected returns and minimize their risks.
Working Paper 2004-21
August 2004

 

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