Three Essays on the Objective Function in Economics.

Abstract

This dissertation consists of three largely independent essays. The first finds a significant correlation between the price of crude oil and significant terrorist attacks by groups of Middle Eastern origin against Western nations. In particular, such terrorist attacks are considerably more common after oil prices fall than after they rise. The paper goes on to suggest that a model based on expected utility theory may account for this observation. Agents that are predisposed to comitting terrorist acts – but have not yet done so – may be triggered to act when economic conditions worsen. The second essay shows that the monetary policies of both the Federal Reserve and the European Central Bank tend to be influenced by the degree of dispersion of unemployment rates across regions. This result is very robust, particularly for the United States. However, the two central banks appear to respond differently to this dispersion. That either bank cares about dispersion at all is surprising, as a result similar to certainty equivalence suggests that – at least in the standard cases – the banks should only be concerned with aggregate measures. We propose two alternative theories that seem, respectively, to be consistent with each bank’s policies. The third essay outlines a strictly neoclassical economic approach to studying behavior linked to emotions. The paper suggests that by explicitly including emotions as an argument in the utility function, textbook economics can yield some non-obvious insights into some human behaviors. The essay demonstrates the neoclassical technique in a number of different settings, and finds it to be applicable to a wide variety of behavrioral phenomena. A unifying theme for these papers – and one that is particularly stressed in the third chapter – is that a correct identification of the objective function of economic agents can be vital in trying to explain puzzling phenomena.