Utility Models and Prospect Theory
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Utility Models and Prospect Theory2014-04-11Alexander HarinRecursive utility and jump-diffusions
http://d.repec.org/n?u=RePEc:hhs:nhhfms:2014_009&r=upt
We derive the equilibrium interest rate and risk premiums using recursive utility for jump-diffusions. Compared to to the continuous version, including jumps allows for a separate risk aversion related to jump size risk in addition to risk aversion related to the continuous part. We also consider a version that allows marginal utility to depend on past consumption. The models with jumps are shown to have a potential to give better explanation of empirical regularities than the recursive models based on merely continuous dynamics.Aase, Knut K.2014-03-25Recursive utility; jump dynamics; the stochastic maximum principle; early resolution; utility gradientsHousing and Relative Risk Aversion
http://d.repec.org/n?u=RePEc:oxf:wpaper:693&r=upt
This paper derives closed-form and numerical solutions for relative risk aversion in a standard consumption-based model enriched with housing.� The presence of housing enables the household to hedge against unexpected shocks and may decrease relative risk aversion.� In addition, housing may generate state-dependent, time-varying risk aversion.Francesco Zanetti2014-01-15Relative risk aversion, housingMultiple Interior Steady States in the Ramsey Model with Elastic Labor Supply
http://d.repec.org/n?u=RePEc:kob:dpaper:dp2014-11&r=upt
In this paper we show that multiple interior steady states are possible in the Ramsey model with elastic labor supply. In particular we establish the following three results: (i) for any discount factor and production function, there is a utility function such that a continuum of interior steady states exist; (ii) the number of interior steady states can also be any nite number; and (iii) for any discount factor and production function, there is a utility function such that there is no interior steady state. Some numerical examples are provided.Takashi Kamihigashi2014-11Shirking, Monitoring, and Risk Aversion
http://d.repec.org/n?u=RePEc:hal:psewpa:halshs-00965532&r=upt
This paper studies the effect of risk aversion on effort under different monitoring schemes. It uses a theoretical model which relaxes the assumption of agents being risk neutral, and investigates changes of effort as monitoring varies. The predictions of the theoretical model are tested using an original experimental setting where the level of risk aversion is measured and monitoring rates vary exogenously. Our results show that shirking decreases with risk aversion and monitoring. Moreover, monitoring is more effective to curtail shirking behaviors for subjects who are less risk averse.Seeun Jung, Kenneth Houngbedji2014-03Risk aversionRamsey Rule with Progressive Utility in Long Term Yield Curves Modeling
http://d.repec.org/n?u=RePEc:arx:papers:1404.1895&r=upt
The purpose of this paper relies on the study of long term yield curves modeling. Inspired by the economic litterature, it provides a financial interpretation of the Ramsey rule that links discount rate and marginal utility of aggregate optimal consumption. For such a long maturity modelization, the possibility of adjusting preferences to new economic information is crucial. Thus, after recalling some important properties on progressive utility, this paper first provides an extension of the notion of a consistent progressive utility to a consistent pair of progressive utilities of investment and consumption. An optimality condition is that the utility from the wealth satisfies a second order SPDE of HJB type involving the Fenchel-Legendre transform of the utility from consumption. This SPDE is solved in order to give a full characterization of this class of consistent progressive pair of utilities. An application of this results is to revisit the classical backward optimization problem in the light of progressive utility theory, emphasizing intertemporal-consistency issue. Then we study the dynamics of the marginal utility yield curve, and give example with backward and progressive power utilities.Nicole El Karoui, Caroline Hillairet, Mohamed Mrad2014-04Ethical social welfare relations and utilitarianism for infinite utility streams with finite sums and averages
http://d.repec.org/n?u=RePEc:hhs:hastef:0747&r=upt
This paper provides axiomatic descriptions of social welfare relations, defined on infinite streams of utility, that are consistent with the utilitarian criterion on subsets where maximizing aggregate utility has a clear interpretation: the streams, or their differences, are summable. Besides standard assumptions on efficiency, equity and interpersonal comparability, two axioms are introduced and shown to be necessary and sufficient. A more general version of one axiom suffices to distinguish streams with different long-run averages.Jonsson, Adam, Voorneveld, Mark2014-03-17Intergenerational equity; aggregating infinite utility streams; ethical social welfare relationsIs Self-Reported Risk Aversion Time Varying?
http://d.repec.org/n?u=RePEc:hal:psewpa:halshs-00965549&r=upt
We examine a Japanese Panel Survey in order to verify whether self-reported risk aversion varies over time. In most panels, risk attitudes variables are collected only once (found in only one survey wave), and it is assumed that self-reported risk aversion reflects individual's time-invariant component of preferences toward risk. Nonetheless, one may wonder whether financial and health shocks a person faces over his lifetime modify his risk aversion. Our empirical analysis provides proof that risk aversion is composed of a time-variant part and shows that the variation cannot be reduced to measurement error or noise given that it is related to income or health shocks. Then, we nonetheless find that time-invariant factors explain a bigger share of individual risk aversion than time-variant ones. Taking into account the fact that there are still time-variant factors in risk aversion, we investigate how often it is preferable to collect the risk aversion measure in long panel surveys. Our result suggests that the best predictor for current behaviors is the average of risk aversion, where risk aversion is collected every 3-4 years. The risk aversion measure is, therefore, advised to be collected every 3 or 4 years in long panel surveys.Seeun Jung, Carole Treibich2014-03Risk AversionMisperception of Consumption: Evidence from a Choice Experiment
http://d.repec.org/n?u=RePEc:hal:psewpa:halshs-00965671&r=upt
We investigate people's different conceptions of the economic term "consumption" when comparing with others. An Internet-based hypothetical discrete choice experiment was conducted with Japanese participants. As in other relative income comparison studies, we found that own consumption and own saving had a positive impact on utility, whereas the consumption and saving of a reference person had a negative impact on utility. However, the results show that the magnitudes of consumption and saving differ in size; saving could affect utility much more than consumption for the Japanese subjects. By using scope tests, we found that the impact of own consumption is not monotonic and so does not necessarily increase utility. This calls into question the conventional assumption of the monotonicity of "the utility of consumption"; consumption could be perceived as a negative good. Our results, therefore, provide some evidence that, in reality, people understand and perceive the economic terms differently from what economists would expect. Furthermore, when considering the consumption of others as well as their own, the size of the discrepancy is even bigger.Seeun Jung, Yasuhiro Nakamoto, Masayuki Sato, Katsunori Yamada2014-03Relative Utility ; Choice Experiment ; Misperception of Economic TermsThe limit of discounted utilitarianism
http://d.repec.org/n?u=RePEc:hhs:hastef:0748&r=upt
This paper presents an infinite-horizon version of intergenerational utilitarianism that is both satisfactorily complete and consistent. By studying discounted utilitarianism as the discount factor tends to one, we obtain a welfare criterion --- limit-discounted utilitarianism --- that combines efficiency and the equal treatment of generations with analytical tractability and a high degree of comparability. We show that limit-discounted utilitarianism satisfies a number of consistency properties; in particular, it provides (i) an intuitive link between preferences over infinite-horizon streams and large, but finite-horizon truncations, and (ii) a complete view of the consequences of delaying streams with well-defined finite averages. The latter is formulated through a principle of compensation. Through this compensation principle, limit-discounted utilitarianism gives a coherent view on the consequences of delaying welfare which is compatible with stationarity. Limit-discounted utilitarianism is characterized on a large domain of infinite-horizon utility streams.Jonsson, Adam, Voorneveld, Mark2014-03-17Intergenerational equity; aggregating infinite utility streams; ethical social welfare relationsDisclosure of information in matching markets with non-transferable utility
http://d.repec.org/n?u=RePEc:mod:recent:094&r=upt
We present a model of two-sided matching where utility is non-transferable and information about individuals’skills is private, utilities are strictly increasing in the partner’s skill and satisfy increasing differences. Skills can be either revealed or kept hidden, but while agents on one side have verifiable skills, agents on the other side have skills that are unverifiable unless certified, and certification is costly. Agents who have revealed their skill enter a standard matching market, while others are matched randomly. We find that in equilibrium only agents with skills above a cutoff reveal, and then they match assortatively. We show that an equilibrium always exists, and we discuss multiplicity. Increasing differences play an important role to shape equilibria, and we remark that this is unusual in matching models with non-transferable utility. We close the paper with some comparative statics exercises where we show the existence of non-trivial externalities and welfare implications.Ennio Bilancini, Leonardo Boncinelli2014-03costly disclosure of information; matching markets; non-transferable utility; partial unraveling; positive assortative matching; increasing differencesEffects of Stress on Economic Decision-Making: Evidence from Laboratory Experiments
http://d.repec.org/n?u=RePEc:iza:izadps:dp8060&r=upt
The ways in which preferences respond to the varying stress of economic environments is a key question for behavioral economics and public policy. We conducted a laboratory experiment to investigate the effects of stress on financial decision making among individuals aged 50 and older. Using the cold pressor task as a physiological stressor, and a series of intelligence tests as cognitive stressors, we find that stress increases subjective discounting rates, has no effect on the degree of risk-aversion, and substantially lowers the effort individuals make to learn about financial decisions.Delaney, Liam, Fink, Günther, Harmon, Colm P.2014-03stress, financial decisions, discounting, risk aversion, learningMedia competition and electoral politics
http://d.repec.org/n?u=RePEc:ivi:wpasad:2014-03&r=upt
We build a framework linking competition in the media market to political participation. Media outlets report on the ability of candidates running for office and compete for audience through their choice of slant. Citizens consume news only if the expected utility of being informed about candidates' ability is sufficiently large for their group collectively. Our results can reconcile seemingly contradictory empirical evidence showing that entry in the media market can either increase or decrease turnout. While information pushes up independent turnout, partisans adjust their turnout to the ability of their preferred candidate, and on average they vote less when informed.Florian Schuett, Amedeo Piolatto2014-03Demand for news, Electoral turnout, Group-rule utilitarianism, Media bias.Instrumental Cardinal Concerns for Social Status in Two-Sided Matching with Non-Transferable Utility
http://d.repec.org/n?u=RePEc:mod:recent:095&r=upt
In this paper we apply the instrumental approach to social preferences in order to distinguish among various shapes of preferences for social status. In particular, we consider the shape of reduced preferences that emerge in the equilibrium of a two-sided matching model with non-transferable utility. Cole et al. (1992, 1995) show that, under full observability of potential mates’ attributes, instrumental concerns for social status are ordinal, i.e., only one’s own rank in the distribution of attributes matters. We show that when we depart from full observability, instrumental concerns for social status become cardinal, i.e., also other features of the distribution of attributes matter. We also show that the actual shape of cardinal concerns depends on how individuals can deal with the informational asymmetry, alternatively leading to upward concerns – i.e., making comparisons with higher rank people – downward concerns – i.e., making comparisons with lower rank people – or bidirectional concerns – i.e, being both upward and downward.Ennio Bilancini, Leonardo Boncinelli2014-03Price vs. weather shock hedging for cash crops: ex ante evaluation for cotton producers in Cameroon
http://d.repec.org/n?u=RePEc:hal:journl:halshs-00967313&r=upt
In the Sudano-sahelian zone, which includes Northern Cameroon, the inter- annual variability of the rainy season is high and irrigation scarce. As a consequence, bad rainy seasons have a detrimental impact on crop yield. In this paper, we assess the risk mitigation capacity of weather index-based insurance for cotton farmers. We compare the ability of various indices, mainly based on daily rainfall, to increase the expected utility of a representative risk-averse farmer. We first give a tractable definition of basis risk and use it to show that weather index-based insurance is associated with a large basis risk, whatever the index considered. It has thus limited potential for income smoothing, a conclusion which is robust to the utility function. Second, in accordance with the existing agronomical literature we find that the length of the cotton growing cycle, in days, is the best performing index considered. Third, we show that using observed cotton sowing dates to define the length of the growing cycle significantly decreases the basis risk, compared to using simulated sowing dates. Finally we find that the gain of the weather-index based insurance is lower than that of hedging against cotton price fluctuations provided by the national cotton company. This casts doubt on the strategy of supporting weather-index insurances in cash crop sectors selling at international market prices without recommending any price stabilisation scheme.Antoine Leblois, Philippe Quirion, Benjamin Sultan2014Weather, index-based insurance, cash crop, price risk.Bidimensional Matching with Heterogeneous Preferences: Smoking in the Marriage Market
http://d.repec.org/n?u=RePEc:oxf:wpaper:696&r=upt
We develop a bidimensional matching model under transferable utility, where individuals are characterized by a continuous trait (e.g., socioeconomic status) and a binary attribute (e.g., smoking status).� The model is "truly multidimensional", in the sense that the impact of the traits cannot be summarized by a one-dimensional index.� We present a general resolution strategy based on optimal control theory, and characterize the stable matching.� We derive testable predictions about equilibrium matching patterns.� Using US data, we find that the observed marital sorting of smokers and non-smokers by education is consistent with our model.Climent Quintana-Domeque, Pierre-Andre Chiappori, Sonia Oreffice2014-01-29Marriage market, multidimensional matching, continuous and discrete characteristics, heterogeneous preferencesOn the core and bargaining set of a veto game
http://d.repec.org/n?u=RePEc:vpi:wpaper:e07-47&r=upt
The notion of veto player was originally introduced in simple games [see Nakamura (1979)], for which every coalition has a value of 0 or 1. In this paper we extend it to monotonic cooperative games with transferable utility: a player has veto power if all coalitions not containing her are worthless. We examine and characterize the core for each one of these "veto games". Moreover, we show the equivalence of the core and the bargaining set. Our work extends the clan games and big-boss games introduced respectively by Potters et al. (1989) and Muto et al. (1988).Eric Bahel2014TU game, veto power, core, objection, bargaining set.The Economics of Presenteeism: A discrete choice & count model framework
http://d.repec.org/n?u=RePEc:hhs:sduhec:2014_002&r=upt
There are three levels in this paper: A search for economic theories about presenteeism, a search for appropriate econometric approaches, and finally empirical results based on a unique Danish cross sectional data set. There are two economic approaches to presenteeism: 1. Productivity losses and 2. labor supply. The first is part of the indirect cost component in cost-of-illness studies and economic evaluation. There are two core questions in the productivity loss literature: Measurement of productivity losses (‘how much’) which has dominated the research agenda and valuation of incurred productivity losses (monetary value). Few economists have addressed the valuation issue and point out that the wage rate sometimes is inadequate. The starting point in the labor supply literature is sickness absence coupled with labor demand. The few economic models about presenteeism are explored and found lacking in the sense that they do not capture the essence of presenteeism. However, discrete choice models (random utility models) seem to be adequate in that the choice about going sick to work basically is a discrete choice situation that can be extended to include discrete counts, i.e. episodes of presenteeism within a given time period. The econometrics of presenteeism must have count models as the starting point due to the many zeroes, i.e. many persons do not experience presenteeism and, if they do, usually relatively few days (‘events’) in a given period and the discrete choice nature of presenteeism. Drawing on the econometric literature on utilization of medical services, the following models are discussed briefly: Poisson models, negative binominal, zero-inflated negative binomial, two part models (hurdle models) and latent class models (finite mixture models). This is in contrast to almost all previous literature where logistic regression has been the dominant statistical strategy. The Poissson model is discarded because an important feature (mean – variance) does not hold. The other models are all used in the empirical part of the paper, and an attempt at model selection is made. The empirical analyses are based on a cross-section survey of Danes in the labor force, N=4,060. The survey was designed with presenteeism in mind – one of the few available data sets at present. Ideally, theory/models should guide empirical work, but can do so only if fully specified theories are available and this is not the case for the random utility models that do no provide much guidance on relevant explanatory variables. The explanatory variables therefore are selected from the existing empirical works along with a number of new variables used in the survey, e.g. attitudinal variables about presenteeism and sickness absence and questions about work environment. A consistent result across all analyses is – not surprisingly - the importance of self reported health status: The worse health situation, the more presenteeism. . Another consistent result is that sickness absence and presenteeism are positively correlated. Persons with managerial positions also consistently have more presenteeism Age and genders are also (almost) consistently statistically significant. Fear of unemployment is also consistently and significantly related to presenteeism.Pedersen, Kjeld Møller, Skagen, Kristian2014-02-15Presenteeism; sickness absence; labor supply; cost-of-illness; economic evaluation; count modelsOptimal dynamic nonlinear income taxes: facing an uncertain future with a sluggish government
http://d.repec.org/n?u=RePEc:pra:mprapa:55088&r=upt
We consider the optimal nonlinear income taxation problem in a dynamic, stochastic environment when the government is sluggish in the sense that it cannot change the tax rule as uncertainty resolves. We show that the sluggish government cannot allow saving or borrowing regardless of the utility function. Moreover, we argue that the zero top marginal tax rate result in static models is of little practical importance because it is actually relevant only when the top earner in the initial period receives the highest shock in every period.Berliant, Marcus, Fujishima, Shota2014-04-04Optimal income taxation; New dynamic public financeA discrete choice model approximation to the consumer’s choice among television displays
http://d.repec.org/n?u=RePEc:alc:alcamo:1402&r=upt
The consumer’s choice over a bundle of products depends on the observable and unobservable characteristics of the product and the consumer. The choice is made over the basis of maximizing utility subject to their income restrictions and, at the same time, firms make product differentiation decisions over the basis of maximizing profit. Quality is one way to differentiate products. An example of this type of differentiation happens in the TV market where several displays are developed. Our objective is to determine the probability for a consumer of choosing a type of display among five kinds: standard tube, LCD, plasma, projection and LED. Using a multinomial logit, we find that electronic appliances such as DVDs and audio systems, as well as socioeconomic status, increase the probability of choosing a high-tech display television. Our empirical approximation contributes to the further understanding of consumer rational behavior through the theory utility maximization and highlights the importance of studying the market structure and analyzing changes in welfare and efficiency.Carlos Giovanni González Espitia, Natalia Serna Borrero2014Observable product characteristics, product differentiation, quality, television displayThe Housing Problem and Revealed Preference Theory: Duality and an application
http://d.repec.org/n?u=RePEc:spo:wpecon:info:hdl:2441/5rkqqmvrn4tl22s9mc0o6ctj2&r=upt
This paper exhibits a duality between the theory of revealed preference of Afriat and the housing allocation problem of Shapley and Scarf. In particular, it is shown that Afriat’s theorem can be interpreted as a second welfare theorem in the housing problem. Using this duality, the revealed preference problem is connected to an optimal assignment problem, and a geometrical characterization of the rationalizability of experiment data is given. This allows in turn to give new indices of rationalizability of the data and to define weaker notions of rationalizability, in the spirit of Afriat’s efficiency index.Ivar Ekeland, Alfred Galichon2013-11Afriat's theorem; Indivisible allocations; Optimal assignment; Revealed preferencesOptimal Expectations and the Welfare Cost of Climate Variability
http://d.repec.org/n?u=RePEc:rff:dpaper:dp-14-03-efd&r=upt
Uncertainty about the future is an important determinant of well-being, especially in developing countries where financial markets and other market failures result in ineffective insurance mechanisms. However, separating the effects of future uncertainty from realised events, and then measuring the impact of uncertainty on utility, presents a number of empirical challenges. This paper aims to address these issues and provides supporting evidence to show that increased climate variability (a proxy for future income uncertainty) reduces farmers' subjective well-being, consistent with the theory of optimal expectations (Brunnermeier & Parker, 2005 AER), using panel data from rural Ethiopia and a new data set containing daily atmospheric parameters. The magnitude of our result indicates that a one standard deviation (7%) increase in climate variability has an equivalent effect on life satisfaction to a two standard deviation (1-2%) decrease in consumption. This effect is one of the largest determinants of life satisfaction in rural Ethiopia.Alem, Yonas, Colmer, Jonathan2014-03-05separated by commasTogether at Last: Trade Costs, Demand Structure, and Welfare
http://d.repec.org/n?u=RePEc:oxf:wpaper:694&r=upt
We show that relaxing the assumption of CES preferences in monopolistic competition has surprising implications when trade is restricted.� Integrated and segmented markets behave differently, the latter typically exhibiting reciprocal dumping.� Globalization and lower trade costs have different effects: the former reduces spending on all existing varieties, the latter switches spending from home to imported varieties; when demands are less convex than CES, globalization raises whereas lower trade costs reduce firm output.� Finally,calibrating gains from trade is harder.� Many more parameters are needed, while import demand elasticities typically overestimate the true elasticities, and so underestimate the gains from trade.Peter Neary, Monika Mrazova2014-01-20Additively Separable Preference, CES Preference, Iceberg Trade Costs, Quantifying Gains from Trade, Super- and Subconvexity of Demand, Super- and Subconcavity of Utility